<PAGE>
Filed pursuant to Rule 424(b)(5)
File No. 333-24327
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 19, 1997)
$212,113,000
[LOGO] NOVASTAR
NOVASTAR HOME EQUITY LOAN
ASSET-BACKED BONDS, SERIES 1997-2
NOVASTAR FINANCIAL, INC.
SELLER
MERRILL LYNCH MORTGAGE INVESTORS, INC.
COMPANY
NovaStar Home Equity Loan Trust Series 1997-2 (the 'Issuer') will be formed
pursuant to a Trust Agreement, dated as of November 1, 1997, between Merrill
Lynch Mortgage Investors, Inc. (the 'Company') and Wilmington Trust Company, the
Owner Trustee. The Issuer will issue $212,113,000 aggregate principal amount of
NovaStar Home Equity Loan Asset-Backed Bonds, Series 1997-2 (the 'Bonds'). The
Bonds will be issued pursuant to an Indenture, dated as of November 1, 1997,
between the Issuer and First Union National Bank, the Indenture Trustee.
The Bonds will represent indebtedness of the Issuer and will be secured by
the trust estate (the 'Trust Estate') created by the Trust Agreement. The Trust
Estate will consist primarily of fixed and adjustable rate, conventional, one-
to four-family, first and second lien home equity loans (the 'Initial Home
Equity Loans') and any funds on deposit in the Interest Coverage Account and
Pre-Funding Account (each as defined herein). Additional Home Equity Loans (the
'Subsequent Home Equity Loans' and, together with the Initial Home Equity Loans,
the 'Home Equity Loans') having an aggregate unpaid principal balance of up to
$50,000,000 meeting the criteria set forth herein are intended to be purchased
by the Issuer on or before January 30, 1998, with funds on deposit in an account
(the 'Pre-Funding Account'), which will become part of the Trust Estate. In
addition, the Bonds will have the benefit of an irrevocable and unconditional
financial guaranty insurance policy (the 'Bond Insurance Policy') to be issued
by MBIA Insurance Corporation (the 'Bond Insurer') as described under
'Description of the Bonds--Bond Insurance Policy' herein.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH UNDER 'RISK
FACTORS' ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND THE INFORMATION SET
FORTH UNDER 'SPECIAL CONSIDERATIONS' ON PAGE 15 OF THE PROSPECTUS BEFORE
PURCHASING ANY OF THE BONDS. (Continued on following page)
[LOGO] MBIA
------------------------
THE ASSETS PLEDGED TO SECURE THE BONDS AND PROCEEDS FROM THE BOND INSURANCE
POLICY ARE THE SOLE SOURCE OF PAYMENTS ON THE BONDS. THE BONDS WILL REPRESENT
OBLIGATIONS SOLELY OF THE ISSUER AND WILL NOT REPRESENT AN INTEREST
IN OR OBLIGATION OF THE COMPANY, THE SERVICER, THE OWNER
TRUSTEE, THE INDENTURE TRUSTEE OR ANY OF THEIR AFFILIATES,
OTHER THAN THE ISSUER. NEITHER THE BONDS NOR THE
UNDERLYING HOME EQUITY LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
There is currently no secondary market for the Bonds. Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the 'Underwriter') intends to make a secondary
market in the Bonds, but is not obligated to do so. There can be no assurance
that a secondary market for the Bonds will develop or, if it does develop, that
it will continue or provide Bondholders with sufficient liquidity of investment.
The Bonds will not be listed on any securities exchange.
The Bonds will be purchased from the Company by the Underwriter and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $211,582,717, before deducting expenses.
The Bonds are offered by the Underwriter subject to prior sale, when, as and
if delivered to and accepted by the Underwriter and subject to certain other
conditions. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject any order in whole or in part. It is expected that
delivery of the Bonds will be made on or about December 11, 1997 in book-entry
form through the Same Day Funds Settlement System of The Depository Trust
Company as discussed herein, against payment therefor in immediately available
funds.
Upon receipt of a request by an investor for an electronic Prospectus
Supplement from the Underwriter or a request by such investor's representative
within the period during which there is an obligation to deliver a Prospectus
Supplement, the Underwriter will promptly deliver, or cause to be delivered, in
addition to such electronic Prospectus Supplement, without charge, a paper copy
of the Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus Supplement is December 3, 1997.
<PAGE>
(Continued from previous page)
The interest rates on the Home Equity Loans will be fixed or subject to
semi-annual or annual adjustment commencing after the related Initial Period (as
defined herein) based on the related Index (as defined herein) and the
respective Gross Margins described herein, subject to certain periodic and
lifetime limitations as described more fully herein.
The Home Equity Loans were generally underwritten in accordance with the
underwriting standards described herein in 'Description of the Home Equity
Pool--Underwriting'. See also 'Risk Factors--Underwriting Standards' in this
Prospectus Supplement. Approximately 24.26% of the Initial Home Equity Loans, by
aggregate principal balance as of the Cut-off Date, are secured by Mortgaged
Properties in California. See 'Risk Factors--Delinquencies and Potential
Delinquencies' in this Prospectus Supplement.
Payments on the Bonds will be made on the 25th day of each month or, if
such day is not a business day, then on the next business day, commencing on
December 26, 1997 (each, a 'Payment Date'). As described herein, interest will
accrue on the Bonds at a floating rate (the 'Bond Interest Rate') equal, on the
first Payment Date, to 6.25%, and thereafter, equal to the lesser of (i)(a) with
respect to each Payment Date up to and including the earlier of (x) the Payment
Date in December 2004 and (y) the Payment Date which occurs on or prior to the
date on which the aggregate Principal Balance of the Home Equity Loans is less
than 25% of the sum of the aggregate Principal Balance of the Initial Home
Equity Loans as of the Cut-off Date and the Original Pre-Funded Amount,
One-Month LIBOR (as defined herein) plus 0.25%, and (b) with respect to each
Payment Date thereafter, One-Month LIBOR plus 0.50% and (ii) 14.51% per annum
(the 'Maximum Interest Rate'). See 'Description of the Bonds--Interest Payments
on the Bonds' herein. As described herein, interest payable with respect to each
Payment Date will accrue on the basis of a 360-day year and the actual number of
days elapsed during the period commencing on the Payment Date immediately
preceding the month in which such Payment Date occurs and ending on the calendar
day immediately preceding such Payment Date, except with respect to the first
Payment Date, which has an accrual period from December 11, 1997 to December 25,
1997, and will be based on the Bond Principal Balance thereof and the
then-applicable Bond Interest Rate thereof. Payments in respect of principal of
the Bonds will be made as described herein under 'Description of the
Bonds--Priority of Payment.'
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance (as defined herein) of the Home Equity Loans is less
than or equal to 25% of the sum of the aggregate Principal Balance of the
Initial Home Equity Loans as of the Cut-off Date and the Original Pre-Funded
Amount or (ii) the Payment Date occurring in December 2004. See 'Description of
the Bonds--Optional Redemption' herein.
The Bonds initially will be registered in the name of Cede & Co., as
nominee of The Depository Trust Company ('DTC'), as further described herein.
The interests of beneficial owners of the Bonds will be represented by book
entries on the records of DTC and the participating members of DTC. Definitive
certificates will be available for the Bonds only under the limited
circumstances described herein. See 'Description of the Bonds--Book-Entry Bonds'
herein.
It is a condition of the issuance of the Bonds that they be rated 'AAA' by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ('S&P') and 'Aaa' by Moody's Investors Service, Inc. ('Moody's').
THE YIELD TO MATURITY ON THE BONDS WILL DEPEND ON, AMONG OTHER THINGS, THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES,
DEFAULTS AND LIQUIDATIONS) ON THE HOME EQUITY LOANS. THE HOME EQUITY LOANS
GENERALLY MAY BE PREPAID IN FULL OR IN PART AT ANY TIME; HOWEVER, PREPAYMENT MAY
SUBJECT THE MORTGAGOR TO A PREPAYMENT CHARGE. IN ADDITION, THE YIELD ON THE
BONDS WILL BE SENSITIVE TO FLUCTUATIONS IN THE LEVEL OF ONE-MONTH LIBOR, WHICH
MAY VARY SIGNIFICANTLY OVER TIME. SEE 'CERTAIN YIELD AND PREPAYMENT
CONSIDERATIONS' HEREIN AND 'YIELD AND PREPAYMENT CONSIDERATIONS' IN THE
PROSPECTUS.
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT CONSTITUTE PART OF A
SEPARATE SERIES OF BONDS BEING OFFERED PURSUANT TO THE COMPANY'S PROSPECTUS
DATED JUNE 19, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND WHICH
ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS IMPORTANT
INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL. SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS THE
PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS.
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE BONDS, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT 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.
S-2
<PAGE>
SUMMARY
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere herein and in the Prospectus.
Capitalized terms used herein and not otherwise defined herein have the meanings
assigned to them in the Prospectus.
<TABLE>
<S> <C>
The Bonds................................. $212,113,000 NovaStar Home Equity Loan Asset-Backed Bonds, Series
1997-2 (the 'Bonds'). Only the Bonds are offered hereby. The Bonds
will be issued pursuant to an Indenture, dated as of November 1,
1997, between the Issuer and the Indenture Trustee.
Issuer.................................... The Bonds will be issued by NovaStar Home Equity Loan Trust Series
1997-2 (the 'Issuer'), a Delaware business trust established pursuant
to the Trust Agreement, dated as of November 1, 1997 (the 'Trust
Agreement'), between the Company and the Owner Trustee. The Bonds
will represent obligations solely of the Issuer, and the proceeds of
the assets of the Issuer (such assets, the 'Trust Estate') and the
Bond Insurance Policy will be the sole source of payments on the
Bonds. The Issuer is not expected to have any significant assets
other than those pledged as collateral to secure the Bonds.
Company................................... Merrill Lynch Mortgage Investors, Inc. (the 'Company'). See 'The
Depositor' in the Prospectus.
Servicer.................................. NovaStar Mortgage, Inc. (the 'Servicer'). See 'Description of the
Servicing Agreement--The Servicer' herein.
Seller.................................... NovaStar Financial, Inc. (the 'Seller'). See 'Description of the Home
Equity Pool--The Seller' herein.
NovaStar Assets........................... NovaStar Assets Corp. ('NovaStar Assets'). See 'Description of the
Home Equity Pool--General' herein.
Owner Trustee............................. Wilmington Trust Company, a Delaware banking company.
Indenture Trustee......................... First Union National Bank, a national banking association.
Cut-off Date.............................. November 1, 1997.
Closing Date.............................. On or about December 11, 1997.
Payment Date.............................. The 25th day of each month (or, if such day is not a business day,
the next business day), beginning on December 26, 1997 (each, a
'Payment Date').
Denominations and Registration............ The Bonds will be issued, maintained and transferred on the book-
entry records of DTC and its Participants (as defined in the
Prospectus). The Bonds will be offered in registered form, in minimum
denominations of $25,000 and integral multiples of $1,000 in excess
thereof. The Bonds will be represented by one or more Bonds
registered in the name of Cede & Co., as nominee of DTC. No
Beneficial Owner will be entitled to receive a Bond in fully
registered, certificated form (a 'Definitive Bond'), except under the
limited circumstances described herein. See 'Description of the
Bonds--Book-Entry Bonds' herein.
The Home Equity Pool...................... The Home Equity Loans are secured by first and second liens on one- to
four-family real properties (each, a 'Mortgaged Property'). The
Initial Home Equity Loans have individual principal balances at
origination of at least $2,750 but not more than $1,745,000 with an
average principal balance at origination of approximately $120,619.
Approximately 2.21% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) are secured by second liens
on the related Mortgaged Properties. The Initial Home
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Equity Loans generally have terms to maturity of up to 30 years from
the date of origination and a weighted average remaining term to
stated maturity of approximately 344 months as of the Cut-off Date.
Approximately 5.07% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) require monthly payments of
principal based on 30-year amortization schedules and have scheduled
maturity dates of 15 years from the due date of the first monthly
payment (each such Home Equity Loan, a 'Balloon Loan'), in each case
leaving a substantial portion of the original principal amount due
and payable on the respective scheduled maturity date.
With respect to approximately 79.87% of the Initial Home Equity Loans
(by aggregate principal balance as of the Cut-off Date) the related
Mortgage Rate on such Initial Home Equity Loans (the 'Adjustable Rate
Home Equity Loans') will be subject to semi-annual or annual
adjustment, commencing after an initial period from origination of
six months, one year, two years or three years (such period, the
'Initial Period'), on its Adjustment Date (as defined herein), to
equal the sum (rounded as described herein) of the related Index
described below and a fixed percentage set forth in the related
Mortgage Note (the 'Gross Margin'). However, (i) on any Adjustment
Date such Mortgage Rate may not increase or decrease by more than the
Periodic Rate Cap (as defined herein), except as described herein,
(ii) over the life of such Adjustable Rate Home Equity Loan, such
Mortgage Rate may not exceed the related maximum Mortgage Rate (the
'Maximum Mortgage Rate'), which Maximum Mortgage Rates will range
from approximately 11.750% to 20.875% and (iii) over the life of such
Adjustable Rate Home Equity Loan, such Mortgage Rate may not be lower
than a specified minimum Mortgage Rate (the 'Minimum Mortgage Rate'),
which Minimum Mortgage Rates will range from approximately 4.750% to
13.875% per annum. The Adjustable Rate Home Equity Loans will have
Gross Margins ranging from approximately 2.700% to 11.500% with a
weighted average of 5.488% as of the Cut-off Date.
With respect to approximately 20.13% of the Initial Home Equity Loans
(by aggregate principal balance as of the Cut-off Date) the related
Mortgage Rate on such Initial Home Equity Loans (the 'Fixed Rate Home
Equity Loans') is fixed. Approximately 0.23% of the Initial Home
Equity Loans (by aggregate principal balance as of the Cut-off Date)
provide for negative amortization.
As of the Cut-off Date, the Initial Home Equity Loans in the
aggregate will have Mortgage Rates of at least 6.875% per annum but
not more than 17.990% per annum, with a weighted average of 10.204%.
Approximately 1.71% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) were thirty days or more
but less than sixty days delinquent in their Monthly Payments as of
the Cut-off Date. Approximately 0.23% of the Initial Home Equity
Loans (by aggregate principal balance as of the Cut-off Date) were
sixty days or more but less than ninety days delinquent as of the
Cut-off Date. None of the Initial Home Equity Loans were ninety days
or more delinquent in their Monthly Payments as of the Cut-off Date.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
For a further description of the Home Equity Loans, see 'Description
of the Home Equity Pool' herein.
Pre-Funding Account....................... On the Closing Date, approximately $50,000,000 (the 'Original
Pre-Funded Amount') will be deposited in an account (the 'Pre-Funding
Account'), which account is in the name of the Indenture Trustee and
is part of the Trust Estate and will be used to acquire Subsequent
Home Equity Loans. During the Funding Period (as defined below), the
Original Pre-Funded Amount will be reduced by the amount thereof used
to purchase Subsequent Home Equity Loans. The 'Funding Period' is the
period commencing on the Closing Date and ending generally on the
earlier to occur of (i) the date on which the amount on deposit in
the Pre-Funding Account is less than $10,000 and (ii) January 30,
1998. See 'Description of the Home Equity Pool--Conveyance of
Subsequent Home Equity Loans and the Pre-Funding Account' herein.
Interest Coverage Account................. On the Closing Date, a portion of the sales proceeds of the Bonds
will be deposited in an account (the 'Interest Coverage Account') for
application by the Indenture Trustee to cover shortfalls in the
Interest Payment Amount (as defined herein) attributable to the pre-
funding feature during the Funding Period. See 'Description of the
Bonds--Interest Coverage Account' herein.
The Indices............................... As of any Adjustment Date with respect to any Adjustable Rate Home
Equity Loan, the Index applicable to the determination of the related
Mortgage Rate will be one of the following: (i) the monthly weighted
average cost of funds for member institutions of the 11th District of
the Federal Home Loan Bank system as most recently published by the
Federal Home Loan Bank of San Francisco and generally made available
as of the date 30 days prior to the applicable Adjustment Date
('COFI'); (ii) the average of the interbank offered rates for
six-month U.S. dollar deposits in the London market based on
quotations of major banks as most recently available generally 30
days prior to the applicable Adjustment Date ('Six-Month LIBOR'); or
(iii) the weekly average yield on U.S. Treasury securities adjusted
to a constant maturity of one year ('One-Year CMT') as published by
the Federal Reserve Board in Statistical Release H.15(519) and most
recently available as of the first business day generally 30 days
prior to the applicable Adjustment Date.
Interest Payments......................... Interest on the Bonds will be paid monthly on each Payment Date,
commencing in December 1997, in an amount (the 'Interest Payment
Amount') equal to the lesser of (i) interest accrued on the Bond
Principal Balance thereof immediately prior to such Payment Date at
the Bond Interest Rate for the related Interest Period (as defined
below) and (ii) the Guaranteed Interest Payment Amount (as defined
below). The 'Bond Interest Rate' on each Payment Date after the first
Payment Date will be a floating rate equal to the lesser of (i)(a)
with respect to each Payment Date up to and including the earlier of
(x) the Payment Date in December 2004 and (y) the Payment Date which
occurs on or prior to the date on which the aggregate Principal
Balance of the Home Equity Loans is less than 25% of the sum of the
aggregate Principal Balance of the Initial Home Equity Loans as of
the Cut-off Date and the Original Pre-Funded Amount, One-Month LIBOR
(as defined herein) plus
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
0.25%, and (b) with respect to each Payment Date thereafter, One-
Month LIBOR plus 0.50% and (ii) 14.51% per annum (the 'Maximum
Interest Rate'). The Bond Interest Rate for the first Payment Date
will equal 6.25% per annum. Interest on the Bonds in respect of any
Payment Date will accrue from the preceding Payment Date (or in the
case of the first Payment Date, from the Closing Date) through the
day preceding such Payment Date (each such period, an 'Interest
Period') on the basis of the actual number of days in the Interest
Period and a 360-day year.
As further described herein, with respect to the Bonds and any
Payment Date, to the extent that the amount calculated pursuant to
clause (i) of the definition of Interest Payment Amount exceeds the
Guaranteed Interest Payment Amount (such excess, the 'Carry-Forward
Amount'), the holders of the Bonds will be paid the amount of such
Carry-Forward Amount with interest thereon at the Bond Interest Rate
for the Bonds applicable from time to time after certain payments to
the holders of the Bonds and the Bond Insurer to the extent of
available funds. The 'Guaranteed Interest Payment Amount' for any
Payment Date is equal to the amount of interest that accrued on the
aggregate outstanding Principal Balance of the Home Equity Loans
payable on the related Due Date minus the aggregate amount of the
related Servicing Fee, the Indenture Trustee Fee, the Owner Trustee
Fee, the Bond Insurance Premium and the Minimum Spread (each as
defined below). With respect to each Home Equity Loan and each
Payment Date, the Servicer will be entitled to a fee (the 'Servicing
Fee') equal to 1/12 of the Servicing Fee Rate times the Principal
Balance of such Home Equity Loan as of such date. With respect to
each Home Equity Loan and each Payment Date, the Indenture Trustee
will be entitled to a fee (the 'Indenture Trustee Fee') equal to
1/12 of the Indenture Trustee Fee Rate times the Principal Balance of
such Home Equity Loan as of such date. For any Payment Date, the
'Servicing Fee Rate' is equal to 0.50% per annum, the 'Indenture
Trustee Fee Rate' is equal to 0.0125% per annum, the 'Owner Trustee
Fee' is $4,000 per annum (payable on the Payment Date in December of
each year) and the 'Bond Insurance Premium' is equal to 1/12 of the
per annum rate specified in the Insurance Agreement times the Bond
Principal Balance (the Bond Insurance Premium together with the Owner
Trustee Fee, the 'Administrative Fee'). With respect to each Home
Equity Loan and each Payment Date, the 'Minimum Spread' is equal to
1/12 of 0.50% per annum times the Principal Balance of such Home
Equity Loan as of such date. The Bond Insurance Policy does not cover
any Prepayment Interest Shortfalls, any Relief Act Shortfalls (each
as defined herein) or the Carry-Forward Amount, nor do the ratings
assigned to the Bonds address the payment of any Prepayment Interest
Shortfalls, any Relief Act Shortfalls or the Carry-Forward Amount.
Principal Payments........................ Principal payments will be payable on the Bonds on each Payment Date
in an aggregate amount equal to the Principal Payment Amount for such
Payment Date. The Principal Payment Amount will include, to the
extent of Available Funds (as defined herein) and except as otherwise
described herein, the principal portion of all scheduled monthly
payments (to the extent received or advanced) due from
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Mortgagors on the related Due Date, and all unscheduled amounts
received during the preceding calendar month that are allocable to
principal (including proceeds of repurchases, principal and
adjustments in the case of substitutions, prepayments, liquidations
and insurance (excluding proceeds paid in respect of the Bond
Insurance Policy)) and may be reduced as a result of
overcollateralization in excess of the required level, as described
herein. In addition, on any Payment Date, to the extent of funds
available therefor, Bondholders will also be entitled to receive
payments generally equal to the amount, if any, necessary to bring
the Subordination Amount up to the Required Subordination Amount
(such amount, the 'Subordination Increase Amount') and with respect
to the Payment Date immediately following the end of the Funding
Period, any amounts in the Pre-Funding Account after giving effect to
any purchase of Subsequent Home Equity Loans. On the Payment Date in
December 2027, principal will be payable on the Bonds in an amount
equal to the Bond Principal Balance on such Payment Date.
The 'Bond Principal Balance' of the Bonds on any date of
determination is the initial principal balance thereof as of the
Closing Date, reduced by all payments of principal thereon prior to
such date of determination.
Bond Insurer.............................. MBIA Insurance Corporation (the 'Bond Insurer'). See 'MBIA Insurance
Corporation' herein.
Bond Insurance Policy..................... On the Closing Date, the Bond Insurer will issue a Bond Insurance
Policy in favor of the Indenture Trustee for the benefit of the
holders of the Bonds. On each Payment Date, a claim will be made on
the Bond Insurance Policy to cover (a) any shortfall in amounts
available to make payments of the Interest Payment Amount (net of any
Prepayment Interest Shortfalls, to the extent not covered by the
Servicer by Compensating Interest (as defined herein), and any Relief
Act Shortfalls) and (b) the Subordination Deficit (as defined
herein), to the extent described herein. The Bond Insurance Policy
will also cover any unpaid Preference Amount (as defined herein). In
addition, the Bond Insurance Policy will guarantee the payment of the
outstanding Bond Principal Balance of each Bond on the Payment Date
in December 2027 (after giving effect to all other amounts
distributable and allocable to principal on such Payment Date, to the
extent described herein). The Bond Insurance Policy does not insure
the payment of the Carry-Forward Amount (as defined herein). See
'Description of the Bonds--Bond Insurance Policy' herein and
'Description of Credit Support' in the Prospectus.
The Certificates.......................... Trust Certificates, Series 1997-2. The Certificates will be issued
pursuant to the Trust Agreement and will represent the beneficial
ownership interest in the Issuer. The Certificates are not offered
hereby.
Credit Enhancement........................ The credit enhancement provided for the benefit of the Bondholders
consists solely of (a) the Net Monthly Excess Cashflow (as defined
herein), (b) the overcollateralization and (c) the Bond Insurance
Policy.
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Overcollateralization. Initially, the sum of the aggregate Principal
Balance of the Home Equity Loans as of the Cut-off Date and the
Original Pre-Funded Amount will exceed the aggregate Bond Principal
Balance of the Bonds as of the Closing Date by approximately
$10,461,961 or 4.7% of the sum of the aggregate Principal Balance of
the Home Equity Loans as of the Cut-off Date and the Original
Pre-Funded Amount. This amount is the required level of
overcollateralization (the 'Required Subordination Amount') as of the
Closing Date and may increase or decrease, subject to certain trigger
tests, in accordance with the provisions of the Indenture. In
addition, upon the end of the Funding Period, the Bond Insurer may
adjust the Required Subordination Amount. An increase would result in
a temporary period of accelerated amortization of the Bonds to
increase the actual level of overcollateralization to its required
level; a decrease would result in a temporary period of decelerated
amortization to reduce the actual level of overcollateralization to
its required level. See 'Description of the
Bonds--Overcollateralization Provisions.'
The Bond Insurance Policy. The Bonds will have the benefit of the
Bond Insurance Policy, as discussed more fully herein. See
'Description of the Bonds--Bond Insurance Policy' herein.
Mandatory Prepayments on the Bonds........ The Bonds will be prepaid in part on the Payment Date immediately
following the end of the Funding Period in the event that any amount
remains on deposit in the Pre-Funding Account on such Payment Date
after the purchase by the Issuer of the Subsequent Home Equity Loans,
if any. Although no assurance can be given, it is anticipated that
the principal amount of the Subsequent Home Equity Loans purchased by
the Issuer will require the application of substantially all of the
Original Pre-Funded Amount and that there should be no material
amount of principal prepaid to the Bonds from the Pre-Funding
Account. However, it is unlikely that the Seller will be able to
deliver Subsequent Home Equity Loans with an aggregate Principal
Balance identical to the Original Pre-Funded Amount. See 'Description
of the Bonds--Mandatory Prepayments on the Bonds' herein.
Advances.................................. The Servicer is required to make advances ('Advances') in respect of
delinquent payments of principal and interest on the Home Equity
Loans, subject to the limitations described herein. See 'Description
of the Bonds--Advances' herein and in the Prospectus.
Optional Redemption of the Bonds.......... The Bonds may be redeemed in whole, but not in part, by the Issuer on
any Payment Date on or after the earlier of (i) the Payment Date on
which the aggregate Principal Balance (as defined herein) of the Home
Equity Loans is less than or equal to 25% of the sum of the aggregate
Principal Balance of the Initial Home Equity Loans as of the Cut-off
Date and the Original Pre-Funded Amount or (ii) the Payment Date
occurring in December 2004. See 'Description of the Bonds--Optional
Redemption' herein and 'The Agreements--Termination; Redemption of
Bonds' in the Prospectus.
Special Prepayment Considerations......... The rate and timing of principal payments on the Bonds will depend,
among other things, on the rate and timing of principal payments
(including prepayments, defaults, liquidations and purchases of the
Home Equity Loans due to a breach of a representation or warranty)
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
on the Home Equity Loans. As is the case with mortgage-backed
securities generally, the Bonds are subject to substantial inherent
cash-flow uncertainties because the Home Equity Loans may be prepaid
at any time; however, a prepayment may subject the related Mortgagor
to a prepayment charge with respect to approximately 65.37% of the
Initial Home Equity Loans (by aggregate principal balance as of the
Cut-off Date). 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. Typically, the Initial Home Equity Loans with a prepayment
charge provision provide for a prepayment charge for partial
prepayments and full prepayments. Prepayment charges may be payable
for a period of time ranging from one to five years from the related
origination date. Such prepayment charges may reduce the rate of
prepayment on the Home Equity Loans.
Investors should be aware that approximately 2.21% of the Initial
Home Equity Loans are secured by second liens on the related
Mortgaged Properties. In addition, some of the Subsequent Home Equity
Loans may be secured by second liens on the related Mortgaged
Properties. Generally, Home Equity Loans secured by second liens are
not viewed by Mortgagors as permanent financing. Accordingly, such
Home Equity Loans may experience a higher rate of prepayment than
Home Equity Loans secured by first liens.
See 'Certain Yield and Prepayment Considerations' herein, and
'Maturity and Prepayment Considerations' in the Prospectus.
Special Yield Considerations.............. The yield to maturity on the Bonds will depend on, among other
things, the rate and timing of principal payments (including
prepayments, defaults, liquidations and purchases of the Home Equity
Loans due to a breach of a representation or warranty) on the Home
Equity Loans and the allocation thereof to reduce the Bond Principal
Balance thereof. The yield to maturity on the Bonds will also depend
on the Bond Interest Rate and the purchase price for such Bonds.
If the Bonds are purchased at a premium and principal payments
thereon occur at a rate faster than anticipated at the time of
purchase, the investor's actual yield to maturity will be lower than
that assumed at the time of purchase. Conversely, if the Bonds are
purchased at a discount and principal payments 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.
The Bonds were structured assuming, among other things, a prepayment
rate and corresponding weighted average lives as described herein.
The prepayment, yield and other assumptions to be used for pricing
purposes for the Bonds may vary as determined at the time of sale.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
See 'Certain Yield and Prepayment Considerations' herein and 'Yield
Considerations' in the Prospectus.
Federal Income Tax Consequences........... Upon the issuance of the Bonds, Thacher Proffitt & Wood, counsel to
the Company, will deliver its opinion generally to the effect that
based on the application of existing law and assuming compliance with
the Trust Agreement, for federal income tax purposes, the Bonds will
be characterized as indebtedness and not as representing an ownership
interest in the Trust Estate or an equity interest in the Issuer or
the Company. In addition, for federal income tax purposes, the Issuer
will not be (i) classified as an association taxable as a corporation
for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a 'publicly traded
partnership' as defined in Treasury Regulation Section 1.7704-1.
For further information regarding certain federal income tax
consequences of an investment in the Bonds see 'Federal Income Tax
Consequences' herein and 'Certain Federal Income Tax Consequences'
and 'State Tax Consequences' in the Prospectus.
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other retirement
plans and arrangements, including individual retirement accounts and
annuities, Keogh plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), or Section 4975 of the Code (each,
a 'Plan') should carefully review with its legal advisors whether the
purchase or holding of Bonds could give rise to a transaction that is
prohibited or is not otherwise permissible either under ERISA or
Section 4975 of the Code or cause the Home Equity Loans securing the
Bonds to be treated as plan assets for purposes of regulations of the
Department of Labor set forth in 29 C.F.R. 2510.3-101 (the 'Plan
Asset Regulations'). Although certain exceptions from the application
of the prohibited transaction rules and the Plan Asset Regulations
exist, there can be no assurance that any such exception will apply
with respect to the acquisition of the Bonds. Although not entirely
free from doubt, the Issuer believes that, as of the date hereof, the
Bonds will be treated as debt obligations without significant equity
features for purposes of the Plan Asset Regulations. Accordingly, a
Plan that acquires the Bonds should not be treated as having acquired
a direct interest in the assets of the Issuer. However, there can be
no complete assurance that the Bonds will be treated as debt
obligations without significant equity features for purposes of the
Plan Asset Regulations. Investors are advised to consult their
counsel and to review 'ERISA Considerations' herein and in the
Prospectus.
Legal Investment.......................... The Bonds will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended. Institutions whose investment activities are subject to
legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on investment
in the Bonds. See 'Legal Investment' herein.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Rating.................................... It is a condition to the issuance of the Bonds that they be rated
'AAA' by Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ('S&P') and 'Aaa' by Moody's Investors
Service, Inc. ('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. A
security rating does not address the frequency of prepayments of Home
Equity Loans, or the corresponding effect on yield to investors.
The ratings issued by S&P and Moody's on payment of principal and
interest on the Bonds do not cover the payment of the Carry-Forward
Amount. See 'Certain Yield and Prepayment Considerations' and
'Ratings' herein.
</TABLE>
S-11
<PAGE>
RISK FACTORS
Prospective Bondholders should consider, among other things, the items
discussed under 'Special Considerations' in the Prospectus and the following
factors in connection with the purchase of the Bonds:
UNDERWRITING STANDARDS
The Home Equity Loans were underwritten generally in accordance with
underwriting standards described in 'Description of the Home Equity
Pool--Underwriting' below which are primarily intended to provide single family
mortgage loans for non-conforming credits which do not satisfy the requirements
of typical 'A' credit borrowers. A 'non-conforming credit' means a mortgage loan
which is ineligible for purchase by FNMA or FHLMC due to credit characteristics
that do not meet the FNMA or FHLMC underwriting guidelines, including mortgagors
whose creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines and mortgagors who may have a record of credit
write-offs, outstanding judgments, prior bankruptcies and other credit items
that do not satisfy such FNMA or FHLMC underwriting guidelines. Accordingly,
Home Equity Loans underwritten under the Originators' (as defined herein)
non-conforming credit underwriting standards or to standards that do not meet
the requirements for typical 'A' credit borrowers are likely to experience rates
of delinquency, foreclosure and loss that are higher, and may be substantially
higher, than mortgage loans originated in accordance with the FNMA or FHLMC
underwriting guidelines or typical 'A' credit borrowers.
DELINQUENCIES AND POTENTIAL DELINQUENCIES
Approximately 1.71% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) were thirty days or more but less than
sixty days delinquent in their Monthly Payments as of the Cut-off Date.
Approximately 0.23% of the Initial Home Equity Loans (by aggregate principal
balance as of the Cut-off Date) were sixty days or more but less than ninety
days delinquent as of the Cut-off Date. None of the Initial Home Equity Loans
were ninety days or more delinquent in their Monthly Payments as of the Cut-off
Date.
The Seller commenced purchasing or originating mortgage loans pursuant to
its underwriting guidelines in February 1997. Accordingly, the Seller does not
have sufficient 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 Home Equity
Loans.
Approximately 24.26% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) are secured by Mortgaged Properties
located in the State of California. In the event California experiences a
decline in real estate values, losses on the Home Equity Loans may be greater
than otherwise would be the case.
Approximately 41.98% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) will have Loan-to-Value Ratios in
excess of 80%. None of such Home Equity Loans will be covered by a primary
mortgage insurance policy and consequently, such Home Equity Loans will be
affected to a greater extent than Home Equity Loans with a Loan-to-Value Ratio
equal to or less than 80% by any decline in the value of the related Mortgaged
Property. No assurance can be given that values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Home Equity Loans. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, and any secondary financing on the Mortgaged
Properties, 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.
Approximately 2.21% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) are secured by second liens on the
related Mortgaged Properties, which liens will be subordinate to the rights of
the mortgagee under the related first lien. Accordingly, investors will be
subject to a loss if the holder of a first lien on the related Mortgaged
Property is successful in foreclosure of its mortgage since no second lien or
encumbrances survive such a foreclosure. Also, due to the priority of the first
lien on the related Mortgaged Property, the holder of a Home Equity Loan secured
by a second lien may not be able to control the timing, method or procedure of
any foreclosure action relating to the Mortgaged Property. Investors should be
aware that any liquidation, insurance or condemnation proceeds received in
respect of such Home Equity Loans will be
S-12
<PAGE>
available to satisfy the outstanding balance of such Home Equity Loans only to
the extent that the claims of such first liens have been satisfied in full,
including any related foreclosure costs.
Approximately 5.07% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date) require monthly payments of principal
based on 30-year amortization schedules and have scheduled maturity dates of 15
years from the due date of the first monthly payment (each such Home Equity
Loan, a 'Balloon Loan'), in each case leaving a substantial portion of the
original principal amount due and payable on the respective scheduled maturity
date (a 'Balloon Payment'). The Balloon Loans entail a greater degree of risk
for prospective investors because the ability of a mortgagor to make a Balloon
Payment typically will depend upon the mortgagor's ability either to refinance
the related Balloon Loan or to sell the related Mortgaged Property. The
mortgagor's ability to sell or refinance will be affected by a number of
factors, including the level of prevailing mortgage rates at the time of sale or
refinancing, the mortgagor's equity in the related Mortgaged Property, the
financial condition and credit profile of the mortgagor, applicable tax laws and
general economic conditions. None of the Company, the Servicer, the Indenture
Trustee, the Seller or any of their respective affiliates, nor any other person,
is obligated to refinance any Balloon Loan.
THE SUBSEQUENT HOME EQUITY LOANS
Subsequent Home Equity Loans may have characteristics different from those
of the Initial Home Equity Loans. However, each Subsequent Home Loan must
satisfy the eligibility criteria referred to herein under 'Description of the
Home Equity Pool--Conveyance of Subsequent Home Equity Loans and the Pre-Funding
Account' at the time of its conveyance to the Trust Estate and must be
underwritten in accordance with the criteria set forth herein under 'Description
of the Home Equity Pool--Underwriting.'
MANDATORY PREPAYMENT
To the extent that amounts on deposit in the Pre-Funding Account have not
been fully applied to the purchase of Subsequent Home Equity Loans by the Issuer
by the end of the Funding Period, the Holders of the Bonds will receive, as
described herein, on the Payment Date immediately following the end of the
Funding Period, any amounts in the Pre-Funding Account after giving effect to
any purchase of Subsequent Home Equity Loans. Although no assurances can be
given, the Company intends that the principal amount of Subsequent Home Equity
Loans sold to the Trust Estate will require the application of substantially all
amounts on deposit in the Pre-Funding Account and that there will be no material
principal payment to the Bonds on such Payment Date.
RISK OF HOME EQUITY LOAN YIELD REDUCING BOND INTEREST RATE ON THE BONDS
The Bond Interest Rate is based upon, among other factors as described
herein under 'Description of the Bonds--Interest Payments on the Bonds,' the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Adjustable Rate Home Equity Loans
(COFI, Six-Month LIBOR, and One-Year CMT (each as defined herein)), as described
under 'Description of the Home Equity Pool' herein. The Mortgage Rate on each of
the Fixed Rate Home Equity Loans will not adjust and the Mortgage Rate of each
Adjustable Rate Home Equity Loan adjusts semi-annually or annually, commencing
after the Initial Period, based upon the related Index, whereas the Bond
Interest Rate on the Bonds adjusts monthly based upon One-Month LIBOR plus 0.25%
(or after the earlier of (x) the Payment Date in December 2004 and (y) the
Payment Date which occurs on or prior to the date on which the aggregate
Principal Balance of the Home Equity Loans is less than 25% of the sum of the
aggregate Principal Balance of the Initial Home Equity Loans as of the Cut-off
Date and the Original Pre-Funded Amount, One-Month LIBOR plus 0.50%), limited by
the Maximum Interest Rate (as defined herein). In addition, One-Month LIBOR and
the Indices on the Adjustable Rate Home Equity Loans may respond differently to
economic and market factors, and there is not necessarily any correlation
between them. Moreover, the Adjustable Rate Home Equity Loans are subject to
Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage Rates (each, as
defined herein). Thus, it is possible, for example, that One-Month LIBOR may
rise during periods in which the Indices are stable or falling or that, even if
both One-Month LIBOR and the Indices rise during the same period, One-Month
LIBOR may rise much more rapidly than the Indices. See 'Description of the
Bonds--Interest Payments on the Bonds.'
S-13
<PAGE>
DESCRIPTION OF THE HOME EQUITY POOL
GENERAL
The statistical information presented in this Prospectus Supplement
describes only the home equity loans included in the Trust Estate as of the
Closing Date (the 'Initial Home Equity Loans') and does not include home equity
loans purchased by the Issuer and included in the Trust Estate after the Closing
Date (the 'Subsequent Home Equity Loans' and, together with the Initial Home
Equity loans, the 'Home Equity Loans').
Subsequent Home Equity Loans are intended to be purchased by the Issuer
from the Seller from time to time on or before January 30, 1998, from funds on
deposit in the Pre-Funding Account. The Subsequent Home Equity Loans, if
available, will be sold by the Seller to the Issuer for inclusion in the Trust
Estate. The Purchase Agreement (as defined below) will provide that the
Subsequent Home Equity Loans must conform to certain specified characteristics
described below under '--Conveyance of Subsequent Home Equity Loans and the Pre-
Funding Account.' In the sole discretion of the Bond Insurer, Subsequent Home
Equity Loans with characteristics varying from those described herein may be
purchased by the Issuer and included in the Trust Estate; provided, however,
that the addition of such Home Equity Loans will not materially affect the
aggregate characteristics of the Home Equity Loans.
The Home Equity Pool will consist of conventional, fixed and
adjustable-rate, monthly payment, first and second lien mortgage loans with
terms to maturity of not more than 30 years from the date of origination or
modification. As of the Cut-off Date, the principal balance of the Initial Home
Equity Loans was equal to approximately $172,574,961. The Company will acquire
the Initial Home Equity Loans to be included in the Home Equity Pool from
NovaStar Assets Corp. ('NovaStar Assets'), a Delaware corporation that is a
wholly-owned limited purpose finance subsidiary of NovaStar Financial, Inc. (the
'Seller'), on the Closing Date pursuant to a home equity loan sale agreement
(the 'Sale Agreement') between the Company and NovaStar Assets. NovaStar Assets
will acquire the Initial Home Equity Loans from the Seller pursuant to a home
equity loan purchase agreement (the 'Purchase Agreement') among NovaStar Assets,
the Seller, the Indenture Trustee and the Issuer. The Seller acquired the
Initial Home Equity Loans from its affiliate NovaStar Mortgage, Inc. as further
described herein. All of the Home Equity Loans will be serviced by NovaStar
Mortgage, Inc. (in such capacity, the 'Servicer') directly or through
subservicers. The Company will convey the Initial Home Equity Loans to the
Issuer on the Closing Date pursuant to the Trust Agreement. The Seller will make
certain representations and warranties with respect to the Home Equity Loans
and, as more particularly described in the Prospectus, will have certain
repurchase or substitution obligations in connection with a breach of any such
representation or warranty, as well as in connection with an omission or defect
in respect of certain constituent documents required to be delivered with
respect to the Home Equity Loans, in any event if such breach, omission or
defect cannot be cured and it materially and adversely affects the value of the
related Home Equity Loan or the interests of holders of the Securities or the
Bond Insurer. See 'Description of the Agreements--Representations and
Warranties; Repurchases' in the Prospectus. The Home Equity Loans will have been
originated or acquired by the Originators in accordance with the underwriting
criteria described herein. See '--Underwriting' below.
The representations and warranties made by the Seller will be pledged to
the Indenture Trustee for the benefit of the Bondholders and the Bond Insurer.
Approximately 41.98% of the Initial Home Equity Loans (by aggregate
principal balance as of the Cut-off Date), will have Loan-to-Value Ratios in
excess of 80%. Such Initial Home Equity Loans will not be covered by a primary
mortgage insurance policy.
As of the Cut-off Date, the minimum and maximum Loan-to-Value Ratios at
origination for the initial Adjustable Rate Home Equity Loans were approximately
7.97% and 100.00%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the initial Adjustable Rate Home Equity Loans was approximately
79.49%. As of the Cut-off Date, the minimum and maximum Loan-to-Value Ratios at
origination for the initial Fixed Rate Home Equity Loans were approximately
1.90% and 102.67%, respectively, and the weighted average Loan-to-Value Ratio at
origination of the initial Fixed Rate Home Equity Loans was approximately
70.52%. As of the Cut-off Date, the minimum and maximum Combined Loan-to-Value
Ratios at origination for the initial second lien Fixed Rate Home Equity Loans
were approximately 14.16% and 110.00%, respectively, and the
S-14
<PAGE>
weighted average Combined Loan-to-Value Ratio at origination of the initial
second lien Fixed Rate Home Equity Loans was approximately 75.52%.
The Fixed Rate Home Equity Loans will contain a customary 'due-on-sale'
clause and the Adjustable Rate Home Equity Loans are generally assumable under
certain circumstances. See 'Certain Yield and Prepayment Considerations' herein.
Pursuant to the terms of the Servicing Agreement, the Servicer will be entitled
to all late payment charges received on the Home Equity Loans as additional
servicing compensation and such amounts will not be available for distribution
on the Securities.
MORTGAGE RATE ADJUSTMENT
The Mortgage Rate on each Home Equity Loan is fixed (with respect to 20.13%
of the Initial Home Equity Loans), adjusts semi-annually (with respect to 71.58%
of the Initial Home Equity Loans) or adjusts annually (with respect to 8.30% of
the Initial Home Equity Loans). Adjustments to the Mortgage Rates on the
Adjustable Rate Home Equity Loans commence after an initial period after
origination (the 'Initial Period') of six months, one year, two years or three
years, in each case on each applicable Adjustment Date to a rate equal to the
sum, generally rounded up to the nearest one-eighth of one percentage point
(12.5 basis points), of (i) the related Index plus (ii) a fixed percentage (the
'Gross Margin'). In addition, the Mortgage Rate on each Adjustable Rate Home
Equity Loan is subject on its first Adjustment Date following its origination to
a cap (the 'Initial Periodic Rate Cap ') and on each Adjustment Date thereafter
to a periodic rate cap (the 'Periodic Rate Cap'). All of the Adjustable Rate
Home Equity Loans are also subject to specified maximum and minimum lifetime
Mortgage Rates ('Maximum Mortgage Rates' and 'Minimum Mortgage Rates,'
respectively). The initial Adjustable Rate Home Equity Loans were generally
originated with an initial Mortgage Rate below the sum of the current Index and
the Gross Margin. Due to the application of the Periodic Rate Caps, Maximum
Mortgage Rates and Minimum Mortgage Rates, the Mortgage Rate on any initial
Adjustable Rate Home Equity Loan, as adjusted on any related Adjustment Date,
may not equal the sum of the related Index and the Gross Margin. The Due Date
for substantially all the Initial Home Equity Loans is the first day of the
month.
Approximately 98.95% of the Adjustable Rate Home Equity Loans will not have
reached their first Adjustment Date as of the Closing Date. The initial Mortgage
Rate is generally lower than the rate that would have been produced if the
applicable Gross Margin had been added to the related Index in effect at
origination. Adjustable Rate Home Equity Loans that have not reached their first
Adjustment Date are, therefore, subject to the initial Periodic Rate Cap on
their first Adjustment Date.
COST OF FUNDS INDEX
The Index applicable to the determination of the Mortgage Rates on the
negative amortization loans (which represent approximately 0.23% of the Initial
Home Equity Loans (by aggregate principal balance as of the Cut-off Date)) will
be the monthly weighted average cost of funds for member institutions of the
11th District of the Federal Home Loan Bank system as most recently published by
the Federal Home Loan Bank of San Francisco and generally made available as of
the date 30 days prior to the applicable Adjustment Date ('COFI').
SIX-MONTH LIBOR INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately 71.58% of the Initial Home Equity Loans (by aggregate principal
balance as of the Cut-off Date) will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market based on
quotations of major banks, as published in the Western Edition of The Wall
Street Journal ('Six-Month LIBOR') applicable on any Adjustment Date is the most
recent index figure available as of the date 45 days before such Adjustment
Date.
The table below sets forth historical average rates of Six-Month LIBOR for
the months indicated as made available from FNMA, which values may differ from
those published in the Western Edition of The Wall Street Journal. Such average
rates may fluctuate significantly from month to month as well as over longer
periods and may not increase or decrease in a constant pattern from period to
period. There can be no assurance that levels of Six-Month LIBOR published by
FNMA, or published on a different Reference Date would have been at the same
levels as those set forth below. The following does not purport to be
representative of future levels of Six-Month
S-15
<PAGE>
LIBOR (as published by FNMA). No assurance can be given as to the level of
Six-Month LIBOR on any Adjustment Date or during the life of any Adjustable Rate
Home Equity Loan based on Six-Month LIBOR.
SIX-MONTH LIBOR
<TABLE>
<CAPTION>
MONTH 1993 1994 1995 1996 1997
- ------------------------------------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January..................................................... 3.44% 3.39% 6.69% 5.34% 5.71%
February.................................................... 3.33 4.00 6.44 5.29 5.68
March....................................................... 3.38 4.25 6.44 5.52 5.96
April....................................................... 3.31 4.63 6.31 5.42 6.08
May......................................................... 3.44 5.00 6.06 5.64 6.01
June........................................................ 3.56 5.25 5.88 5.84 5.94
July........................................................ 3.56 5.33 5.88 5.92 5.83
August...................................................... 3.44 5.33 5.94 5.74 5.86
September................................................... 3.38 5.69 5.99 5.75 5.85
October..................................................... 3.50 6.00 5.95 5.58 5.80
November.................................................... 3.52 6.44 5.74 5.55
December.................................................... 3.50 7.00 5.56 5.62
</TABLE>
ONE-YEAR CMT INDEX
The Index applicable to the determination of the Mortgage Rate on
approximately 8.07% of the Initial Home Equity Loans (by aggregate principal
balance as of the Cut-off Date) will be the weekly average yield on U.S.
Treasury securities adjusted to a constant maturity of one year as published by
the Federal Reserve Board in Statistical Release H.15(519) and most recently
available as of the first business day generally 30 days prior to the Adjustment
Date ('One-Year CMT').
The table below sets forth historical average rates of One-Year CMT for the
months indicated as made available from Telerate Page 7052. Such average rates
may fluctuate significantly from month to month as well as over longer periods
and may not increase or decrease in a constant pattern from period to period.
There can be no assurance that levels of One-Year CMT published by Telerate Page
7052, or published on a different Reference Date would have been at the same
levels as those set forth below. The following does not purport to be
representative of future levels of One-Year CMT (as published by Telerate Page
7052). No assurance can be given as to the level of One-Year CMT on any
Adjustment Date or during the life of any Adjustable Rate Home Equity Loan based
on One-Year CMT.
ONE-YEAR CMT
<TABLE>
<CAPTION>
MONTH 1993 1994 1995 1996 1997
- ------------------------------------------------------------ ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
January..................................................... 3.50% 3.54% 7.08% 5.11% 5.60%
February.................................................... 3.38 3.85 6.73 4.94 5.52
March....................................................... 3.33 4.28 6.43 5.31 5.79
April....................................................... 3.25 4.74 6.27 5.53 5.99
May......................................................... 3.36 5.31 6.02 5.64 5.87
June........................................................ 3.55 5.24 5.66 5.81 5.69
July........................................................ 3.45 5.47 5.59 5.84 5.54
August...................................................... 3.47 5.56 5.72 5.69 5.56
September................................................... 3.36 5.74 5.64 5.84 5.46
October..................................................... 3.38 6.11 5.60 5.57 5.52
November.................................................... 3.58 6.48 5.45 5.43
December.................................................... 3.61 7.10 5.32 5.47
</TABLE>
S-16
<PAGE>
HOME EQUITY LOAN CHARACTERISTICS
All percentages of the Initial Home Equity Loans described herein are
approximate percentages (except as otherwise indicated) by aggregate principal
balance as of the Cut-off Date.
Except with respect to Balloon Loans, the Initial Home Equity Loans
generally have original terms to stated maturity of approximately 30 years.
Approximately 2.21% of the Initial Home Equity Loans are secured by second
liens on the related Mortgaged Properties.
Effective with the first payment due on an Adjustable Rate Home Equity Loan
after each related Adjustment Date, the Monthly Payment will be adjusted to an
amount that will fully amortize the outstanding principal balance of the Home
Equity Loan over its remaining term. The weighted average number of months from
the Cut-off Date to the next Adjustment Date for the Adjustable Rate Home Equity
Loans is 19 months.
As of the Cut-off Date, each Initial Home Equity Loan will have an unpaid
principal balance of not less than $2,536 or more than $1,745,000 and the
average unpaid principal balance of the Initial Home Equity Loans will be
approximately $120,513. The latest stated maturity date of any of the Initial
Home Equity Loans will be November 2027; however, the actual date on which any
Initial Home Equity Loan is paid in full may be earlier than the stated maturity
date due to unscheduled payments of principal.
The weighted average remaining term to stated maturity of the Initial Home
Equity Loans will be approximately 344 months. The weighted average original
term to maturity of the Initial Home Equity Loans will be approximately 346
months.
The earliest year of origination of any Initial Home Equity Loan is 1994
and the latest month and year of origination will be November 1997.
Certain of the Home Equity Loans provide for payment of a prepayment
charge. As to each such Home Equity Loan, the prepayment charge provisions
typically provide for payment of a prepayment charge for partial prepayments and
full prepayments. Prepayments may be payable for a period of time ranging from
one to five years from the related origination date. Prepayment charges received
on the Home Equity Loans will be available for distribution on the Bonds.
None of the Initial Home Equity Loans are Buydown Mortgage Loans.
Set forth below is a description of certain additional characteristics of
the Initial Home Equity Loans as of the Cut-off Date (except as otherwise
indicated). Dollar amounts and percentages may not add up to totals due to
rounding.
S-17
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF
NUMBER OF INITIAL PRINCIPAL CUT-OFF DATE
STATE HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- --------------------------------------------- -------------------- ---------------- ---------------------------
<S> <C> <C> <C>
AZ........................................... 22 $ 3,160,570 1.83%
CA........................................... 259 41,863,707 24.26
CO........................................... 27 3,815,420 2.21
CT........................................... 1 619,284 0.36
DC........................................... 12 1,765,229 1.02
FL........................................... 147 14,549,603 8.43
GA........................................... 25 2,836,001 1.64
HI........................................... 1 429,815 0.25
ID........................................... 15 1,156,783 0.67
IL........................................... 3 341,210 0.20
IN........................................... 34 2,195,785 1.27
LA........................................... 1 58,500 0.03
MA........................................... 1 128,800 0.07
MD........................................... 57 9,231,636 5.35
MI........................................... 71 7,573,119 4.39
MN........................................... 21 1,918,998 1.11
MO........................................... 71 6,769,191 3.92
MT........................................... 9 604,075 0.35
NC........................................... 12 1,029,389 0.60
NJ........................................... 3 846,586 0.49
NM........................................... 10 884,200 0.51
NV........................................... 63 7,921,566 4.59
NY........................................... 3 181,095 0.10
OH........................................... 7 473,763 0.27
OK........................................... 24 1,936,938 1.12
OR........................................... 88 10,648,408 6.17
PA........................................... 7 650,524 0.38
SC........................................... 4 302,413 0.18
TN........................................... 50 4,399,767 2.55
TX........................................... 57 6,194,159 3.59
UT........................................... 74 9,707,014 5.62
VA........................................... 85 8,814,336 5.11
WA........................................... 164 19,163,140 11.10
WV........................................... 1 194,770 0.11
WY........................................... 3 209,166 0.12
------ ---------------- -------
Total...................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
No more than approximately 1.02% of the Initial Home Equity Loans will be
secured by Mortgaged Properties located in any one zip code.
S-18
<PAGE>
INITIAL HOME EQUITY LOAN TYPE
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF
NUMBER OF INITIAL PRINCIPAL CUT-OFF DATE
LOAN TYPE HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
One-Year CMT................................... 75 $ 13,926,211 8.07%
COFI........................................... 2 390,461 0.23
2/28 Six-Month LIBOR........................... 809 103,538,513 60.00
3/27 Six-Month LIBOR........................... 16 1,418,665 0.82
Six-Month LIBOR................................ 104 18,566,628 10.76
Fixed Rate..................................... 338 25,984,527 15.06
Fixed Rate Balloon............................. 88 8,749,957 5.07
------ ---------------- -------
Total..................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
PRINCIPAL BALANCES OF THE INITIAL HOME EQUITY LOANS AT ORIGINATION
<TABLE>
<CAPTION>
ORIGINAL AGGREGATE UNPAID PERCENTAGE OF
HOME EQUITY LOAN NUMBER OF INITIAL PRINCIPAL CUT-OFF DATE
PRINCIPAL BALANCE($) HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
0.01 - 25,000.00...................... 65 $ 1,302,142 0.75%
25,000.01 - 50,000.00...................... 224 8,857,873 5.13
50,000.01 - 75,000.00...................... 305 19,041,509 11.03
75,000.01 - 100,000.00...................... 244 21,221,523 12.30
100,000.01 - 125,000.00...................... 169 18,942,084 10.98
125,000.01 - 150,000.00...................... 120 16,359,633 9.48
150,000.01 - 175,000.00...................... 77 12,460,902 7.22
175,000.01 - 200,000.00...................... 53 9,970,041 5.78
200,000.01 - 225,000.00...................... 37 7,833,930 4.54
225,000.01 - 250,000.00...................... 17 4,041,777 2.34
250,000.01 - 275,000.00...................... 21 5,561,999 3.22
275,000.01 - 300,000.00...................... 12 3,469,795 2.01
300,000.01 - 325,000.00...................... 9 2,817,775 1.63
325,000.01 - 350,000.00...................... 10 3,398,545 1.97
350,000.01 - 400,000.00...................... 21 7,996,511 4.63
400,000.01 - 450,000.00...................... 8 3,404,838 1.97
450,000.01 - 500,000.00...................... 9 4,310,679 2.50
500,000.01 - 550,000.00...................... 5 2,698,713 1.56
550,000.01 - 600,000.00...................... 11 6,412,888 3.72
600,000.01 - 650,000.00...................... 3 1,888,406 1.09
650,000.01 - 700,000.00...................... 4 2,717,415 1.57
700,000.01 - 750,000.00...................... 3 2,164,720 1.25
750,000.01 - 800,000.00...................... 2 1,562,495 0.91
850,000.01 - 900,000.00...................... 1 899,301 0.52
1,450,000.01 - 1,500,000.00..................... 1 1,494,467 0.87
1,700,000.01 - 1,750,000.00..................... 1 1,745,000 1.01
------ ---------------- -------
Total..................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The average original principal balance of the Initial Home Equity Loans
will be approximately $120,619.
S-19
<PAGE>
CURRENT BALANCES OF THE INITIAL HOME EQUITY LOANS AT THE CUT-OFF DATE
<TABLE>
<CAPTION>
CURRENT AGGREGATE UNPAID PERCENTAGE OF
HOME EQUITY LOAN NUMBER OF INITIAL PRINCIPAL CUT-OFF DATE
PRINCIPAL BALANCE ($) HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
0.01 - 25,000.00..................... 65 $ 1,302,142 0.75%
25,000.01 - 50,000.00..................... 224 8,857,873 5.13
50,000.01 - 75,000.00..................... 305 19,041,509 11.03
75,000.01 - 100,000.00...................... 245 21,321,523 12.35
100,000.01 - 125,000.00...................... 168 18,842,084 10.92
125,000.01 - 150,000.00...................... 120 16,359,633 9.48
150,000.01 - 175,000.00...................... 77 12,460,902 7.22
175,000.01 - 200,000.00...................... 53 9,970,041 5.78
200,000.01 - 225,000.00...................... 37 7,833,930 4.54
225,000.01 - 250,000.00...................... 17 4,041,777 2.34
250,000.01 - 275,000.00...................... 21 5,561,999 3.22
275,000.01 - 300,000.00...................... 12 3,469,795 2.01
300,000.01 - 325,000.00...................... 9 2,817,775 1.63
325,000.01 - 350,000.00...................... 10 3,398,545 1.97
350,000.01 - 400,000.00...................... 21 7,996,511 4.63
400,000.01 - 450,000.00...................... 8 3,404,838 1.97
450,000.01 - 500,000.00...................... 9 4,310,679 2.50
500,000.01 - 550,000.00...................... 5 2,698,713 1.56
550,000.01 - 600,000.00...................... 11 6,412,888 3.72
600,000.01 - 650,000.00...................... 3 1,888,406 1.09
650,000.01 - 700,000.00...................... 4 2,717,415 1.57
700,000.01 - 750,000.00...................... 3 2,164,720 1.25
750,000.01 - 800,000.00...................... 2 1,562,495 0.91
850,000.01 - 900,000.00...................... 1 899,301 0.52
1,450,000.01 - 1,500,000.00..................... 1 1,494,467 0.87
1,700,000.01 - 1,750,000.00..................... 1 1,745,000 1.01
------ ---------------- -------
Total......................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The average current principal balance of the Initial Home Equity Loans will
be approximately $120,513.
S-20
<PAGE>
ORIGINAL TERM TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE UNPAID
NUMBER OF INITIAL PRINCIPAL PERCENTAGE OF CUT-OFF DATE
ORIGINAL TERM HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
120............................................ 2 $ 24,349 0.01%
180............................................ 201 13,245,954 7.68
240............................................ 7 172,948 0.10
300............................................ 5 155,803 0.09
360............................................ 1,217 158,975,907 92.12
------ ---------------- -------
Total..................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The weighted average Original Term to Maturity at origination of the
Initial Home Equity Loans will be approximately 346 months.
ORIGINAL AMORTIZATION TERM TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE UNPAID
NUMBER OF INITIAL PRINCIPAL PERCENTAGE OF CUT-OFF DATE
ORIGINAL AMORTIZATION TERM HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
120............................................ 2 $ 24,349 0.01%
180............................................ 113 4,495,997 2.61
240............................................ 7 172,948 0.10
300............................................ 5 155,803 0.09
360............................................ 1,305 167,725,864 97.19
------ ---------------- -------
Total..................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The weighted average Original Amortization Term to Maturity of the Initial
Home Equity Loans will be approximately 355 months.
REMAINING TERM TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE UNPAID
NUMBER OF INITIAL PRINCIPAL PERCENTAGE OF CUT-OFF DATE
REMAINING TERM HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
1 - 120...................................... 2 $ 24,349 0.01%
121 - 180...................................... 201 13,245,954 7.68
181 - 240...................................... 7 172,948 0.10
241 - 300...................................... 5 155,803 0.09
301 - 360...................................... 1,217 158,975,907 92.12
------ ---------------- -------
Total........................................ 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The weighted average Remaining Term to Maturity of the Initial Home Equity
Loans will be approximately 344 months.
DOCUMENTATION TYPE
<TABLE>
<CAPTION>
AGGREGATE UNPAID
NUMBER OF INITIAL PRINCIPAL PERCENTAGE OF CUT-OFF DATE
DOCUMENTATION TYPE HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
Full........................................... 1,044 $111,340,374 64.52%
Limited........................................ 141 30,357,981 17.59
Stated......................................... 247 30,876,606 17.89
------ ---------------- -------
Total........................................ 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
S-21
<PAGE>
OCCUPANCY TYPES
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF CUT-OFF DATE
NUMBER OF INITIAL PRINCIPAL AGGREGATE PRINCIPAL
OCCUPANCY (AS INDICATED BY BORROWER) HOME EQUITY LOANS BALANCE BALANCE
- ------------------------------------------------- ----------------- ---------------- --------------------------
<S> <C> <C> <C>
Investment Non-Owner-Occupied.................... 102 $ 7,795,646 4.52%
Primary.......................................... 1,321 164,011,352 95.04
Secondary........................................ 9 767,963 0.45
------ ---------------- -------
Total....................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
RISK CATEGORIES OF INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF CUT-OFF DATE
NUMBER OF INITIAL PRINCIPAL AGGREGATE PRINCIPAL
RISK CATEGORY HOME EQUITY LOANS BALANCE BALANCE
- ------------------------------------------------- ----------------- ---------------- --------------------------
<S> <C> <C> <C>
A................................................ 651 $ 83,564,140 48.42%
A-............................................... 404 52,057,046 30.16
B................................................ 273 28,335,876 16.42
C................................................ 88 7,547,960 4.37
D................................................ 16 1,069,938 0.62
------ ---------------- -------
Total.......................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
See '--Underwriting' below for a description of the risk categories of the
Home Equity Loans.
PROPERTY TYPES
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF CUT-OFF DATE
NUMBER OF INITIAL PRINCIPAL AGGREGATE PRINCIPAL
PROPERTY TYPE HOME EQUITY LOANS BALANCE BALANCE
- ------------------------------------------------- ----------------- ---------------- --------------------------
<S> <C> <C> <C>
Two- to Four-Family.............................. 24 $ 2,826,006 1.64%
Single-family Attached........................... 21 1,684,500 0.98
Condominium...................................... 33 2,186,516 1.27
Single-family Detached........................... 1,298 161,305,598 93.47
Manufactured Housing............................. 36 2,418,828 1.40
Planned Unit Development......................... 20 2,153,514 1.25
------ ---------------- -------
Total....................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
PURPOSES OF INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
NUMBER OF INITIAL AGGREGATE UNPAID PERCENTAGE OF CUT-OFF DATE
PURPOSE HOME EQUITY LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- ------------------------------------------------ ----------------- ----------------- ---------------------------
<S> <C> <C> <C>
Const-Perm no Cash Out.......................... 2 $ 262,500 0.15%
Other--Cashout.................................. 1 38,812 0.02
Purchase--No Cash Out........................... 419 49,657,810 28.77
Purchase--Cashout............................... 20 2,629,275 1.52
Refinance--No Cash Out.......................... 333 41,895,125 24.28
Refinance--Cashout.............................. 657 78,091,439 45.25
------ ----------------- -------
Total...................................... 1,432 $ 172,574,961 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
In general, in the case of a Home Equity Loan made for 'no equity take-out'
refinance purposes, substantially all of the proceeds are used to pay in full
the principal balance of a previous mortgage loan of the mortgagor with respect
to a Mortgaged Property and to pay origination and closing costs associated with
such refinancing. Home Equity Loans made for 'equity take-out' refinance
purposes may involve the use of the proceeds to pay in full the principal
balance of a previous mortgage loan and related costs except that a portion of
the proceeds are generally retained by the mortgagor for uses unrelated to the
Mortgaged Property. The amount of such proceeds retained by the mortgagor may be
substantial.
S-22
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE UNPAID
NUMBER OF INITIAL PRINCIPAL PERCENTAGE OF CUT-OFF DATE
ORIGINAL LOAN-TO-VALUE RATIOS (%) HOME EQUITY LOANS BALANCE AGGREGATE PRINCIPAL BALANCE
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
0.01- 5.00.................................. 2 $ 11,536 0.01%
5.01- 10.00.................................. 15 382,293 0.22
10.01- 15.00.................................. 29 826,269 0.48
15.01- 20.00.................................. 33 1,153,529 0.67
20.01- 25.00.................................. 19 634,742 0.37
25.01- 30.00.................................. 12 479,869 0.28
30.01- 35.00.................................. 14 848,573 0.49
35.01- 40.00.................................. 8 499,585 0.29
40.01- 45.00.................................. 12 597,264 0.35
45.01- 50.00.................................. 20 1,609,500 0.93
50.01- 55.00.................................. 14 1,403,570 0.81
55.01- 60.00.................................. 34 3,257,391 1.89
60.01- 65.00.................................. 74 9,951,744 5.77
65.01- 70.00.................................. 101 13,415,466 7.77
70.01- 75.00.................................. 221 29,464,855 17.07
75.01- 80.00.................................. 261 35,598,551 20.63
80.01- 85.00.................................. 232 30,584,713 17.72
85.01- 90.00.................................. 310 39,342,758 22.80
90.01- 95.00.................................. 10 1,188,451 0.69
95.01-100.00.................................. 10 1,247,336 0.72
100.01-105.00.................................. 1 76,968 0.04
------ ---------------- -------
Total........................................ 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
The minimum and maximum Loan-to-Value Ratios at origination of the Initial
Home Equity Loans were approximately 1.90% and 102.67%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the Initial Home Equity
Loans was approximately 77.68%. As of the Cut-off Date, the minimum and maximum
Loan-to-Value Ratios at origination for the initial Adjustable Rate Home Equity
Loans were approximately 7.97% and 100.00%, respectively, and the weighted
average Loan-to-Value Ratio at origination of the initial Adjustable Rate Home
Equity Loans was approximately 79.49%. As of the Cut-off Date, the minimum and
maximum Loan-to-Value Ratios at origination for the initial Fixed Rate Home
Equity Loans were approximately 1.90% and 102.67%, respectively, and the
weighted average Loan-to-Value Ratio at origination of the initial Fixed Rate
Home Equity Loans was approximately 70.52%.
S-23
<PAGE>
SEASONING
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE UNPAID CUT-OFF DATE
NUMBER OF INITIAL PRINCIPAL AGGREGATE
MONTHS OF SEASONING HOME EQUITY LOANS BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
0- 6.................................................... 1,305 $166,505,925 96.48%
7-12.................................................... 114 5,028,541 2.91
13-18.................................................... 5 135,616 0.08
19-24.................................................... 2 32,794 0.02
25-30.................................................... 3 662,227 0.38
31-36.................................................... 3 209,858 0.12
------ ---------------- -------
Total............................................... 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
</TABLE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIO OF INITIAL SECOND LIEN HOME EQUITY LOANS
<TABLE>
<CAPTION>
AGGREGATE UNPAID PERCENTAGE OF CUT-OFF DATE
ORIGINAL COMBINED NUMBER OF INITIAL PRINCIPAL AGGREGATE PRINCIPAL BALANCE
LOAN-TO-VALUE RATIO (%) HOME EQUITY LOANS BALANCE INITIAL SECOND LIEN HOME EQUITY LOANS
- ------------------------------------- ----------------- ---------------- -------------------------------------
<S> <C> <C> <C>
10.01- 20.00........................ 1 $ 34,593 0.91%
20.01- 30.00........................ 1 14,874 0.39
30.01- 40.00........................ 6 247,211 6.47
40.01- 50.00........................ 5 124,465 3.26
50.01- 60.00........................ 15 468,176 12.26
60.01- 70.00........................ 12 393,055 10.29
70.01- 80.00........................ 22 699,454 18.31
80.01- 90.00........................ 29 1,015,010 26.57
90.01-100.00........................ 21 683,066 17.88
100.01-110.00........................ 4 140,257 3.67
--- ---------------- -------
Total........................... 116 $3,820,161 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
As of the Cut-off Date, the minimum and maximum Combined Loan-to-Value
Ratios at origination for the initial Second Lien Fixed Rate Home Equity Loans
were approximately 14.16% and 110.00%, respectively, and the weighted average
Combined Loan-to-Value Ratio at origination of the initial Second Lien Fixed
Rate Home Equity Loans was approximately 75.52%.
LIEN PRIORITY FOR FIXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE UNPAID AGGREGATE PRINCIPAL BALANCE
NUMBER OF INITIAL PRINCIPAL OF THE FIXED RATE INITIAL
LIEN PRIORITY HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
1st............................................ 310 $ 30,914,322 89.00%
2nd............................................ 116 3,820,161 11.00
--- ---------------- -------
Total..................................... 426 $ 34,734,484 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
S-24
<PAGE>
MORTGAGE RATES FOR FIXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE UNPAID AGGREGATE PRINCIPAL BALANCE
NUMBER OF INITIAL PRINCIPAL OF THE FIXED RATE INITIAL
MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
7.51- 8.00.................................... 2 $ 121,358 0.35%
8.01- 8.50.................................... 1 58,125 0.17
8.51- 9.00.................................... 17 2,421,052 6.97
9.01- 9.50.................................... 21 2,516,521 7.25
9.51-10.00.................................... 53 4,907,359 14.13
10.01-10.50.................................... 57 5,187,569 14.93
10.51-11.00.................................... 67 7,488,758 21.56
11.01-11.50.................................... 48 4,269,429 12.29
11.51-12.00.................................... 38 2,705,277 7.79
12.01-12.50.................................... 32 2,014,057 5.80
12.51-13.00.................................... 34 1,297,217 3.73
13.01-13.50.................................... 9 213,557 0.61
13.51-14.00.................................... 21 690,931 1.99
14.01-14.50.................................... 15 603,895 1.74
14.51-15.00.................................... 8 190,830 0.55
15.01-15.50.................................... 1 24,737 0.07
15.51-16.00.................................... 1 14,874 0.04
17.51-18.00.................................... 1 8,938 0.03
--- ---------------- -------
Total..................................... 426 $ 34,734,484 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average Mortgage Rate of the Fixed Rate Initial Home Equity
Loans will be approximately 10.83% per annum.
MORTGAGE RATES AT ORIGINATION FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME
EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF SIX-MONTH LIBOR INDEXED
NUMBER OF INITIAL PRINCIPAL RATE INITIAL HOME EQUITY
MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
6.51- 7.00.................................... 1 $ 633,750 0.51%
7.01- 7.50.................................... 7 938,776 0.76
7.51- 8.00.................................... 9 1,736,917 1.41
8.01- 8.50.................................... 26 4,735,550 3.83
8.51- 9.00.................................... 69 11,405,157 9.23
9.01- 9.50.................................... 100 14,263,122 11.55
9.51-10.00.................................... 168 22,712,703 18.39
10.01-10.50.................................... 165 22,769,890 18.43
10.51-11.00.................................... 184 22,210,459 17.98
11.01-11.50.................................... 102 12,120,893 9.81
11.51-12.00.................................... 74 7,792,986 6.31
12.01-12.50.................................... 16 1,176,902 0.95
12.51-13.00.................................... 6 765,952 0.62
13.01-13.50.................................... 1 204,750 0.17
13.51-14.00.................................... 1 56,000 0.05
--- ---------------- -------
Total..................................... 929 $123,523,806 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average Mortgage Rate of the Six-Month LIBOR Indexed Rate
Initial Home Equity Loans at origination will be approximately 10.15% per annum.
S-25
<PAGE>
MORTGAGE RATES AT ORIGINATION FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY
LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE ONE-YEAR CMT INDEXED
NUMBER OF INITIAL PRINCIPAL RATE INITIAL HOME EQUITY
MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
7.01- 7.50.................................... 4 $ 658,618 4.73%
7.51- 8.00.................................... 5 1,189,868 8.54
8.01- 8.50.................................... 7 2,523,461 18.12
8.51- 9.00.................................... 11 1,941,490 13.94
9.01- 9.50.................................... 16 2,142,368 15.38
9.51-10.00.................................... 15 2,884,457 20.71
10.01-10.50.................................... 6 1,059,852 7.61
10.51-11.00.................................... 8 1,106,326 7.94
11.01-11.50.................................... 2 289,771 2.08
11.51-12.00.................................... 1 130,000 0.93
-- ---------------- -------
Total..................................... 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average Mortgage Rate of the One-Year CMT Indexed Rate Initial
Home Equity Loans at origination will be approximately 9.21% per annum.
MINIMUM MORTGAGE RATES AT CUT-OFF DATE
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
AGGREGATE UNPAID SIX-MONTH LIBOR
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
MINIMUM MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- --------------------------------------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
6.51- 7.00........................................ 1 $ 633,750 0.51%
7.01- 7.50........................................ 7 938,776 0.76
7.51- 8.00........................................ 9 1,736,917 1.41
8.01- 8.50........................................ 26 4,735,550 3.83
8.51- 9.00........................................ 72 11,716,032 9.48
9.01- 9.50........................................ 104 14,482,282 11.72
9.51-10.00........................................ 170 23,690,664 19.18
10.01-10.50........................................ 169 22,811,484 18.47
10.51-11.00........................................ 181 21,769,577 17.62
11.01-11.50........................................ 96 11,437,213 9.26
11.51-12.00........................................ 70 7,367,956 5.96
12.01-12.50........................................ 16 1,176,902 0.95
12.51-13.00........................................ 6 765,952 0.62
13.01-13.50........................................ 1 204,750 0.17
13.51-14.00........................................ 1 56,000 0.05
--- ---------------- -------
Total......................................... 929 $123,523,806 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average Minimum Mortgage Rate of the Six-Month LIBOR Indexed
Rate Initial Home Equity Loans as of the Cut-off Date will be approximately
10.13% per annum.
S-26
<PAGE>
MINIMUM MORTGAGE RATES AT CUT-OFF DATE
FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
MINIMUM MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------------- ----------------- ---------------- ---------------------
<S> <C> <C> <C>
4.51- 5.00.......................................... 1 $ 61,322 0.44%
7.01- 7.50.......................................... 4 658,618 4.73
7.51- 8.00.......................................... 4 1,128,546 8.10
8.01- 8.50.......................................... 7 2,523,461 18.12
8.51- 9.00.......................................... 12 2,112,490 15.17
9.01- 9.50.......................................... 16 2,142,368 15.38
9.51-10.00.......................................... 16 3,214,457 23.08
10.01-10.50.......................................... 5 888,852 6.38
10.51-11.00.......................................... 7 776,326 5.57
11.01-11.50.......................................... 2 289,771 2.08
11.51-12.00.......................................... 1 130,000 0.93
-- ---------------- -------
Total........................................... 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average Minimum Mortgage Rate of the One-Year CMT Indexed Rate
Initial Home Equity Loans as of the Cut-off Date will be approximately 9.16% per
annum.
NEXT ADJUSTMENT DATE
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
AGGREGATE UNPAID SIX-MONTH LIBOR
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
NEXT ADJUSTMENT DATE HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- --------------------------------------------------- ----------------- ---------------- ------------------------
<S> <C> <C> <C>
January 1, 1998.................................... 1 $ 87,851 0.07%
February 1, 1998................................... 14 3,230,991 2.62
March 1, 1998...................................... 28 4,786,192 3.87
March 7, 1998...................................... 1 699,665 0.57
April 1, 1998...................................... 34 6,668,310 5.40
May 1, 1998........................................ 26 3,093,620 2.50
December 1, 1998................................... 1 108,433 0.09
March 1, 1999...................................... 9 740,838 0.60
June 1, 1999....................................... 1 773,003 0.63
July 1, 1999....................................... 4 375,937 0.30
August 1, 1999..................................... 119 17,768,939 14.39
September 1, 1999.................................. 232 30,507,826 24.70
September 10, 1999................................. 1 117,958 0.10
October 1, 1999.................................... 250 30,730,475 24.88
October 21, 1999................................... 1 67,500 0.05
November 1, 1999................................... 191 22,347,604 18.09
March 1, 2000...................................... 1 60,602 0.05
June 1, 2000....................................... 1 97,597 0.08
August 1, 2000..................................... 3 186,136 0.15
September 1, 2000.................................. 4 426,586 0.35
October 1, 2000.................................... 4 347,744 0.28
November 1, 2000................................... 3 300,000 0.24
--- ---------------- -------
Total......................................... 929 $123,523,806 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average remaining months to the next Adjustment Date of the
Six-Month LIBOR Indexed Rate Initial Home Equity Loans will be approximately 20
months.
S-27
<PAGE>
NEXT ADJUSTMENT DATE
FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE OF THE
AGGREGATE UNPAID ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
NEXT ADJUSTMENT DATE HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ---------------------------------------------- ----------------- ---------------- ----------------------------
<S> <C> <C> <C>
April 1, 1998................................. 1 $ 61,322 0.44%
May 1, 1998................................... 1 91,837 0.66
June 1, 1998.................................. 2 305,769 2.20
July 1, 1998.................................. 2 348,725 2.50
August 1, 1998................................ 10 1,849,728 13.28
September 1, 1998............................. 21 3,771,660 27.08
October 1, 1998............................... 26 5,428,265 38.98
October 15, 1998.............................. 1 330,000 2.37
November 1, 1998.............................. 11 1,738,903 12.49
-- ---------------- -------
Total.................................... 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average remaining months to the next Adjustment Date of the
One-Year CMT Indexed Rate Initial Home Equity Loans will be approximately 10
months.
GROSS MARGIN
FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF
DATE AGGREGATE
PRINCIPAL BALANCE
SIX-MONTH LIBOR
NUMBER OF INITIAL AGGREGATE UNPAID INDEXED RATE INITIAL
GROSS MARGINS (%) HOME EQUITY LOANS PRINCIPAL BALANCE HOME EQUITY LOANS
- --------------------------------------------- ----------------- ----------------- ------------------------------
<S> <C> <C> <C>
2.51- 3.00.................................. 1 $ 319,041 0.26%
4.01- 4.50.................................. 9 2,811,517 2.28
4.51- 5.00.................................. 231 32,321,386 26.17
5.01- 5.50.................................. 325 43,785,503 35.45
5.51- 6.00.................................. 211 26,108,128 21.14
6.01- 6.50.................................. 94 11,016,638 8.92
6.51- 7.00.................................. 33 5,191,410 4.20
7.01- 7.50.................................. 12 845,146 0.68
7.51- 8.00.................................. 5 516,946 0.42
8.01- 8.50.................................. 3 224,326 0.18
8.51- 9.00.................................. 2 129,259 0.10
9.01- 9.50.................................. 1 51,750 0.04
9.51-10.00.................................. 1 80,537 0.07
11.01-11.50.................................. 1 122,218 0.10
--- ----------------- -------
Total................................... 929 $ 123,523,806 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Gross Margin of the Six-Month LIBOR Indexed Rate
Initial Home Equity Loans will be approximately 5.48% per annum.
S-28
<PAGE>
GROSS MARGIN
FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL
BALANCE OF THE
ONE-YEAR CMT INDEXED
NUMBER OF INITIAL AGGREGATE UNPAID RATE INITIAL HOME
GROSS MARGINS (%) HOME EQUITY LOANS PRINCIPAL BALANCE EQUITY LOANS
- --------------------------------------------------- ----------------- ----------------- --------------------
<S> <C> <C> <C>
2.51-3.00.......................................... 2 $ 451,399 3.24%
4.01-4.50.......................................... 4 789,588 5.67
4.51-5.00.......................................... 12 1,722,764 12.37
5.01-5.50.......................................... 14 2,639,854 18.96
5.51-6.00.......................................... 18 4,384,165 31.48
6.01-6.50.......................................... 18 2,551,564 18.32
6.51-7.00.......................................... 4 672,849 4.83
7.01-7.50.......................................... 2 338,371 2.43
7.51-8.00.......................................... 1 375,657 2.70
-- ----------------- -------
Total......................................... 75 $13,926,211 100.00%
-- ----------------- -------
-- ----------------- -------
</TABLE>
The weighted average Gross Margin of the One-Year CMT Indexed Rate Initial
Home Equity Loans will be approximately 5.67% per annum.
MAXIMUM MORTGAGE RATE
FOR SIX-MONTH LIBOR INDEXED
RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
OF THE SIX-MONTH LIBOR
NUMBER OF INITIAL AGGREGATE UNPAID INDEXED RATE INITIAL HOME
MAXIMUM MORTGAGE RATE (%) HOME EQUITY LOANS PRINCIPAL BALANCE EQUITY LOANS
- ------------------------------------------------ ----------------- ----------------- ---------------------------
<S> <C> <C> <C>
13.01-13.50..................................... 1 $ 319,041 0.26%
13.51-14.00..................................... 1 149,788 0.12
14.01-14.50..................................... 11 2,272,362 1.84
14.51-15.00..................................... 16 3,413,882 2.76
15.01-15.50..................................... 41 5,471,051 4.43
15.51-16.00..................................... 71 11,437,452 9.26
16.01-16.50..................................... 93 12,836,477 10.39
16.51-17.00..................................... 173 25,344,888 20.52
17.01-17.50..................................... 158 21,664,976 17.54
17.51-18.00..................................... 173 20,534,795 16.62
18.01-18.50..................................... 98 10,805,433 8.75
18.51-19.00..................................... 66 6,664,001 5.39
19.01-19.50..................................... 21 1,715,224 1.39
19.51-20.00..................................... 4 633,688 0.51
20.01-20.50..................................... 1 204,750 0.17
20.51-21.00..................................... 1 56,000 0.05
--- ----------------- -------
Total...................................... 929 $ 123,523,806 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
The weighted average Maximum Mortgage Rate of the Six-Month LIBOR Indexed
Rate Initial Home Equity Loans will be approximately 17.05% per annum.
S-29
<PAGE>
MAXIMUM MORTGAGE RATE FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
MAXIMUM MORTGAGE RATES (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
11.51-12.00.................................... 1 $ 61,322 0.44%
12.51-13.00.................................... 1 390,077 2.80
13.01-13.50.................................... 1 47,829 0.34
13.51-14.00.................................... 1 65,110 0.47
14.01-14.50.................................... 4 735,707 5.28
14.51-15.00.................................... 4 733,060 5.26
15.01-15.50.................................... 10 3,502,042 25.15
15.51-16.00.................................... 10 1,751,569 12.58
16.01-16.50.................................... 13 1,706,253 12.25
16.51-17.00.................................... 14 2,691,347 19.33
17.01-17.50.................................... 5 801,780 5.76
17.51-18.00.................................... 7 892,419 6.41
18.01-18.50.................................... 1 91,837 0.66
18.51-19.00.................................... 3 455,858 3.27
-- ---------------- -------
Total..................................... 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average Maximum Mortgage Rate of the One-Year CMT Indexed Rate
Initial Home Equity Loans will be approximately 16.01% per annum.
INITIAL PERIODIC RATE CAP FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME EQUITY
LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE SIX-MONTH LIBOR
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
INITIAL PERIODIC RATE CAP (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
1.00........................................... 99 $ 18,109,808 14.66%
3.00........................................... 830 105,413,997 85.34
--- ---------------- -------
Total..................................... 929 $123,523,806 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average Initial Periodic Rate Cap of the Six-Month LIBOR
Indexed Rate Initial Home Equity Loans will be approximately 2.71%.
INITIAL PERIODIC RATE CAP FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY
LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
INITIAL RATE CAP (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- -------------------------------------------- ----------------- ---------------- -------------------------------
<S> <C> <C> <C>
1.00........................................ 2 $ 616,650 4.43%
2.00........................................ 68 12,486,441 89.66
3.00........................................ 4 433,043 3.11
5.00........................................ 1 390,077 2.80
-- ---------------- -------
Total.................................. 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average Initial Periodic Rate Cap of the One-Year CMT Indexed
Rate Initial Home Equity Loans will be approximately 2.07%.
S-30
<PAGE>
PERIODIC RATE CAP FOR SIX-MONTH LIBOR INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE SIX-MONTH LIBOR
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
PERIODIC RATE CAP (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- --------------------------------------------- ----------------- ---------------- ------------------------------
<S> <C> <C> <C>
1.00......................................... 926 $123,171,947 99.72%
1.50......................................... 3 351,858 0.28
--- ---------------- -------
Total................................... 929 $123,523,806 100.00%
--- ---------------- -------
--- ---------------- -------
</TABLE>
The weighted average Periodic Rate Cap of the Six-Month LIBOR Indexed Rate
Initial Home Equity Loans will be approximately 1.00%.
PERIODIC RATE CAP FOR ONE-YEAR CMT INDEXED RATE INITIAL HOME EQUITY LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF CUT-OFF DATE
AGGREGATE PRINCIPAL BALANCE
AGGREGATE UNPAID OF THE ONE-YEAR CMT
NUMBER OF INITIAL PRINCIPAL INDEXED RATE INITIAL
PERIODIC RATE CAP (%) HOME EQUITY LOANS BALANCE HOME EQUITY LOANS
- ----------------------------------------------- ----------------- ---------------- ---------------------------
<S> <C> <C> <C>
1.00........................................... 6 $ 1,049,693 7.54%
2.00........................................... 69 12,876,517 92.46
-- ---------------- -------
Total..................................... 75 $ 13,926,211 100.00%
-- ---------------- -------
-- ---------------- -------
</TABLE>
The weighted average Periodic Rate Cap of the One-Year CMT Indexed Rate
Initial Home Equity Loans will be approximately 1.92%.
NUMBER OF DAYS DELINQUENT
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE UNPAID CUT-OFF DATE
NUMBER OF INITIAL PRINCIPAL AGGREGATE
NUMBER OF DAYS DELINQUENT HOME EQUITY LOANS BALANCE PRINCIPAL BALANCE
- --------------------------------------------------------- ----------------- ---------------- -----------------
<S> <C> <C> <C>
0-29 Days................................................ 1,409 $169,241,767 98.07%
30-59 Days............................................... 20 2,943,417 1.71
60-89 Days............................................... 3 389,776 0.23
------ ---------------- -------
Total.................................................. 1,432 $172,574,961 100.00%
------ ---------------- -------
------ ---------------- -------
Delinquencies as a Percentage of Total Initial Home
Equity Loans Outstanding..........................1.94%
</TABLE>
CONVEYANCE OF SUBSEQUENT HOME EQUITY LOANS AND THE PRE-FUNDING ACCOUNT
Under the Purchase Agreement, following the initial issuance of the Bonds,
the Issuer will be obligated to purchase from the Seller for inclusion in the
Trust Estate during the Funding Period, subject to the availability thereof, the
Subsequent Home Equity Loans secured by first liens on fee simple interests in
one- to four-family residential real properties. Each Subsequent Home Equity
Loan will have been underwritten in accordance with the criteria set forth
herein under 'Description of the Home Equity Pool--Underwriting.' Subsequent
Home Equity Loans will be transferred to the Issuer pursuant to subsequent
transfer instruments (the 'Subsequent Transfer Instruments') between the Seller
and the Issuer. In connection with the purchase of Subsequent Home Equity Loans
on such dates of transfer (the 'Subsequent Transfer Dates'), the Issuer will be
required to pay to the Seller from amounts on deposit in the Pre-Funding Account
(as defined below) a cash purchase price of 100% of the principal balance
thereof. The Issuer will designate the Subsequent Transfer Date as the cut-off
date (the 'Subsequent Cut-off Date') with respect to the Subsequent Home Equity
Loans acquired on such date. The amount paid from the Pre-Funding Account on
each Subsequent Transfer Date will not include accrued interest on the
Subsequent Home Equity Loans. Following each Subsequent Transfer Date, the
aggregate Principal Balance of the Home Equity Loans will increase by an amount
equal to the aggregate Principal Balance of the Subsequent Home Equity Loans so
acquired and the amount in the Pre-Funding Account will decrease accordingly.
S-31
<PAGE>
On the Closing Date, approximately $50,000,000 (the 'Original Pre-Funded
Amount') will be deposited in an account (the 'Pre-Funding Account'), which
account will be in the name of the Indenture Trustee and shall be part of the
Trust Estate and which amount will be used to acquire Subsequent Home Equity
Loans. During the Funding Period (as defined herein), the Original Pre-Funding
Amount will be reduced (on any date of determination, the related Original
Pre-Funded Amount as so reduced, the 'Pre-Funded Amount') by the amount thereof
used to purchase Subsequent Home Equity Loans. The 'Funding Period' is the
period commencing on the Closing Date and ending on the earlier to occur of (i)
the date on which the amount on deposit in the Funding Account is less than
$10,000 and (ii) January 30, 1998.
Any conveyance of Subsequent Home Equity Loans on a Subsequent Transfer
Date is subject to certain conditions including, but not limited to: (a) each
such Subsequent Home Equity Loan must satisfy the representations and warranties
specified in the related Subsequent Transfer Instrument and the Purchase
Agreement; (b) the Seller will not select such Subsequent Home Equity Loans in a
manner that it reasonably believes is adverse to the interests of the
Bondholders or the Bond Insurer; (c) the Seller will deliver certain opinions of
counsel acceptable to the Bond Insurer and the Indenture Trustee with respect to
the validity of the conveyance of such Subsequent Home Equity Loans; and (d) as
of each Subsequent Cut-off Date, each Subsequent Home Equity Loan will satisfy
the following criteria: (i) such Subsequent Home Equity Loan may not be 30 or
more days contractually delinquent as of the related Subsequent Cut-off Date;
(ii) the remaining stated term to maturity of such Subsequent Home Equity Loan
will not exceed 360 months; (iii) the lien securing any such Subsequent Home
Equity Loan must be a first priority; (iv) such Subsequent Home Equity Loan must
have an outstanding Principal Balance of at least $10,000 as of the Subsequent
Cut-off Date; (v) such Subsequent Home Equity Loan will be underwritten in
accordance with the criteria set forth under 'Description of the Home Equity
Pool-Underwriting' herein; (vi) such Subsequent Home Equity Loan must have a
Loan-to-Value Ratio of no more than 90%; (vii) the stated maturity of such
Subsequent Home Equity Loan will be no later than February 1, 2028; (viii) such
Subsequent Home Equity Loan shall not provide for negative amortization; (ix)
such Subsequent Home Equity Loan must have a fixed Mortgage Rate of at least
7.88% or, if an adjustable rate loan, a Gross Margin of at least 2.7% and
following the purchase of such Subsequent Home Equity Loans by the Issuer, the
Home Equity Loans included in the Trust Estate must have a weighted average
interest rate, a weighted average remaining term to maturity and a weighted
average Loan-to-Value Ratio as of each respective Subsequent Cut-off Date which
will not vary materially from the Initial Home Equity Loans included initially
in the Trust Estate; and (x) any additional criteria in the Insurance Agreement.
In addition, the Indenture Trustee shall not agree to any transfer of Subsequent
Home Equity Loans without (i) a signed certification from the Bond Insurer that
the Subsequent Home Equity Loans are acceptable to the Bond Insurer and (ii) a
confirmation from the rating agencies that the acquisition of such Subsequent
Home Equity Loans will not result in a downgrade, withdrawal or qualification of
the ratings then in effect for the outstanding Bonds, without regard to the Bond
Insurance Policy. In the sole discretion of the Bond Insurer, Subsequent Home
Equity Loans with characteristics varying from those set forth above may be
purchased by Issuer and included in the Trust Estate; provided, however, that
the addition of such Home Equity Loans will not materially affect the aggregate
characteristics of the entire pool of Home Equity Loans. Upon the end of the
Funding Period, the Bond Insurer, in its sole discretion, may adjust the
Required Subordination Amount.
UNDERWRITING
All of the Initial Home Equity Loans were purchased by the Seller through
its affiliate the Servicer. The Servicer originated or purchased such Home
Equity Loans in the ordinary course of business on either (i) a loan by loan
basis directly from mortgage brokers and mortgage loan originators (each, an
'Originator') or (ii) a bulk or mini-bulk purchase from mortgage banks and other
mortgage originators (each, a 'HEL Collateral Seller'). No HEL Collateral Seller
sold more than 6.97% of the Initial Home Equity Loans (by aggregate principal
balance as of the Cut-off Date) to the Servicer.
The Home Equity Loans purchased from Originators' were underwritten in
accordance with the Servicer's underwriting guidelines described below.
Generally, the Home Equity Loans purchased from HEL Collateral Sellers were
re-underwritten to the underwriting guidelines of the respective HEL Collateral
Seller and assigned a NovaStar Mortgage Credit Rating outlined in the table
below. The underwriting guidelines of each HEL Collateral Seller conform
substantially to the Servicer's underwriting guidelines.
S-32
<PAGE>
The underwriting guidelines of the Servicer are intended to evaluate the
credit history of the potential borrower, the capacity and willingness of the
borrower to repay the loan and the adequacy of the collateral securing the loan.
Each loan applicant completes an application that includes information with
respect to the applicant's income, assets, liabilities and employment history. A
credit report is also submitted by the broker along with the loan application
which provides detailed information concerning the payment history of the
borrower on all of their debts. Prior to issuing an approval on the loan, the
underwriter runs an independent credit report to verify that the information
submitted by the broker is still accurate and up to date. An appraisal is also
required on all loans and in many cases a review appraisal or second appraisal
may be required depending on the value of the property and the underwriters
comfort with the original valuation. All appraisals are required to conform to
the Uniform Standards of Professional Appraisal Practice adopted by the
Appraisal Standards Board of the Appraisal Foundation and are generally on forms
acceptable to FNMA and FHLMC. The properties securing the mortgage loans are
generally appraised by qualified independent appraisers who are generally
approved by the related originator. The mortgagor may also include information
regarding verification of deposits at financial institutions where the mortgagor
had demand or savings accounts. In the case of investment properties, income
derived from the mortgage property may have been used for underwriting purposes.
The underwriting guidelines include three levels of applicant documentation
requirements, referred to as 'Full Documentation', 'Limited Documentation' and
'Stated Income'. Under the Full Documentation program applicants generally are
required to submit two written forms of verification of stable income for at
least 12 months. Under the Limited Documentation program, no such verification
is required, however, bank statements for the most recent consecutive 6-month
period are required to evidence cash flow. If business bank statements are used
in lieu of personal statements, an unaudited current profit loss statement must
accompany the bank statements. Under the Stated Income program, an applicant may
be qualified based on monthly income as stated in the loan application. Home
Equity Loans originated under the 'Limited Documentation' and 'Stated Income'
programs require less documentation and verification than do traditional 'Full
Documentation' programs. Generally, under such programs, minimal investigation
into a mortgagor's credit history and income profile would have been undertaken
by the originator and the underwriting for such mortgage loans will place a
greater emphasis on the value of the mortgaged property. Given that the Servicer
primarily lends to subprime borrowers, it places great emphasis on the ability
of collateral to protect against losses in the event of default by borrowers.
On a case-by-case basis, exceptions to the underwriting guidelines are made
where the Servicer believes compensating factors exist. Compensating factors may
consist of factors like length of time in residence, lowering of the borrower's
monthly debt service payments, the Loan-to-Value ratio or Combined Loan-to-Value
Ratio on the loan, as applicable, or other criteria that in the judgement of the
underwriter warrants an exception. All loans in excess of $350,000 currently
require the approval of the Chief Credit Officer of the Servicer. In addition,
the President of the Servicer approves all loans in excess of $750,000.
With respect to each Home Equity Loan secured by a second lien on the
related Mortgaged Property, the 'Combined Loan-to-Value Ratio' at any given time
generally will be the ratio, expressed as a percentage, the numerator of which
is the sum of (i) the original principal balance of the Home Equity Loan plus
(ii) the unpaid principal balance of any first lien on the related Mortgaged
Property as of such date, and the denominator of which is the lesser of (i) the
appraised value of the related Mortgaged Property as of the date of the
appraisal used by or on behalf of the Seller to underwrite such Home Equity Loan
or (ii) the sale price of the related Mortgaged Property if such a sale occurred
at origination of the Home Equity Loan.
S-33
<PAGE>
The Servicer's categories and criteria as of September 30, 1997, for
grading the credit history of potential borrowers and the maximum Loan-to-Value
ratios and Combined Loan-to-Value Ratios allowed for each category are shown in
the following table.
<TABLE>
<CAPTION>
A RISK A- RISK B RISK C RISK D RISK
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Mortgage History Maximum one 30-day Maximum two Maximum three 30 Maximum five 30 Maximum six 30
late and no 60-day 30-days late and days late and one days late and two days late, three
late within last no 60-day late 60 day late within 60 days late 60 days late and
12 months. within last 12 the last 12 within the last 12 two 90 days late
months. months. months. within the last 12
months. Must be
current at time of
origination.
Other Credit Limited 30 days Limited 60 days Limited 60 days Limited 90 days Discretionary.
late within the late within the late within the late within the Credit is
last 12 months. last 12 months. last 12 months. last 12 months. generally expected
Generally accounts to be late pay.
paid as agreed.
Bankruptcy Filings Chapter 13 must be Chapter 13 must be Chapter 13 must be Chapter 13 no Chapter 13 no
discharged minimum discharged minimum discharged minimum seasoning required seasoning required
of 1 year with re- of 1 year with re- of 1 year with re- on discharge. on discharge.
established established established Chapter 7 minimum Chapter 7 minimum
credit. Chapter 7 credit. Chapter 7 credit. Chapter 7 discharge of 2 discharge of 1
must be discharged must be discharged must be discharged years. year.
minimum of 2 years minimum of 2 years minimum of 2 years
with re- with re- with re-
established established established
credit. credit. credit.
Debt to Service 45% 45% 50% 55% 60%
Ratio:
Maximum Loan- 90% 90% 85% 75% 65%
to-Value Ratio
Maximum Combined 100% 100% 100% 90% 90%
Loan-to-Value
Ratio:
</TABLE>
Geographic Diversification. Close attention is paid to geographic
diversification in managing the Servicer's credit risk. The Servicer believes
one of the best tools for managing credit risk is to diversify the markets in
which it originates and purchases mortgage loans. The Servicer has established a
diversification policy to be followed in managing this credit risk which states
that no one market can represent a percentage of total mortgage loans owned by
the Servicer higher than twice that market's percentage of the total national
market share. While there generally is some geographic concentration in mortgage
loans originated through the bulk acquisition channel, over time the Servicer's
mortgage lending operation plans to diversify its credit risk by selecting
target markets through the wholesale channel.
Quality Control. Quality control reviews are conducted to ensure that all
mortgage loans, whether originated or purchased, meet quality standards. The
type and extent of the reviews depend on the production channel through which
the mortgage loan was obtained and the characteristics of the mortgage loan. The
Servicer reviews a high percentage of mortgage loans with (i) principal balances
in excess of $450,000, (ii) higher Loan-to-Value ratios or Combined
Loan-to-Value Ratios (in excess of 75%), (iii) limited documentation, or (iv)
made
S-34
<PAGE>
for 'cash out' refinance purposes. The Servicer also performs appraisal reviews
and compliance reviews as part of the quality control process to ensure
adherence to state and federal regulations.
ADDITIONAL INFORMATION
Prior to the issuance of the Bonds, Initial Home Equity Loans may be
removed from the Trust Estate as a result of incomplete documentation or
otherwise, if the Company deems such removal necessary or appropriate. A limited
number of other home equity loans may be included in the Home Equity Pool prior
to the issuance of the Bonds. The Company believes that the information set
forth herein will be substantially representative of the characteristics of the
Home Equity Pool as it will be constituted at the time the Bonds are issued,
although the range of Mortgage Rates and maturities and certain other
characteristics of the Home Equity Loans in the Home Equity Pool may vary,
although such variance will not be material.
THE SELLER
The information set forth in the following paragraphs has been provided by
the Seller. None of the Company, the Underwriter, the Owner Trustee, the
Indenture Trustee, the Bond Insurer, the Issuer or any of their respective
affiliates has made or will make any representation as to the accuracy or
completeness of the information provided by the Seller.
NovaStar Financial, Inc. (the 'Seller') was incorporated in the State of
Maryland on September 13, 1996. The common stock of the Seller is registered
under the Securities Act of 1933 and quoted on the New York Stock Exchange. The
Seller is subject to the reporting requirements of the Securities and Exchange
Act of 1934, and in accordance therewith, files reports and other information
with the Securities and Exchange Commission (the 'Commission'). Copies of such
materials may be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at its Public Reference
Section, 450 Fifth Street, N.W., Washington, D.C. 20549, or by mailing a written
request to the corporate secretary of the Seller at 1900 W. 47th Place, Suite
205, Westwood, Kansas 66205.
The Seller is a specialty finance company which (i) originates, acquires,
and services single family residential subprime mortgage loans; (ii) leverages
its assets using bank warehouse lines and repurchase agreements; (iii) issues
collateralized debt obligations through special purpose subsidiaries to finance
its subprime mortgage loans on a long-term basis; (iv) purchases high quality
mortgage securities in the secondary mortgage market; and (v) manages the
resulting combined portfolio of mortgage assets in its structure as a real
estate investment trust. The Seller originates subprime residential mortgage
loans through a nationwide network of unaffiliated wholesale loan brokers and
correspondents and purchases bulk pools of closed loans. For the nine months
ended September 30, 1997, the Seller originated $226 million in subprime
mortgage loans, including $51.2 million in the month of September.
The principal executive offices of the Seller are at 1900 W. 47th Place,
Suite 205, Westwood, Kansas 66205. Principal officers for the Seller's mortgage
lending operations are in Irvine, California. The Seller and its subsidiaries
have approximately 130 employees located primarily in Kansas and California. As
of September 30, 1997, the Seller had total consolidated assets of $699.1
million, total consolidated liabilities of $652.1 million, and stockholders'
equity of $47 million. For the nine months ended September 30, 1997, the Seller
had a net consolidated loss of $702,000.
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Home Equity Loans and the remedies
for any breach thereof that are assigned to the Indenture Trustee for the
benefit of the Bondholders and the Bond Insurer. Moreover, as discussed above,
the Seller has only limited assets available to perform its repurchase
obligations in respect of any breach of such representations and warranties,
relative to the potential amount of repurchase liability, and the total
potential amount of repurchase liability is expected to increase over time as
the Seller continues to originate, acquire and sell mortgage loans. There can be
no assurance that the Seller will continue to generate operating earnings, or
that it will be successful under its current business plan. Therefore,
prospective investors in the Bonds should consider the possibility that the
Seller will not have sufficient assets with which to satisfy its repurchase
obligations in the event that a substantial amount of Home Equity Loans are
required to be repurchased due to breaches of representations and warranties.
S-35
<PAGE>
THE ISSUER
NovaStar Home Equity Loan Trust Series 1997-2 is a business trust formed
under the laws of the State of Delaware pursuant to the Trust Agreement, dated
as of November 1, 1997, between the Company and Wilmington Trust Company as the
Owner Trustee for the transactions described in this Prospectus Supplement. The
Trust Agreement constitutes the 'governing instrument' under the laws of the
State of Delaware relating to business trusts. After its formation, the Issuer
will not engage in any activity other than (i) acquiring and holding the Home
Equity Loans and the other assets of the Issuer and proceeds therefrom, (ii)
issuing the Bonds and the Certificates, (iii) making payments on the Bonds and
the Certificates and (iv) engaging in other activities that are necessary,
suitable or convenient to accomplish the foregoing or are incidental thereto or
connected therewith. The Issuer is not expected to have any significant assets
other than those pledged as collateral to secure the Bonds.
The assets of the Issuer will consist of the Home Equity Loans and certain
related assets pledged to secure the Bonds.
The Issuer's principal offices are in Wilmington, Delaware, in care of
Wilmington Trust Company, as Owner Trustee.
THE OWNER TRUSTEE
Wilmington Trust Company is the Owner Trustee under the Trust Agreement.
The Owner Trustee is a Delaware banking corporation and its principal offices
are located in Wilmington, Delaware.
Neither the Owner Trustee nor any director, officer or employee of the
Owner Trustee will be under any liability to the Issuer or the Bondholders under
the Trust Agreement under any circumstances, except for the Owner Trustee's own
misconduct, gross negligence, bad faith or grossly negligent failure to act or
in the case of the inaccuracy of certain representations made by the Owner
Trustee in the Trust Agreement. All persons into which the Owner Trustee may be
merged or with which it may be consolidated or any person resulting from such
merger or consolidation shall be the successor of the Owner Trustee under the
Trust Agreement.
THE INDENTURE TRUSTEE
First Union National Bank, a national banking association, will act as
Indenture Trustee. A copy of the Indenture will be provided by the Issuer
without charge upon written request. Requests should be addressed to the
Indenture Trustee at First Union National Bank, 230 S. Tryon Street, 9th Floor,
Charlotte, North Carolina 28288-1179, Attention: NovaStar Home Equity Loan Trust
Series 1997-2.
MBIA INSURANCE CORPORATION
The following information has been supplied by MBIA Insurance Corporation
(the 'Bond Insurer') for inclusion in this Prospectus Supplement.
The Bond 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 Bond Insurer. The Bond 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 Northern Mariana Islands, the Virgin Islands of
the United States and the Territory of Guam. The Bond 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 payment of dividends by the Bond Insurer, changes
in control and transactions among affiliates. Additionally, the Bond Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
On November 14, 1997, MBIA Inc. announced the signing of a definitive
agreement to merge with CapMAC Holdings Inc. ('CHI'), the parent company of
Capital Markets Assurance Corporation ('CapMAC'), in a stock-for-stock
transaction valued at $607 million. The announcement also stated that all
outstanding policies issued by CapMAC will be backed by the full financial
resources of MBIA Inc., and that the agreement is subject to regulatory
approvals and approval by CHI shareholders.
S-36
<PAGE>
The consolidated financial statements of the Bond Insurer, a wholly owned
subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1996 and
December 31, 1995 and for the three years ended December 31, 1996, 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, 1996 and the
consolidated financial statements of the Bond Insurer and its subsidiaries for
the nine months ended September 30, 1997 and for the periods ending September
30, 1997 and September 30, 1996 included in the Quarterly Report on Form 10-Q of
MBIA Inc. for the period ending September 30, 1997 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 Bond Insurer and its subsidiaries included
in 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 Bonds
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 Bond Insurer
determined in accordance with statutory accounting practices prescribed or
permitted by insurance regulatory authorities ('SAP') and generally accepted
accounting principles ('GAAP'):
<TABLE>
<CAPTION>
SAP
---------------------------------------
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Admitted Assets............................................................ $ 4,476 $5,165
Liabilities................................................................ 3,009 3,457
Capital and Surplus........................................................ 1,467 1,708
<CAPTION>
GAAP
---------------------------------------
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
(Audited) (Unaudited)
(In millions)
<S> <C> <C>
Assets..................................................................... $ 5,066 $5,819
Liabilities................................................................ 2,262 2,594
Shareholder's Equity....................................................... 2,804 3,225
</TABLE>
Copies of the financial statements of the Bond Insurer incorporated by
reference herein and copies of the Bond Insurer's 1996 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Bond Insurer. The address of the Bond
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Bond Insurer is (914) 273-4545.
The Bond 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 Bond Insurance Policy and Bond Insurer set
forth under the headings 'Description of the Bonds--Bond Insurance Policy' and
'MBIA Insurance Corporation'. Additionally, the Insurer makes no representation
regarding the Bonds or the advisability of investing in the Bonds.
Moody's Investors Service, Inc. rates the claims paying ability of the Bond
Insurer 'Aaa.'
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the claims paying ability of the Bond Insurer 'AAA.'
Fitch Investors Service, L.P. rates the claims paying ability of the Bond
Insurer 'AAA.'
Each rating of the Bond Insurer should be evaluated independently. The
ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Bond 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.
S-37
<PAGE>
The above ratings are not recommendations to buy, sell or hold the Bonds,
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 Bonds. The Bond Insurer
does not guaranty the market price of the Bonds nor does it guaranty that the
ratings on the Bonds will not be revised or withdrawn.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds will be issued pursuant to the Indenture, dated as of November 1,
1997, between the Issuer and First Union National Bank, as Indenture Trustee.
The Certificates (together with the Bonds, the 'Securities') will be issued
pursuant to the Trust Agreement, dated as of November 1, 1997, between the
Company and Wilmington Trust Company, as Owner Trustee. The following summaries
describe certain provisions of the Securities, the Indenture, the Trust
Agreement and the Servicing Agreement. The summaries do not purport to be
complete and are subject to, and qualified in their entirety by reference to,
the provisions of the applicable agreement. Only the Bonds are offered hereby.
The Bonds will be secured by the pledge by the Issuer of its assets to the
Indenture Trustee pursuant to the Indenture, which assets will consist of the
following (such assets, collectively, the 'Trust Estate'): (i) the Home Equity
Loans; (ii) collections in respect of principal and interest of the Home Equity
Loans received after the Cut-off Date or Subsequent Cut-off Date, as applicable
(other than payments due on or before the Cut-off Date or the Subsequent Cut-off
Date, as applicable); (iii) the amounts on deposit in any Collection Account (as
defined in the Prospectus), including the account in which amounts are deposited
prior to payment to the Bondholders (the 'Payment Account'), including net
earnings thereon; (iv) certain insurance policies maintained by the Mortgagors
or by or on behalf of the Servicer or any related subservicer in respect of the
Home Equity Loans; (v) an assignment of the Company's rights under the Sale
Agreement; (vi) an assignment of the Issuer's rights under the Servicing
Agreement; (vii) amounts on deposit in the Interest Coverage Account and the
Pre-Funding Account and (viii) proceeds of the foregoing.
The Bonds will be issued in denominations of $25,000 and integral multiples
of $1,000 in excess thereof. See '--Book-Entry Bonds' below.
BOOK-ENTRY BONDS
General. Beneficial Owners that are not Participants or Intermediaries (as
defined in the Prospectus) but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Bonds may do so only
through Participants and Intermediaries. In addition, Beneficial Owners will
receive all payments of principal of and interest on the related Book-Entry
Bonds from the Paying Agent (as defined in the Prospectus) through DTC and
Participants. Accordingly, Beneficial Owners may experience delays in their
receipt of payments. Unless and until Definitive Bonds are issued for the
related Book-Entry Bonds, it is anticipated that the only registered Bondholder
of such Book-Entry Bonds will be Cede & Co., as nominee of DTC. Beneficial
Owners will not be recognized by the Indenture Trustee or the Servicer as
Bondholders, as such term is used in the Indenture, and Beneficial Owners will
be permitted to receive information furnished to Bondholders and to exercise the
rights of Bondholders only indirectly through DTC, its Participants and
Intermediaries.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the 'Rules'), DTC is required to make book-entry transfers of
Book-Entry Bonds among Participants and to receive and transmit payments of
principal of, and interest on, such Book-Entry Bonds. Participants and
Intermediaries with which Beneficial Owners have accounts with respect to such
Book-Entry Bonds similarly are required to make book-entry transfers and receive
and transmit such payments on behalf of their respective Beneficial Owners.
Accordingly, although Beneficial Owners will not possess physical certificates
evidencing their interests in the Book-Entry Bonds, the Rules provide a
mechanism by which Beneficial Owners, through their Participants and
Intermediaries, will receive payments and will be able to transfer their
interests in the Book-Entry Bonds.
None of the Company, the Servicer, the Bond Insurer, the Owner Trustee, the
Issuer or the Indenture Trustee will have any liability for any actions taken by
DTC or its nominee, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Book-Entry
S-38
<PAGE>
Bonds held by Cede, as nominee for DTC, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.
Definitive Bonds. Definitive Bonds will be issued to Beneficial Owners or
their nominees, respectively, rather than to DTC or its nominee, only under the
limited conditions set forth in the Prospectus under 'Description of the
Securities--Book-Entry Registration and Definitive Securities.'
Upon the occurrence of an event described in the Prospectus in the seventh
paragraph under 'Description of the Securities--Form of Book-Entry Registration
and Definitive Securities,' the Indenture Trustee is required to notify, through
DTC, Participants who have ownership of Book-Entry Bonds as indicated on the
records of DTC of the availability of Definitive Bonds for their Book-Entry
Bonds. Upon surrender by DTC of the definitive certificates representing the
Book-Entry Bonds and upon receipt of instructions from DTC for re-registration,
the Indenture Trustee will reissue the Book-Entry Bonds as Definitive Bonds
issued in the respective principal amounts owned by individual Beneficial
Owners, and thereafter the Indenture Trustee will recognize the holders of such
Definitive Bonds as Bondholders under the Indenture.
For additional information regarding DTC and the Book-Entry Bonds, see
'Description of the Securities--Book-Entry Registration and Definitive
Securities' in the Prospectus.
PAYMENTS
Payments on the Bonds will be made by the Indenture Trustee or the Paying
Agent on the 25th day of each month or, if such day is not a Business Day, then
the next succeeding Business Day, commencing in December 1997. Payments on the
Bonds will be made to the persons in whose names such Bonds are registered at
the close of business on the day prior to each Payment Date or, if the Bonds are
no longer Book-Entry Bonds, on the Record Date. See 'Description of the
Securities--Distributions' in the Prospectus. Payments will be made by check or
money order mailed (or upon the request, at least five Business Days prior to
the related Record Date, of a Holder owning Bonds having denominations
aggregating at least $5,000,000, by wire transfer or otherwise) to the address
of the person entitled thereto (which, in the case of Book-Entry Bonds, will be
DTC or its nominee) as it appears on the Security Register on the related Record
Date. However, the final payment in respect of the Bonds will be made only upon
presentation and surrender thereof at the office or the agency of the Indenture
Trustee specified in the notice to Holders of such final payment. A 'Business
Day' is any day other than (i) a Saturday or Sunday or (ii) a day on which
banking institutions in New York City, California, Kansas or Delaware or in the
city in which the corporate trust offices of the Indenture Trustee or the
principal office of the Bond Insurer are located, are required or authorized by
law to be closed.
AVAILABLE FUNDS
The 'Available Funds' for any Payment Date will equal the amount received
by the Indenture Trustee and available in the Payment Account on each Payment
Date. The Available Funds will generally be equal to the sum of (i) the
aggregate amount of scheduled payments on the related Home Equity Loans due on
the related Due Date and received on or prior to the related Determination Date,
(ii) any amounts representing interest on amounts in the Payment Account and
miscellaneous fees and collections, including assumption fees and prepayment
penalties (but excluding late fees), (iii) any unscheduled payments and
receipts, including Mortgagor prepayments on such Home Equity Loans, received
during the related Prepayment Period (as defined herein), and (iv) all Advances
made for such Payment Date in respect of such Home Equity Loans, in each case
net of amounts reimbursable therefrom to the Servicer and any subservicer and
reduced by Servicing Fees, Administrative Fees and fees of the Indenture Trustee
paid by the Servicer. In addition, on the Payment Date relating to the Due
Period in which the termination of the Pre-Funding Period occurred, Available
Funds will include the amount on deposit in the Pre-Funding Account at such
time, plus on each Payment Date on or prior to the Payment Date in January 1998,
Available Funds will include the amount, if any, withdrawn from the Interest
Coverage Account. With respect to any Payment Date, (i) the 'Due Date' is the
first day of the month in which such Payment Date occurs, and (ii) the
'Determination Date' is the 15th day of the month in which such Payment Date
occurs, or if such day is not a Business Day, the immediately preceding Business
Day.
S-39
<PAGE>
INTEREST PAYMENTS ON THE BONDS
On each Payment Date, holders of the Bonds will be entitled to receive an
amount (the 'Interest Payment Amount') equal to the lesser of (i) interest
accrued on the Bond Principal Balance thereof immediately prior to such Payment
Date at the Bond Interest Rate (as defined below) for the related Interest
Period and (ii) the Guaranteed Interest Payment Amount (as defined below). With
respect to each Payment Date, interest payable on the Bonds will accrue during
the Interest Period. Interest will be calculated on the basis of the actual
number of days in the Interest Period and a 360-day year. Notwithstanding the
foregoing, if payments are not made as required under the Bond Insurance Policy,
additional interest shortfalls may be allocated to the Bonds as described below.
See 'Description of the Bonds--Bond Insurance Policy.'
On each Payment Date after the first Payment Date, the 'Bond Interest Rate'
will be a floating rate equal to the lesser of (i)(a) with respect to each
Payment Date up to and including the earlier of (x) the Payment Date in December
2004 and (y) the Payment Date which occurs on or prior to the date on which the
aggregate Principal Balance of the Home Equity Loans is less than 25% of the sum
of the aggregate Principal Balance of the Initial Home Equity Loans as of the
Cut-off Date and the Original Pre-Funded Amount, One-Month LIBOR (as defined
herein) plus 0.25%, and (b) with respect to each Payment Date thereafter,
One-Month LIBOR plus 0.50% and (ii) 14.51% per annum (the 'Maximum Interest
Rate'). On the first Payment Date, the Bond Interest Rate will be equal to 6.25%
per annum.
As further described herein, with respect to the Bonds and any Payment
Date, to the extent that the amount calculated pursuant to clause (i) of the
definition of Interest Payment Amount exceeds the Guaranteed Interest Payment
Amount (such excess, the 'Carry-Forward Amount'), the holders of the Bonds will
be paid the amount of such Carry-Forward Amount with interest thereon at the
Bond Interest Rate for the Bonds applicable from time to time after certain
payments to the holders of the Bonds and the Bond Insurer to the extent of
available funds. The 'Guaranteed Interest Payment Amount' for any Payment Date
is equal to the amount of interest that accrued on the aggregate outstanding
Principal Balance of the Home Equity Loans payable on the related Due Date minus
the aggregate amount of the related Servicing Fee, the Indenture Trustee Fee,
the Owner Trustee Fee, the Bond Insurance Premium and the Minimum Spread (each
as defined below). With respect to each Home Equity Loan and each Payment Date,
the Servicer will be entitled to a fee (the 'Servicing Fee') equal to 1/12 of
the Servicing Fee Rate times the Principal Balance of such Home Equity Loan as
of such date. With respect to each Home Equity Loan and each Payment Date, the
Indenture Trustee will be entitled to a fee (the 'Indenture Trustee Fee') equal
to 1/12 of the Indenture Trustee Fee Rate times the Principal Balance of such
Home Equity Loan as of such date. For any Payment Date, the 'Servicing Fee Rate'
is equal to 0.50% per annum, the 'Indenture Trustee Fee Rate' is equal to
0.0125% per annum, the 'Owner Trustee Fee' is $4,000 per annum (payable on the
Payment Date in December of each year) and the 'Bond Insurance Premium' is equal
to 1/12 of the per annum rate specified in the Insurance Agreement times the
Bond Principal Balance (the Bond Insurance Premium together with the Owner
Trustee Fee, the 'Administrative Fee'). With respect to each Home Equity Loan
and each Payment Date, the 'Minimum Spread' is equal to 1/12 of 0.50% per annum
times the Principal Balance of such Home Equity Loan as of such. The Bond
Insurance Policy does not cover any Prepayment Interest Shortfalls, any Relief
Act Shortfalls (each as defined herein) or the Carry-Forward Amount, nor do the
ratings assigned to the Bonds address the payment of any Prepayment Interest
Shortfalls, any Relief Act Shortfalls or the Carry-Forward Amount.
As described herein, the Interest Payment Amount allocable to the Bonds is
based on the Bond Principal Balance. The 'Bond Principal Balance' of any Bond as
of any date of determination is equal to the initial principal balance thereof
as of the Closing Date, reduced by all amounts allocable to the Principal
Payment Amount and the Subordination Increase Amount previously distributed with
respect to such Bond.
The 'Principal Balance' of any Home Equity Loan is, at any given time, the
Principal Balance as of the Cut-off Date or Subsequent Cut-off Date, as
applicable, of such Home Equity Loan, minus (a) the sum of all amounts paid or
advanced with respect to such Home Equity Loan with respect to principal and (b)
the principal portion of any losses with respect thereto for any previous
Payment Date.
S-40
<PAGE>
CALCULATION OF ONE-MONTH LIBOR
On the second business day preceding each Payment Date, commencing with the
Payment Date occurring in December 1997 (each such date, an 'Interest
Determination Date'), the Indenture Trustee will determine the London interbank
offered rate for one-month United States dollar deposits ('One-Month LIBOR') for
the next Interest Period for the Bonds on the basis of the offered rates of the
Reference Banks for one-month United States dollar deposits, as such rates
appear on the Telerate Page 3750, as of 11:00 a.m. (London time) on such
Interest Determination Date. If such rate does not appear on Telerate Page 3750,
the rate for that day will be determined on the basis of the rates at which
deposits in United States dollars are offered by the Reference Banks at
approximately 11:00 a.m., London time, on that day to prime banks in the London
interbank market for a period equal to the relevant Interest Period (commencing
on the first day of such Interest Period). The Indenture Trustee will request
the principal London office of each of the Reference Banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
for that day will be the arithmetic mean of the quotations. If fewer than two
quotations are provided as requested, the rate for that day will be the
arithmetic mean of the rates quoted by major banks in The City of New York,
selected by the Indenture Trustee, at approximately 11:00 a.m., New York City
time, on that day for loans in United States dollars to leading European banks
for a period equal to the relevant Interest Period (commencing on the first day
of such Interest Period).
'Telerate Page 3750' means the display page currently so designated on the
Dow Jones Telerate Service (or such other page as may replace that page on that
service for the purpose of displaying comparable rates or prices) and 'Reference
Banks' means leading banks selected by the Indenture Trustee and engaged in
transactions in European deposits in the international Eurocurrency market.
The establishment of One-Month LIBOR on each Interest Determination Date by
the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Bonds for the related Interest Period shall (in the
absence of manifest error) be final and binding.
PRINCIPAL PAYMENTS ON THE BONDS
The 'Principal Payment Amount' for (a) any Payment Date, other than the
Final Scheduled Payment Date and the first Payment Date following any
acceleration of the Bonds following an Event of Default (as defined herein),
will be equal to the lesser of (x) the sum of the Available Funds remaining
after distributions pursuant to clause (i) of '--Priority of Payment' below and
any portion of any Insured Payment (as defined herein) for such Payment Date
representing a Subordination Deficit and (y) the sum of:
(i) the principal portion of all scheduled monthly payments on the
Home Equity Loans received or Advanced (as defined herein) on the Home
Equity Loans with respect to the related Due Date;
(ii) the principal portion of all proceeds of the repurchase of a Home
Equity Loan (or, in the case of a substitution, certain amounts
representing a principal adjustment) pursuant to the Servicing Agreement or
the Purchase Agreement during the preceding calendar month;
(iii) the principal portion of all other unscheduled collections
received during the related Prepayment Period (or deemed to be received
during the related Prepayment Period) (including, without limitation, full
and partial Principal Prepayments made by the respective Mortgagors,
Liquidation Proceeds and Insurance Proceeds (excluding proceeds paid in
respect of the Bond Insurance Policy)), to the extent not distributed in
the preceding month;
(iv) any Insured Payment made with respect to any Subordination
Deficit; and
(v) with respect to the Payment Date immediately following the end of
the Funding Period, any amounts in the Pre-Funding Account after giving
effect to any purchase of Subsequent Home Equity Loans;
minus
(vi) the amount of any Subordination Reduction Amount for such Payment
Date;
and (b) with respect to the Final Scheduled Payment Date and the first Payment
Date following any acceleration of the Bonds following an Event of Default, the
amount necessary to reduce the Bond Principal Balance to zero.
S-41
<PAGE>
In no event will the Principal Payment Amount with respect to any Payment
Date be (x) less than zero or (y) greater than the then outstanding Bond
Principal Balance of the Bonds.
PRIORITY OF PAYMENT
On each Payment Date, Available Funds and any Insured Payment with respect
to such Payment Date will be allocated to the Securities in the following order
of priority, in each case to the extent of Available Funds remaining:
(i) to the Bondholders, the Interest Payment Amount with respect to
such Payment Date;
(ii) to the Bondholders, the Principal Payment Amount with respect to
such Payment Date;
(iii) to the Bond Insurer, the sum of (a) all amounts previously paid
by the Bond Insurer under the Bond Insurance Policy which have not
previously been reimbursed, (b) any other amounts due to the Bond Insurer
pursuant to the agreement pursuant to which the Bond Insurance Policy is
issued (the 'Insurance Agreement') and (c) interest on the foregoing as set
forth in the Insurance Agreement from the date such amounts became due
until paid in full (the 'Reimbursement Amount');
(iv) to the Bondholders, the Subordination Increase Amount (as defined
in '---Overcollateralization Provisions' below), in reduction of the Bond
Principal Balance thereof, until the Bond Principal Balance has been
reduced to zero;
(v) to the Bondholders, any Carry-Forward Amount for such Payment
Date;
(vi) to the Indenture Trustee, for any amounts owing to the Indenture
Trustee;
(vii) to the Servicer, any amounts owing to the Servicer pursuant to
the Servicing Agreement in connection with the indemnity by the Issuer
thereunder; and
(viii) any remaining amounts to the holders of the Certificates.
OVERCOLLATERALIZATION PROVISIONS
Overcollateralization Resulting from Cash Flow Structure.
With respect to any Payment Date, the excess, if any, of (x) the sum of the
aggregate Principal Balances of the Home Equity Loans as of the close of
business on the last day of the period commencing on the second day of the month
preceding the month of such Payment Date (or, with respect to the first Payment
Date, the day following the Cut-Off Date) and ending on the related Due Date
(such period, the 'Due Period') and the amount of funds in the Pre-Funding
Account as of such Payment Date over (y) the Bond Principal Balance of the Bonds
as of such Payment Date (and following the making of all payments made on such
Payment Date) is the 'Subordination Amount' as of such Payment Date. The
Indenture requires that, on each Payment Date, the Net Monthly Excess Cashflow,
if any, be applied on such Payment Date as an accelerated payment of principal
on the Bonds, but only to the limited extent hereafter described. The 'Net
Monthly Excess Cashflow' for any Payment Date is equal to the amount of
Available Funds remaining after application to items (i) through (iii) under
'--Priority of Payment' herein. This application has the effect of accelerating
the amortization of the Bonds relative to the amortization of the Home Equity
Loans. The Indenture requires that the Net Monthly Excess Cashflow will be
applied as an accelerated payment of principal on the Bonds until the
Subordination Amount has increased to the level equal to the Required
Subordination Amount for such Payment Date.
Any amount of Net Monthly Excess Cashflow actually applied as an
accelerated payment of principal is a 'Subordination Increase Amount.' The
required level of the Subordination Amount with respect to a Payment Date is the
'Required Subordination Amount' with respect to such Payment Date. Initially,
the sum of the aggregate Principal Balance of the Initial Home Equity Loans as
of the Cut-off Date and the Original Pre-Funded Amount will exceed the aggregate
Bond Principal Balance of the Bonds as of the Closing Date by approximately
$10,461,961 or 4.7% of the sum of the aggregate Principal Balance of the Initial
Home Equity Loans as of the Cut-off Date and the Original Pre-Funded Amount.
This amount is the initial Required Subordination Amount. In addition, upon the
end of the Funding Period, the Bond Insurer may adjust the Required
Subordination Amount.
S-42
<PAGE>
The Indenture generally provides that the Required Subordination Amount may,
over time, decrease, or increase, subject to certain floors, caps and triggers.
In the event that the Required Subordination Amount is permitted to
decrease or 'step down' on a Payment Date in the future, the Indenture provides
that a portion of the principal payment which would otherwise be distributed to
the Holders of the Bonds on such Payment Date shall be distributed to the
Holders of the Certificates on such Payment Date. This has the effect of
decelerating the amortization of the Bonds relative to the amortization of the
Home Equity Loans, and of reducing the Subordination Amount. With respect to any
Payment Date, the difference, if any, between (a) the Subordination Amount that
would result on such Payment Date after taking into account all payments to be
made on such Payment Date (exclusive of any reductions thereto attributable to
Subordination Reduction Amounts (as described below) on such Payment Date) and
(b) the Required Subordination Amount for such Payment Date is the 'Excess
Subordination Amount' with respect to such Payment Date. With respect to any
Payment Date, an amount equal to the lesser of (a) the Excess Subordination
Amount and (b) the principal collections received by the Servicer with respect
to the prior Due Period is the 'Subordination Reduction Amount.' In addition, a
Subordination Reduction Amount may result even prior to the occurrence of any
decrease or 'step down' in the Required Subordination Amount. This is because
the Holders of the Bonds will generally be entitled to receive 100% of collected
principal, even though the Bond Principal Balance of the Bonds will represent
less than 100% of the Home Equity Loans' principal balance. In the absence of
the provisions relating to the Subordination Reduction Amount, the foregoing may
otherwise increase the Subordination Amount above the Required Subordination
Amount even without the application of any Net Monthly Excess Cashflow.
The Indenture provides that, on any Payment Date, all unscheduled
collections on account of principal (other than any such amount applied to the
payment of a Subordination Reduction Amount) with respect to Home Equity Loans
during the calendar month preceding the calendar month in which such Payment
Date occurs (the 'Prepayment Period') will be distributed to the Holders of the
Bonds on such Payment Date. If any Home Equity Loan became a Liquidated Home
Equity Loan (as defined below) during such Prepayment Period, the net
Liquidation Proceeds (as defined in the Prospectus) related thereto and
allocated to principal may be less than the Principal Balance of the related
Home Equity Loan; the amount of any such insufficiency is generally defined as a
'Realized Loss.' A 'Liquidated Home Equity Loan' is, in general, a defaulted
Home Equity Loan as to which the Servicer has determined that all amounts that
it expects to recover on such Home Equity Loan have been recovered (exclusive of
any possibility of a deficiency judgment) and, in addition, shall be deemed to
include any Home Equity Loan secured by a second lien of which any portion of a
scheduled monthly payment of principal and interest is in excess of 180 days
past due. The principal balance of any Home Equity Loan after it becomes a
Liquidated Home Equity Loan shall equal zero. The Indenture does not contain any
provision which requires that the amount of any Realized Loss should be
distributed to the Holders of the Bonds on the Payment Date which immediately
follows the event of loss; i.e., the Indenture does not require the current
recovery of losses. However, the occurrence of a Realized Loss will reduce the
Subordination Amount, which, to the extent that such reduction causes the
Subordination Amount to be less than the Required Subordination Amount
applicable to the related Payment Date, will require the payment of a
Subordination Increase Amount on such Payment Date (or, if insufficient funds
are available on such Payment Date, on subsequent Payment Dates, until the
Subordination Amount equals the Required Subordination Amount). The effect of
the foregoing is to allocate losses to overcollateralization by reducing, or
eliminating entirely, payments of Net Monthly Excess Cashflow and of
Subordination Reduction Amounts which the holders of the Certificates would
otherwise receive.
Overcollateralization and the Bond Insurance Policy. The Indenture defines
a 'Subordination Deficit' with respect to a Payment Date to be the amount, if
any, by which (x) the aggregate Bond Principal Balance of the Bonds as of such
Payment Date, and following the making of all payments to be made on such
Payment Date (except for any payment to be made as to principal from proceeds of
the Bond Insurance Policy), exceeds (y) the sum of the aggregate Principal
Balances of the Home Equity Loans as of the close of business on the Due Date
preceding such Payment Date and the amount of funds in the Pre-Funding Account
on such Due Date. The Indenture requires the Indenture Trustee to make a claim
for an Insured Payment under the Bond Insurance Policy not later than the second
Business Day prior to any Payment Date as to which the Indenture Trustee has
determined that a Subordination Deficit will occur for the purpose of applying
the proceeds of such Insured Payment as a payment of principal to the Holders of
the Bonds on such Payment Date. Investors in the Bonds
S-43
<PAGE>
should realize that, under extreme loss or delinquency scenarios, they may
temporarily receive no payments of principal.
BOND INSURANCE POLICY
The following information has been supplied by the Bond Insurer for
inclusion in this Prospectus Supplement.
The Bond Insurer, in consideration of the payment of the premium and
subject to the terms of the Bond Insurance Policy, thereby unconditionally and
irrevocably guarantees to any Owner that an amount equal to each full and
complete Insured Payment will be received by the Indenture Trustee, or its
successor, as trustee for the Owners, on behalf of the Owners from the Bond
Insurer, for distribution by the Indenture Trustee to each Owner of each Owner's
proportionate share of the Insured Payment. The Bond Insurer's obligations under
the Bond 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 Indenture Trustee, whether or not such funds are properly
applied by the Indenture Trustee. Insured Payments shall be made only at the
time set forth in the Bond Insurance Policy and no accelerated Insured Payments
shall be made regardless of any acceleration of the Bonds, unless such
acceleration is at the sole option of the Bond Insurer.
Notwithstanding the foregoing paragraph, the Bond Insurance Policy does not
cover shortfalls, if any, attributable to the liability of the Issuer or the
Indenture Trustee for withholding taxes, if any (including interest and
penalties in respect of any such liability). The Bond Insurance Policy does not
cover, and Insured Payments do not include, any Prepayment Interest Shortfalls,
any Relief Act Shortfalls or any Carry-Forward Amounts.
The Bond Insurer will pay any Insured Payment that is a Preference Amount
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 Bond Insurer
that such order is final and not subject to appeal, (iii) an assignment in such
form as is reasonably required by the Bond Insurer, irrevocably assigning to the
Bond Insurer all rights and claims of the Owner relating to or arising under the
Bonds 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 Bond Insurer as agent for such Owner in any legal
proceeding related to such preference payment, such instruments being in a form
satisfactory to the Bond 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 Bonds to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The Bond Insurer will pay any other amount payable under the Bond Insurance
Policy no later than 12:00 noon New York City time on the later of the Payment
Date on which the related Deficiency Amount is due or the second 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 Bond Insurer or any successor
fiscal agent appointed by the Bond 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 claim
under the Bond Insurance Policy it shall be deemed not to have been received by
the Fiscal Agent for purposes of this paragraph, and the Bond Insurer or the
Fiscal Agent, as the case may be, shall promptly so advise the Indenture Trustee
and the Indenture Trustee may submit an amended Notice.
Insured Payments due under the Bond Insurance Policy unless otherwise
stated therein will be disbursed by the Fiscal Agent to the Indenture 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 Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
S-44
<PAGE>
The Fiscal Agent is the agent of the Bond 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 Bond Insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the Bond Insurance Policy.
Subject to the terms of the Agreement, the Bond Insurer shall be subrogated
to the rights of each Owner to receive payments under the Bonds to the extent of
any payment by the Bond Insurer under the Bond Insurance Policy.
As used in the Bond Insurance Policy, the following terms shall have the
following meanings:
'Agreement' means the Indenture dated as of November 1, 1997 between the
Issuer and the Indenture Trustee, without regard to any amendment or supplement
thereto unless such amendment or supplement has been approved in writing by the
Bond Insurer.
'Business Day' means any day other than a Saturday, a Sunday or a day on
which the Bond Insurer or banking institutions in New York City or in the city
in which the corporate trust office of the Indenture Trustee under the Agreement
or the principal office of the Bond Insurer are located are authorized or
obligated by law or executive order to close.
'Deficiency Amount' means (a) with respect to each Payment Date prior to
the Final Scheduled Payment Date, an amount equal to the sum of (i) the excess,
if any, of the Interest Payment Amount (net of any Prepayment Interest
Shortfalls, to the extent not covered by the Servicer by Compensating Interest
(as defined herein), and any Relief Act Shortfalls for such Payment Date) over
the Available Funds for such Payment Date and (ii) any Subordination Deficit;
(b) with respect to the Final Scheduled Payment Date, an amount equal to the sum
of (i) the excess, if any, of the Interest Payment Amount (net of any Prepayment
Interest Shortfalls, to the extent not covered by the Servicer by Compensating
Interest, and any Relief Act Shortfalls for such Payment Date) over the
Available Funds for such Payment Date and (ii) the excess, if any, of the Bond
Principal Balance of all Outstanding Bonds due on such Final Scheduled Payment
Date over Available Funds not used to pay the Interest Payment Amount (net of
any Prepayment Interest Shortfalls, to the extent not covered by the Servicer by
Compensating Interest, and any Relief Act Shortfalls for such Payment Date) for
such Final Scheduled Payment Date; and (c) for any date on which the
acceleration of the Bonds has been directed or consented to by the Bond Insurer
pursuant to Section 5.02 of the Indenture, an amount equal to the excess, if
any, of the sum of the Bond Principal Balance of the Bonds, together with
accrued and unpaid interest thereon through the date of payment of such
accelerated Bonds, over the Available Funds for such date of payment.
'Insured Payment' means (i) as of any Payment Date, any 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 Bond
Insurance Policy, the original of which is subsequently delivered by registered
or certified mail, from the Indenture Trustee specifying the Insured Payment
which shall be due and owing on the applicable Payment Date.
'Owner' means each Bondholder (as defined in the Agreement) of a Bond who,
on the applicable Payment Date, is entitled under the terms of the applicable
Bonds to payment thereunder.
'Preference Amount' means any amount previously distributed to an Owner on
the Bonds 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.
'Relief Act Shortfalls' means for any Payment Date any shortfalls relating
to the Soldiers' and Sailors' Civil Relief Act of 1940, as amended or similar
legislation or regulations.
Capitalized terms used in the Bond Insurance Policy and not otherwise
defined in the Bond Insurance Policy shall have the respective meanings set
forth in the Agreement as of the date of execution of the Bond 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 Bond Insurer.
S-45
<PAGE>
Any notice under the Bond 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 Bond Insurer shall specify in writing to the Indenture
Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006 Attention: Municipal Registrar and Paying Agency or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
THE BOND 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 Bond Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The Bond Insurance Policy is not cancelable for any reason. The premium on
the Bond Insurance Policy is not refundable for any reason including payment, or
provision being made for payment, prior to maturity of the Bonds.
ADVANCES
Prior to each Payment Date, the Servicer is required under the Servicing
Agreement to make 'Advances' (out of its own funds, advances made by any
subservicer, or funds held in the Collection Account (as described in the
Prospectus) for future payment or withdrawal) with respect to any payments of
principal and interest (net of the Servicing Fee Rate) which were due on the
Home Equity Loans on the immediately preceding Due Date and which are delinquent
on the business day next preceding the related Determination Date.
Such Advances are required to be made only to the extent they are deemed by
the Servicer to be recoverable from related late collections, Insurance
Proceeds, or Liquidation Proceeds. The purpose of making such Advances is to
maintain a regular cash flow to the Bondholders, rather than to guarantee or
insure against losses. Any failure by the Servicer to make an Advance as
required under the Servicing Agreement will constitute an Event of Default
thereunder, in which case the Indenture Trustee, as successor Servicer, will be
obligated to make any such Advance, in accordance with the terms of the
Servicing Agreement.
All Advances will be reimbursable to the Servicer on a first priority basis
from late collections, Insurance Proceeds or Liquidation Proceeds from the Home
Equity Loan as to which such unreimbursed Advance was made. In addition, any
Advances previously made which are deemed by the Servicer to be nonrecoverable
from related late collections, Insurance Proceeds and Liquidation Proceeds may
be reimbursed to the Servicer out of any funds in the Collection Account prior
to payments on the Bonds.
THE PAYING AGENT
The Paying Agent shall initially be the Indenture Trustee. The Paying Agent
shall have the revocable power to withdraw funds from the Payment Account for
the purpose of making payments to the Bondholders.
OPTIONAL REDEMPTION
The Bonds may be redeemed in whole, but not in part, by the Issuer on any
Payment Date on or after the earlier of (i) the Payment Date on which the
aggregate Principal Balance of the Home Equity Loans is less than or equal to
25% of the sum of the aggregate Principal Balance of the Initial Home Equity
Loans as of the Cut-off Date and the Original Pre-Funded Amount or (ii) the
Payment Date occurring in December 2004. The purchase price will be equal to
100% of the aggregate outstanding Bond Principal Balance and accrued and unpaid
interest thereon (including any Carry-Forward Amount) at the Bond Interest Rate
through the date on which the Bonds are redeemed in full together with all
amounts due and owing to the Bond Insurer, the Servicer and the Indenture
Trustee. The 'Final Scheduled Payment Date' is the Payment Date occurring in
December 2027.
S-46
<PAGE>
MANDATORY PREPAYMENTS ON THE BONDS
The Bonds will be partially prepaid on the Payment Date immediately
following the end of the Funding Period to the extent that any amount remains on
deposit in the Pre-Funding Account on such Payment Date. Although no assurance
can be given, it is anticipated that the principal amount of Subsequent Home
Equity Loans sold to the Issuer and included in the Trust Estate will require
the application of substantially all of the Original Pre-Funded Amount and that
there should be no material amount of principal prepaid to the Bonds from the
Pre-Funding Account. However, it is unlikely that the Seller will be able to
deliver Subsequent Home Equity Loans with an aggregate principal balance
identical to the Original Pre-Funded Amount.
INTEREST COVERAGE ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Bonds will be
deposited in an account (the 'Interest Coverage Account') for application by the
Indenture Trustee to cover shortfalls in the Interest Payment Amount
attributable to the pre-funding feature during the Funding Period. Such
shortfall initially will exist during the Funding Period because the aggregate
Principal Balance of the Bonds, and interest accrued thereon, during the Funding
Period will be greater than the aggregate principal balance of the Home Equity
Loans, and interest accrued thereon, during such period. On the first business
day following the first Payment Date following the termination of the Funding
Period, funds on deposit in the Interest Coverage Account will be deposited in
the Payment Account.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of the Bonds will depend on the price paid by the
holder for such Bond, the Bond Interest Rate and the rate and timing of
principal payments (including payments in excess of required installments,
prepayments or terminations, liquidations and repurchases) on the Home Equity
Loans and the allocation thereof. Such yield may be adversely affected by a
higher or lower than anticipated rate of principal payments on the Home Equity
Loans and the amount, if any, distributed from the Pre-Funding Account at the
end of the Funding Period. The rate of principal payments on such Home Equity
Loans will in turn be affected by the amortization schedules of the Home Equity
Loans, the rate and timing of principal prepayments thereon by the Mortgagors
and liquidations of defaulted Home Equity Loans, and purchases of Home Equity
Loans due to certain breaches of representations and warranties and optional
repurchases of delinquent loans by the Servicer. The timing of changes in the
rate of prepayments, liquidations and repurchases of the Home Equity Loans may,
and the timing of losses will, significantly affect the yield to an investor,
even if the average rate of principal payments experienced over time is
consistent with an investor's expectation. Since the rate and timing of
principal payments on the Home Equity Loans will depend on future events and on
a variety of factors (as described more fully herein and in the Prospectus under
'Yield Considerations'), no assurance can be given as to such rate or the timing
of principal payments on the Bonds.
The Home Equity Loans generally may be prepaid in full or in part at any
time; however, prepayment may subject the mortgagor to a prepayment charge.
Investors should be aware that 2.21% of the Home Equity Loans are secured by
second liens on the related Mortgaged Properties. Generally, Home Equity Loans
secured by second liens are not viewed by Mortgagors as permanent financing.
Accordingly, such Home Equity Loans may experience a higher rate of prepayment
than first lien mortgage loans. The Adjustable Rate Home Equity Loans generally
are assumable under certain circumstances if, in the sole judgment of the
Servicer, the prospective purchaser of a Mortgaged Property is creditworthy and
the security for such Home Equity Loan is not impaired by the assumption. The
Fixed Rate Home Equity Loans contain a customary 'due on sale' provision. The
Servicer shall enforce any due-on-sale clause contained in any Mortgage Note or
Mortgage, to the extent permitted under applicable law and governmental
regulations; provided, however, if the Servicer determines that it is reasonably
likely that any Mortgagor will bring, or if any Mortgagor does bring, legal
action to declare invalid or otherwise avoid enforcement of a due-on-sale clause
contained in any Mortgage Note or Mortgage, the Servicer shall not be required
to enforce the due-on-sale clause or to contest such action. The extent to which
the Home Equity Loans are assumed by purchasers of the Mortgaged Properties
rather than prepaid by the related
S-47
<PAGE>
Mortgagors in connection with the sales of the Mortgaged Properties will affect
the weighted average life of the Bonds and may result in a prepayment experience
on the Home Equity Loans that differs from that on other conventional Home
Equity Loans. See 'Yield Considerations' in the Prospectus. Prepayments,
liquidations and purchases of the Home Equity Loans will result in payments to
holders of the Bonds of principal amounts which would otherwise be distributed
over the remaining terms of the Home Equity Loans. Factors affecting prepayment
(including defaults and liquidations) of Home Equity Loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions.
The rate of defaults on the Home Equity Loans will also affect the rate and
timing of principal payments on the Home Equity Loans. In general, defaults on
Home Equity Loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments of the Adjustable Rate Home Equity
Loans to an amount in excess of the monthly payment required at the time of
origination may result in a default rate higher than that on level payment Home
Equity Loans, particularly since the Mortgagor under each Adjustable Rate Home
Equity Loan was qualified on the basis of the Mortgage Rate in effect at
origination. The repayment of such Adjustable Rate Home Equity Loans will be
dependent on the ability of the Mortgagor to make larger monthly payments as the
Mortgage Rate increases. With respect to the Home Equity Loans that are secured
by second liens on the related Mortgaged Properties, such Home Equity Loans are
subordinate to the rights of the mortgagee under the related first lien.
Accordingly, investors will be subject to a loss if the holder of a first lien
on the related Mortgaged Property is successful in foreclosure of its mortgage
since no second lien or encumbrances survive such a foreclosure. Investors
should be aware that any liquidation, insurance or condemnation proceeds
received in respect of such Home Equity Loans will be available to satisfy the
outstanding balance of such Home Equity Loans only to the extent that the claims
of such first liens have been satisfied in full, including any related
foreclosure costs. In addition, the rate of default on Home Equity Loans which
are refinance or limited documentation Home Equity Loans, and on Home Equity
Loans with high Loan-to-Value Ratios, may be higher than for other types of Home
Equity Loans. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Home Equity Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values. See 'Yield Considerations' in the Prospectus.
To the extent that the Original Pre-Funded Amount has not been fully
applied to the purchase of Subsequent Home Equity Loans by the Issuer by the end
of the Funding Period, the Holders of the Bonds will receive on the first
Payment Date following the termination of the Funding Period a prepayment of
principal in an amount equal to the lesser of (i) the Pre-Funded Amount
remaining in the Pre-Funding Account and (ii) the outstanding Principal Balance
of the Bonds. Although no assurance can be given, it is anticipated by the
Company that the principal amount of Subsequent Home Equity Loans sold to the
Issuer for inclusion in the Trust Estate will require the application of
substantially all amounts on deposit in the Pre-Funding Account and that there
will be no material amount of principal prepaid to such Bondholders. However, it
is unlikely that the Seller will be able to deliver Subsequent Home Equity Loans
with an aggregate principal balance identical to the Pre-Funded Amount.
In addition, the yield to maturity of the Bonds will depend on, among other
things, the price paid by the holders of the Bonds and the then applicable Bond
Interest Rate. The extent to which the yield to maturity of a Bond is sensitive
to prepayments will depend, in part, upon the degree to which it is purchased at
a discount or premium. In general, if a Bond is purchased at a premium and
principal payments thereon occur at a rate faster than anticipated at the time
of purchase, the investor's actual yield to maturity will be lower than that
assumed at the time of purchase. Conversely, if a Bond is purchased at a
discount and principal payments 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. For additional considerations
relating to the yield on the Bonds, see 'Yield Considerations' in the
Prospectus.
S-48
<PAGE>
Furthermore, the yield to maturity on the Bonds may be affected by
shortfalls with respect to interest in the event that the interest accrued on
the Bonds at the Bond Interest Rate is greater than the amount of interest
accrued on the Home Equity Loans at the related Mortgage Rates less the sum of
the Servicing Fee, the Indenture Trustee Fee and the Administrative Fee. In such
event, the resulting shortfall, if not paid under the Bond Insurance Policy,
will only be payable to the extent that on any future Payment Date interest
accrued on the Home Equity Loans at the related Mortgage Rates less such rates
is greater than the interest accrued on the Bonds, and only to the extent of
Available Funds following distributions to the Bondholders pursuant to clauses
(i) through (iv) under 'Description of the Securities--Priority of Payment.'
The Bond Interest Rate is based upon, among other factors as described
herein under 'Description of the Bonds-Interest Payments on the Bonds,' the
value of an index (One-Month LIBOR (as defined herein)) which is different from
the value of the indices applicable to the Home Equity Loans, COFI, Six-Month
LIBOR and One-Year CMT). The Mortgage Rate for each Fixed Rate Home Equity Loan
is fixed and the Mortgage Rate for each Adjustable Rate Home Equity Loan adjusts
semi-annually or annually, commencing after the Initial Period, based upon the
related Index, whereas the Bond Interest Rate on the Bonds adjusts monthly based
upon One-Month LIBOR plus 0.25% (or after the earlier of (x) the Payment Date in
December 2004 and (y) the Payment Date which occurs on or prior to the date on
which the aggregate Principal Balance of the Home Equity Loans is less than 25%
of the sum of the aggregate Principal Balance of the Initial Home Equity Loans
as of the Cut-off Date and the Original Pre-Funded Amount, One-Month LIBOR plus
0.50%), limited by the Maximum Interest Rate (as defined herein). In addition,
One-Month LIBOR and the Indices on the Adjustable Rate Home Equity Loans may
respond differently to economic and market factors, and there is not necessarily
any correlation between them. Moreover, the Adjustable Rate Home Equity Loans
are subject to Periodic Rate Caps, Maximum Mortgage Rates and Minimum Mortgage
Rates (each, as defined herein). Thus, it is possible, for example, that
One-Month LIBOR may rise during periods in which the Indices are stable or
falling or that, even if both One-Month LIBOR and the Indices rise during the
same period, One-Month LIBOR may rise much more rapidly than the Indices.
Although the Mortgage Rates on the Adjustable Rate Home Equity Loans will
adjust semi-annually or annually, such increases and decreases may be limited by
the Periodic Rate Cap, the Maximum Mortgage Rate and the Minimum Mortgage Rate,
if applicable, on each such Adjustable Rate Home Equity Loan, and will be based
on the applicable Index (which may not rise and fall consistently with
prevailing mortgage rates) plus the related Gross Margin (which may be different
from the prevailing margins on other Home Equity Loans). As a result, the
Mortgage Rates on the Adjustable Rate Home Equity Loans at any time may not
equal the prevailing rates for other adjustable-rate loans and accordingly, the
rate of prepayment may be lower or higher than would otherwise be anticipated.
In addition, because all of the Adjustable Rate Home Equity Loans have Maximum
Mortgage Rates, if prevailing mortgage rates were to increase above the Maximum
Mortgage Rates, the rate of prepayment on the Adjustable Rate Home Equity Loans
may be slower than would otherwise be the case. In general, if prevailing
mortgage rates fall significantly below the Mortgage Rates on the Adjustable
Rate Home Equity Loans, the rate of prepayments (including refinancings) will be
expected to increase. Conversely, if prevailing mortgage rates rise
significantly above the Mortgage Rates on the Adjustable Rate Home Equity Loans,
the rate of prepayment on the Adjustable Rate Home Equity Loans will be expected
to decrease.
S-49
<PAGE>
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of payment to the investor
of each dollar distributed in reduction of principal of such security (assuming
no losses). The weighted average life of the Bonds will be influenced by, among
other things, the rate at which principal of the Home Equity Loans is paid,
which may be in the form of scheduled amortization, prepayments or liquidations.
Because the amortization schedule of each Adjustable Rate Home Equity Loan will
be recalculated semi-annually or annually after the initial Adjustment Date for
such Adjustable Rate Home Equity Loan, any partial prepayments thereof will not
reduce the term to maturity of such Adjustable Rate Home Equity Loan. In
addition, an increase in the Mortgage Rate on an Adjustable Rate Home Equity
Loan will result in a larger monthly payment and in a larger percentage of such
monthly payment being allocated to interest and a smaller percentage being
allocated to principal, and conversely, a decrease in the Mortgage Rate on the
Adjustable Rate Home Equity Loan will result in a lower monthly payment and in a
larger percentage of each monthly payment being allocated to principal and a
smaller percentage being allocated to interest.
Prepayments on Home Equity Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement, the
Conditional Prepayment Rate model ('CPR'), assumes that the outstanding
principal balance of a pool of Home Equity Loans prepays each month at a
specified annual rate or CPR. In generating monthly cash flows, this annual rate
is converted to an equivalent monthly rate. With respect to the Adjustable Rate
Home Equity Loans, the prepayment model assumes a constant CPR of 30%. With
respect to the Fixed Rate Home Equity Loans, the prepayment model assumes a CPR
of 2% in the first month of the life of the Fixed Rate Home Equity Loans and an
additional 1.63636% per annum in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter, the prepayment
model assumes a CPR of 20% (such model, the 'Prepayment Assumption'). The levels
of CPR used above in defining the Prepayment Assumption represent 100% of the
Prepayment Assumption. To assume a CPR percentage in either prepayment model is
to assume that the stated percentage of the outstanding principal balance of the
pool would be prepaid over the course of a year. No representation is made that
the Home Equity Loans will prepay at the percentages of CPR specified in either
prepayment model.
The table set forth below has been prepared on the basis of certain
assumptions as described below regarding the weighted average characteristics of
the Home Equity Loans that are expected to be included in the Trust Estate as
described under 'Description of the Home Equity Pool' herein and the performance
thereof. The table assumes, among other things, that: (i) the Home Equity Pool
consists of Home Equity Loans with the following characteristics:
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO MONTHS TO MAXIMUM MINIMUM
PRINCIPAL MORTGAGE MATURITY MATURITY NEXT RATE GROSS MORTGAGE MORTGAGE
BALANCE RATE (IN MONTHS) (IN MONTHS) ADJUSTMENT DATE MARGIN RATE RATE
- ------------------ -------- ----------- --------------- ---------------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
One-Year CMT
Initial
$ 2,657,382.10 9.701 % 360 356 8 6.208 % 16.227 % 9.635%
11,268,828.58 9.096 360 358 11 5.548 15.959 9.044
Pre-Funded Amount
4,135,736.47 9.211 360 360 10 5.674 16.01 9.157
Six-Month LIBOR
Initial
3,318,841.59 9.505 360 357 3 5.502 16.486 9.505
5,485,856.82 9.594 360 357 4 5.570 16.214 9.467
6,668,309.81 9.317 360 359 5 5.766 16.316 9.317
3,093,620.00 9.466 360 360 6 5.713 16.690 9.446
1,998,210.93 9.634 360 354 18 5.298 17.167 9.538
17,768,938.63 10.135 360 357 21 5.437 16.984 10.115
30,625,783.99 10.316 360 358 22 5.346 17.014 10.311
30,730,475.31 10.237 360 359 23 5.462 17.246 10.237
22,415,103.79 10.418 360 360 24 5.570 17.457 10.372
1,418,664.63 10.263 360 358 34 5.559 16.886 10.178
Pre-funded Amount
36,683,482.55 10.148 360 360 20 5.476 17.053 10.127
COFI
Initial
390,461.04 7.547 360 329 1 2.719 11.875 7.547
<CAPTION>
INITIAL
PRINCIPAL PERIODIC PERIODIC
BALANCE CAP CAP
- ------------------ -------- --------
<S> <C> <C>
Initial
$ 2,657,382.10 2.000% 2.000%
11,268,828.58 2.088 1.907
Pre-Funded Amount
4,135,736.47 2.071 1.925
Initial
3,318,841.59 1.000 1.000
5,485,856.82 1.000 1.000
6,668,309.81 1.040 1.000
3,093,620.00 1.539 1.000
1,998,210.93 3.000 1.088
17,768,938.63 3.000 1.000
30,625,783.99 3.000 1.000
30,730,475.31 2.975 1.000
22,415,103.79 2.988 1.000
1,418,664.63 3.000 1.000
Pre-funded Amount
36,683,482.55 2.707 1.001
Initial
390,461.04 0 0
</TABLE>
S-50
<PAGE>
<TABLE>
<CAPTION>
ORIGINAL REMAINING
TERM TO TERM TO MONTHS TO MAXIMUM MINIMUM
PRINCIPAL MORTGAGE MATURITY MATURITY NEXT RATE GROSS MORTGAGE MORTGAGE
BALANCE RATE (IN MONTHS) (IN MONTHS) ADJUSTMENT DATE MARGIN RATE RATE
- ------------------ -------- ----------- --------------- ---------------- ------ ------- -------
Fixed
<S> <C> <C> <C> <C> <C> <C> <C>
Initial
25,984,527.10 10.868 327 325 N/A N/A N/A N/A
Pre-funded Amount
6,918,296.66 10.344 340 340 N/A N/A N/A N/A
Fixed Balloon
Initial
8,749,956.56 10.716 180 178 N/A N/A N/A N/A
Pre-funded Amount
2,262,484.32 10.612 180 180 N/A N/A N/A N/A
<CAPTION>
INITIAL
PRINCIPAL PERIODIC PERIODIC
BALANCE CAP CAP
- ------------------ -------- --------
<S> <C> <C>
Initial
25,984,527.10 N/A N/A
Pre-funded Amount
6,918,296.66 N/A N/A
Initial
8,749,956.56 N/A N/A
Pre-funded Amount
2,262,484.32 N/A N/A
</TABLE>
(ii) COFI, One-Month LIBOR, Six-Month LIBOR and One-Year CMT remain constant at
4.94%, 5.6875%, 5.90625% and 5.47%, respectively; (iii) payments on the Bonds
are based upon the actual number of days in the month and a 360-day year and are
received, in cash, on the 25th day of each month, commencing in December 1997;
(iv) there are no delinquencies or losses on the Home Equity Loans, and
principal payments on the Home Equity Loans are timely received together with
prepayments, if any, at the respective constant percentages of CPR or Prepayment
Assumption set forth in the following table; (v) there are no repurchases of the
Home Equity Loans; (vi) the scheduled monthly payment for each Home Equity Loan
is calculated based on its principal balance, Mortgage Rate and remaining term
to maturity such that such Home Equity Loan will amortize in amounts sufficient
to repay the remaining principal balance of such Home Equity Loan by its
remaining term to maturity, (vii) the Indices remain constant at the rates
listed above and the Mortgage Rate on each Adjustable Rate Home Equity Loan is
adjusted on the next Adjustment Date (and on subsequent Adjustment Dates, as
necessary) to equal the related Index plus the applicable Gross Margin, subject
to the Maximum Mortgage Rate listed below and the related Periodic Rate Cap;
(viii) with respect to each Home Equity Loan (other than the Fixed Rate Home
Equity Loans), the monthly payment on the Home Equity Loan is adjusted on the
Due Date immediately following the next related Adjustment Date (and on
subsequent Adjustment Dates, as necessary) to equal a fully amortizing payment
as described in clause (vi) above; (ix) payments on the Home Equity Loans earn
no reinvestment return; (x) the Bond Insurance Premium is the rate set forth in
the Insurance Agreement, the Indenture Trustee Fee Rate is 0.0125% per annum and
the Servicing Fee Rate is 0.50% per annum; (xi) there are no additional ongoing
Trust Estate expenses payable out of the Trust Estate; (xii) the Home Equity
Loans experience no prepayment charges; (xiii) there are no investment earnings
on amounts in any Collection Account, including the Payment Account, and no
other miscellaneous servicing fees are passed through to the Bondholders; (xiv)
the Subsequent Home Equity Loans are acquired on December 30, 1997, resulting in
no mandatory prepayment of the Bonds on the January 26, 1998 Payment Date; and
(xv) the Bonds will be purchased on December 11, 1997.
The actual characteristics and performance of the Home Equity Loans will
differ from the assumptions used in constructing the table set forth below,
which is hypothetical in nature and is provided only to give a general sense of
how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Home Equity Loans will prepay at a
constant level of CPR until maturity or that all of the Home Equity Loans will
prepay at the same level of CPR or Prepayment Assumption. Moreover, the diverse
remaining terms to stated maturity of the Home Equity Loans could produce slower
or faster principal payments than indicated in the table at the various constant
percentages of CPR specified, even if the weighted average remaining term to
stated maturity of the Home Equity Loans is as assumed. Any difference between
such assumptions and the actual characteristics and performance of the Home
Equity Loans, or actual prepayment experience, will affect the percentages of
initial Bond Principal Balance outstanding over time and the weighted average
life of the Bonds. Subject to the foregoing discussion and assumptions, the
following table indicates the weighted average life of the Bonds, and sets forth
the percentages of the initial Bond Principal Balance of the Bonds that would be
outstanding after each of the dates shown at various percentages of CPR.
S-51
<PAGE>
PERCENT OF INITIAL BOND PRINCIPAL BALANCE OUTSTANDING
AT THE SPECIFIED PERCENTAGES OF CPR OR THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
SCENARIO(1)(5)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Rate Home Equity Loans(2)........................ 0% 50% 75% 100% 125% 150%
Adjustable Rate Home Equity Loans(3)................... 0% 10% 20% 30% 40% 50%
--------- --------- --------- --------- --------- ---------
<CAPTION>
PAYMENT DATE
- -------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage..................................... 100% 100% 100% 100% 100% 100%
November 25, 1998...................................... 99 90 81 72 63 54
November 25, 1999...................................... 99 80 64 50 38 28
November 25, 2000...................................... 98 71 51 36 25 0
November 25, 2001...................................... 98 63 41 26 0 0
November 25, 2002...................................... 97 56 33 0 0 0
November 25, 2003...................................... 96 49 27 0 0 0
November 25, 2004...................................... 95 44 0 0 0 0
November 25, 2005...................................... 0 0 0 0 0 0
Weighted Average Life in Years(4)(5)................... 6.88 4.82 3.45 2.27 1.64 1.24
Weighted Average Life in Years(4)(6)................... 21.02 7.89 4.45 2.98 2.18 1.66
</TABLE>
- ------------------
(1) Rounded to the nearest whole percentage.
(2) As a percentage of the Prepayment Assumption.
(3) As conditional prepayment rate (CPR) percentage.
(4) The weighted average life of a Bond is determined by (i) multiplying the
amount of each distribution of principal on a Bond by the number of years
from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results, and (iii) dividing the sum by the Initial Bond Principal
Balance of the Bond.
(5) Assumes the Issuer exercises its option to redeem the Bonds at the earlier
of: (a) when the aggregate principal balance of the Home Equity Loans
remaining is less than 25% of the sum of the aggregate Principal Balance of
the Initial Home Equity Loans as of the Cut-off Date and the Original
Pre-Funded Amount and (b) the December 2004 Payment Date. See 'Description
of the Bonds--Optional Redemption' herein.
(6) Assumes that the Bonds remain outstanding to their maturity date.
THIS TABLE HAS BEEN PREPARED BASED ON THE ASSUMPTIONS DESCRIBED IN THE SECOND
PARAGRAPH PRECEDING THIS TABLE (INCLUDING THE ASSUMPTIONS REGARDING THE
CHARACTERISTICS AND PERFORMANCE OF THE HOME EQUITY LOANS WHICH DIFFER FROM THE
ACTUAL CHARACTERISTICS AND PERFORMANCE THEREOF) AND SHOULD BE READ IN
CONJUNCTION THEREWITH.
DESCRIPTION OF THE SERVICING AGREEMENT
The following summary describes certain terms of the Servicing Agreement,
dated as of November 1, 1997, between the Issuer, the Indenture Trustee and the
Servicer (the 'Servicing Agreement'). The summary does not purport to be
complete and is subject to, and qualified in its entirety by reference to, the
provisions of the Servicing Agreement. Whenever particular sections or defined
terms of the Servicing Agreement are referred to, such sections or defined terms
are thereby incorporated herein by reference.
THE SERVICER
NovaStar Mortgage, Inc. (the 'Servicer') will act as Servicer for the Home
Equity Loans pursuant to the Servicing Agreement. The Servicer was incorporated
in the State of Virginia on May 16, 1996 and is a wholly-owned subsidiary of NFI
Holding Corporation, Inc., a Delaware corporation ('Holding'). The Seller owns
one hundred percent of the preferred stock of Holding. The Servicer serves as a
loan servicer and a vehicle for loan origination--a primary source of mortgage
assets for the Seller. The Servicer is an approved HUD lender.
The Servicer originates subprime residential mortgage loans through a
network of unaffiliated wholesale loan brokers, and the mortgage loans it
originates are generally sold to the Seller on a servicing-retained basis. The
Servicer utilizes a network of approximately 200 wholesale loan brokers in 27
different states. In addition, the Servicer services loans nationwide, and is
qualified to do business as a foreign corporation in more than 45
S-52
<PAGE>
states. The Servicer's servicing portfolio currently includes only subprime
residential mortgage loans. The Servicer's principal executive offices are
located at 1900 W. 47th Place, Suite 205, Westwood, Kansas 66205. The principal
office for the Servicer's mortgage lending operations are in Irvine, California.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure experience,
respectively, as of the date indicated, of mortgage loans serviced by the
Servicer. Since the Servicer only began servicing Home Equity Loans in July
1997, the delinquency and foreclosure percentages may be affected by the size
and relative lack of seasoning of the servicing portfolio because many of such
loans were not outstanding long enough to give rise to some or all of the
periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount or severity of delinquencies or foreclosures on the Home Equity Loans and
no assurances can be given that the foreclosure and delinquency experience
presented in the table below will be indicative of such experience on the Home
Equity Loans:
DELINQUENCY AND FORECLOSURE
<TABLE>
<CAPTION>
AS OF OCTOBER 31, 1997
--------------------------
PRINCIPAL
BALANCE PERCENTAGE
------------ ----------
<S> <C> <C>
Portfolio.................................................................. $445,091,399
Delinquency Percentage(1)
30-59................................................................. 5,142,855 1.16%
60-89................................................................. 2,475,835 0.56%
90+ Days.............................................................. 9,056,077 2.03%
Total(2).............................................................. $ 16,674,767 3.75%
------------ -----
------------ -----
Foreclosure Rate(3)........................................................ $ 7,538,812 1.69%
</TABLE>
(1) The period of delinquency is based on the number of days payments are
contractually past due.
(2) The total percentages and dollar amounts includes the dollar amounts and
percentages indicated in Foreclosure Rate.
(3) 'Foreclosure Rate' is the dollar amount of the mortgage loans in foreclosure
as a percentage of the total principal balance of the mortgage loans
outstanding as of the date indicated, this amount is also included in Total.
There can be no assurance that the delinquency and foreclosure experience
of the Home Equity Loans will correspond to the delinquency and foreclosure
experience of the servicing portfolio of the Servicer set forth in the foregoing
table. The statistics shown above represent the respective delinquency and
foreclosure experiences only at the date presented, whereas the aggregate
delinquency and foreclosure experience on the Home Equity Loans will depend on
the results obtained over the life of the Trust Estate. The Servicer's servicing
portfolio includes mortgage loans underwritten pursuant to guidelines not
necessarily representative of those applicable to the Home Equity Loans. It
should be noted that if the residential real estate market should experience an
overall decline in property values, the actual rates of delinquencies and
foreclosures could be higher than those previously experienced by the Servicer.
In addition, adverse economic conditions may affect the timely payment by
mortgagors of scheduled payments of principal and interest on the Home Equity
Loans and, accordingly, the actual rates of delinquencies and foreclosures with
respect to the Home Equity Loans.
SERVICING AND OTHER COMPENSATION
The Servicing Fee for each Home Equity Loan is payable out of the interest
payments on such Home Equity Loan. The Servicing Fee Rate in respect of each
Home Equity Loan will be equal to 0.50% per annum of the outstanding principal
balance of such Home Equity Loan. The Servicer will not be entitled to any
additional servicing compensation (other than late payment charges) such as
prepayment penalties and any such amount to the extent received by the Servicer,
will be included in Available Funds.
S-53
<PAGE>
With respect to any Payment Date, any Prepayment Interest Shortfalls during
the preceding calendar month will be covered by the Servicer, but only to the
extent such Prepayment Interest Shortfalls do not exceed an amount equal to the
total servicing fee payable to the Servicer and any subservicer with respect to
such Payment Date (any such payments, 'Compensating Interest'). The 'Prepayment
Interest Shortfall' for any Payment Date is equal to the aggregate shortfall, if
any, in collections of interest resulting from Mortgagor prepayments in full or
in part on the Home Equity Loans during the preceding calendar month. Such
shortfalls will result because interest on prepayments in full is distributed
only to the date of prepayment, and because no interest is distributed on
prepayments in part, as such prepayments in part are applied to reduce the
outstanding principal balance of the related Home Equity Loans as of the Due
Date in the month of prepayment. No assurance can be given that Compensating
Interest will be sufficient to cover Prepayment Interest Shortfalls for any
Payment Date.
THE INDENTURE
The following summary describes certain terms of the Indenture. The summary
does not purport to be complete and is subject to, and qualified in its entirety
by reference to, the provisions of the Trust Agreement and Indenture. Whenever
particular defined terms of the Indenture are referred to, such defined terms
are thereby incorporated herein by reference. See 'The Agreements' in the
Prospectus.
CONTROL BY BOND INSURER
Pursuant to the Indenture, unless a Bond Insurer Default exists (i) the
Bond Insurer shall have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee, subject to
certain limitations, and (ii) the Indenture Trustee may take actions which would
otherwise be at its option or within its discretion, including the actions
referred to under '--Events of Default' and '--Rights Upon Event of Default,'
only at the direction of the Bond Insurer and (iii) the Bond Insurer shall be
deemed to be the holder of the Bonds for certain purposes (other than with
respect to payment on the Bonds), and will be entitled to exercise all rights of
the Bondholders thereunder, without the consent of such Bondholders, and the
Bondholders may exercise such rights only with the prior written consent of the
Bond Insurer. A 'Bond Insurer Default' means the existence and continuation of
(i) a failure of the Bond Insurer to make a payment under the Bond Insurance
Policy in accordance with its terms or (ii) certain bankruptcy or insolvency
actions by or against the Bond Insurer.
EVENTS OF DEFAULT
An 'Event of Default' with respect to the Bonds is defined in the Indenture
as follows: (a) the failure of the Issuer to pay (i) the Interest Payment Amount
or the Principal Payment Amount with respect to a Payment Date on such Payment
Date (provided that for purposes of this clause, payment by the Indenture
Trustee from proceeds of the Bond Insurance Policy shall not be considered
payment by the Issuer with respect to the Bonds), or (ii) any Subordination
Increase Amount or Carry-Forward Amount, but only to the extent funds are
available to make such payment as described under 'Description of the
Bonds--Priority of Payment' (provided that for purposes of this clause, payment
by the Indenture Trustee from proceeds of the Bond Insurance Policy shall not be
considered payment by the Issuer with respect to the Bonds); (b) the failure by
the Issuer on the Final Scheduled Payment Date to reduce the Bond Principal
Balance to zero; (c) a default in the observance or performance of any covenant
or agreement of the Issuer in the Indenture, and the continuation of any such
default for a period of thirty days after notice to the Issuer by the Indenture
Trustee or to the Issuer and the Indenture Trustee by the Bond Insurer, or if a
Bond Insurer Default exists, by the Holders of at least 25% of the Bond
Principal Balance of the Bonds; (d) any representation or warranty made by the
Issuer in the Indenture or in any certificate or other writing delivered
pursuant thereto having been incorrect in a material respect as of the time
made, and the circumstance in respect of which such representation or warranty
is incorrect not having been cured within thirty days after notice thereof is
given to the Issuer by the Indenture Trustee or to the Issuer and the Indenture
Trustee by the Bond Insurer, or, if a Bond Insurer Default exists, by
Bondholders representing at least 25% of the Bond Principal Balance of the
Bonds; or (e) certain events of bankruptcy, insolvency, receivership or
reorganization of the Issuer.
S-54
<PAGE>
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
the Bonds, the Indenture Trustee may (with the prior written consent of the Bond
Insurer) and, upon the written direction of the Bond Insurer or, if a Bond
Insurer Default exists, Bondholders representing more than 50% of the Bond
Principal Balance of the Bonds shall, declare the principal of such Bonds to be
immediately due and payable. Such declaration may under certain circumstances be
rescinded by the Bond Insurer, or if a Bond Insurer Default exists, Bondholders
representing more than 50% of the Bond Principal Balance of the Bonds.
If, following an Event of Default, the Bonds have been declared to be due
and payable, the Indenture Trustee may, in its discretion (provided that the
Bond Insurer or Bondholders representing more than 50% of the Bond Principal
Balance of the Bonds have not directed the Indenture Trustee to sell the assets
included in the Trust Estate), refrain from selling such assets and continue to
apply all amounts received on such assets to payments due on the Bonds in
accordance with their terms, notwithstanding the acceleration of the maturity of
such Bonds. In addition, upon an Event of Default the Indenture Trustee may,
with the consent of the Bond Insurer, sell all or part of the assets included in
the Trust Estate, in which event the collections on, or the proceeds from the
sale of, such assets will be applied as provided below; provided, however, that
any proceeds of a claim under the Bond Insurance Policy shall be used only to
pay interest and principal on the Bonds as provided in clauses (iii) and (iv):
(i) to the payment of the fees of the Indenture Trustee which have not been
previously paid; (ii) to the Bond Insurer, any premium then due, provided no
Bond Insurer Default exists; (iii) to the Bondholders, the amount of interest
then due and unpaid on the Bonds (but not including any Carry-Forward Amount),
without preference or priority of any kind; (iv) to the Bondholders, the amount
of principal then due and unpaid on the Bonds, without preference or priority of
any kind; (v) to the payment of the amounts due and owing to the Bond Insurer,
to the extent not previously reimbursed; (vi) to the Bondholders, the amount of
any Carry-Forward Amount not previously paid; and (vii) to the holder of the
Certificates.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the rights
and powers under the Indenture at the request or direction of any of the
Bondholders, unless such Bondholders shall have offered to the Indenture Trustee
reasonable security or indemnity satisfactory to it against the costs, expenses
and liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the Bond Insurer, or if a Bond Insurer
Default exists, Bondholders representing more than 50% of the Bond Principal
Balance of the Bonds shall have the right to direct the time, method, and place
of conducting any proceeding or any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee with respect to
the Bonds; and the Bond Insurer, or if a Bond Insurer Default exists,
Bondholders representing more than 50% of the Bond Principal Balance of the
Bonds may, in certain cases, waive any default with respect thereto, except a
default in the payment of principal or interest or a default in respect of a
covenant or provision of the Indenture that cannot be modified without the
waiver or consent of the holder of each outstanding Bond affected thereby.
LIMITATION ON SUITS
No Bondholder will have any right to institute any proceedings with respect
to the Indenture unless (1) such Bondholder has previously given written notice
to the Indenture Trustee of a continuing Event of Default; (2) Bondholders
representing not less than 25% of the Bond Principal Balance of the Bonds have
made written request to the Indenture Trustee to institute proceedings in
respect of such Event of Default in its own name as Indenture Trustee; (3) such
Bondholders have offered to the Indenture Trustee reasonable indemnity
satisfactory to it against the costs, expenses and liabilities to be incurred in
compliance with such request; (4) for 60 days after its receipt of such notice
of, request and offer of indemnity the Indenture Trustee has failed to institute
any such proceedings; (5) no direction inconsistent with such written request
has been given to the Indenture Trustee during such 60-day period by the
Bondholders representing more than 50% of the Bond Principal Balance of the
Bonds; and (6) such Bondholders have the consent of the Bond Insurer, unless a
Bond Insurer Default exists.
S-55
<PAGE>
THE INDENTURE TRUSTEE
The Indenture Trustee may resign at any time, in which event the Issuer
will be obligated to appoint, with the consent of the Bond Insurer, a successor
Indenture Trustee. The Indenture Trustee also may be removed at any time by the
Bond Insurer, or if a Bond Insurer Default exists, then by Bondholders
representing more than 50% of the Bond Principal Balance of the Bonds. The
Issuer shall, with the consent of the Bond Insurer, so long as no Bond Insurer
Default exists, remove the Indenture Trustee if the Indenture Trustee ceases to
be eligible to continue as such under the Indenture or if the Indenture Trustee
becomes incapable of acting, bankrupt, insolvent or if a receiver or public
officer takes charge of the Indenture Trustee or its property. Any resignation
or removal of the Indenture Trustee and appointment of a successor Indenture
Trustee will not become effective until acceptance of the appointment by the
successor Indenture Trustee.
FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Bonds, Thacher Proffitt & Wood, counsel to the
Company, will deliver its opinion generally to the effect that based on the
application of existing law and assuming compliance with the Trust Agreement,
for federal income tax purposes, the Bonds will be characterized as indebtedness
and not as representing an ownership interest in the Trust Estate or an equity
interest in the Issuer or the Company. In addition, for federal income tax
purposes, the Issuer will not be (i) classified as an association taxable as a
corporation for federal income tax purposes, (ii) a taxable mortgage pool as
defined in Section 7701(i) of the Code, or (iii) a 'publicly traded partnership'
as defined in Treasury Regulation Section 1.7704-1.
The Bonds will not be treated as having been issued with 'original issue
discount' (as defined in the Prospectus). The prepayment assumption that will be
used in determining the rate of amortization of market discount and premium, if
any, for federal income tax purposes will be based on the assumption that,
subsequent to the date of any determination the Adjustable Rate Home Equity
Loans will prepay at a rate equal to 30% CPR and the Fixed Rate Home Equity
Loans will prepay at a rate equal to 2% CPR in the first month of the life of
the Fixed Rate Home Equity Loans and an additional 1.63636% CPR per annum in
each month thereafter until the twelfth month; beginning in the twelfth month
and in each month thereafter, the Fixed Rate Home Equity Loans will prepay at a
rate equal to 20% CPR. No representation is made that the Home Equity Loans will
prepay at that rate or at any other rate. See 'Certain Federal Income Tax
Consequences' in the Prospectus.
The Bonds will not be treated as assets described in Section 7701(a)(19)(C)
of the Code or 'real estate assets' under Section 856(c)(4)(A) of the Code. In
addition, interest on the Bonds will not be treated as 'interest on obligations
secured by mortgages on real property' under Section 856(c)(3)(B) of the Code.
The Bonds will also not be treated as 'qualified mortgages' under Section
860G(a)(3)(C) of the Code.
Prospective investors in the Bonds should see 'Certain Federal Income Tax
Consequences' and 'State Tax Consequences' in the Prospectus for a discussion of
the application of certain federal income and state and local tax laws to the
Issuer and purchasers of the Bonds.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in an underwriting agreement
dated December 3, 1997 (the 'Underwriting Agreement') between the Company and
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the 'Underwriter'), the
Company has agreed to sell the Bonds to the Underwriter and the Underwriter has
agreed to purchase the Bonds from the Company. It is expected that delivery of
the Bonds will be made only in book-entry form through the Same Day Funds
Settlement System of DTC, on or about December 11, 1997, against payment
therefor in immediately available funds.
The Bonds will be purchased from the Company by the Underwriter and will be
offered by the Underwriter from time to time to the public in negotiated
transactions or otherwise at varying prices to be determined at the time of
sale. The proceeds to the Company from the sale of the Bonds are expected to be
approximately $211,582,717, before deducting expenses. The Underwriter may
effect such transactions by selling the Bonds to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter. In connection with the sale of
the Bonds, the Underwriter
S-56
<PAGE>
may be deemed to have received compensation from the Company in the form of
underwriting compensation. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Bonds may be deemed to be
underwriters and any profit on the resale of the Bonds positioned by them may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
The Underwriting Agreement provides that the Company will indemnify the
Underwriter, and that under limited circumstances the Underwriter will indemnify
the Company, against certain civil liabilities under the Securities Act of 1933,
or contribute to payments required to be made in respect thereof.
There can be no assurance that a secondary market for the Bonds will
develop or, if it does develop, that it will continue or provide the Bondholders
with sufficient liquidity of investment. The primary source of information
available to investors concerning the Bonds will be the monthly statements
discussed in the Prospectus under 'Description of the Securities--Reports to
Securityholders,' which will include information as to the outstanding principal
balance of the Bonds. There can be no assurance that any additional information
regarding the Bonds will be available through any other source. In addition, the
Company is not aware of any source through which price information about the
Bonds will be generally available on an ongoing basis. The limited nature of
such information regarding the Bonds may adversely affect the liquidity of the
Bonds, even if a secondary market for the Bonds becomes available.
LEGAL OPINIONS
Certain legal matters relating to the Bonds will be passed upon for the
Seller, NovaStar Assets and the Servicer by Stinson, Mag & Fizzell, P.C. Kansas
City, Missouri, and for the Company and the Underwriter by Thacher Proffitt &
Wood, New York, New York. Certain legal matters regarding the enforceability of
the Bond Insurance Policy will be passed upon for the Bond Insurer by Kutak
Rock, Omaha, Nebraska.
RATINGS
It is a condition of the issuance of the Bonds that they be rated 'AAA' by
Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies,
Inc. ('S&P') and 'Aaa' by Moody's Investors Service, Inc. ('Moody's').
S&P's ratings on mortgage pass-through certificates address the likelihood
of the receipt by Bondholders of payments required under the Indenture. S&P's
ratings take into consideration the credit quality of the mortgage pool,
structural and legal aspects associated with the Bonds, and the extent to which
the payment stream in the mortgage pool is adequate to make payments required
under the Bonds. S&P's rating on the Bonds does not, however, constitute a
statement regarding frequency of prepayments on the mortgages. See 'Certain
Yield and Prepayment Considerations' herein. The ratings issued by S&P on
payment of principal and interest do not cover the payment of any Prepayment
Interest Shortfalls, Relief Act Shortfalls or any Carry-Forward Amount.
The rating process of Moody's addresses the structural and legal aspects
associated with the Bonds, including the nature of the underlying Home Equity
Loans. The ratings assigned to the Bonds do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that Bondholders might suffer a lower than anticipated yield. The
ratings do not address the likelihood that Bondholders will be paid the
Carry-Forward Amount.
The Company has not requested a rating on the Bonds by any rating agency
other than S&P and Moody's. However, there can be no assurance as to whether any
other rating agency will rate the Bonds, or, if it does, what rating would be
assigned by any such other rating agency. A rating on the Bonds by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
Bonds by S&P and 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. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to the
Bonds are subsequently lowered for any reason, no person or entity is obligated
to provide any additional support or credit enhancement with respect to the
Bonds.
S-57
<PAGE>
LEGAL INVESTMENT
The Bonds will not constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984, as amended.
The Company makes no representations as to the proper characterization of
the Bonds for legal investment or other purposes, or as to the ability of
particular investors to purchase the Bonds under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Bonds. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations, regulatory capital requirements or review
by regulatory authorities should consult with their legal advisors in
determining whether and to what extent the Bonds constitute a legal investment
or are subject to investment, capital or other restrictions.
See 'Legal Investment' in the Prospectus.
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan or any other plan or arrangement
subject to the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), or Section 4975 of the Code (each, a 'Plan') or any person investing
'Plan Assets' of any Plan (as defined in the Prospectus under 'ERISA
Considerations') should carefully review with its legal advisors whether the
purchase, sale or holding of the Bonds will give rise to a prohibited
transaction under ERISA or Section 4975 of the Code or cause the Home Equity
Loans securing the Bonds to be treated as plan assets for purposes of
regulations of the Department of Labor set forth in 29 C.F.R. 2510.3-101 (the
'Plan Asset Regulations'). Although certain exceptions from the application of
the prohibited transaction rules and the Plan Asset Regulations exist, there can
be no assurance that any such exception will apply with respect to the
acquisition of the Bonds. Although not entirely free from doubt, the Issuer
believes that, as of the date hereof, the Bonds will be treated as debt
obligations without significant equity features for purposes of the Plan Asset
Regulations. Accordingly, a Plan that acquires the Bonds should not be treated
as having acquired a direct interest in the assets of the Issuer. However, there
can be no complete assurance that the Bonds will be treated as debt obligations
without significant equity features for purposes of the Plan Asset Regulations.
Investors are advised to consult their counsel and for further information
regarding the ERISA considerations of investing in the Bonds, see 'ERISA
Considerations' in the Prospectus.
EXPERTS
The consolidated financial statements of MBIA Insurance Corporation and its
subsidiaries as of December 31, 1996 and December 31, 1995 and for each of the
three years in the period ended December 31, 1996, incorporated by reference
into this Prospectus Supplement have been audited by Coopers and 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.
S-58
<PAGE>
PROSPECTUS
ASSET BACKED CERTIFICATES
ASSET BACKED NOTES
(ISSUABLE IN SERIES)
MERRILL LYNCH MORTGAGE INVESTORS, INC.
DEPOSITOR
------------------------
The Asset Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities') offered
hereby and by Supplements to this Prospectus (the 'Offered Securities') will be
offered from time to time in one or more series. Each series of Certificates
will represent in the aggregate the entire beneficial ownership interest in a
trust fund (with respect to any series, the 'Trust Fund') consisting of one or
more segregated pools of various types of single family and/or multifamily
mortgage loans (or certain balances thereof) (collectively, the 'Mortgage
Loans'), unsecured home improvement installment sales contracts and installment
loans ('Unsecured Home Improvement Loans'), mortgage participations ('Mortgage
Participations'), mortgage pass-through certificates or mortgage-backed
securities evidencing interests in Mortgage Loans or secured thereby (the
'MBS'), manufactured housing installment sale contracts or installment loan
agreements ('Contracts'), certain direct obligations of the United States,
agencies thereof or agencies created thereby (the 'Government Securities'),
certain small business loans described herein or a combination of Mortgage
Loans, Unsecured Home Improvement Loans, Mortgage Participations, MBS,
Contracts, Government Securities and/or such small business loans (with respect
to any series, collectively, 'Assets'). The Mortgage Loans, Mortgage
Participations and MBS are collectively referred to herein as the 'Mortgage
Assets.' If a series of Securities includes Notes, such Notes will be issued and
secured pursuant to an indenture and will represent indebtedness of the Trust
Fund. If so specified in the related Prospectus Supplement, the Trust Fund for a
series of Securities may include letters of credit, insurance policies,
guarantees, reserve funds or other types of credit support, or any combination
thereof (with respect to any series, collectively, 'Credit Support'), and
currency or interest rate exchange agreements and other financial assets, or any
combination thereof (with respect to any series, collectively, 'Cash Flow
Agreements'). See 'Description of the Trust Funds,' 'Description of the
Securities' and 'Description of Credit Support.'
(cover continued on next page)
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
Prior to issuance there will have been no market for the Securities of any
series and there can be no assurance that a secondary market for any Offered
Securities will develop or that, if it does develop, it will continue. This
Prospectus may not be used to consummate sales of the Offered Securities of any
series unless accompanied by the Prospectus Supplement for such series.
Offers of the Offered Securities may be made through one or more different
methods, including offerings through underwriters, as more fully described under
'Plan of Distribution' herein and in the related Prospectus Supplement.
------------------------
MERRILL LYNCH & CO.
------------------------
The date of this Prospectus is June 19, 1997.
<PAGE>
(cover continued from previous page)
Each series of Securities will consist of one or more classes of Securities
that may (i) provide for the accrual of interest thereon based on fixed,
variable or adjustable rates; (ii) be senior or subordinate to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions; (iv) be entitled to interest
distributions, with disproportionately low, nominal or no principal
distributions; (v) provide for distributions of accrued interest thereon
commencing only following the occurrence of certain events, such as the
retirement of one or more other classes of Securities of such series; (vi)
provide for distributions of principal as described in the related Prospectus
Supplement; and/or (vii) provide for distributions based on a combination of two
or more components thereof with one or more of the characteristics described in
this paragraph, to the extent of available funds, in each case as described in
the related Prospectus Supplement. Any such classes may include classes of
Offered Securities. See 'Description of the Securities.'
Principal and interest with respect to Securities will be distributable
monthly, quarterly, semi-annually or at such other intervals and on the dates
specified in the related Prospectus Supplement. Distributions on the Securities
of any series will be made only from the assets of the related Trust Fund.
The Securities of each series will not represent an obligation of or
interest in the Depositor, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
any Master Servicer, any Sub-Servicer or any of their respective affiliates,
except to the limited extent described herein and in the related Prospectus
Supplement. Neither the Securities nor any assets in the related Trust Fund will
be guaranteed or insured by any governmental agency or instrumentality or by any
other person, unless otherwise provided in the related Prospectus Supplement.
The assets in each Trust Fund will be held in trust for the benefit of the
holders of the related series of Certificates pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as more fully described herein.
The yield on each class of Securities of a series will be affected by,
among other things, the rate of payment of principal (including prepayments,
repurchase and defaults) on the Assets in the related Trust Fund and the timing
of receipt of such payments as described under the caption 'Yield
Considerations' herein and in the related Prospectus Supplement. A Trust Fund
may be subject to early termination under the circumstances described herein and
in the related Prospectus Supplement.
If so provided in the related Prospectus Supplement, one or more elections
may be made to treat the related Trust Fund or a designated portion thereof as a
'real estate mortgage investment conduit' for federal income tax purposes. See
also 'Certain Federal Income Tax Consequences' herein.
---------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING UNDER THE
CAPTION 'SPECIAL CONSIDERATIONS' HEREIN AND SUCH INFORMATION AS MAY BE SET FORTH
UNDER THE CAPTION 'RISK FACTORS' IN THE RELATED PROSPECTUS SUPPLEMENT BEFORE
PURCHASING ANY OFFERED SECURITY.
2
<PAGE>
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Offered Securities covered by such Prospectus
Supplement, whether or not participating in the distribution thereof, may be
required to deliver such Prospectus Supplement and this Prospectus. This is in
addition to the obligation of dealers to deliver a Prospectus and Prospectus
Supplement when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PROSPECTUS SUPPLEMENT
As more particularly described herein, the Prospectus Supplement relating
to the Offered Securities of each series will, among other things, set forth
with respect to such Securities, as appropriate: (i) a description of the class
or classes of Securities, the payment provisions with respect to each such class
and the Pass-Through Rate or interest rate or method of determining the
Pass-Through Rate or interest rate with respect to each such class; (ii) the
aggregate principal amount and distribution dates relating to such series and,
if applicable, the initial and final scheduled distribution dates for each
class; (iii) information as to the assets comprising the Trust Fund, including
the general characteristics of the assets included therein, including the Assets
and any Credit Support and Cash Flow Agreements (with respect to the Securities
of any series, the 'Trust Assets'); (iv) the circumstances, if any, under which
the Trust Fund may be subject to early termination; (v) additional information
with respect to the method of distribution of such Certificates; (vi) whether
one or more REMIC elections will be made and designation of the regular
interests and residual interests; (vii) the aggregate original percentage
ownership interest in the Trust Fund to be evidenced by each class of
Securities; (viii) information as to any Master Servicer, any Sub-Servicer and
the Trustee, as applicable; (ix) information as to the nature and extent of
subordination with respect to any class of Securities that is subordinate in
right of payment to any other class; and (x) whether such Securities will be
initially issued in definitive or book-entry form.
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
'Commission') a Registration Statement (of which this Prospectus forms a part)
under the Securities Act of 1933, as amended, with respect to the Offered
Securities. This Prospectus and the Prospectus Supplement relating to each
series of Securities contain summaries of the material terms of the documents
referred to herein and therein, but do not contain all of the information set
forth in the Registration Statement pursuant to the rules and regulations of the
Commission. For further information, reference is made to such Registration
Statement and the exhibits thereto. Such Registration Statement and exhibits can
be inspected and copied at prescribed rates at the public reference facilities
maintained by the Commission at its Public Reference Section, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at its Regional Offices located as follows:
Chicago Regional Office, Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661; and New York Regional Office, Seven World Trade Center,
13th Floor, New York, New York 10048. The Commission maintains a Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Offered Securities
or an offer of the Offered Securities to any person in any state or other
jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus and any Prospectus Supplement hereto at any time does not imply that
information herein is correct as of any time subsequent to its date.
A Master Servicer or the Trustee will be required to mail to holders of
Offered Securities of each series periodic unaudited reports concerning the
related Trust Fund. Unless and until definitive Securities are issued, or unless
otherwise provided in the related Prospectus Supplement, such reports will be
sent on behalf of the related Trust Fund to Cede & Co. ('Cede'), as nominee of
The Depository Trust Company ('DTC') and registered holder of the Offered
Securities, pursuant to the applicable Agreement. Such reports may be available
to holders of interests in the Securities (the 'Securityholders') upon request
to their respective DTC participants. See 'Description of the
Securities--Reports to Securityholders' and 'Description of the
Agreements--Evidence as
3
<PAGE>
to Compliance.' The Depositor will file or cause to be filed with the Commission
such periodic reports with respect to each Trust Fund as are required under the
Securities Exchange Act of 1934, as amended (the 'Exchange Act'), the rules and
regulations of the Commission thereunder, as interpreted by the staff of the
Commission thereunder.
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 an offering of Offered Securities evidencing interests therein. Upon request,
the Depositor will provide or cause to be provided without charge to each person
to whom this Prospectus is delivered in connection with the offering of one or
more classes of Offered Securities, a copy of any or all 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 Offered Securities, other
than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests to the Depositor should
be directed in writing to Merrill Lynch Mortgage Investors, Inc., 250 Vesey
Street, World Financial Center--North Tower, 10th Floor, New York, New York
10281-1310, Attention: Secretary, or by telephone at (212) 449-0357. The
Depositor has determined that its financial statements are not material to the
offering of any Offered Securities.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Supplement...................................................................................... 3
Available Information...................................................................................... 3
Incorporation of Certain Information by Reference.......................................................... 4
Summary of Prospectus...................................................................................... 6
Special Considerations..................................................................................... 15
Description of the Trust Funds............................................................................. 20
Use of Proceeds............................................................................................ 26
Yield Considerations....................................................................................... 26
The Depositor.............................................................................................. 31
Description of the Securities.............................................................................. 31
Description of the Agreements.............................................................................. 38
Description of Credit Support.............................................................................. 57
Certain Legal Aspects of Mortgage Loans.................................................................... 59
Certain Legal Aspects of the Contracts..................................................................... 69
Certain Federal Income Tax Consequences.................................................................... 73
State Tax Considerations................................................................................... 104
ERISA Considerations....................................................................................... 104
Legal Investment........................................................................................... 106
Plan of Distribution....................................................................................... 108
Legal Matters.............................................................................................. 109
Financial Information...................................................................................... 109
Rating..................................................................................................... 109
Index of Principal Definitions............................................................................. 110
</TABLE>
5
<PAGE>
SUMMARY OF PROSPECTUS
The following summary of certain pertinent information is qualified in its
entirety by reference to the more detailed information appearing elsewhere in
this Prospectus and by reference to the information with respect to each series
of Securities contained in the Prospectus Supplement to be prepared and
delivered in connection with the offering of such series. An Index of Principal
Definitions is included at the end of this Prospectus.
<TABLE>
<S> <C>
Title of Certificates..................... Asset-Backed Certificates (the 'Certificates') and Asset Backed Notes
(the 'Notes' and, together with the Certificates, the 'Securities'),
issuable in series.
Depositor................................. Merrill Lynch Mortgage Investors, Inc. (the 'Depositor'), a wholly
owned subsidiary of Merrill Lynch Mortgage Capital, Inc., which is a
wholly-owned indirect subsidiary of Merrill Lynch & Co., Inc. The
Depositor is an affiliate of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Neither Merrill Lynch & Co., Inc. nor any of its
affiliates, including the Depositor and Merrill Lynch, Pierce, Fenner
& Smith Incorporated, will insure or guarantee the Certificates or
the Mortgage Loans or be otherwise obligated in respect thereof.
Master Servicer........................... The master servicer or master servicers (each, a 'Master Servicer'),
if any, or a servicer for substantially all the Mortgage Loans for
each series of Securities, which servicer or master servicer(s) may
be affiliates of the Depositor, will be named in the related
Prospectus Supplement. See 'Description of the Agreements--General'
and '--Collection and Other Servicing Procedures.'
Trustee................................... The trustee (the 'Trustee') for each series of Certificates will be
named in the related Prospectus Supplement. See 'Description of the
Agreements--The Trustee.'
The Trust Assets.......................... Each series of Certificates will represent in the aggregate the
entire beneficial ownership interest in a Trust Fund. If a series of
Securities includes Notes, such Notes will represent indebtedness of
the Trust Fund and will be secured by a security interest in the
Assets of the Trust Fund. A Trust Fund will consist primarily of any
of the following assets (the Mortgage Assets, Unsecured Home
Improvement Loans, Contracts, Government Securities and the small
business loans described herein may be referred to collectively or
individually as 'Assets'):
(a) Mortgage Assets....................... The Mortgage Assets with respect to a series of Certificates will
consist of a pool of single family and/or multifamily loans (or
certain balances thereof) (collectively, the 'Mortgage Loans'),
mortgage participations ('Mortgage Participations') or mortgage
pass-through certificates or other mortgage-backed securities
evidencing interests in or secured by Mortgage Loans (collectively,
the 'MBS') or a combination of Mortgage Loans, Mortgage
Participations and/or MBS. The Mortgage Loans will not be guaranteed
or insured by the Depositor or any of its affiliates or, unless
otherwise provided in the Prospectus Supplement, by any governmental
agency or instrumentality or other person. The Mortgage Loans will be
secured by first and/or junior liens on (i) one- to four-family
residential properties or security interests in shares issued by
cooperative housing corporations ('Single Family Properties') and/or
(ii) residential properties consisting of five or more dwelling
units, including mixed residential and commercial
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
structures ('Multifamily Properties'). The Mortgage Loans may include
(i) closed-end and/or revolving home equity loans or certain balances
thereof ('Home Equity Loans') and/or (ii) home improvement
installment sales contracts and installment loan agreements ('Home
Improvement Contracts'). The Mortgaged Properties may be located in
any one of the fifty states, the District of Columbia or the
Commonwealth of Puerto Rico. The Prospectus Supplement will indicate
additional jurisdictions (which may be outside the United States), if
any, in which the Mortgaged Properties may be located. Unless
otherwise provided in the related Prospectus Supplement, all Mortgage
Loans will have individual principal balances at origination of not
less than $25,000 and original terms to maturity of not more than 40
years. All Mortgage Loans will have been originated by persons other
than the Depositor, and all Mortgage Assets will have been purchased,
either directly or indirectly, by the Depositor on or before the date
of initial issuance of the related series of Certificates. The
related Prospectus Supplement will indicate if any such persons are
affiliates of the Depositor.
Each Mortgage Loan may provide for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or that
adjusts from time to time, or that may be converted from an
adjustable to a fixed Mortgage Rate, or from a fixed to an adjustable
Mortgage Rate, from time to time at the mortgagor's election, in each
case as described in the related Prospectus Supplement. Adjustable
Mortgage Rates on the Mortgage Loans in a Trust Fund may be based on
one or more indices. Each Mortgage Loan may provide for scheduled
payments to maturity, payments that adjust from time to time to
accommodate changes in the Mortgage Rate or to reflect the occurrence
of certain events, and may provide for negative amortization or
accelerated amortization, in each case as described in the related
Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each
case as described in the related Prospectus Supplement. Each Mortgage
Loan may contain prohibitions on prepayment or require payment of a
premium or a yield maintenance penalty in connection with a
prepayment, in each case as described in the related Prospectus
Supplement. The Mortgage Loans may provide for payments of principal,
interest or both, on due dates that occur monthly, quarterly,
semi-annually or at such other interval as is specified in the
related Prospectus Supplement. See 'Description of the Trust
Funds--Assets.'
(b) Unsecured Home Improvement Loans...... The Assets with respect to a series of Securities may consist of or
include home improvement installment sales contracts or installment
loans that are unsecured ('Unsecured Home Improvement Loans'). The
Unsecured Home Improvement Loans may have any of the features
described under '(a) Mortgage Assets' above, except that they will
not be secured by a lien on or other security interest in any
property. Unless the context otherwise requires, references in this
Prospectus to Mortgage Loans, Whole Loans and related terms shall
include Unsecured Home Improvement Loans and related terms to the
extent relevant (e.g., a reference to a Mortgaged Property or
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
hazard insurance does not relate to an Unsecured Home Improvement
Contract).
(c) Contracts............................. The Contracts with respect to a series of Securities will consist of
manufactured housing installment sale contracts and installment loan
agreements secured by a security interest in a new or used
manufactured home (each, a 'Manufactured Home'), and, to the extent,
if any, indicated in the related Prospectus Supplement, by real
property. The Contracts will not be insured or guaranteed by the
Depositor or any of its affiliates or, unless otherwise specified in
the related Prospectus Supplement, by any governmental agency or
instrumentality or any other person. The Manufactured Homes may be
located in any of the fifty states or any other jurisdiction
specified in the related Prospectus Supplement. All Contracts will
have been originated by persons other than the Depositor, and all
Contracts will have been purchased, either directly or indirectly, by
the Depositor on or before the date of initial issuance of the
related series of Certificates. The related Prospectus Supplement
will indicate if any such persons are affiliates of the Depositor.
Each Contract may provide for an annual percentage rate thereon (a
'Contract Rate') that is fixed over its term or that adjusts as
described in the related Prospectus Supplement. The manner of
determining scheduled payments due on the Contract will be described
in the Prospectus Supplement. The Prospectus Supplement will describe
the minimum principal balance of the Contracts at origination and the
maximum original term to maturity of the Contracts.
(d) Government Securities................. If so provided in the related Prospectus Supplement, the Trust Fund
may include, in addition to Mortgage Assets and/or Contracts, certain
direct obligations of the United States, agencies thereof or agencies
created thereby which provide for payment of interest and/or
principal (collectively, 'Government Securities').
(e) SBA Loans and SBA 504 Loans........... If so provided in the related Prospectus Supplement, the Trust Fund
may include (i) the unguaranteed portion of loans ('SBA Loans')
originated under the general business loan program (the 'Section 7(a)
Program') of the U.S. Small Business Association (the 'SBA') created
pursuant to Section 7(a) of the Small Business Act of 1953 (the 'SBA
Act') and/or (ii) loans ('SBA 504 Loans') originated under the SBA's
504 program (the 'SBA 504 Loan Program'). The loans originated by the
originators under the SBA 504 Loan Program are not guaranteed by the
SBA. Unless the context otherwise requires, references in this
Prospectus to Mortgage Loans and related terms shall include SBA
Loans and SBA 504 Loans and related terms to the extent relevant
(e.g., a reference to a Mortgaged Property or hazard insurance does
not relate to a SBA Loan or a SBA 504 Loan).
(f) Collection Accounts................... Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or
persons designated in the related Prospectus Supplement will, to the
extent described herein and in such Prospectus Supplement, deposit
all payments and collections received or advanced with respect to the
Assets and other assets in the Trust Fund. Such an account may be
maintained as an interest bearing or a non-interest bearing
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as
described in the related Prospectus Supplement. See 'Description of
the Agreements--Collection Account and Related Accounts.'
(g) Credit Support........................ If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the
related Trust Fund may be provided to one or more classes of
Securities of the related series in the form of subordination of one
or more other classes of Securities of such series, which other
classes may include one or more classes of Offered Securities, or by
one or more other types of credit support, such as a letter of
credit, insurance policy, guarantee, reserve fund or another type of
credit support, or a combination thereof (any such coverage with
respect to the Securities of any series, 'Credit Support'). The
amount and types of coverage, the identification of the entity
providing the coverage (if applicable) and related information with
respect to each type of Credit Support, if any, will be described in
the Prospectus Supplement for a series of Securities. The Prospectus
Supplement for any series of Securities evidencing an interest in a
Trust Fund that includes MBS will describe any similar forms of
credit support that are provided by or with respect to, or are
included as part of the trust fund evidenced by or providing security
for, such MBS. See 'Special Considerations--Credit Support
Limitations' and 'Description of Credit Support.'
(h) Cash Flow Agreements.................. If so provided in the related Prospectus Supplement, the Trust Fund
may include guaranteed investment contracts pursuant to which moneys
held in the funds and accounts established for the related series
will be invested at a specified rate. The Trust Fund may also include
certain other agreements, such as interest rate exchange agreements,
interest rate cap or floor agreements, currency exchange agreements
or similar agreements provided to reduce the effects of interest rate
or currency exchange rate fluctuations on the Assets or on one or
more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Assets
(such as Mortgage Loans secured by Mortgaged Properties located
outside the United States) were denominated in a non-United States
currency.) The principal terms of any such guaranteed investment
contract or other agreement (any such agreement, a 'Cash Flow
Agreement'), including, without limitation, provisions relating to
the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the
Prospectus Supplement for the related series. In addition, the
related Prospectus Supplement will provide certain information with
respect to the obligor under any such Cash Flow Agreement. The
Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any cash
flow agreements that are included as part of the trust fund evidenced
by or providing security for such MBS. See 'Description of the Trust
Funds--Cash Flow Agreements.'
(i) Pre-Funding Account................... To the extent provided in a Prospectus Supplement, the Depositor will
be obligated (subject only to the availability thereof) to sell at a
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
predetermined price, and the Trust Fund for the related series of
Securities will be obligated to purchase (subject to the satisfaction
of certain conditions described in the applicable Agreement),
additional Assets (the 'Subsequent Assets') from time to time (as
frequently as daily) within the number of months specified in the
Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the
amount on deposit in the Pre-Funding Account (the 'Pre-Funded
Amount') for such series on the date of such issuance.
Description of Securities................. Each series of Certificates will evidence an interest in the related
Trust Fund and will be issued pursuant to a pooling and servicing
agreement or a trust agreement. Pooling and servicing agreements and
trust agreements are referred to herein as the 'Agreements.' If a
series of Securities includes Notes, such Notes will represent
indebtedness of the related Trust Fund and will be secured by a
security interest in the Assets of the Trust Fund (or a specified
group thereof) pursuant to an indenture.
Each series of Securities will include one or more classes. Each
class of Securities (other than certain Stripped Interest Securities,
as defined below) will have a stated principal amount (a 'Security
Balance') and except for certain Stripped Principal Securities, as
defined below, will accrue interest thereon based on a fixed,
variable or adjustable interest rate (in the case of Certificates, a
'Pass-Through Rate'). The related Prospectus Supplement will specify
the Security Balance, if any, and the Pass-Through Rate or interest
rate for each class of Securities or, in the case of a variable or
adjustable Pass-Through Rate or interest rate, the method for
determining the Pass-Through Rate or interest rate.
Distributions on Securities............... Each series of Securities will consist of one or more classes of
Securities that may (i) provide for the accrual of interest thereon
based on fixed, variable or adjustable rates; (ii) be senior
(collectively, 'Senior Securities') or subordinate (collectively,
'Subordinate Securities') to one or more other classes of Securities
in respect of certain distributions on the Securities; (iii) be
entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped
Principal Securities'); (iv) be entitled to interest distributions,
with disproportionately low, nominal or no principal distributions
(collectively, 'Stripped Interest Securities'); (v) provide for
distributions of accrued interest thereon commencing only following
the occurrence of certain events, such as the retirement of one or
more other classes of Securities of such series (collectively,
'Accrual Securities'); (vi) provide for distributions of principal as
described in the related Prospectus Supplement; and/or (vii) provide
for distributions based on a combination of two or more components
thereof with one or more of the characteristics described in this
paragraph, including a Stripped Principal Security component and a
Stripped Interest Security component, to the extent of available
funds, in each case as described in the related Prospectus
Supplement. If so specified in the related Prospectus Supplement,
distributions on one or more classes of a series of Securities may be
limited to collections from a designated portion of the Mortgage
Loans in the related Mortgage
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
Pool or Contracts in the related Contract Pool (each such portion of
Mortgage Loans, a 'Mortgage Loan Group' and each such portion of the
Contracts, a 'Contract Group'). See 'Description of the
Securities--General.' Any such classes may include classes of Offered
Securities. With respect to Securities with two or more components,
references herein to Security Balance, notional amount and
Pass-Through Rate or interest rate refer to the principal balance, if
any, notional amount, if any, and the Pass-Through Rate or interest
rate, if any, for any such component.
The Securities will not be guaranteed or insured by the Depositor or
any of its affiliates, by any governmental agency or instrumentality
or by any other person, unless otherwise provided in the related
Prospectus Supplement. See 'Special Considerations--Limited Assets'
and 'Description of the Securities.'
(a) Interest.............................. Interest on each class of Offered Securities (other than Stripped
Principal Securities and certain classes of Stripped Interest
Securities) of each series will accrue at the applicable Pass-Through
Rate or interest rate on the outstanding Security Balance thereof and
will be distributed to Securityholders as provided in the related
Prospectus Supplement. The specified date on which distributions are
to be made is a 'Distribution Date.' Distributions with respect to
interest on Stripped Interest Securities may be made on each
Distribution Date on the basis of a notional amount as described in
the related Prospectus Supplement. Distributions of interest with
respect to one or more classes of Securities may be reduced to the
extent of certain delinquencies, losses, prepayment interest
shortfalls, and other contingencies described herein and in the
related Prospectus Supplement. See 'Special Considerations--Average
Life of Securities; Prepayments; Yields,' 'Yield Considerations' and
'Description of the Securities--Distributions of Interest on the
Securities.'
(b) Principal............................. The Securities of each series initially will have an aggregate
Security Balance no greater than the outstanding principal balance of
the Assets as of, unless the related Prospectus Supplement provides
otherwise, the close of business on the first day of the month of
formation of the related Trust Fund (the 'Cut-off Date'), after
application of scheduled payments due on or before such date, whether
or not received. The Security Balance of a Security outstanding from
time to time represents the maximum amount that the holder thereof is
then entitled to receive in respect of principal from future cash
flow on the assets in the related Trust Fund. Unless otherwise
provided in the related Prospectus Supplement, distributions of
principal will be made on each Distribution Date to the class or
classes of Securities entitled thereto until the Security Balances of
such Securities have been reduced to zero. Unless otherwise specified
in the related Prospectus Supplement, distributions of principal of
any class of Securities will be made on a pro rata basis among all of
the Securities of such class or by random selection, as described in
the related Prospectus Supplement or otherwise established by the
related Trustee. Stripped Interest Securities with no Security
Balance will not receive distributions in
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
respect of principal. See 'Description of the Securities--
Distributions of Principal of the Securities.'
Advances.................................. Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer will be obligated as part of its servicing
responsibilities to make certain advances that in its good faith
judgment it deems recoverable with respect to delinquent scheduled
payments on the Whole Loans or Contracts in such Trust Fund. Neither
the Depositor nor any of its affiliates will have any responsibility
to make such advances. Advances made by a Master Servicer are
reimbursable generally from subsequent recoveries in respect of such
Whole Loans or Contracts and otherwise to the extent described herein
and in the related Prospectus Supplement. If and to the extent
provided in the Prospectus Supplement for any series, the Master
Servicer will be entitled to receive interest on its outstanding
advances, payable from amounts in the related Trust Fund. The
Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any
corresponding advancing obligation of any person in connection with
such MBS. See 'Description of the Securities--Advances in Respect of
Delinquencies.'
Termination............................... If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the
repurchase of the Assets in the related Trust Fund by the party
specified therein, under the circumstances and in the manner set
forth therein. If so provided in the related Prospectus Supplement,
upon the reduction of the Security Balance of a specified class or
classes of Securities to a specified percentage or amount or on and
after a date specified in such Prospectus Supplement, the party
specified therein will solicit bids for the purchase of all of the
Assets of the Trust Fund, or of a sufficient portion of such Assets
to retire such class or classes, or purchase such Assets at a price
set forth in the related Prospectus Supplement. In addition, if so
provided in the related Prospectus Supplement, certain classes of
Securities may be purchased subject to similar conditions. See
'Description of the Securities--Termination.'
Registration of Securities................ If so provided in the related Prospectus Supplement, one or more
classes of the Offered Securities will initially be represented by
one or more certificates or notes, as applicable, registered in the
name of Cede & Co., as the nominee of DTC. No person acquiring an
interest in Offered Securities so registered will be entitled to
receive a definitive certificate or note, as applicable, representing
such person's interest except in the event that definitive
certificates or notes, as applicable, are issued under the limited
circumstances described herein. See 'Special
Considerations--Book-Entry Registration' and 'Description of the
Securities--Book-Entry Registration and Definitive Securities.'
Tax Status of the Certificates............ The Certificates of each series will constitute, as specified in the
related Prospectus Supplement, either (i) 'regular interests' ('REMIC
Regular Certificates') and 'residual interests' ('REMIC Residual
Certificates') in a Trust Fund treated as a real estate mortgage
investment conduit ('REMIC') under Sections 860A through 860G of the
Internal Revenue Code of 1986,
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
as amended (the 'Code'), (ii) interests ('Grantor Trust
Certificates') in a Trust Fund treated as a grantor trust under
applicable provisions of the Code, (iii) an interest in a Trust Fund
treated as a partnership for purposes of federal and state income tax
or (iv) indebtedness of the Trust Fund for federal income tax
purposes.
(a) REMIC................................. REMIC Regular Certificates generally will be treated as debt
obligations of the applicable REMIC for federal income tax purposes.
Certain REMIC Regular Certificates may be issued with original issue
discount for federal income tax purposes. See 'Certain Federal Income
Tax Consequences' herein and in the related Prospectus Supplement.
The Offered Certificates evidencing an interest in a Trust Fund
containing Mortgage Loans (not including Unsecured Home Improvement
Loans, SBA Loans and SBA 504 Loans) will be treated as (i) assets
described in section 7701(a)(19)(C) of the Code and (ii) 'real estate
assets' within the meaning of section 856(c)(5)(A) of the Code, in
each case to the extent described herein and in the Prospectus. See
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
(b) Grantor Trust......................... If the related Prospectus Supplement specifies that the related Trust
Fund will be a grantor trust, the Trust Fund will be classified as a
grantor trust and not as an association taxable as a corporation for
federal income tax purposes, and therefore holders of Certificates
will be treated as the owners of undivided pro rata interests in the
Assets held by the Trust Fund.
(c) Partnership........................... If so specified in a Prospectus Supplement, the related Trust Fund
will be treated as a partnership for purposes of federal and state
income tax, and each Certificateholder, by the acceptance of a
Certificate of such Trust Fund, will agree to treat the Trust Fund as
a partnership in which such Certificateholder is a partner for
federal income and state tax purposes. Alternative characterizations
of such Trust Fund and such Certificates are possible, but would not
result in materially adverse tax consequences to Certificateholders.
(d) Indebtedness.......................... If so specified in the related Prospectus Supplement, the
Certificates of a series will be treated as indebtedness for federal
income tax purposes and the Certificateholder, in accepting the
Certificate, will agree to treat such Certificate as indebtedness.
Investors are advised to consult their tax advisors and to review
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
Tax Status of Notes....................... Unless otherwise specified in the related Prospectus Supplement,
Notes of a series will be treated as indebtedness for federal and
state income tax purposes and the Noteholder, in accepting the Note,
will agree to treat such Note as indebtedness. See 'Certain Federal
Income Tax Consequences' herein and in such Prospectus Supplement.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
Investors are advised to consult their tax advisors and to review
'Certain Federal Income Tax Consequences' herein and in the related
Prospectus Supplement.
ERISA Considerations...................... A fiduciary of an employee benefit plan and certain other retirement
plans and arrangements, including individual retirement accounts,
annuities, Keogh plans, and collective investment funds and separate
accounts in which such plans, accounts, annuities or arrangements are
invested, that is subject to the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), or Section 4975 of the Code should
carefully review with its legal advisors whether the purchase or
holding of Offered Securities could give rise to a transaction that
is prohibited or is not otherwise permissible either under ERISA or
Section 4975 of the Code. See 'ERISA Considerations' herein and in
the related Prospectus Supplement. Certain classes of Securities may
not be transferred unless the Trustee and the Depositor are furnished
with a letter of representations or an opinion of counsel to the
effect that such transfer will not result in a violation of the
prohibited transaction provisions of ERISA and the Code and will not
subject the Trustee, the Depositor or the Master Servicer to
additional obligations. See 'Description of the Securities--General'
and 'ERISA Considerations'.
Legal Investment.......................... Each Prospectus Supplement will specify which class or classes of
Offered Securities, if any, will constitute 'mortgage-related
securities' for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ('SMMEA'). Institutions whose investment activities are
subject to legal investment laws and regulations or review by certain
regulatory authorities may be subject to restrictions on investment
in certain classes of the Offered Securities. See 'Legal Investment'
herein and in the related Prospectus Supplement.
Rating.................................... At the date of issuance, as to each series, each class of Offered
Securities will be rated not lower than investment grade by one or
more nationally recognized statistical rating agencies (each, a
'Rating Agency'). See 'Rating' herein and in the related Prospectus
Supplement.
</TABLE>
14
<PAGE>
SPECIAL CONSIDERATIONS
Investors should consider, in connection with the purchase of Offered
Securities, among other things, the following factors.
LIMITED LIQUIDITY
At the time of issuance of a series of Securities, there will be no
secondary market for any of the Securities. Merrill Lynch, Pierce, Fenner &
Smith Incorporated currently expects to make a secondary market in the Offered
Securities, but has no obligation to do so. There can be no assurance that a
secondary market for the Securities of any series will develop or, if it does
develop, that it will provide holders with liquidity of investment or will
continue while Securities of such series remain outstanding.
LIMITED ASSETS
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their affiliates. The only obligations
with respect to the Securities or the Assets will be the obligations (if any) of
the Warranting Party (as defined herein) pursuant to certain limited
representations and warranties made with respect to the Mortgage Loans or
Contracts, the Master Servicer's and any Sub-Servicer's servicing obligations
under the related Agreement (including the limited obligation to make certain
advances in the event of delinquencies on the Mortgage Loans or Contracts, but
only to the extent deemed recoverable) and, if and to the extent expressly
described in the related Prospectus Supplement, certain limited obligations of
the Master Servicer in connection with an agreement to purchase or act as
remarketing agent with respect to a convertible ARM Loan (as defined herein)
upon conversion to a fixed rate or a different index. Since certain
representations and warranties with respect to the Mortgage Assets or Contracts
may have been made and/or assigned in connection with transfers of such Mortgage
Assets or Contracts prior to the Closing Date, the rights of the Trustee and the
Securityholders with respect to such representations or warranties will be
limited to their rights as an assignee thereof. Unless otherwise specified in
the related Prospectus Supplement, none of the Depositor, the Master Servicer or
any affiliate thereof will have any obligation with respect to representations
or warranties made by any other entity. Unless otherwise specified in the
related Prospectus Supplement, neither the Securities nor the underlying Assets
will be guaranteed or insured by any governmental agency or instrumentality, or
by the Depositor, the Master Servicer, any Sub-Servicer or any of their
affiliates. Proceeds of the assets included in the related Trust Fund for each
series of Securities (including the Assets and any form of credit enhancement)
will be the sole source of payments on the Securities, and there will be no
recourse to the Depositor or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Securities.
Unless otherwise specified in the related Prospectus Supplement, a series
of Securities will not have any claim against or security interest in the Trust
Funds for any other series. If the related Trust Fund is insufficient to make
payments on such Securities, no other assets will be available for payment of
the deficiency. Additionally, certain amounts remaining in certain funds or
accounts, including the Collection Account and any accounts maintained as Credit
Support, may be withdrawn under certain conditions, as described in the related
Prospectus Supplement. In the event of such withdrawal, such amounts will not be
available for future payment of principal of or interest on the Securities. If
so provided in the Prospectus Supplement for a series of Securities consisting
of one or more classes of Subordinate Securities, on any Distribution Date in
respect of which losses or shortfalls in collections on the Assets have been
incurred, the amount of such losses or shortfalls will be borne first by one or
more classes of the Subordinate Securities, and, thereafter, by the remaining
classes of Securities in the priority and manner and subject to the limitations
specified in such Prospectus Supplement.
AVERAGE LIFE OF SECURITIES; PREPAYMENTS; YIELDS
Prepayments (including those caused by defaults) on the Assets in any Trust
Fund generally will result in a faster rate of principal payments on one or more
classes of the related Securities than if payments on such Assets were made as
scheduled. Thus, the prepayment experience on the Assets may affect the average
life of each class of related Securities. The rate of principal payments on
pools of mortgage loans or manufactured housing contracts varies between pools
and from time to time is influenced by a variety of economic, demographic,
geographic, social, tax, legal and other factors. There can be no assurance as
to the rate of prepayment on the Assets in any Trust Fund or that the rate of
payments will conform to any model described herein or in any Prospectus
Supplement. If prevailing interest rates fall significantly below the applicable
mortgage interest rates, principal prepayments are likely to be higher than if
prevailing rates remain at or above the rates borne by the Mortgage Loans
underlying or comprising the Mortgage Assets in any Trust Fund. As a result, the
actual
15
<PAGE>
maturity of any class of Securities evidencing an interest in a Trust Fund
containing Mortgage Assets could occur significantly earlier than expected. The
relationship of prevailing interest rates and prepayment rates on Contracts will
be discussed in the related Prospectus Supplement. In addition, certain
prepayments may result in the collection of less interest than would otherwise
be the case in the month of prepayment.
A series of Securities may include one or more classes of Securities with
priorities of payment and, as a result, yields on other classes of Securities,
including classes of Offered Securities, of such series may be more sensitive to
prepayments on Assets. A series of Securities may include one or more classes
offered at a significant premium or discount. Yields on such classes of
Securities will be sensitive, and in some cases extremely sensitive, to
prepayments on Mortgage Assets and, where the amount of interest payable with
respect to a class is disproportionately high, as compared to the amount of
principal, as with certain classes of Stripped Interest Securities, a holder
might, in some prepayment scenarios, fail to recoup its original investment. A
series of Securities may include one or more classes of Securities, including
classes of Offered Securities, that provide for distribution of principal
thereof from amounts attributable to interest accrued but not currently
distributable on one or more classes of Accrual Securities and, as a result,
yields on such Securities will be sensitive to (a) the provisions of such
Accrual Securities relating to the timing of distributions of interest thereon
and (b) if such Accrual Securities accrue interest at a variable or adjustable
Pass-Through Rate or interest rate, changes in such rate. See 'Yield
Considerations' herein and, if applicable, in the related Prospectus Supplement.
LIMITED NATURE OF RATINGS
Any rating assigned by a Rating Agency to a class of Securities will
reflect such Rating Agency's assessment solely of the likelihood that holders of
Securities of such class will receive payments to which such Securityholders are
entitled under the related Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments (including those caused
by defaults) on the related Mortgage Assets will be made, the degree to which
the rate of such prepayments might differ from that originally anticipated or
the likelihood of early optional termination of the series of Securities. Such
rating will not address the possibility that prepayment at higher or lower rates
than anticipated by an investor may cause such investor to experience a lower
than anticipated yield or that an investor purchasing a Security at a
significant premium might fail to recoup its initial investment under certain
prepayment scenarios. Each Prospectus Supplement will identify any payment to
which holders of Offered Securities of the related series are entitled that is
not covered by the applicable rating.
MORTGAGE LOANS AND MORTGAGED PROPERTIES IN GENERAL
An investment in securities such as the Securities which generally
represent interests in Mortgage Loans may be affected by, among other things, a
decline in real estate values and changes in the mortgagors' financial
condition. No assurance can be given that values of the Mortgaged Properties
have remained or will remain at their levels on 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, and any secondary financing on the Mortgaged Properties, 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, in the case
of Mortgage Loans that are subject to negative amortization, due to the addition
to principal balance of deferred interest, the principal balances of such
Mortgage Loans could be increased to an amount equal to or in excess of the
value of the underlying Mortgaged Properties, thereby increasing the likelihood
of default. To the extent that such losses are not covered by the applicable
Credit Support, if any, holders of Securities of the series evidencing interests
in the related Mortgage Loans will bear all risk of loss resulting from default
by mortgagors and will have to look primarily to the value of the Mortgaged
Properties for recovery of the outstanding principal and unpaid interest on the
defaulted Mortgage Loans. Certain of the types of Mortgage Loans may involve
additional uncertainties not present in traditional types of loans. For example,
certain of the Mortgage Loans provide for escalating or variable payments by the
mortgagor under the Mortgage Loan, as to which the mortgagor is generally
qualified on the basis of the initial payment amount. In some instances the
mortgagors' income may not be sufficient to enable them to continue to make
their loan payments as such payments increase and thus the likelihood of default
will increase. In addition to the foregoing, certain geographic regions of 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 than will be experienced on mortgage loans generally.
The Mortgage Loans 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 securities
without such concentration. Furthermore, the rate of default on Mortgage Loans
that are refinance or limited
16
<PAGE>
documentation mortgage loans, and on Mortgage Loans with high Loan-to-Value
Ratios, may be higher than for other types of Mortgage Loans. Additionally, a
decline in the value of the Mortgaged Properties will increase the risk of loss
particularly with respect to any related junior Mortgage Loans. See '--Junior
Mortgage Loans.'
Mortgage Loans secured by Multifamily Properties may entail risks of
delinquency and foreclosure, and risks of loss in the event thereof, that are
greater than similar risks associated with loans secured by Single Family
Properties. The ability of a borrower to repay a loan secured by an
income-producing property typically is dependent primarily upon the successful
operation of such property rather than upon the existence of independent income
or assets of the borrower; thus, the value of an income-producing property
typically is directly related to the net operating income derived from such
property. If the net operating income of the property is reduced (for example,
if rental or occupancy rates decline or real estate tax rates or other operating
expenses increase), the borrower's ability to repay the loan may be impaired. In
addition, the concentration of default, foreclosure and loss risk for a pool of
Mortgage Loans secured by Multifamily Properties may be greater than for a pool
of Mortgage Loans secured by Single Family Properties of comparable aggregate
unpaid principal balance because the pool of Mortgage Loans secured by
Multifamily Properties is likely to consist of a smaller number of higher
balance loans.
If applicable, certain legal aspects of the Mortgage Loans for a series of
Certificates may be described in the related Prospectus Supplement. See also
'Certain Legal Aspects of Mortgage Loans' herein.
BALLOON PAYMENTS
Certain of the Mortgage Loans (the 'Balloon Mortgage Loans') as of the
Cut-off Date may not be fully amortizing over their terms to maturity and, thus,
will require substantial principal payments (i.e., balloon payments) at their
stated maturity. Mortgage Loans with balloon payments involve a greater degree
of risk because the ability of a mortgagor to make a balloon payment typically
will depend upon its ability either to timely refinance the loan or to timely
sell the related Mortgaged Property. The ability of a mortgagor to accomplish
either of these goals will be affected by a number of factors, including the
level of available mortgage interest rates at the time of sale or refinancing,
the mortgagor's equity in the related Mortgaged Property, the financial
condition of the mortgagor, the value of the Mortgaged Property, tax laws,
prevailing general economic conditions and the availability of credit for single
family or multifamily real properties generally.
JUNIOR MORTGAGE LOANS
Certain of the Mortgage Loans may be secured by junior liens and the
related first and other senior liens, if any (collectively, the 'senior lien'),
may not be included in the Mortgage Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the possibility that adequate funds
will not be received in connection with a foreclosure of the related senior lien
to satisfy fully both the senior lien and the Mortgage Loan. In the event that a
holder of the senior lien forecloses on a Mortgaged Property, the proceeds of
the foreclosure or similar sale will be applied first to the payment of court
costs and fees in connection with the foreclosure, second to real estate taxes,
third in satisfaction of all principal, interest, prepayment or acceleration
penalties, if any, and any other sums due and owing to the holder of the senior
lien. The claims of the holder of the senior lien will be satisfied in full out
of proceeds of the liquidation of the Mortgage Loan, if such proceeds are
sufficient, before the Trust Fund as holder of the junior lien receives any
payments in respect of the Mortgage Loan. If the Master Servicer were to
foreclose on any Mortgage Loan, it would do so subject to any related senior
lien. In order for the debt related to the Mortgage Loan to be paid in full at
such sale, a bidder at the foreclosure sale of such Mortgage Loan would have to
bid an amount sufficient to pay off all sums due under the Mortgage Loan and the
senior lien or purchase the Mortgaged Property subject to the senior lien. In
the event that such proceeds from a foreclosure or similar sale of the related
Mortgaged Property were insufficient to satisfy both loans in the aggregate, the
Trust Fund, as the holder of the junior lien, and, accordingly, holders of the
Certificates, would bear the risk of delay in distributions while a deficiency
judgment against the borrower was being obtained and the risk of loss if the
deficiency judgment were not realized upon. Moreover, deficiency judgments may
not be available in certain jurisdictions. In addition, a junior mortgagee may
not foreclose on the property securing a junior mortgage unless it forecloses
subject to the senior mortgage.
CONTRACTS AND MANUFACTURED HOMES IN GENERAL
An investment in Certificates evidencing an interest in a Trust Fund
containing Contracts may be affected by, among other things, a downturn in
national, regional or local economic conditions. The geographic location of the
Manufactured Homes in any Contract Pool at origination of the related Contract
will be set forth in the related Prospectus Supplement under 'The Contract
Pool'. Regional and local economic conditions are often
17
<PAGE>
volatile and, historically, regional and local economic conditions, as well as
national economic conditions, have affected the delinquency, loan loss and
repossession experience of manufactured housing installment sales contracts
and/or installment loan contracts (hereinafter generally referred to as
'contracts' or 'manufactured housing contracts'). Moreover, regardless of its
location, manufactured housing generally depreciates in value. Thus, such
Securityholders should expect that, as a general matter, the market value of any
Manufactured Home will be lower than the outstanding principal balance of the
related Contract. Sufficiently high delinquencies and liquidation losses on the
Contracts in a Contract Pool will have the effect of reducing, and could
eliminate, the protection against loss afforded by any credit enhancement
supporting any class of the related Securities. If such protection is eliminated
with respect to a class of Securities, the holders of such Securities will bear
all risk of loss on the related Contracts and will have to rely on the value of
the related Manufactured Homes for recovery of the outstanding principal of and
unpaid interest on any defaulted Contracts in the related Contract Pool. See
'Description of Credit Support.'
SECURITY INTERESTS AND CERTAIN OTHER LEGAL ASPECTS OF THE CONTRACTS
The Asset Seller in respect of a Contract will represent that such Contract
is secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of Federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, the Master Servicer will not amend any certificates of title to change
the lienholder specified therein from the Asset Seller to the Trustee and will
not deliver any certificate of title to the Trustee or note thereon the
Trustee's interest. Consequently, in some states, in the absence of such an
amendment, the assignment to the Trustee of the security interest in the
Manufactured Home may not be effective or such security interest may not be
perfected and, in the absence of such notation or delivery to the Trustee, the
assignment of the security interest in the Manufactured Home may not be
effective against creditors of the Asset Seller or a trustee in bankruptcy of
the Asset Seller. In addition, numerous federal and state consumer protection
laws impose requirements on lending under installment sales contracts and
installment loan agreements such as the Contracts, and the failure by the lender
or seller of goods to comply with such requirements could give rise to
liabilities of assignees for amounts due under such agreements and claims by
such assignees may be subject to set-off as a result of such lender's or
seller's noncompliance. These laws would apply to the Trustee as assignee of the
Contracts. The Asset Seller of the Contracts to the Depositor will warrant that
each Contract complies with all requirements of law and will make certain
warranties relating to the validity, subsistence, perfection and priority of the
security interest in each Manufactured Home securing a Contract. A breach of any
such warranty that materially adversely affects any Contract would create an
obligation of the Asset Seller to repurchase such Contract unless such breach is
cured. If the Credit Support is exhausted and recovery of amounts due on the
Contracts is dependent on repossession and resale of Manufactured Homes securing
Contracts that are in default, certain other factors may limit the ability of
the Certificateholders to realize upon the Manufactured Home or may limit the
amount realized to less than the amount due. See 'Certain Legal Aspects of the
Contracts.'
UNSECURED HOME IMPROVEMENT LOANS
The obligations of the borrower under any Unsecured Home Improvement Loan
included in a Trust Fund will not be secured by an interest in the related real
estate or any other property, and the Trust Fund will be a general unsecured
creditor as to such obligations. In the event of a default under an Unsecured
Home Improvement Loan, the related Trust Fund will have recourse only against
the borrower's assets generally, along with all other general unsecured
creditors of the borrower. In a bankruptcy or insolvency proceeding relating to
a borrower on an Unsecured Home Improvement Loan, the obligations of the
borrower under such Unsecured Home Improvement Loan may be discharged in their
entirety, notwithstanding the fact that the portion of such borrower's assets
made available to the related Trust Fund as a general unsecured creditor to pay
amounts due and owing thereunder are insufficient to pay all such amounts. A
borrower on an Unsecured Home Improvement Loan may not demonstrate the same
degree of concern over performance of the borrower's obligations under such Home
Improvement Loan as if such obligations were secured by the real estate or other
assets owned by such borrower.
18
<PAGE>
CREDIT SUPPORT LIMITATIONS
The Prospectus Supplement for a series of Certificates will describe any
Credit Support in the related Trust Fund, which may include letters of credit,
insurance policies, guarantees, reserve funds or other types of credit support,
or combinations thereof. Use of Credit Support will be subject to the conditions
and limitations described herein and in the related Prospectus Supplement.
Moreover, such Credit Support may not cover all potential losses or risks; for
example, Credit Support may or may not cover fraud or negligence by a mortgage
loan or contract originator or other parties.
A series of Securities may include one or more classes of Subordinate
Securities (which may include Offered Securities), if so provided in the related
Prospectus Supplement. Although subordination is intended to reduce the risk to
holders of Senior Securities of delinquent distributions or ultimate losses, the
amount of subordination will be limited and may decline under certain
circumstances. In addition, if principal payments on one or more classes of
Securities of a series are made in a specified order of priority, any limits
with respect to the aggregate amount of claims under any related Credit Support
may be exhausted before the principal of the lower priority classes of
Securities of such series has been repaid. As a result, the impact of
significant losses and shortfalls on the Assets may fall primarily upon those
classes of Securities having a lower priority of payment. Moreover, if a form of
Credit Support covers more than one series of Securities (each, a 'Covered
Trust'), holders of Securities evidencing an interest in a Covered Trust will be
subject to the risk that such Credit Support will be exhausted by the claims of
other Covered Trusts.
The amount of any applicable Credit Support supporting one or more classes
of Offered Securities, including the subordination of one or more classes of
Securities, will be determined on the basis of criteria established by each
Rating Agency rating such classes of Securities based on an assumed level of
defaults, delinquencies, other losses or other factors. There can, however, be
no assurance that the loss experience on the related Assets will not exceed such
assumed levels. See '--Limited Nature of Ratings,' 'Description of the
Securities' and 'Description of Credit Support.'
Regardless of the form of credit enhancement provided, the amount of
coverage will be limited in amount and in most cases will be subject to periodic
reduction in accordance with a schedule or formula. The Master Servicer will
generally be permitted to reduce, terminate or substitute all or a portion of
the credit enhancement for any series of Securities, if the applicable Rating
Agency indicates that the then-current rating thereof will not be adversely
affected. The rating of any series of Securities by any applicable Rating Agency
may be lowered following the initial issuance thereof as a result of the
downgrading of the obligations of any applicable Credit Support provider, or as
a result of losses on the related Assets substantially in excess of the levels
contemplated by such Rating Agency at the time of its initial rating analysis.
None of the Depositor, the Master Servicer or any of their affiliates will have
any obligation to replace or supplement any Credit Support or to take any other
action to maintain any rating of any series of Securities.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES; EFFECT OF LOSSES ON THE ASSETS
The rights of Subordinate Securityholders to receive distributions to which
they would otherwise be entitled with respect to the Assets will be subordinate
to the rights of the Master Servicer (to the extent that the Master Servicer is
paid its servicing fee, including any unpaid servicing fees with respect to one
or more prior Due Periods, and is reimbursed for certain unreimbursed advances
and unreimbursed liquidation expenses) and the Senior Securityholders to the
extent described in the related Prospectus Supplement. As a result of the
foregoing, investors must be prepared to bear the risk that they may be subject
to delays in payment and may not recover their initial investments in the
Subordinate Securities. See 'Description of the Securities--General' and
'--Allocation of Losses and Shortfalls.'
The yields on the Subordinate Securities may be extremely sensitive to the
loss experience of the Assets and the timing of any such losses. If the actual
rate and amount of losses experienced by the Assets exceed the rate and amount
of such losses assumed by an investor, the yields to maturity on the Subordinate
Securities may be lower than anticipated.
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL CERTIFICATES
Holders of REMIC Residual Certificates will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC, regardless of the amount or timing of their receipt
of cash payments, as described in 'Certain Federal Income Tax
Consequences--REMICs.' Accordingly, under certain circumstances, holders of
Offered Securities that constitute REMIC Residual Certificates may have taxable
income and tax liabilities arising from such investment during a taxable year in
19
<PAGE>
excess of the cash received during such period. Individual holders of REMIC
Residual Certificates may be limited in their ability to deduct servicing fees
and other expenses of the REMIC. In addition, REMIC Residual Certificates are
subject to certain restrictions on transfer. Because of the special tax
treatment of REMIC Residual Certificates, the taxable income arising in a given
year on a REMIC Residual Certificate will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the REMIC Residual Certificate may be significantly less than that of a
corporate bond or stripped instrument having similar cash flow characteristics.
Additionally, prospective purchasers of a REMIC Residual Certificate should be
aware that recently issued temporary regulations provide restrictions on the
ability to mark-to-market certain 'negative value' REMIC residual interests. See
'Certain Federal Income Tax Consequences--REMICs.'
BOOK-ENTRY REGISTRATION
If so provided in the Prospectus Supplement, one or more classes of the
Securities will be initially represented by one or more certificates registered
in the name of Cede, the nominee for DTC, and will not be registered in the
names of the Securityholders or their nominees. Because of this, unless and
until Definitive Securities are issued, Securityholders will not be recognized
by the Trustee as 'Securityholders' (as that term is to be used in the related
Agreement). Hence, until such time, Securityholders will be able to exercise the
rights of Securityholders only indirectly through DTC and its participating
organizations. See 'Description of the Securities--Book-Entry Registration and
Definitive Securities.'
DESCRIPTION OF THE TRUST FUNDS
ASSETS
The primary assets of each Trust Fund (the 'Assets') will include (i)
single family and/or multifamily mortgage loans (or certain balances thereof)
(collectively, the 'Mortgage Loans'), including without limitation, Home Equity
Loans and Home Improvement Contracts, (ii) unsecured home improvement loans
('Unsecured Home Improvement Loans'), (iii) mortgage participations ('Mortgage
Participations'), (iv) pass-through certificates or other mortgage-backed
securities evidencing interests in or secured by one or more Mortgage Loans or
other similar participations, certificates or securities ('MBS'), (v)
manufactured housing installment sale contracts and installment loan agreements
(the 'Contracts'), (vi) direct obligations of the United States, agencies
thereof or agencies created thereby which are not subject to redemption prior to
maturity at the option of the issuer and are (a) interest-bearing securities,
(b) non-interest-bearing securities, (c) originally interest-bearing securities
from which coupons representing the right to payment of interest have been
removed, or (d) interest-bearing securities from which the right to payment of
principal has been removed (the 'Government Securities'), (vii) certain small
business loans defined below ('SBA Loans' and 'SBA 504 Loans') or (viii) a
combination of Mortgage Loans, Unsecured Home Improvement Loans, Mortgage
Participations, Contracts, MBS and Government Securities. As used herein,
'Mortgage Loans' refers to both whole Mortgage Loans (or certain balances
thereof) and Mortgage Loans underlying Mortgage Participations or MBS. Mortgage
Loans that secure, or interests in which are evidenced by, MBS are herein
sometimes referred to as 'Underlying Mortgage Loans.' Mortgage Loans (or certain
balances thereof) that are not Underlying Mortgage Loans are sometimes referred
to as 'Whole Loans.' Any pass-through certificates or other asset-backed
certificates in which an MBS evidences an interest or which secure an MBS are
sometimes referred to herein also as MBS or as 'Underlying MBS.' Mortgage Loans,
Mortgage Participations and MBS are sometimes referred to herein as 'Mortgage
Assets.' The Mortgage Assets will not be guaranteed or insured by Merrill Lynch
Mortgage Investors, Inc. (the 'Depositor') or any of its affiliates or, unless
otherwise provided in the Prospectus Supplement, by any governmental agency or
instrumentality or by any other person. Each Asset will be selected by the
Depositor for inclusion in a Trust Fund from among those purchased, either
directly or indirectly, from a prior holder thereof (an 'Asset Seller'), which
may be an affiliate of the Depositor and, with respect to Assets, which prior
holder may or may not be the originator of such Mortgage Loan or Contract or the
issuer of such MBS.
Unless otherwise specified in the related Prospectus Supplement, the
Securities will be entitled to payment only from the assets of the related Trust
Fund and will not be entitled to payments in respect of the assets of any other
trust fund established by the Depositor. If specified in the related Prospectus
Supplement, the assets of a Trust Fund will consist of certificates representing
beneficial ownership interests in, or indebtedness of, another trust fund that
contains the Assets.
20
<PAGE>
MORTGAGE LOANS
General
Unless otherwise specified in the related Prospectus Supplement, each
Mortgage Loan will be secured by (i) a lien on a Mortgaged Property consisting
of a one- to four-family residential property (a 'Single Family Property' and
the related Mortgage Loan a 'Single Family Mortgage Loan') or a residential
property consisting of five or more dwelling units in multi-story structures (a
'Multifamily Property' and the related Mortgage Loan a 'Multifamily Mortgage
Loan') or (ii) a security interest in shares issued by private cooperative
housing corporations ('Cooperatives'). If so specified in the related Prospectus
Supplement, a Mortgaged Property may include some commercial use. Mortgaged
Properties will be located, unless otherwise specified in the related Prospectus
Supplement, in any one of the fifty states, the District of Columbia or the
Commonwealth of Puerto Rico. To the extent specified in the related Prospectus
Supplement, the Mortgage Loans will be secured by first and/or junior mortgages
or deeds of trust or other similar security instruments creating a first or
junior lien on Mortgaged Property. The Mortgaged Properties may include
apartments owned by Cooperatives. The Mortgaged Properties may include leasehold
interests in properties, the title to which is held by third party lessors.
Unless otherwise specified in the Prospectus Supplement, the term of any such
leasehold shall exceed the term of the related mortgage note by at least five
years. Each Mortgage Loan will have been originated by a person (the
'Originator') other than the Depositor. The related Prospectus Supplement will
indicate if any Originator is an affiliate of the Depositor. The Mortgage Loans
will be evidenced by promissory notes (the 'Mortgage Notes') secured by
mortgages, deeds of trust or other security instruments (the 'Mortgages')
creating a lien on the Mortgaged Properties.
Loan-to-Value Ratio
The 'Loan-to-Value Ratio' of a Mortgage Loan at any given time is the ratio
(expressed as a percentage) of the then outstanding principal balance of the
Mortgage Loan to the Value of the related Mortgaged Property. The 'Value' of a
Mortgaged Property, other than with respect to Refinance Loans, is generally the
lesser of (a) the appraised value determined in an appraisal obtained by the
originator at origination of such loan and (b) the sales price for such
property. 'Refinance Loans' are loans made to refinance existing loans. Unless
otherwise set forth in the related Prospectus Supplement, the Value of the
Mortgaged Property securing a Refinance Loan is the appraised value thereof
determined in an appraisal obtained at the time of origination of the Refinance
Loan. The Value of a Mortgaged Property as of the date of initial issuance of
the related series of Certificates may be less than the value at origination and
will fluctuate from time to time based upon changes in economic conditions and
the real estate market.
Mortgage Loan Information in Prospectus Supplements
Each Prospectus Supplement will contain information, as of the dates
specified in such Prospectus Supplement and to the extent then applicable and
specifically known to the Depositor, with respect to the Mortgage Loans,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Mortgage Loans as of
the applicable Cut-off Date, (ii) the type of property securing the Mortgage
Loans, (iii) the weighted average (by principal balance) of the original and
remaining terms to maturity of the Mortgage Loans, (iv) the earliest and latest
origination date and maturity date of the Mortgage Loans, (v) the range of the
Loan-to-Value Ratios at origination of the Mortgage Loans, (vi) the Mortgage
Rates or range of Mortgage Rates and the weighted average Mortgage Rate borne by
the Mortgage Loans, (vii) the state or states in which most of the Mortgaged
Properties are located, (viii) information with respect to the prepayment
provisions, if any, of the Mortgage Loans, (ix) with respect to Mortgage Loans
with adjustable Mortgage Rates ('ARM Loans'), the index, the frequency of the
adjustment dates, the range of margins added to the index, and the maximum
Mortgage Rate or monthly payment variation at the time of any adjustment thereof
and over the life of the ARM Loan and (x) information regarding the payment
characteristics of the Mortgage Loans, including without limitation balloon
payment and other amortization provisions. If specific information respecting
the Mortgage Loans is not known to the Depositor at the time Securities are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement, and specific information will be set
forth in a report which will be available to purchasers of the related
Securities at or before the initial issuance thereof and will be filed as part
of a Current Report on Form 8-K with the Securities and Exchange Commission
within fifteen days after such initial issuance.
21
<PAGE>
The related Prospectus Supplement may specify whether the Mortgage Loans
include (i) closed-end and/or revolving home equity loans or certain balances
thereof ('Home Equity Loans'), which may be secured by Mortgages that are junior
to other liens on the related Mortgaged Property and/or (ii) home improvement
installment sales contracts or installment loan agreements (the 'Home
Improvement Contracts') originated by a home improvement contractor and secured
by a Mortgage on the related Mortgaged Property that is junior to other liens on
the Mortgaged Property. Except as otherwise described in the related Prospectus
Supplement, the home improvements purchased with the Home Improvement Contracts
will generally be replacement windows, house siding, roofs, swimming pools,
satellite dishes, kitchen and bathroom remodeling goods and solar heating
panels. The related Prospectus Supplement will specify whether the Home
Improvement Contracts are partially insured under Title I of the National
Housing Act and, if so, the limitations on such insurance.
If specified in the related Prospectus Supplement, new draws by borrowers
under the revolving Home Equity Loans will, during a specified period of time,
automatically become part of the Trust Fund for a series. As a result, the
aggregate balance of the revolving Home Equity Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal payments
are applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. If specified
in the related Prospectus Supplement, principal collections received on the
closed-end Home Equity Loans may be applied to purchase additional closed-end
Home Equity Loans which will become part of the Trust Fund for a series.
Payment Provisions of the Mortgage Loans
Unless otherwise specified in the related Prospectus Supplement, all of the
Mortgage Loans will (i) have individual principal balances at origination of not
less than $25,000, (ii) have original terms to maturity of not more than 40
years and (iii) provide for payments of principal, interest or both, on due
dates that occur monthly, quarterly or semi-annually or at such other interval
as is specified in the related Prospectus Supplement. Each Mortgage Loan may
provide for no accrual of interest or for accrual of interest thereon at an
interest rate (a 'Mortgage Rate') that is fixed over its term or that adjusts
from time to time, or that may be converted from an adjustable to a fixed
Mortgage Rate or a different adjustable Mortgage Rate, or from a fixed to an
adjustable Mortgage Rate, from time to time pursuant to an election or as
otherwise specified on the related Mortgage Note, in each case as described in
the related Prospectus Supplement. Each Mortgage Loan may provide for scheduled
payments to maturity or payments that adjust from time to time to accommodate
changes in the Mortgage Rate or to reflect the occurrence of certain events or
that adjust on the basis of other methodologies, and may provide for negative
amortization or accelerated amortization, in each case as described in the
related Prospectus Supplement. Each Mortgage Loan may be fully amortizing or
require a balloon payment due on its stated maturity date, in each case as
described in the related Prospectus Supplement. Each Mortgage Loan may contain
prohibitions on prepayment (a 'Lock-out Period' and, the date of expiration
thereof, a 'Lock-out Date') or require payment of a premium or a yield
maintenance penalty (a 'Prepayment Premium') in connection with a prepayment, in
each case as described in the related Prospectus Supplement. In the event that
holders of any class or classes of Offered Securities will be entitled to all or
a portion of any Prepayment Premiums collected in respect of Mortgage Loans, the
related Prospectus Supplement will specify the method or methods by which any
such amounts will be allocated.
Mortgage Participations
Mortgage Participations will evidence an undivided participation interest
in Underlying Mortgage Loans. To the extent available to the Depositor, the
related Prospectus Supplement will contain information in respect of the
Underlying Mortgage Loans substantially similar to the information described
above in respect of Mortgage Loans. Such Prospectus Supplement will also specify
the amount of the participation interest and describe the servicing provisions
of the participation and servicing agreements.
UNSECURED HOME IMPROVEMENT LOANS
The Unsecured Home Improvement Loans may consist of conventional unsecured
home improvement loans and FHA insured unsecured home improvement loans. Except
as otherwise set forth in the related Prospectus Supplement, the Unsecured Home
Improvement Loans will be fully amortizing and will bear interest at a fixed or
variable annual percentage rate. Unless the context otherwise requires,
references in this Prospectus to Mortgage Loans, Whole Loans and related terms
shall include Unsecured Home Improvement Loans and related terms to
22
<PAGE>
the extent relevant (e.g., a reference to a Mortgaged Property or hazard
insurance does not relate to an Unsecured Home Improvement Loan).
MBS
Any MBS will have been issued pursuant to a pooling and servicing
agreement, a trust agreement, an indenture or similar agreement (an 'MBS
Agreement'). A seller (the 'MBS Issuer') and/or servicer (the 'MBS Servicer') of
the underlying Mortgage Loans (or Underlying MBS) will have entered into the MBS
Agreement with a trustee or a custodian under the MBS Agreement (the 'MBS
Trustee'), if any, or with the original purchaser of the interest in the
underlying Mortgage Loans or MBS evidenced by the MBS.
Distributions of any principal or interest, as applicable, will be made on
MBS on the dates specified in the related Prospectus Supplement. The MBS may be
issued in one or more classes with characteristics similar to the classes of
Securities described in this Prospectus. Any principal or interest distributions
will be made on the MBS by the MBS Trustee or the MBS Servicer. The MBS Issuer
or the MBS Servicer or another person specified in the related Prospectus
Supplement may have the right or obligation to repurchase or substitute assets
underlying the MBS after a certain date or under other circumstances specified
in the related Prospectus Supplement.
Enhancement in the form of reserve funds, subordination or other forms of
credit support similar to that described for the Securities under 'Description
of Credit Support' may be provided with respect to the MBS. The type,
characteristics and amount of such credit support, if any, will be a function of
certain characteristics of the Underlying Mortgage Loans or Underlying MBS
evidenced by or securing such MBS and other factors and generally will have been
established for the MBS on the basis of requirements of either any Rating Agency
that may have assigned a rating to the MBS or the initial purchasers of the MBS.
The Prospectus Supplement for a series of Securities evidencing interests
in Mortgage Assets that include MBS will specify, to the extent available to the
Depositor, (i) the aggregate approximate initial and outstanding principal
amount or notional amount, as applicable, and type of the MBS to be included in
the Trust Fund, (ii) the original and remaining term to stated maturity of the
MBS, if applicable, (iii) whether such MBS is entitled only to interest
payments, only to principal payments or to both, (iv) the pass-through or bond
rate of the MBS or formula for determining such rates, if any, (v) the
applicable payment provisions for the MBS, including, but not limited to, any
priorities, payment schedules and subordination features, (vi) the MBS Issuer,
MBS Servicer and MBS Trustee, as applicable, (vii) certain characteristics of
the credit support, if any, such as subordination, reserve funds, insurance
policies, letters of credit or guarantees relating to the related Underlying
Mortgage Loans, the Underlying MBS or directly to such MBS, (viii) the terms on
which the related Underlying Mortgage Loans or Underlying MBS for such MBS or
the MBS may, or are required to, be purchased prior to their maturity, (ix) the
terms on which Mortgage Loans or Underlying MBS may be substituted for those
originally underlying the MBS, (x) the servicing fees payable under the MBS
Agreement, (xi) the type of information in respect of the Underlying Mortgage
Loans described under '--Mortgage Loans--Mortgage Loan Information in Prospectus
Supplements' above, and the type of information in respect of the Underlying MBS
described in this paragraph, (xii) the characteristics of any cash flow
agreements that are included as part of the trust fund evidenced or secured by
the MBS and (xiii) whether the MBS is in certificated form or held through a
depository such as The Depository Trust Company or the Participants Trust
Company.
CONTRACTS
General
Unless otherwise specified in the related Prospectus Supplement, each
Contract will be secured by a security interest in a new or used Manufactured
Home. Such Prospectus Supplement will specify the states or other jurisdictions
in which the Manufactured Homes are located as of the related Cut-off Date. The
method of computing the 'Loan-to-Value Ratio' of a Contract will be described in
the related Prospectus Supplement.
Contract Information in Prospectus Supplements
Each Prospectus Supplement will contain certain information, as of the
dates specified in such Prospectus Supplement and to the extent then applicable
and specifically known to the Depositor, with respect to the Contracts,
including (i) the aggregate outstanding principal balance and the largest,
smallest and average outstanding principal balance of the Contracts as of the
applicable Cut-off Date, (ii) whether the Manufactured Homes were new or used as
of the origination of the related Contracts, (iii) the weighted average (by
principal
23
<PAGE>
balance) of the original and remaining terms to maturity of the Contracts, (iv)
the earliest and latest origination date and maturity date of the Contracts, (v)
the range of the Loan-to-Value Ratios at origination of the Contracts, (vi) the
Contract Rates or range of Contract Rates and the weighted average Contract Rate
borne by the Contracts, (vii) the state or states in which most of the
Manufactured Homes are located at origination, (viii) information with respect
to the prepayment provisions, if any, of the Contracts, (ix) with respect to
Contracts with adjustable Contract Rates ('ARM Contracts'), the index, the
frequency of the adjustment dates, and the maximum Contract Rate or monthly
payment variation at the time of any adjustment thereof and over the life of the
ARM Contract, and (x) information regarding the payment characteristics of the
Contracts. If specific information respecting the Contracts is not known to the
Depositor at the time Securities are initially offered, more general information
of the nature described above will be provided in the Prospectus Supplement, and
specific information will be set forth in a report which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed as part of a Current Report on Form 8-K with the Securities
and Exchange Commission within fifteen days after such initial issuance.
Payment Provisions of the Contracts
Unless otherwise specified in the related Prospectus Supplement, all of the
Contracts will (i) have individual principal balances at origination of not less
than $1,000, (ii) have original terms to maturity of not more than 40 years and
(iii) provide for payments of principal, interest or both, on due dates that
occur monthly or at such other interval as is specified in the related
Prospectus Supplement. Each Contract may provide for no accrual of interest or
for accrual of interest thereon at an annual percentage rate (a 'Contract Rate')
that is fixed over its term or that adjusts from time to time, or as otherwise
specified in the related Prospectus Supplement. Each Contract may provide for
scheduled payments to maturity or payments that adjust from time to time to
accommodate changes in the Contract Rate as otherwise described in the related
Prospectus Supplement.
GOVERNMENT SECURITIES
The Prospectus Supplement for a series of Securities evidencing interests
in Assets of a Trust Fund that include Government Securities will specify, to
the extent available, (i) the aggregate approximate initial and outstanding
principal amounts or notional amounts, as applicable, and types of the
Government Securities to be included in the Trust Fund, (ii) the original and
remaining terms to stated maturity of the Government Securities, (iii) whether
such Government Securities are entitled only to interest payments, only to
principal payments or to both, (iv) the interest rates of the Government
Securities or the formula to determine such rates, if any, (v) the applicable
payment provisions for the Government Securities and (vi) to what extent, if
any, the obligation evidenced thereby is backed by the full faith and credit of
the United States.
SBA LOANS
The SBA Loans will consist of the Unguaranteed Interests (as defined below)
in loans originated under Section 7(a) (the 'Section 7(a) Program') of the Small
Business Act of 1953 (the 'SBA Act'), which Act created the Small Business
Administration (the 'SBA'). The Section 7(a) Program was intended to encourage
lenders to provide loans to existing qualifying small businesses. Loans made
under the Section 7(a) Program can be used to construct, purchase, expand or
convert facilities or to purchase building equipment, leaseholds or materials.
Money lent under the Section 7(a) Program also can be used for working capital.
The SBA Loans are partially guaranteed by the SBA pursuant to a Small
Business Administration Loan Guaranty Agreement between the originator and the
SBA and pursuant to pertinent SBA regulations found at 13 C.F.R. parts 120 and
122. As to any SBA Loan, the right to receive the guaranteed portion of the
principal balance thereof together with interest thereon at a per annum rate in
effect from time to time plus a fee paid to the SBA's fiscal and transfer agent
is referred to herein as the 'Guaranteed Interest.' The Guaranteed Interest
varies from SBA Loan to SBA Loan, will not be included in the related Trust Fund
and Securityholders will have no right or interest therein. As to any SBA Loan,
the 'Unguaranteed Interest' will equal all payments and other recoveries on such
SBA Loan not constituting the Guaranteed Interest therein.
The SBA administers three levels of lender participation in the Section
7(a) Program. Under the first level, known as the 'Guaranteed Participant
Program,' the lender gathers and processes data from applicants and forwards it,
along with a request for the SBA's guaranty, to a local SBA office. The SBA then
completes an independent analysis and decides whether to guarantee the loan. SBA
turnaround time on such applications varies greatly, depending on its backlog of
loan applications.
24
<PAGE>
Under the second level of lender participation, known as the 'Certified
Lender Program,' the lender (the 'Certified Lender') gathers and processes data
from applicants and makes a request to the SBA, as in the Guaranteed Participant
Program procedure. The SBA then performs an expedited review of the lender's
credit analysis, which generally is completed within three working days. The SBA
requires that lenders originate loans meeting certain portfolio and volume
criteria before authorizing them to participate in the Certified Lender Program.
Under the third level of lender participation, known as the 'Preferred
Lender Program', the lender (the 'Preferred Lender') has the authority to
approve a loan and obligate the SBA to guarantee the loan without submitting an
application to the SBA for credit review. The lender is required to notify the
SBA of the approved loan and submit certain documents. The standards established
for participants in the Preferred Lender Program are more stringent than those
for participants in the Certified Lender Program and involve meeting additional
portfolio quality and volume requirements. In addition, before being granted
preferred lender status under the Preferred Lender Program in a particular SBA
district, the lender must have been a Certified Lender under the Certified
Lender Program in such SBA district for at least 12 months.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA Loan).
SBA 504 LOANS
The SBA 504 Loans will consist of loans originated by the originators under
the SBA 504 Loan Program (the 'SBA 504 Loan Program'). The SBA 504 Loan Program
was established under the SBA Act to encourage lenders to provide fixed asset
financing to existing qualifying small businesses. SBA 504 Loans may be used for
plant acquisition, construction, renovation, expansion, land and site
improvements, acquisition and installation of machinery and equipment and the
interest on interim financing. The Originators provide at least 50% of project
costs in a conventional loan agreement with borrowers, with the SBA providing
the remainder of the financing. Each loan by the Originators must be approved by
the SBA.
The funds used by the SBA to originate its portion of a project generated
pursuant to the SBA 504 Loan Program are generated by issuing SBA-guaranteed
debentures on behalf of a certified development company (a 'CDC'). A CDC is a
non-profit organization sponsored by private interests or by state or local
governments. The debentures are pooled monthly and sold through a certificate
mechanism to the public market. The loans originated by the Originators under
the SBA 504 Loan Program are not guaranteed by the SBA.
Unless the context otherwise requires, references in this Prospectus to
Mortgage Loans, Whole Loans and related terms shall include SBA 504 Loans and
related terms to the extent relevant (e.g., a reference to a Mortgaged Property
or hazard insurance does not relate to a SBA 504 Loan).
PRE-FUNDING ACCOUNT
To the extent provided in a Prospectus Supplement, the Depositor will be
obligated (subject only to the availability thereof) to sell at a predetermined
price, and the Trust Fund for the related series of Securities will be obligated
to purchase (subject to the satisfaction of certain conditions described in the
applicable Agreement), additional Assets (the 'Subsequent Assets') from time to
time (as frequently as daily) within the number of months specified in the
related Prospectus Supplement after the issuance of such series of Securities
having an aggregate principal balance approximately equal to the amount on
deposit in the Pre-Funding Account (the 'Pre-Funded Amount') for such series on
the date of such issuance.
ACCOUNTS
Each Trust Fund will include one or more accounts established and
maintained on behalf of the Securityholders into which the person or persons
designated in the related Prospectus Supplement will, to the extent described
herein and in such Prospectus Supplement deposit all payments and collections
received or advanced with respect to the Assets and other assets in the Trust
Fund. Such an account may be maintained as an interest bearing or a non-interest
bearing account, and funds held therein may be held as cash or invested in
certain short-term, investment grade obligations, in each case as described in
the related Prospectus Supplement. See 'Description of the
Agreements--Collection Account and Related Accounts.'
25
<PAGE>
CREDIT SUPPORT
If so provided in the related Prospectus Supplement, partial or full
protection against certain defaults and losses on the Assets in the related
Trust Fund may be provided to one or more classes of Securities in the related
series in the form of subordination of one or more other classes of Securities
in such series or by one or more other types of credit support, such as a letter
of credit, insurance policy, guarantee, reserve fund or another type of credit
support, or a combination thereof (any such coverage with respect to the
Securities of any series, 'Credit Support'). The amount and types of coverage,
the identification of the entity providing the coverage (if applicable) and
related information with respect to each type of Credit Support, if any, will be
described in the Prospectus Supplement for a series of Securities. See 'Special
Considerations--Credit Support Limitations' and 'Description of Credit Support.'
CASH FLOW AGREEMENTS
If so provided in the related Prospectus Supplement, the Trust Fund may
include guaranteed investment contracts pursuant to which moneys held in the
funds and accounts established for the related series will be invested at a
specified rate. The Trust Fund may also include certain other agreements, such
as interest rate exchange agreements, interest rate cap or floor agreements,
currency exchange agreements or similar agreements provided to reduce the
effects of interest rate or currency exchange rate fluctuations on the Assets or
on one or more classes of Securities. (Currency exchange agreements might be
included in the Trust Fund if some or all of the Mortgage Assets (such as
Mortgage Loans secured by Mortgaged Properties located outside the United
States) were denominated in a non-United States currency.) The principal terms
of any such guaranteed investment contract or other agreement (any such
agreement, a 'Cash Flow Agreement'), including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, will be described in the Prospectus
Supplement for the related series. In addition, the related Prospectus
Supplement will provide certain information with respect to the obligor under
any such Cash Flow Agreement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Securities will be
applied by the Depositor to the purchase of Assets, or the payment of the
financing incurred in such purchase, and to pay for certain expenses incurred in
connection with such purchase of Assets and sale of Securities. The Depositor
expects to sell the Securities from time to time, but the timing and amount of
offerings of Securities will depend on a number of factors, including the volume
of Assets acquired by the Depositor, prevailing interest rates, availability of
funds and general market conditions.
YIELD CONSIDERATIONS
GENERAL
The yield on any Offered Security will depend on the price paid by the
Securityholder, the Pass-Through Rate of the Security, the receipt and timing of
receipt of distributions on the Security and the weighted average life of the
Assets in the related Trust Fund (which may be affected by prepayments,
defaults, liquidations or repurchases). See 'Special Considerations.'
PASS-THROUGH RATE AND INTEREST RATE
Securities of any class within a series may have fixed, variable or
adjustable Pass-Through Rates or interest rates, which may or may not be based
upon the interest rates borne by the Assets in the related Trust Fund. The
Prospectus Supplement with respect to any series of Securities will specify the
Pass-Through Rate or interest rate for each class of such Securities or, in the
case of a variable or adjustable Pass-Through Rate or interest rate, the method
of determining the Pass-Through Rate or interest rate; the effect, if any, of
the prepayment of any Asset on the Pass-Through Rate or interest rate of one or
more classes of Securities; and whether the distributions of
26
<PAGE>
interest on the Securities of any class will be dependent, in whole or in part,
on the performance of any obligor under a Cash Flow Agreement.
If so specified in the related Prospectus Supplement, the effective yield
to maturity to each holder of Securities entitled to payments of interest will
be below that otherwise produced by the applicable Pass-Through Rate or interest
rate and purchase price of such Security because, while interest may accrue on
each Asset during a certain period, the distribution of such interest will be
made on a day which may be several days, weeks or months following the period of
accrual.
TIMING OF PAYMENT OF INTEREST
Each payment of interest on the Securities (or addition to the Security
Balance of a class of Accrual Securities) on a Distribution Date will include
interest accrued during the Interest Accrual Period for such Distribution Date.
As indicated above under '--Pass-Through Rate and Interest Rate,' if the
Interest Accrual Period ends on a date other than the day before a Distribution
Date for the related series, the yield realized by the holders of such
Securities may be lower than the yield that would result if the Interest Accrual
Period ended on such day before the Distribution Date.
PAYMENTS OF PRINCIPAL; PREPAYMENTS
The yield to maturity on the Securities will be affected by the rate of
principal payments on the Assets (including principal prepayments on Mortgage
Loans and Contracts resulting from both voluntary prepayments by the borrowers
and involuntary liquidations). The rate at which principal prepayments occur on
the Mortgage Loans and Contracts will be affected by a variety of factors,
including, without limitation, the terms of the Mortgage Loans and Contracts,
the level of prevailing interest rates, the availability of mortgage credit and
economic, demographic, geographic, tax, legal and other factors. In general,
however, if prevailing interest rates fall significantly below the Mortgage
Rates on the Mortgage Loans comprising or underlying the Assets in a particular
Trust Fund, such Mortgage Loans are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the rates borne by such
Mortgage Loans. In this regard, it should be noted that certain Assets may
consist of Mortgage Loans with different Mortgage Rates and the stated
pass-through or pay-through interest rate of certain MBS may be a number of
percentage points higher or lower than certain of the Underlying Mortgage Loans.
The rate of principal payments on some or all of the classes of Securities of a
series will correspond to the rate of principal payments on the Assets in the
related Trust Fund and is likely to be affected by the existence of Lock-out
Periods and Prepayment Premium provisions of the Mortgage Loans underlying or
comprising such Assets, and by the extent to which the servicer of any such
Mortgage Loan is able to enforce such provisions. Mortgage Loans with a Lock-out
Period or a Prepayment Premium provision, to the extent enforceable, generally
would be expected to experience a lower rate of principal prepayments than
otherwise identical Mortgage Loans without such provisions, with shorter
Lock-out Periods or with lower Prepayment Premiums.
Because of the depreciating nature of manufactured housing, which limits
the possibilities for refinancing, and because the terms and principal amounts
of manufactured housing contracts are generally shorter and smaller than the
terms and principal amounts of mortgage loans secured by site-built homes,
changes in interest rates have a correspondingly smaller effect on the amount of
the monthly payments on manufactured housing contracts than on the amount of the
monthly payments on mortgage loans secured by site-built homes. Consequently,
changes in interest rates may play a smaller role in prepayment behavior of
manufactured housing contracts than they do in the prepayment behavior of
mortgage loans secured by site-built homes. Conversely, local economic
conditions and certain of the other factors mentioned above may play a larger
role in the prepayment behavior of manufactured housing contracts than they do
in the prepayment behavior of loans secured by mortgages on site-built homes.
If the purchaser of a Security offered at a discount calculates its
anticipated yield to maturity based on an assumed rate of distributions of
principal that is faster than that actually experienced on the Assets, the
actual yield to maturity will be lower than that so calculated. Conversely, if
the purchaser of a Security offered at a premium calculates its anticipated
yield to maturity based on an assumed rate of distributions of principal that is
slower than that actually experienced on the Assets, the actual yield to
maturity will be lower than that so
27
<PAGE>
calculated. In either case, if so provided in the Prospectus Supplement for a
series of Securities, the effect on yield on one or more classes of the
Securities of such series of prepayments of the Assets in the related Trust Fund
may be mitigated or exacerbated by any provisions for sequential or selective
distribution of principal to such classes.
Unless otherwise specified in the related Prospectus Supplement, when a
full prepayment is made on a Mortgage Loan or a Contract, the obligor is charged
interest on the principal amount of the Mortgage Loan or Contract so prepaid for
the number of days in the month actually elapsed up to the date of the
prepayment. Unless otherwise specified in the related Prospectus Supplement, the
effect of prepayments in full will be to reduce the amount of interest paid in
the following month to holders of Securities entitled to payments of interest
because interest on the principal amount of any Mortgage Loan or Contract so
prepaid will be paid only to the date of prepayment rather than for a full
month. Unless otherwise specified in the related Prospectus Supplement, a
partial prepayment of principal is applied so as to reduce the outstanding
principal balance of the related Mortgage Loan or Contract as of the Due Date in
the month in which such partial prepayment is received.
The timing of changes in the rate of principal payments on the Assets may
significantly affect an investor's actual yield to maturity, even if the average
rate of distributions of principal is consistent with an investor's expectation.
In general, the earlier a principal payment is received on the Mortgage Assets
and distributed on a Security, the greater the effect on such investor's yield
to maturity. The effect on an investor's yield of principal payments occurring
at a rate higher (or lower) than the rate anticipated by the investor during a
given period may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
The Securityholder will bear the risk of being able to reinvest principal
received in respect of a Security at a yield at least equal to the yield on such
Security.
PREPAYMENTS--MATURITY AND WEIGHTED AVERAGE LIFE
The rates at which principal payments are received on the Assets included
in or comprising a Trust Fund and the rate at which payments are made from any
Credit Support or Cash Flow Agreement for the related series of Securities may
affect the ultimate maturity and the weighted average life of each class of such
series. Prepayments on the Mortgage Loans or Contracts comprising or underlying
the Assets in a particular Trust Fund will generally accelerate the rate at
which principal is paid on some or all of the classes of the Securities of the
related series.
If so provided in the Prospectus Supplement for a series of Securities, one
or more classes of Securities may have a final scheduled Distribution Date,
which is the date on or prior to which the Security Balance thereof is scheduled
to be reduced to zero, calculated on the basis of the assumptions applicable to
such series set forth therein.
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of a class of
Securities of a series will be influenced by the rate at which principal on the
Mortgage Loans or Contracts comprising or underlying the Assets is paid to such
class, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term 'prepayment' includes prepayments, in whole or in part,
and liquidations due to default).
In addition, the weighted average life of the Securities may be affected by
the varying maturities of the Mortgage Loans or Contracts comprising or
underlying the Assets in a Trust Fund. If any Mortgage Loans or Contracts
comprising or underlying the Assets in a particular Trust Fund have actual terms
to maturity less than those assumed in calculating final scheduled Distribution
Dates for the classes of Securities of the related series, one or more classes
of such Securities may be fully paid prior to their respective final scheduled
Distribution Dates, even in the absence of prepayments. Accordingly, the
prepayment experience of the Assets will, to some extent, be a function of the
mix of Mortgage Rates or Contract Rates and maturities of the Mortgage Loans or
Contracts comprising or underlying such Assets. See 'Description of the Trust
Funds.'
Prepayments on loans are also commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ('CPR') prepayment model
or the Standard Prepayment Assumption ('SPA') prepayment model, each as
described below. CPR represents a constant assumed rate of prepayment each month
28
<PAGE>
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. SPA represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of a pool of loans. A
prepayment assumption of 100% of SPA assumes prepayment rates of 0.2% per annum
of the then outstanding principal balance of such loans in the first month of
the life of the loans and an additional 0.2% per annum in each month thereafter
until the thirtieth month. Beginning in the thirtieth month and in each month
thereafter during the life of the loans, 100% of SPA assumes a constant
prepayment rate of 6% per annum each month.
Neither CPR nor SPA nor any other prepayment model or assumption purports
to be a historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of loans, including the Mortgage
Loans or Contracts underlying or comprising the Assets.
The Prospectus Supplement with respect to each series of Securities may
contain tables, if applicable, setting forth the projected weighted average life
of each class of Offered Securities of such series and the percentage of the
initial Security Balance of each such class that would be outstanding on
specified Distribution Dates based on the assumptions stated in such Prospectus
Supplement, including assumptions that prepayments on the Mortgage Loans
comprising or underlying the related Assets are made at rates corresponding to
various percentages of CPR, SPA or such other standard specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of the weighted average life of the Securities to various
prepayment rates and will not be intended to predict or to provide information
that will enable investors to predict the actual weighted average life of the
Securities. It is unlikely that prepayment of any Mortgage Loans or Contracts
comprising or underlying the Assets for any series will conform to any
particular level of CPR, SPA or any other rate specified in the related
Prospectus Supplement.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
Type of Mortgage Asset or Contract
If so specified in the related Prospectus Supplement, a number of Mortgage
Loans may have balloon payments due at maturity, and because the ability of a
mortgagor to make a balloon payment typically will depend upon its ability
either to refinance the loan or to sell the related Mortgaged Property, there is
a risk that a number of Mortgage Loans having balloon payments may default at
maturity. In the case of defaults, recovery of proceeds may be delayed by, among
other things, bankruptcy of the mortgagor or adverse conditions in the market
where the property is located. In order to minimize losses on defaulted Mortgage
Loans, the servicer may, to the extent and under the circumstances set forth in
the related Prospectus Supplement, be permitted to modify Mortgage Loans that
are in default or as to which a payment default is imminent. Any defaulted
balloon payment or modification that extends the maturity of a Mortgage Loan
will tend to extend the weighted average life of the Securities, thereby
lengthening the period of time elapsed from the date of issuance of a Security
until it is retired.
With respect to certain Mortgage Loans, including ARM Loans, the Mortgage
Rate at origination may be below the rate that would result if the index and
margin relating thereto were applied at origination. With respect to certain
Contracts, the Contract Rate may be 'stepped up' during its term or may
otherwise vary or be adjusted. Under the applicable underwriting standards, the
mortgagor under each Mortgage Loan or Contract generally will be qualified on
the basis of the Mortgage Rate or Contract Rate in effect at origination. The
repayment of any such Mortgage Loan or Contract may thus be dependent on the
ability of the mortgagor or obligor to make larger level monthly payments
following the adjustment of the Mortgage Rate or Contract Rate. In addition,
certain Mortgage Loans may be subject to temporary buydown plans ('Buydown
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 thereon (the 'Buydown Period'). The periodic increase in the
amount paid by the mortgagor of a Buydown Mortgage Loan during or at the end of
the applicable Buydown Period may create a greater financial burden for the
mortgagor, who might not have otherwise qualified for a mortgage, and may
accordingly increase the risk of default with respect to the related Mortgage
Loan.
The Mortgage Rates on certain ARM Loans subject to negative amortization
generally adjust monthly and their amortization schedules adjust less
frequently. During a period of rising interest rates as well as immediately
after origination (initial Mortgage Rates are generally lower than the sum of
the applicable index at origination
29
<PAGE>
and the related margin over such index at which interest accrues), the amount of
interest accruing on the principal balance of such Mortgage Loans may exceed the
amount of the minimum scheduled monthly payment thereon. As a result, a portion
of the accrued interest on negatively amortizing Mortgage Loans may be added to
the principal balance thereof and will bear interest at the applicable Mortgage
Rate. The addition of any such deferred interest to the principal balance of any
related class or classes of Securities will lengthen the weighted average life
thereof and may adversely affect yield to holders thereof, depending upon the
price at which such Securities were purchased. In addition, with respect to
certain ARM Loans subject to negative amortization, during a period of declining
interest rates, it might be expected that each minimum scheduled monthly payment
on such a Mortgage Loan would exceed the amount of scheduled principal and
accrued interest on the principal balance thereof, and since such excess will be
applied to reduce the principal balance of the related class or classes of
Securities, the weighted average life of such Securities will be reduced and may
adversely affect yield to holders thereof, depending upon the price at which
such Securities were purchased.
Defaults
The rate of defaults on the Mortgage Loans or Contracts will also affect
the rate, timing and amount of principal payments on the Assets and thus the
yield on the Securities. In general, defaults on mortgage loans or contracts are
expected to occur with greater frequency in their early years. The rate of
default on Mortgage Loans which are refinance or limited documentation mortgage
loans, and on Mortgage Loans with high Loan-to-Value Ratios, may be higher than
for other types of Mortgage Loans. Furthermore, the rate and timing of
prepayments, defaults and liquidations on the Mortgage Loans and Contracts will
be affected by the general economic condition of the region of the country in
which the related Mortgaged Properties or Manufactured Homes are located. The
risk of delinquencies and loss is greater and prepayments are less likely in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
Foreclosures
The number of foreclosures or repossessions and the principal amount of the
Mortgage Loans or Contracts comprising or underlying the Assets that are
foreclosed or repossessed in relation to the number and principal amount of
Mortgage Loans or Contracts that are repaid in accordance with their terms will
affect the weighted average life of the Mortgage Loans or Contracts comprising
or underlying the Assets and that of the related series of Securities.
Refinancing
At the request of a mortgagor, the Master Servicer or a Sub-Servicer may
allow the refinancing of a Mortgage Loan or Contract in any Trust Fund by
accepting prepayments thereon and permitting a new loan secured by a mortgage on
the same property. In the event of such a refinancing, the new loan would not be
included in the related Trust Fund and, therefore, such refinancing would have
the same effect as a prepayment in full of the related Mortgage Loan or
Contract. A Sub-Servicer or the Master Servicer may, from time to time,
implement programs designed to encourage refinancing. Such programs may include,
without limitation, modifications of existing loans, general or targeted
solicitations, the offering of pre-approved applications, reduced origination
fees or closing costs, or other financial incentives. In addition, Sub-Servicers
may encourage the refinancing of Mortgage Loans or Contracts, including
defaulted Mortgage Loans or Contracts, that would permit creditworthy borrowers
to assume the outstanding indebtedness of such Mortgage Loans or Contracts.
Due-on-Sale Clauses
Acceleration of mortgage payments as a result of certain transfers of
underlying Mortgaged Property is another factor affecting prepayment rates that
may not be reflected in the prepayment standards or models used in the relevant
Prospectus Supplement. A number of the Mortgage Loans comprising or underlying
the Assets may include 'due-on-sale' clauses that allow the holder of the
Mortgage Loans to demand payment in full of the remaining principal balance of
the Mortgage Loans upon sale, transfer or conveyance of the related Mortgaged
Property. With respect to any Whole Loans, unless otherwise provided in the
related Prospectus Supplement, the Master Servicer will generally enforce any
due-on-sale clause to the extent it has knowledge of the conveyance or
30
<PAGE>
proposed conveyance of the underlying Mortgaged Property and it is entitled to
do so under applicable law; provided, however, that the Master Servicer will not
take any action in relation to the enforcement of any due-on-sale provision
which would adversely affect or jeopardize coverage under any applicable
insurance policy. See 'Certain Legal Aspects of Mortgage Loans--Due-on-Sale
Clauses' and 'Description of the Agreements--Due-on-Sale Provisions.' Unless
otherwise specified in the related Prospectus Supplement, the Contracts, in
general, prohibit the sale or transfer of the related Manufactured Homes without
the consent of the Master Servicer and permit the acceleration of the maturity
of the Contracts by the Master Servicer upon any such sale or transfer that is
not consented to. Unless otherwise specified in the related Prospectus
Supplement, it is expected that the Master Servicer 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 of the Manufactured Home. In the case of a transfer of a
Manufactured Home after which the Master Servicer desires to accelerate the
maturity of the related Contract, the Master Servicer's ability to do so will
depend on the enforceability under state law of the 'due-on-sale' clause. See
'Certain Legal Aspects of the Contracts--Transfers of Manufactured Homes;
Enforceability of 'Due-on-Sale' Clauses.'
THE DEPOSITOR
Merrill Lynch Mortgage Investors, Inc., the Depositor, is a direct
wholly-owned subsidiary of Merrill Lynch Mortgage Capital Inc. and was
incorporated in the State of Delaware on June 13, 1986. The principal executive
offices of the Depositor are located at 250 Vesey Street, World Financial
Center, North Tower, 10th Floor, New York, New York 10218-1310. Its telephone
number is (212) 449-0357.
The Depositor does not have, nor is it expected in the future to have, any
significant assets.
DESCRIPTION OF THE SECURITIES
GENERAL
The Certificates of each series (including any class of Certificates not
offered hereby) will represent the entire beneficial ownership interest in the
Trust Fund created pursuant to the related Agreement. If a series of Securities
includes Notes, such Notes will represent indebtedness of the related Trust Fund
and will be issued and secured pursuant to an indenture (an 'Indenture'). Each
series of Securities will consist of one or more classes of Securities that may
(i) provide for the accrual of interest thereon based on fixed, variable or
adjustable rates; (ii) be senior (collectively, 'Senior Securities') or
subordinate (collectively, 'Subordinate Securities') to one or more other
classes of Securities in respect of certain distributions on the Securities;
(iii) be entitled to principal distributions, with disproportionately low,
nominal or no interest distributions (collectively, 'Stripped Principal
Securities'); (iv) be entitled to interest distributions, with
disproportionately low, nominal or no principal distributions (collectively,
'Stripped Interest Securities'); (v) provide for distributions of accrued
interest thereon commencing only following the occurrence of certain events,
such as the retirement of one or more other classes of Securities of such series
(collectively, 'Accrual Securities'); (vi) provide for payments of principal as
described in the related Prospectus Supplement, from all or only a portion of
the Assets in such Trust Fund, to the extent of available funds, in each case as
described in the related Prospectus Supplement; and/or (vii) provide for
distributions based on a combination of two or more components thereof with one
or more of the characteristics described in this paragraph including a Stripped
Principal Security component and a Stripped Interest Security component. If so
specified in the related Prospectus Supplement, a Trust Fund may include (i)
additional Mortgage Loans (or certain balances thereof) that will be transferred
to the Trust from time to time and/or (ii) in the case of revolving Home Equity
loans or certain balances thereof, any additional balances advanced to the
borrowers under the revolving Home Equity loans during certain periods. If so
specified in the related Prospectus Supplement, distributions on one or more
classes of a series of Securities may be limited to collections from a
designated portion of the Whole Loans in the related Mortgage Pool (each such
portion of Whole Loans, a 'Mortgage Loan Group') or a designated portion of
Contracts in the related Contract Pool (each such portion of Contracts, a
'Contract Group'). Any such classes may include classes of Offered Securities.
31
<PAGE>
Each class of Offered Securities of a series will be issued in minimum
denominations corresponding to the Security Balances or, in case of Stripped
Interest Securities, notional amounts or percentage interests specified in the
related Prospectus Supplement. The transfer of any Offered Securities may be
registered and such Securities may be exchanged without the payment of any
service charge payable in connection with such registration of transfer or
exchange, but the Depositor or the Trustee or any agent thereof may require
payment of a sum sufficient to cover any tax or other governmental charge. One
or more classes of Securities of a series may be issued in definitive form
('Definitive Securities') or in book-entry form ('Book-Entry Securities'), as
provided in the related Prospectus Supplement. See 'Special
Considerations--Book-Entry Registration' and 'Description of the
Securities--Book-Entry Registration and Definitive Securities.' Definitive
Securities will be exchangeable for other Securities of the same class and
series of a like aggregate Security Balance, notional amount or percentage
interest but of different authorized denominations. See 'Special
Considerations--Limited Liquidity' and '--Limited Assets.'
DISTRIBUTIONS
Distributions on the Securities of each series will be made by or on behalf
of the Trustee on each Distribution Date as specified in the related Prospectus
Supplement from the Available Distribution Amount for such series and such
Distribution Date. Except as otherwise specified in the related Prospectus
Supplement, distributions (other than the final distribution) will be made to
the persons in whose names the Securities are registered at the close of
business on the last business day of the month preceding the month in which the
Distribution Date occurs (the 'Record Date'), and the amount of each
distribution will be determined as of the close of business on the date
specified in the related Prospectus Supplement (the 'Determination Date'). All
distributions with respect to each class of Securities on each Distribution Date
will be allocated pro rata among the outstanding Securities in such class or by
random selection, as described in the related Prospectus Supplement or otherwise
established by the related Trustee. Payments will be made either by wire
transfer in immediately available funds to the account of a Securityholder at a
bank or other entity having appropriate facilities therefor, if such
Securityholder has so notified the Trustee or other person required to make such
payments no later than the date specified in the related Prospectus Supplement
(and, if so provided in the related Prospectus Supplement, holds Securities in
the requisite amount specified therein), or by check mailed to the address of
the person entitled thereto as it appears on the Security Register; provided,
however, that the final distribution in retirement of the Securities (whether
Definitive Securities or Book-Entry Securities) will be made only upon
presentation and surrender of the Securities at the location specified in the
notice to Securityholders of such final distribution.
AVAILABLE DISTRIBUTION AMOUNT
All distributions on the Securities of each series on each Distribution
Date will be made from the Available Distribution Amount described below, in
accordance with the terms described in the related Prospectus Supplement. Unless
provided otherwise in the related Prospectus Supplement, the 'Available
Distribution Amount' for each Distribution Date equals the sum of the following
amounts:
(i) the total amount of all cash on deposit in the related Collection
Account as of the corresponding Determination Date, exclusive of:
(a) all scheduled payments of principal and interest collected but
due on a date subsequent to the related Due Period (unless the related
Prospectus Supplement provides otherwise, a 'Due Period' with respect to
any Distribution Date will commence on the second day of the month in
which the immediately preceding Distribution Date occurs, or the day
after the Cut-off Date in the case of the first Due Period, and will end
on the first day of the month of the related Distribution Date),
(b) unless the related Prospectus Supplement provides otherwise,
all prepayments, together with related payments of the interest thereon
and related Prepayment Premiums, Liquidation Proceeds, Insurance
Proceeds and other unscheduled recoveries received subsequent to the
related Due Period, and
(c) all amounts in the Collection Account that are due or
reimbursable to the Depositor, the Trustee, an Asset Seller, a
Sub-Servicer, the Master Servicer or any other entity as specified in
the
32
<PAGE>
related Prospectus Supplement or that are payable in respect of certain
expenses of the related Trust Fund;
(ii) if the related Prospectus Supplement so provides, interest or
investment income on amounts on deposit in the Collection Account,
including any net amounts paid under any Cash Flow Agreements;
(iii) all advances made by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to such
Distribution Date;
(iv) if and to the extent the related Prospectus Supplement so
provides, amounts paid by a Master Servicer or any other entity as
specified in the related Prospectus Supplement with respect to interest
shortfalls resulting from prepayments during the related Prepayment Period;
and
(v) unless the related Prospectus Supplement provides otherwise, to
the extent not on deposit in the related Collection Account as of the
corresponding Determination Date, any amounts collected under, from or in
respect of any Credit Support with respect to such Distribution Date.
As described below, the entire Available Distribution Amount will be
distributed among the related Securities (including any Securities not offered
hereby) on each Distribution Date, and accordingly will be released from the
Trust Fund and will not be available for any future distributions.
DISTRIBUTIONS OF INTEREST ON THE SECURITIES
Each class of Securities (other than classes of Stripped Principal
Securities that have no Pass-Through Rate or interest rate) may have a different
Pass-Through Rate or interest rate, which will be a fixed, variable or
adjustable rate at which interest will accrue on such class or a component
thereof (the 'Pass-Through Rate' in the case of Certificates). The related
Prospectus Supplement will specify the Pass-Through Rate or interest rate for
each class or component or, in the case of a variable or adjustable Pass-Through
Rate or interest rate, the method for determining the Pass-Through Rate or
interest rate. Unless otherwise specified in the related Prospectus Supplement,
interest on the Securities will be calculated on the basis of a 360-day year
consisting of twelve 30-day months.
Distributions of interest in respect of the Securities of any class will be
made on each Distribution Date (other than any class of Accrual Securities,
which will be entitled to distributions of accrued interest commencing only on
the Distribution Date, or under the circumstances, specified in the related
Prospectus Supplement, and any class of Stripped Principal Securities that are
not entitled to any distributions of interest) based on the Accrued Security
Interest for such class and such Distribution Date, subject to the sufficiency
of the portion of the Available Distribution Amount allocable to such class on
such Distribution Date. Prior to the time interest is distributable on any class
of Accrual Securities, the amount of Accrued Security Interest otherwise
distributable on such class will be added to the Security Balance thereof on
each Distribution Date. With respect to each class of Securities and each
Distribution Date (other than certain classes of Stripped Interest Securities),
'Accrued Security Interest' will be equal to interest accrued for a specified
period on the outstanding Security Balance thereof immediately prior to the
Distribution Date, at the applicable Pass-Through Rate or interest rate, reduced
as described below. Unless otherwise provided in the Prospectus Supplement,
Accrued Security Interest on Stripped Interest Securities will be equal to
interest accrued for a specified period on the outstanding notional amount
thereof immediately prior to each Distribution Date, at the applicable
Pass-Through Rate or interest rate, reduced as described below. The method of
determining the notional amount for any class of Stripped Interest Securities
will be described in the related Prospectus Supplement. Reference to notional
amount is solely for convenience in certain calculations and does not represent
the right to receive any distributions of principal. Unless otherwise provided
in the related Prospectus Supplement, the Accrued Security Interest on a series
of Securities will be reduced in the event of prepayment interest shortfalls,
which are shortfalls in collections of interest for a full accrual period
resulting from prepayments prior to the due date in such accrual period on the
Mortgage Loans or Contracts comprising or underlying the Assets in the Trust
Fund for such series. The particular manner in which such shortfalls are to be
allocated among some or all of the classes of Securities of that series will be
specified in the related Prospectus Supplement. The related Prospectus
Supplement will also describe the extent to which the amount of Accrued
Certificate Interest that is otherwise distributable on (or, in the case of
Accrual Securities, that may otherwise be added to the Security Balance of) a
class of Offered
33
<PAGE>
Securities may be reduced as a result of any other contingencies, including
delinquencies, losses and deferred interest on or in respect of the Mortgage
Loans or Contracts comprising or underlying the Assets in the related Trust
Fund. Unless otherwise provided in the related Prospectus Supplement, any
reduction in the amount of Accrued Security Interest otherwise distributable on
a class of Securities by reason of the allocation to such class of a portion of
any deferred interest on the Mortgage Loans or Contracts comprising or
underlying the Assets in the related Trust Fund will result in a corresponding
increase in the Security Balance of such class. See 'Special
Considerations--Average Life of Securities; Prepayments; Yields' and 'Yield
Considerations.'
DISTRIBUTIONS OF PRINCIPAL OF THE SECURITIES
The Securities of each series, other than certain classes of Stripped
Interest Securities, will have a 'Security Balance' which, at any time, will
equal the then maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the Assets and other assets
included in the related Trust Fund. The outstanding Security Balance of a
Security will be reduced to the extent of distributions of principal thereon
from time to time and, if and to the extent so provided in the related
Prospectus Supplement, by the amount of losses incurred in respect of the
related Assets, may be increased in respect of deferred interest on the related
Mortgage Loans to the extent provided in the related Prospectus Supplement and,
in the case of Accrual Securities prior to the Distribution Date on which
distributions of interest are required to commence, will be increased by any
related Accrued Security Interest. Unless otherwise provided in the related
Prospectus Supplement, the initial aggregate Security Balance of all classes of
Securities of a series will not be greater than the outstanding aggregate
principal balance of the related Assets as of the applicable Cut-off Date. The
initial aggregate Security Balance of a series and each class thereof will be
specified in the related Prospectus Supplement. Unless otherwise provided in the
related Prospectus Supplement, distributions of principal will be made on each
Distribution Date to the class or classes of Securities entitled thereto in
accordance with the provisions described in such Prospectus Supplement until the
Security Balance of such class has been reduced to zero. Stripped Interest
Securities with no Security Balance are not entitled to any distributions of
principal.
COMPONENTS
To the extent specified in the related Prospectus Supplement, distribution
on a class of Securities may be based on a combination of two or more different
components as described under '--General' above. To such extent, the
descriptions set forth under '--Distributions of Interest on the Securities' and
'--Distributions of Principal of the Securities' above also relate to components
of such a class of Securities. In such case, reference in such sections to
Security Balance and Pass-Through Rate or interest rate refer to the principal
balance, if any, of any such component and the Pass-Through Rate or interest
rate, if any, on any such component, respectively.
DISTRIBUTIONS ON THE SECURITIES OF PREPAYMENT PREMIUMS
If so provided in the related Prospectus Supplement, Prepayment Premiums
that are collected on the Mortgage Assets in the related Trust Fund will be
distributed on each Distribution Date to the class or classes of Securities
entitled thereto in accordance with the provisions described in such Prospectus
Supplement.
ALLOCATION OF LOSSES AND SHORTFALLS
If so provided in the Prospectus Supplement for a series of Securities
consisting of one or more classes of Subordinate Securities, on any Distribution
Date in respect of which losses or shortfalls in collections on the Assets have
been incurred, the amount of such losses or shortfalls will be borne first by a
class of Subordinate Securities in the priority and manner and subject to the
limitations specified in such Prospectus Supplement. See 'Description of Credit
Support' for a description of the types of protection that may be included in a
Trust Fund against losses and shortfalls on Assets comprising such Trust Fund.
ADVANCES IN RESPECT OF DELINQUENCIES
With respect to any series of Securities evidencing an interest in a Trust
Fund, unless otherwise provided in the related Prospectus Supplement, the Master
Servicer or another entity described therein will be required as part of its
servicing responsibilities to advance on or before each Distribution Date its
own funds or funds held in the
34
<PAGE>
Collection Account that are not included in the Available Distribution Amount
for such Distribution Date, in an amount equal to the aggregate of payments of
principal (other than any balloon payments) and interest (net of related
servicing fees and Retained Interest) that were due on the Whole Loans or
Contracts in such Trust Fund during the related Due Period and were delinquent
on the related Determination Date, subject to the Master Servicer's (or another
entity's) good faith determination that such advances will be reimbursable from
Related Proceeds (as defined below). In the case of a series of Securities that
includes one or more classes of Subordinate Securities and if so provided in the
related Prospectus Supplement, the Master Servicer's (or another entity's)
advance obligation may be limited only to the portion of such delinquencies
necessary to make the required distributions on one or more classes of Senior
Securities and/or may be subject to the Master Servicer's (or another entity's)
good faith determination that such advances will be reimbursable not only from
Related Proceeds but also from collections on other Assets otherwise
distributable on one or more classes of such Subordinate Securities. See
'Description of Credit Support.'
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of the class or classes of Certificates entitled
thereto, rather than to guarantee or insure against losses. Unless otherwise
provided in the related Prospectus Supplement, advances of the Master Servicer's
(or another entity's) funds will be reimbursable only out of related recoveries
on the Mortgage Loans or Contracts (including amounts received under any form of
Credit Support) respecting which such advances were made (as to any Mortgage
Loan or Contract, 'Related Proceeds') and, if so provided in the Prospectus
Supplement, out of any amounts otherwise distributable on one or more classes of
Subordinate Securities of such series; provided, however, that any such advance
will be reimbursable from any amounts in the Collection Account prior to any
distributions being made on the Securities to the extent that the Master
Servicer (or such other entity) shall determine in good faith that such advance
(a 'Nonrecoverable Advance') is not ultimately recoverable from Related Proceeds
or, if applicable, from collections on other Assets otherwise distributable on
such Subordinate Securities. If advances have been made by the Master Servicer
from excess funds in the Collection Account, the Master Servicer is required to
replace such funds in the Collection Account on any future Distribution Date to
the extent that funds in the Collection Account on such Distribution Date are
less than payments required to be made to Securityholders on such date. If so
specified in the related Prospectus Supplement, the obligations of the Master
Servicer (or another entity) to make advances may be secured by a cash advance
reserve fund, a surety bond, a letter of credit or another form of limited
guaranty. If applicable, information regarding the characteristics of, and the
identity of any obligor on, any such surety bond, will be set forth in the
related Prospectus Supplement.
If and to the extent so provided in the related Prospectus Supplement, the
Master Servicer (or another entity) will be entitled to receive interest at the
rate specified therein on its outstanding advances and will be entitled to pay
itself such interest periodically from general collections on the Assets prior
to any payment to Securityholders or as otherwise provided in the related
Agreement and described in such Prospectus Supplement.
The Prospectus Supplement for any series of Securities evidencing an
interest in a Trust Fund that includes MBS will describe any corresponding
advancing obligation of any person in connection with such MBS.
REPORTS TO SECURITYHOLDERS
Unless otherwise provided in the Prospectus Supplement, with each
distribution to holders of any class of Securities of a series, the Master
Servicer or the Trustee, as provided in the related Prospectus Supplement, will
forward or cause to be forwarded to each such holder, to the Depositor and to
such other parties as may be specified in the related Agreement, a statement
setting forth, in each case to the extent applicable and available:
(i) the amount of such distribution to holders of Securities of such
class applied to reduce the Security Balance thereof;
(ii) the amount of such distribution to holders of Securities of such
class allocable to Accrued Security Interest;
(iii) the amount of such distribution allocable to Prepayment
Premiums;
(iv) the amount of related servicing compensation received by a Master
Servicer (and, if payable directly out of the related Trust Fund, by any
Sub-Servicer) and such other customary information as any
35
<PAGE>
such Master Servicer or the Trustee deems necessary or desirable, or that a
Securityholder reasonably requests, to enable Securityholders to prepare
their tax returns;
(v) the aggregate amount of advances included in such distribution,
and the aggregate amount of unreimbursed advances at the close of business
on such Distribution Date;
(vi) the aggregate principal balance of the Assets at the close of
business on such Distribution Date;
(vii) the number and aggregate principal balance of Whole Loans or
Contracts in respect of which (a) one scheduled payment is delinquent, (b)
two scheduled payments are delinquent, (c) three or more scheduled payments
are delinquent and (d) foreclosure proceedings have been commenced;
(viii) with respect to any Whole Loan or Contract liquidated during
the related Due Period, (a) the portion of such liquidation proceeds
payable or reimbursable to the Master Servicer (or any other entity) in
respect of such Mortgage Loan and (b) the amount of any loss to
Securityholders;
(ix) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the loan number of the related Mortgage Loan or Contract and
(b) the date of acquisition;
(x) with respect to each REO Property relating to a Whole Loan or
Contract and included in the Trust Fund as of the end of the related Due
Period, (a) the book value, (b) the principal balance of the related
Mortgage Loan or Contract immediately following such Distribution Date
(calculated as if such Mortgage Loan or Contract were still outstanding
taking into account certain limited modifications to the terms thereof
specified in the Agreement), (c) the aggregate amount of unreimbursed
servicing expenses and unreimbursed advances in respect thereof and (d) if
applicable, the aggregate amount of interest accrued and payable on related
servicing expenses and related advances;
(xi) with respect to any such REO Property sold during the related Due
Period (a) the aggregate amount of sale proceeds, (b) the portion of such
sales proceeds payable or reimbursable to the Master Servicer in respect of
such REO Property or the related Mortgage Loan or Contract and (c) the
amount of any loss to Securityholders in respect of the related Mortgage
Loan;
(xii) the aggregate Security Balance or notional amount, as the case
may be, of each class of Securities (including any class of Securities not
offered hereby) at the close of business on such Distribution Date,
separately identifying any reduction in such Security Balance due to the
allocation of any loss and increase in the Security Balance of a class of
Accrual Securities in the event that Accrued Security Interest has been
added to such balance;
(xiii) the aggregate amount of principal prepayments made during the
related Due Period;
(xiv) the amount deposited in the reserve fund, if any, on such
Distribution Date;
(xv) the amount remaining in the reserve fund, if any, as of the close
of business on such Distribution Date;
(xvi) the aggregate unpaid Accrued Security Interest, if any, on each
class of Securities at the close of business on such Distribution Date;
(xvii) in the case of Securities with a variable Pass-Through Rate or
interest rate, the Pass-Through Rate or interest rate applicable to such
Distribution Date, and, if available, the immediately succeeding
Distribution Date, as calculated in accordance with the method specified in
the related Prospectus Supplement;
(xviii) in the case of Securities with an adjustable Pass-Through Rate
or interest rate, for statements to be distributed in any month in which an
adjustment date occurs, the adjustable Pass-Through Rate or interest rate
applicable to such Distribution Date, if available, and the immediately
succeeding Distribution Date as calculated in accordance with the method
specified in the related Prospectus Supplement;
(xix) as to any series which includes Credit Support, the amount of
coverage of each instrument of Credit Support included therein as of the
close of business on such Distribution Date; and
36
<PAGE>
(xx) the aggregate amount of payments by the obligors of (a) default
interest, (b) late charges and (c) assumption and modification fees
collected during the related Due Period.
In the case of information furnished pursuant to subclauses (i)-(iv) above,
the amounts shall be expressed as a dollar amount per minimum denomination of
Securities or for such other specified portion thereof. In addition, in the case
of information furnished pursuant to subclauses (i), (ii), (xii), (xvi) and
(xvii) above, such amounts shall also be provided with respect to each
component, if any, of a class of Securities. The Master Servicer or the Trustee,
as specified in the related Prospectus Supplement, will forward or cause to be
forwarded to each holder, to the Depositor and to such other parties as may be
specified in the Agreement, a copy of any statements or reports received by the
Master Servicer or the Trustee, as applicable, with respect to any MBS. The
Prospectus Supplement for each series of Offered Securities will describe any
additional information to be included in reports to the holders of such
Securities.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee, as provided in the related Prospectus
Supplement, shall furnish to each person who at any time during the calendar
year was a holder of a Security a statement containing the information set forth
in subclauses (i)-(iv) above, aggregated for such calendar year or the
applicable portion thereof during which such person was a Securityholder. Such
obligation of the Master Servicer or the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information shall be
provided by the Master Servicer or the Trustee pursuant to any requirements of
the Code as are from time to time in force. See 'Description of the Securities--
Book-Entry Registration and Definitive Securities.'
TERMINATION
The obligations created by the related Agreement for each series of
Certificates will terminate upon the payment to Certificateholders of that
series of all amounts held in the Collection Account or by the Master Servicer,
if any, or the Trustee and required to be paid to them pursuant to such
Agreement following the earlier of (i) the final payment or other liquidation of
the last Asset subject thereto or the disposition of all property acquired upon
foreclosure of any Whole Loan or Contract subject thereto and (ii) the purchase
of all of the assets of the Trust Fund by the party entitled to effect such
termination, under the circumstances and in the manner set forth in the related
Prospectus Supplement. In no event, however, will the trust created by the
Agreement continue beyond the date specified in the related Prospectus
Supplement. Written notice of termination of the Agreement will be given to each
Securityholder, and the final distribution will be made only upon presentation
and surrender of the Securities at the location to be specified in the notice of
termination.
If so specified in the related Prospectus Supplement, a series of
Securities may be subject to optional early termination through the repurchase
of the assets in the related Trust Fund by the party specified therein, under
the circumstances and in the manner set forth therein. If so provided in the
related Prospectus Supplement, upon the reduction of the Security Balance of a
specified class or classes of Securities by a specified percentage or amount,
the party specified therein will solicit bids for the purchase of all assets of
the Trust Fund, or of a sufficient portion of such assets to retire such class
or classes or purchase such class or classes at a price set forth in the related
Prospectus Supplement, in each case, under the circumstances and in the manner
set forth therein.
BOOK-ENTRY REGISTRATION AND DEFINITIVE SECURITIES
If so provided in the related Prospectus Supplement, one or more classes of
the Offered Securities of any series will be issued as Book-Entry Securities,
and each such class will be represented by one or more single Securities
registered in the name of a nominee for the depository, The Depository Trust
Company ('DTC').
DTC is a limited-purpose trust company organized under the laws of the
State of New York, a member of the Federal Reserve System, a 'clearing
corporation' within the meaning of the Uniform Commercial Code ('UCC') and a
'clearing agency' registered pursuant to the provisions of Section 17A of the
Securities Exchange Act of 1934, as amended. DTC was created to hold securities
for its participating organizations ('Participants') and facilitate the
clearance and settlement of securities transactions between Participants through
electronic book-entry changes in their accounts, thereby eliminating the need
for physical movement of certificates. Participants include Merrill Lynch,
Pierce, Fenner & Smith Incorporated, securities brokers and dealers, banks,
trust companies and clearing corporations and may include certain other
organizations. Indirect
37
<PAGE>
access to the DTC system also is available to others such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly ('Indirect
Participants').
Unless otherwise provided in the related Prospectus Supplement, investors
that are not Participants or Indirect Participants but desire to purchase, sell
or otherwise transfer ownership of, or other interests in, Book-Entry Securities
may do so only through Participants and Indirect Participants. In addition, such
investors ('Security Owners') will receive all distributions on the Book-Entry
Securities through DTC and its Participants. Under a book-entry format, Security
Owners will receive payments after the related Distribution Date because, while
payments are required to be forwarded to Cede & Co., as nominee for DTC
('Cede'), on each such date, DTC will forward such payments to its Participants
which thereafter will be required to forward them to Indirect Participants or
Security Owners. Unless otherwise provided in the related Prospectus Supplement,
the only 'Securityholder' (as such term is used in the Agreement) will be Cede,
as nominee of DTC, and the Security Owners will not be recognized by the Trustee
as Securityholders under the Agreement. Security Owners will be permitted to
exercise the rights of Securityholders under the related Agreement, Trust
Agreement or Indenture, as applicable, only indirectly through the Participants
who in turn will exercise their rights through DTC.
Under the rules, regulations and procedures creating and affecting DTC and
its operations, DTC is required to make book-entry transfers among Participants
on whose behalf it acts with respect to the Book-Entry Securities and is
required to receive and transmit distributions of principal of and interest on
the Book-Entry Securities. Participants and Indirect Participants with which
Security Owners have accounts with respect to the Book-Entry Securities
similarly are required to make book-entry transfers and receive and transmit
such payments on behalf of their respective Security Owners.
Because DTC can act only on behalf of Participants, who in turn act on
behalf of Indirect Participants and certain banks, the ability of a Security
Owner to pledge its interest in the Book-Entry Securities to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of its interest in the Book-Entry Securities, may be limited due to the lack of
a physical certificate evidencing such interest.
DTC has advised the Depositor that it will take any action permitted to be
taken by a Securityholder under an Agreement only at the direction of one or
more Participants to whose account with DTC interests in the Book-Entry
Securities are credited.
Unless otherwise specified in the related Prospectus Supplement, Securities
initially issued in book-entry form will be issued in fully registered,
certificated form to Security Owners or their nominees ('Definitive
Securities'), rather than to DTC or its nominee only if (i) the Depositor
advises the Trustee in writing that DTC is no longer willing or able to properly
discharge its responsibilities as depository with respect to the Securities and
the Depositor is unable to locate a qualified successor or (ii) the Depositor,
at its option, elects to terminate the book-entry system through DTC.
Upon the occurrence of either of the events described in the immediately
preceding paragraph, DTC is required to notify all Participants of the
availability through DTC of Definitive Securities for the Security Owners. Upon
surrender by DTC of the certificate or certificates representing the Book-Entry
Securities, together with instructions for reregistration, the Trustee will
issue (or cause to be issued) to the Security Owners identified in such
instructions the Definitive Securities to which they are entitled, and
thereafter the Trustee will recognize the holders of such Definitive Securities
as Securityholders under the Agreement.
DESCRIPTION OF THE AGREEMENTS
AGREEMENTS APPLICABLE TO A SERIES
REMIC Certificates, Grantor Trust Certificates. Certificates that are
REMIC Certificates, Grantor Trust Certificates or indebtedness for tax purposes
will be issued, and the related Trust Fund will be created, pursuant to a
pooling and servicing agreement (a 'Pooling and Servicing Agreement') among the
Depositor, the Master Servicer and the Trustee. The Assets of such Trust Fund
will be transferred to the Trust Fund and thereafter serviced in accordance with
the terms of the Pooling and Servicing Agreement. In the context of the
conveyance
38
<PAGE>
and servicing of the related Assets, the Pooling and Servicing Agreement may be
referred to herein as the 'Agreement'. Notwithstanding the foregoing, if the
Assets of the Trust Fund for such a series consists only of Government
Securities or MBS, such Assets will be conveyed to the Trust Fund and
administered pursuant to a trust agreement between the Depositor and the Trustee
(a 'Trust Agreement'), which may also be referred to herein as the 'Agreement.'
Certificates That Are Partnership Interests for Tax Purposes and
Notes. Certificates that are partnership interests for tax purposes will be
issued, and the related Trust Fund will be created, pursuant to a Trust
Agreement between the Depositor and the Trustee. The Assets of the related Trust
Fund will be transferred to the Trust Fund and thereafter serviced in accordance
with a servicing agreement (a 'Servicing Agreement') between the Depositor, the
Servicer and the Trustee. In the context of the conveyance and servicing of the
related Assets, a Servicing Agreement may be referred to herein as the
'Agreement.'
A series of Notes issued by a Trust Fund will be issued pursuant to the
indenture (the 'Indenture') between the related Trust Fund and an indenture
trustee (the 'Indenture Trustee') named in the related Prospectus Supplement.
Notwithstanding the foregoing, if the Assets of a Trust Fund consist only
of MBS or Government Securities, such Assets will be conveyed to the Trust Fund
and administered in accordance with the terms of the Trust Agreement, which in
such context may be referred to herein as the Agreement.
General. Any Master Servicer and the Trustee with respect to any series of
Securities will be named in the related Prospectus Supplement. In any series of
Securities for which there are multiple Master Servicers, there may also be
multiple Mortgage Loan Groups or Contract Groups, each corresponding to a
particular Master Servicer; and, if the related Prospectus Supplement so
specifies, the servicing obligations of each such Master Servicer will be
limited to the Whole Loans in such corresponding Mortgage Loan Group or the
Contracts in the corresponding Contract Group. In lieu of appointing a Master
Servicer, a servicer may be appointed pursuant to the Agreement for any Trust
Fund. Such servicer will service all or a significant number of Whole Loans or
Contracts directly without a Sub-Servicer. Unless otherwise specified in the
related Prospectus Supplement, the obligations of any such servicer shall be
commensurate with those of the Master Servicer described herein. References in
this Prospectus to Master Servicer and its rights and obligations, unless
otherwise specified in the related Prospectus Supplement, shall be deemed to
also be references to any servicer servicing Whole Loans or Contracts directly.
A manager or administrator may be appointed pursuant to the Trust Agreement for
any Trust Fund to administer such Trust Fund. The provisions of each Agreement
will vary depending upon the nature of the Securities to be issued thereunder
and the nature of the related Trust Fund. Forms of a Pooling and Servicing
Agreement, a Sale and Servicing Agreement and a Trust Agreement have been filed
as exhibits to the Registration Statement of which this Prospectus is a part.
The following summaries describe certain provisions that may appear in each
Agreement. The Prospectus Supplement for a series of Securities will describe
any provision of the Agreement relating to such series that materially differs
from the description thereof contained in this Prospectus. The summaries do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Agreement for each Trust Fund and
the description of such provisions in the related Prospectus Supplement. As used
herein with respect to any series, the term 'Security' refers to all of the
Securities of that series, whether or not offered hereby and by the related
Prospectus Supplement, unless the context otherwise requires. The Depositor will
provide a copy of the Agreement (without exhibits) relating to any series of
Securities without charge upon written request of a holder of a Security of such
series addressed to Merrill Lynch Mortgage Investors, Inc., 250 Vesey Street,
World Financial Center, North Tower, 10th Floor, New York, New York 10281-1310.
Attention: Jack Ross.
ASSIGNMENT OF ASSETS; REPURCHASES
At the time of issuance of any series of Securities, the Depositor will
assign (or cause to be assigned) to the designated Trustee the Assets to be
included in the related Trust Fund, together with all principal and interest to
be received on or with respect to such Assets after the Cut-off Date, other than
principal and interest due on or before the Cut-off Date and other than any
Retained Interest. The Trustee will, concurrently with such assignment, deliver
the Certificates to the Depositor in exchange for the Assets and the other
assets comprising
39
<PAGE>
the Trust Fund for such series. Each Asset will be identified in a schedule
appearing as an exhibit to the related Agreement. Unless otherwise provided in
the related Prospectus Supplement, such schedule will include detailed
information (i) in respect of each Whole Loan included in the related Trust
Fund, including without limitation, the address of the related Mortgaged
Property and type of such property, the Mortgage Rate and, if applicable, the
applicable index, margin, adjustment date and any rate cap information, the
original and remaining term to maturity, the original and outstanding principal
balance and balloon payment, if any, the Value and Loan-to-Value Ratio as of the
date indicated and payment and prepayment provisions, if applicable; (ii) in
respect of each Contract included in the related Trust Fund, including without
limitation the Contract number, the outstanding principal amount and the
Contract Rate; and (iii) in respect of each MBS included in the related Trust
Fund, including without limitation, the MBS Issuer, MBS Servicer and MBS
Trustee, the pass-through or bond rate or formula for determining such rate, the
issue date and original and remaining term to maturity, if applicable, the
original and outstanding principal amount and payment provisions, if applicable.
With respect to each Whole Loan, except as otherwise specified in the
related Prospectus Supplement, the Depositor will deliver or cause to be
delivered to the Trustee (or to the custodian hereinafter referred to) certain
loan documents, which unless otherwise specified in the related Prospectus
Supplement will include the original Mortgage Note endorsed, without recourse,
in blank or to the order of the Trustee, the original Mortgage (or a certified
copy thereof) with evidence of recording indicated thereon and an assignment of
the Mortgage to the Trustee in recordable form. Notwithstanding the foregoing, a
Trust Fund may include Mortgage Loans where the original Mortgage Note is not
delivered to the Trustee if the Depositor delivers to the Trustee or the
custodian a copy or a duplicate original of the Mortgage Note, together with an
affidavit certifying that the original thereof has been lost or destroyed. With
respect to such Mortgage Loans, the Trustee (or its nominee) may not be able to
enforce the Mortgage Note against the related borrower. Unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
required to agree to repurchase, or substitute for, each such Mortgage Loan that
is subsequently in default if the enforcement thereof or of the related Mortgage
is materially adversely affected by the absence of the original Mortgage Note.
Unless otherwise provided in the related Prospectus Supplement, the related
Agreement will require the Depositor or another party specified therein to
promptly cause each such assignment of Mortgage to be recorded in the
appropriate public office for real property records, except in the State of
California or in other states where, in the opinion of counsel acceptable to the
Trustee, such recording is not required to protect the Trustee's interest in the
related Whole Loan against the claim of any subsequent transferee or any
successor to or creditor of the Depositor, the Master Servicer, the relevant
Asset Seller or any other prior holder of the Whole Loan.
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
40
<PAGE>
The Trustee (or a custodian) will review such Whole Loan documents within a
specified period of days after receipt thereof, and the Trustee (or a custodian)
will hold such documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, if any such
document is found to be missing or defective in any material respect, the
Trustee (or such custodian) shall immediately notify the Master Servicer and the
Depositor, and the Master Servicer shall immediately notify the relevant Asset
Seller. If the Asset Seller cannot cure the omission or defect within a
specified number of days after receipt of such notice, then unless otherwise
specified in the related Prospectus Supplement, the Asset Seller will be
obligated, within a specified number of days of receipt of such notice, to
repurchase the related Whole Loan from the Trustee at the Purchase Price or
substitute for such Mortgage Loan. There can be no assurance that an Asset
Seller will fulfill this repurchase or substitution obligation, and neither the
Master Servicer nor the Depositor will be obligated to repurchase or substitute
for such Mortgage Loan if the Asset Seller defaults on its obligation. Unless
otherwise specified in the related Prospectus Supplement, this repurchase or
substitution obligation constitutes the sole remedy available to the
Certificateholders or the Trustee for omission of, or a material defect in, a
constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
Notwithstanding the preceding two paragraphs, unless otherwise specified in
the related Prospectus Supplement, the documents with respect to Home Equity
Loans, Home Improvement Contracts and Unsecured Home Improvement Loans will not
be delivered to the Trustee (or a custodian), but will be retained by the Master
Servicer, which may also be the Asset Seller. In addition, assignments of the
related Mortgages to the Trustee will not be recorded, unless otherwise provided
in the related Prospectus Supplement.
With respect to each Contract, unless otherwise specified in the related
Prospectus Supplement, the Master Servicer (which may also be the Asset Seller)
will maintain custody of 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 Trustee in the Contracts, the Depositor will cause
UCC-1 financing statements to be executed by the related Asset Seller
identifying the Depositor as secured party and by the Depositor identifying the
Trustee as the secured party and, in each case, identifying all Contracts as
collateral. Unless otherwise specified in the related Prospectus Supplement, the
Contracts will not be stamped or otherwise marked to reflect their assignment
from the Company to the Trust. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the interest of the Trustee in the
Contracts could be defeated. See 'Certain Legal Aspects of the Contracts.'
While the Contract documents will not be reviewed by the Trustee or the
Master Servicer, if the Master Servicer finds that any such document is missing
or defective in any material respect, the Master Servicer shall immediately
notify the Depositor and the relevant Asset Seller. If the Asset Seller cannot
cure the omission or defect within a specified number of days after receipt of
such notice, then unless otherwise specified in the related Prospectus
Supplement, the Asset Seller will be obligated, within a specified number of
days of receipt of such notice, to repurchase the related Contract from the
Trustee at the Purchase Price or substitute for such Contract. There can be no
assurance that an Asset Seller will fulfill this repurchase or substitution
obligation, and neither the Master Servicer nor the Depositor will be obligated
to repurchase or substitute for such Contract if the Asset Seller defaults on
its obligation. Unless otherwise specified in the related Prospectus Supplement,
this repurchase or substitution obligation constitutes the sole remedy available
to the Certificateholders or the Trustee for omission of, or a material defect
in, a constituent document. To the extent specified in the related Prospectus
Supplement, in lieu of curing any omission or defect in the Asset or
repurchasing or substituting for such Asset, the Asset Seller may agree to cover
any losses suffered by the Trust Fund as a result of such breach or defect.
With respect to each Government Security or MBS in certificated form, the
Depositor will deliver or cause to be delivered to the Trustee (or the
custodian) the original certificate or other definitive evidence of such
Government Security or MBS, as applicable, together with bond power or other
instruments, certifications or documents required to transfer fully such
Government Security or MBS, as applicable, to the Trustee for the benefit of the
Certificateholders. With respect to each Government Security or MBS in
uncertificated or book-entry form or held through a 'clearing corporation'
within the meaning of the UCC, the Depositor and the Trustee will cause such
Government Security or MBS to be registered directly or on the books of such
clearing
41
<PAGE>
corporation or of a financial intermediary in the name of the Trustee for the
benefit of the Certificateholders. Unless otherwise provided in the related
Prospectus Supplement, the related Agreement will require that either the
Depositor or the Trustee promptly cause any MBS and Government Securities in
certificated form not registered in the name of the Trustee to be re-registered,
with the applicable persons, in the name of the Trustee.
REPRESENTATIONS AND WARRANTIES; REPURCHASES
Unless otherwise provided in the related Prospectus Supplement the
Depositor will, with respect to each Whole Loan or Contract, assign certain
representations and warranties, as of a specified date (the person making such
representations and warranties, the 'Warranting Party') covering, by way of
example, the following types of matters: (i) the accuracy of the information set
forth for such Whole Loan or Contract on the schedule of Assets appearing as an
exhibit to the related Agreement; (ii) in the case of a Whole Loan, the
existence of title insurance insuring the lien priority of the Whole Loan and,
in the case of a Contract, that the Contract creates a valid first security
interest in or lien on the related Manufactured Home; (iii) the authority of the
Warranting Party to sell the Whole Loan or Contract; (iv) the payment status of
the Whole Loan or Contract; (v) in the case of a Whole Loan, the existence of
customary provisions in the related Mortgage Note and Mortgage to permit
realization against the Mortgaged Property of the benefit of the security of the
Mortgage; and (vi) the existence of hazard and extended perils insurance
coverage on the Mortgaged Property or Manufactured Home.
Any Warranting Party shall be an Asset Seller or an affiliate thereof or
such other person acceptable to the Depositor and shall be identified in the
related Prospectus Supplement.
Representations and warranties made in respect of a Whole Loan or Contract
may have been made as of a date prior to the applicable Cut-off Date. A
substantial period of time may have elapsed between such date and the date of
initial issuance of the related series of Certificates evidencing an interest in
such Whole Loan or Contract. Unless otherwise specified in the related
Prospectus Supplement, in the event of a breach of any such representation or
warranty, the Warranting Party will be obligated to reimburse the Trust Fund for
losses caused by any such breach or either cure such breach or repurchase or
replace the affected Whole Loan or Contract as described below. Since the
representations and warranties may not address events that may occur following
the date as of which they were made, the Warranting Party will have a
reimbursement, cure, repurchase or substitution obligation in connection with a
breach of such a representation and warranty only if the relevant event that
causes such breach occurs prior to such date. Such party would have no such
obligations if the relevant event that causes such breach occurs after such
date.
Unless otherwise provided in the related Prospectus Supplement, each
Agreement will provide that the Master Servicer and/or Trustee will be required
to notify promptly the relevant Warranting Party of any breach of any
representation or warranty made by it in respect of a Whole Loan or Contract
that materially and adversely affects the value of such Whole Loan or Contract
or the interests therein of the Certificateholders. If such Warranting Party
cannot cure such breach within a specified period following the date on which
such party was notified of such breach, then such Warranting Party will be
obligated to repurchase such Whole Loan or Contract from the Trustee within a
specified period from the date on which the Warranting Party was notified of
such breach, at the Purchase Price therefor. As to any Whole Loan or Contract,
unless otherwise specified in the related Prospectus Supplement, the 'Purchase
Price' is equal to the sum of the unpaid principal balance thereof, plus unpaid
accrued interest thereon at the Mortgage Rate or Contract Rate from the date as
to which interest was last paid to the due date in the Due Period in which the
relevant purchase is to occur, plus certain servicing expenses that are
reimbursable to the Master Servicer. If so provided in the Prospectus Supplement
for a series, a Warranting Party, rather than repurchase a Whole Loan or
Contract as to which a breach has occurred, will have the option, within a
specified period after initial issuance of such series of Certificates, to cause
the removal of such Whole Loan or Contract from the Trust Fund and substitute in
its place one or more other Whole Loans or Contracts, as applicable, in
accordance with the standards described in the related Prospectus Supplement. If
so provided in the Prospectus Supplement for a series, a Warranting Party,
rather than repurchase or substitute a Whole Loan or Contract as to which a
breach has occurred, will have the option to reimburse the Trust Fund or the
Certificateholders for any losses caused by such breach. Unless otherwise
specified in the related Prospectus Supplement, this reimbursement, repurchase
or substitution obligation will constitute the sole remedy available to holders
of Certificates or the Trustee for a breach of representation by a Warranting
Party.
42
<PAGE>
Neither the Depositor (except to the extent that it is the Warranting
Party) nor the Master Servicer will be obligated to purchase or substitute for a
Whole Loan or Contract if a Warranting Party defaults on its obligation to do
so, and no assurance can be given that Warranting Parties will carry out such
obligations with respect to Whole Loans or Contracts.
Unless otherwise provided in the related Prospectus Supplement the
Warranting Party will, with respect to a Trust Fund that includes Government
Securities or MBS, make or assign certain representations or warranties, as of a
specified date, with respect to such Government Securities or MBS, covering (i)
the accuracy of the information set forth therefor on the schedule of Assets
appearing as an exhibit to the related Agreement and (ii) the authority of the
Warranting Party to sell such Assets. The related Prospectus Supplement will
describe the remedies for a breach thereof.
A Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Agreement. A breach of any such representation of
the Master Servicer which materially and adversely affects the interests of the
Certificateholders and which continues unremedied for the number of days
specified in the Agreement after the giving of written notice of such breach to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Certificates evidencing not less
than 25% of the Voting Rights (unless otherwise specified in the related
Prospectus Supplement), will constitute an Event of Default under such Pooling
and Servicing Agreement. See 'Events of Default' and 'Rights Upon Event of
Default.'
COLLECTION ACCOUNT AND RELATED ACCOUNTS
General
The Master Servicer and/or the Trustee will, as to each Trust Fund,
establish and maintain or cause to be established and maintained one or more
separate accounts for the collection of payments on the related Assets
(collectively, the 'Collection Account'), which must be either (i) an account or
accounts the deposits in which are insured by the Bank Insurance Fund or the
Savings Association Insurance Fund of the Federal Deposit Insurance Corporation
('FDIC') (to the limits established by the FDIC) and the uninsured deposits in
which are otherwise secured such that the Certificateholders have a claim with
respect to the funds in the Collection Account or a perfected first priority
security interest against any collateral securing such funds that is superior to
the claims of any other depositors or general creditors of the institution with
which the Collection Account is maintained or (ii) otherwise maintained with a
bank or trust company, and in a manner, satisfactory to the Rating Agency or
Agencies rating any class of Securities of such series. The collateral eligible
to secure amounts in the Collection Account is limited to United States
government securities and other investment grade obligations specified in the
Agreement ('Permitted Investments'). A Collection Account may be maintained as
an interest bearing or a non-interest bearing account and the funds held therein
may be invested pending each succeeding Distribution Date in certain short-term
Permitted Investments. Unless otherwise provided in the related Prospectus
Supplement, any interest or other income earned on funds in the Collection
Account will be paid to a Master Servicer or its designee as additional
servicing compensation. The Collection Account may be maintained with an
institution that is an affiliate of the Master Servicer, if applicable, provided
that such institution meets the standards imposed by the Rating Agency or
Agencies. If permitted by the Rating Agency or Agencies and so specified in the
related Prospectus Supplement, a Collection Account may contain funds relating
to more than one series of mortgage pass-through certificates and may contain
other funds respecting payments on mortgage loans belonging to the Master
Servicer or serviced or master serviced by it on behalf of others.
Deposits
A Master Servicer or the Trustee will deposit or cause to be deposited in
the Collection Account for one or more Trust Funds on a daily basis, unless
otherwise provided in the related Agreement, the following payments and
collections received, or advances made, by the Master Servicer or the Trustee or
on its behalf subsequent to the Cut-off Date (other than payments due on or
before the Cut-off Date, and exclusive of any amounts representing a Retained
Interest):
(i) all payments on account of principal, including principal prepayments,
on the Assets;
43
<PAGE>
(ii) all payments on account of interest on the Assets, including any
default interest collected, in each case net of any portion thereof retained by
a Master Servicer or a Sub-Servicer as its servicing compensation and net of any
Retained Interest;
(iii) all proceeds of the hazard insurance policies to be maintained in
respect of each Mortgaged Property securing a Whole Loan in the Trust Fund (to
the extent such proceeds are not applied to the restoration of the property or
released to the mortgagor in accordance with the normal servicing procedures of
a Master Servicer or the related Sub-Servicer, subject to the terms and
conditions of the related Mortgage and Mortgage Note) (collectively, 'Insurance
Proceeds') and all other amounts received and retained in connection with the
liquidation of defaulted Mortgage Loans in the Trust Fund, by foreclosure or
otherwise ('Liquidation Proceeds'), together with the net proceeds on a monthly
basis with respect to any Mortgaged Properties acquired for the benefit of
Securityholders by foreclosure or by deed in lieu of foreclosure or otherwise;
(iv) any amounts paid under any instrument or drawn from any fund that
constitutes Credit Support for the related series of Securities as described
under 'Description of Credit Support';
(v) any advances made as described under 'Description of the
Securities--Advances in Respect of Delinquencies';
(vi) any amounts paid under any Cash Flow Agreement, as described under
'Description of the Trust Funds--Cash Flow Agreements';
(vii) all proceeds of any Asset or, with respect to a Whole Loan, property
acquired in respect thereof purchased by the Depositor, any Asset Seller or any
other specified person as described under 'Assignment of Assets; Repurchases'
and 'Representations and Warranties; Repurchases,' all proceeds of any defaulted
Mortgage Loan purchased as described under 'Realization Upon Defaulted Whole
Loans,' and all proceeds of any Asset purchased as described under 'Description
of the Securities--Termination' (also, 'Liquidation Proceeds');
(viii) any amounts paid by a Master Servicer to cover certain interest
shortfalls arising out of the prepayment of Whole Loans or Contracts in the
Trust Fund as described under 'Description of the Agreements--Retained Interest;
Servicing Compensation and Payment of Expenses';
(ix) to the extent that any such item does not constitute additional
servicing compensation to a Master Servicer, any payments on account of
modification or assumption fees, late payment charges or Prepayment Premiums on
the Mortgage Assets;
(x) all payments required to be deposited in the Collection Account with
respect to any deductible clause in any blanket insurance policy described under
'Hazard Insurance Policies';
(xi) any amount required to be deposited by a Master Servicer or the
Trustee in connection with losses realized on investments for the benefit of the
Master Servicer or the Trustee, as the case may be, of funds held in the
Collection Account; and
(xii) any other amounts required to be deposited in the Collection Account
as provided in the related Agreement and described in the related Prospectus
Supplement.
Withdrawals
A Master Servicer or the Trustee may, from time to time, unless otherwise
specified in the related Prospectus Supplement or the related Agreement, make
withdrawals from the Collection Account for each Trust Fund for any of the
following purposes:
(i) to make distributions to the Securityholders on each Distribution Date;
(ii) to reimburse a Master Servicer for unreimbursed amounts advanced as
described under 'Description of the Securities--Advances in Respect of
Delinquencies,' such reimbursement to be made out of amounts received which were
identified and applied by the Master Servicer as late collections of interest
(net of related servicing fees and Retained Interest) on and principal of the
particular Whole Loans or Contracts with respect to which the advances were made
or out of amounts drawn under any form of Credit Support with respect to such
Whole Loans or Contracts;
44
<PAGE>
(iii) to reimburse a Master Servicer for unpaid servicing fees earned and
certain unreimbursed servicing expenses incurred with respect to Whole Loans or
Contracts and properties acquired in respect thereof, such reimbursement to be
made out of amounts that represent Liquidation Proceeds and Insurance Proceeds
collected on the particular Whole Loans or Contracts and properties, and net
income collected on the particular properties, with respect to which such fees
were earned or such expenses were incurred or out of amounts drawn under any
form of Credit Support with respect to such Whole Loans or Contracts and
properties;
(iv) to reimburse a Master Servicer for any advances described in clause
(ii) above and any servicing expenses described in clause (iii) above which, in
the Master Servicer's good faith judgment, will not be recoverable from the
amounts described in clauses (ii) and (iii), respectively, such reimbursement to
be made from amounts collected on other Assets or, if and to the extent so
provided by the related Agreement and described in the related Prospectus
Supplement, just from that portion of amounts collected on other Assets that is
otherwise distributable on one or more classes of Subordinate Securities, if
any, remain outstanding, and otherwise any outstanding class of Securities, of
the related series;
(v) if and to the extent described in the related Prospectus Supplement, to
pay a Master Servicer interest accrued on the advances described in clause (ii)
above and the servicing expenses described in clause (iii) above while such
remain outstanding and unreimbursed;
(vi) to reimburse a Master Servicer, the Depositor, or any of their
respective directors, officers, employees and agents, as the case may be, for
certain expenses, costs and liabilities incurred thereby, as and to the extent
described under 'Certain Matters Regarding a Master Servicer and the Depositor';
(vii) if and to the extent described in the related Prospectus Supplement,
to pay (or to transfer to a separate account for purposes of escrowing for the
payment of) the Trustee's fees;
(viii) to reimburse the Trustee or any of its directors, officers,
employees and agents, as the case may be, for certain expenses, costs and
liabilities incurred thereby, as and to the extent described under 'Certain
Matters Regarding the Trustee';
(ix) unless otherwise provided in the related Prospectus Supplement, to pay
a Master Servicer, as additional servicing compensation, interest and investment
income earned in respect of amounts held in the Collection Account;
(x) to pay the person entitled thereto any amounts deposited in the
Collection Account that were identified and applied by the Master Servicer as
recoveries of Retained Interest;
(xi) to pay for costs reasonably incurred in connection with the proper
management and maintenance of any Mortgaged Property acquired for the benefit of
Securityholders by foreclosure or by deed in lieu of foreclosure or otherwise,
such payments to be made out of income received on such property;
(xii) if one or more elections have been made to treat the Trust Fund or
designated portions thereof as a REMIC, to pay any federal, state or local taxes
imposed on the Trust Fund or its assets or transactions, as and to the extent
described under 'Certain Federal Income Tax Consequences--REMICS--Prohibited
Transactions Tax and Other Taxes';
(xiii) to pay for the cost of an independent appraiser or other expert in
real estate matters retained to determine a fair sale price for a defaulted
Whole Loan or a property acquired in respect thereof in connection with the
liquidation of such Whole Loan or property;
(xiv) to pay for the cost of various opinions of counsel obtained pursuant
to the related Agreement for the benefit of Securityholders;
(xv) to pay for the costs of recording the related Agreement if such
recordation materially and beneficially affects the interests of
Securityholders, provided that such payment shall not constitute a waiver with
respect to the obligation of the Warranting Party to remedy any breach of
representation or warranty under the Agreement;
(xvi) to pay the person entitled thereto any amounts deposited in the
Collection Account in error, including amounts received on any Asset after its
removal from the Trust Fund whether by reason of purchase or substitution as
contemplated by 'Assignment of Assets; Repurchase' and 'Representations and
Warranties; Repurchases' or otherwise;
45
<PAGE>
(xvii) to make any other withdrawals permitted by the related Agreement;
and
(xviii) to clear and terminate the Collection Account at the termination of
the Trust Fund.
Other Collection Accounts
Notwithstanding the foregoing, if so specified in the related Prospectus
Supplement, the Agreement for any series of Securities may provide for the
establishment and maintenance of a separate collection account into which the
Master Servicer or any related Sub-Servicer will deposit on a daily basis the
amounts described under '--Deposits' above for one or more series of Securities.
Any amounts on deposit in any such collection account will be withdrawn
therefrom and deposited into the appropriate Collection Account by a time
specified in the related Prospectus Supplement. To the extent specified in the
related Prospectus Supplement, any amounts which could be withdrawn from the
Collection Account as described under '--Withdrawals' above, may also be
withdrawn from any such collection account. The Prospectus Supplement will set
forth any restrictions with respect to any such collection account, including
investment restrictions and any restrictions with respect to financial
institutions with which any such collection account may be maintained.
COLLECTION AND OTHER SERVICING PROCEDURES
The Master Servicer, directly or through Sub-Servicers, is required to make
reasonable efforts to collect all scheduled payments under the Whole Loans and
will follow or cause to be followed such collection procedures as it would
follow with respect to mortgage loans that are comparable to the Whole Loans or
manufactured housing contracts comparable to the Contracts and held for its own
account, provided such procedures are consistent with (i) the terms of the
related Agreement and any related hazard insurance policy or instrument of
Credit Support, if any, included in the related Trust Fund described herein or
under 'Description of Credit Support,' (ii) applicable law and (iii) the general
servicing standard specified in the related Prospectus Supplement or, if no such
standard is so specified, its normal servicing practices (in either case, the
'Servicing Standard'). In connection therewith, the Master Servicer will be
permitted in its discretion to waive any late payment charge or penalty interest
in respect of a late payment on a Whole Loan or Contract.
Each Master Servicer will also be required to perform other customary
functions of a servicer of comparable loans, including maintaining hazard
insurance policies as described herein and in any related Prospectus Supplement,
and filing and settling claims thereunder; maintaining escrow or impoundment
accounts of mortgagors for payment of taxes, insurance and other items required
to be paid by any mortgagor pursuant to a Whole Loan; processing assumptions or
substitutions in those cases where the Master Servicer has determined not to
enforce any applicable due-on-sale clause; attempting to cure delinquencies;
supervising foreclosures or repossessions; inspecting and managing Mortgaged
Properties or Manufactured Homes under certain circumstances; and maintaining
accounting records relating to the Whole Loans or Contracts. Unless otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
responsible for filing and settling claims in respect of particular Whole Loans
or Contracts under any applicable instrument of Credit Support. See 'Description
of Credit Support.'
The Master Servicer may agree to modify, waive or amend any term of any
Whole Loan or Contract in a manner consistent with the Servicing Standard so
long as the modification, waiver or amendment will not (i) affect the amount or
timing of any scheduled payments of principal or interest on the Whole Loan or
Contract or (ii) in its judgment, materially impair the security for the Whole
Loan or Contract or reduce the likelihood of timely payment of amounts due
thereon. The Master Servicer also may agree to any modification, waiver or
amendment that would so affect or impair the payments on, or the security for, a
Whole Loan or Contract if, unless otherwise provided in the related Prospectus
Supplement, (i) in its judgment, a material default on the Whole Loan or
Contract has occurred or a payment default is imminent and (ii) in its judgment,
such modification, waiver or amendment is reasonably likely to produce a greater
recovery with respect to the Whole Loan or Contract on a present value basis
than would liquidation. The Master Servicer is required to notify the Trustee in
the event of any modification, waiver or amendment of any Whole Loan or
Contract.
In the case of Multifamily Loans, a Mortgagor's failure to make required
Mortgage Loan payments may mean that operating income is insufficient to service
the Mortgage Loan debt, or may reflect the diversion of that income from the
servicing of the Mortgage Loan debt. In addition, a Mortgagor under a
Multifamily Loan that is
46
<PAGE>
unable to make Mortgage Loan payments may also be unable to make timely payment
of all required taxes and otherwise to maintain and insure the related Mortgaged
Property. In general, the Servicer will be required to monitor any Multifamily
Loan that is in default, evaluate whether the causes of the default can be
corrected over a reasonable period without significant impairment of the value
of the related Mortgaged Property, initiate corrective action in cooperation
with the Mortgagor if cure is likely, inspect the related Multifamily Property
and take such other actions as are consistent with the related Agreement. A
significant period of time may elapse before the Servicer is able to assess the
success of any such corrective action or the need for additional initiatives.
The time within which the Servicer can make the initial determination of
appropriate action, evaluate the success of corrective action, develop
additional initiatives, institute foreclosure proceedings and actually foreclose
may vary considerably depending on the particular Multifamily Loan, the
Multifamily Property, the Mortgagor, the presence of an acceptable party to
assume the Multifamily Loan and the laws of the jurisdiction in which the
Multifamily Property is located.
SUB-SERVICERS
A Master Servicer may delegate its servicing obligations in respect of the
Whole Loans or Contracts to third-party servicers (each, a 'Sub-Servicer'), but
such Master Servicer will remain obligated under the related Agreement. Each
sub-servicing agreement between a Master Servicer and a Sub-Servicer (a
'Sub-Servicing Agreement') must be consistent with the terms of the related
Agreement and must provide that, if for any reason the Master Servicer for the
related series of Securities is no longer acting in such capacity, the Trustee
or any successor Master Servicer may assume the Master Servicer's rights and
obligations under such Sub-Servicing Agreement.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be solely liable for all fees owed by it to any Sub-Servicer,
irrespective of whether the Master Servicer's compensation pursuant to the
related Agreement is sufficient to pay such fees. However, a Sub-Servicer may be
entitled to a Retained Interest in certain Whole Loans or Contracts. Each
Sub-Servicer will be reimbursed by the Master Servicer for certain expenditures
which it makes, generally to the same extent the Master Servicer would be
reimbursed under an Agreement. See 'Retained Interest; Servicing Compensation
and Payment of Expenses.'
REALIZATION UPON DEFAULTED WHOLE LOANS
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer is required to monitor any Whole Loan or Contract which is in default,
initiate corrective action in cooperation with the mortgagor or obligor if cure
is likely, inspect the Mortgaged Property or Manufactured Home and take such
other actions as are consistent with the Servicing Standard. A significant
period of time may elapse before the Master Servicer is able to assess the
success of such corrective action or the need for additional initiatives.
Any Agreement relating to a Trust Fund that includes Whole Loans or
Contracts may grant to the Master Servicer and/or the holder or holders of
certain classes of Securities a right of first refusal to purchase from the
Trust Fund at a predetermined purchase price any such Whole Loan or Contract as
to which a specified number of scheduled payments thereunder are delinquent. Any
such right granted to the holder of an Offered Security will be described in the
related Prospectus Supplement. The related Prospectus Supplement will also
describe any such right granted to any person if the predetermined purchase
price is less than the Purchase Price described under 'Representations and
Warranties; Repurchases.'
If so specified in the related Prospectus Supplement, the Master Servicer
may offer to sell any defaulted Whole Loan or Contract described in the
preceding paragraph and not otherwise purchased by any person having a right of
first refusal with respect thereto, if and when the Master Servicer determines,
consistent with the Servicing Standard, that such a sale would produce a greater
recovery on a present value basis than would liquidation through foreclosure,
repossession or similar proceedings. The related Agreement will provide that any
such offering be made in a commercially reasonable manner for a specified period
and that the Master Servicer accept the highest cash bid received from any
person (including itself, an affiliate of the Master Servicer or any
Certificateholder) that constitutes a fair price for such defaulted Whole Loan
or Contract. In the absence of any bid determined in accordance with the related
Agreement to be fair, the Master Servicer shall proceed with respect to such
defaulted Mortgage Loan or Contract as described below. Any bid in an amount at
least equal to
47
<PAGE>
the Purchase Price described under 'Representations and Warranties; Repurchases'
will in all cases be deemed fair.
The Master Servicer, on behalf of the Trustee, may at any time institute
foreclosure proceedings, exercise any power of sale contained in any mortgage,
obtain a deed in lieu of foreclosure, or otherwise acquire title to a Mortgaged
Property securing a Whole Loan by operation of law or otherwise and may at any
time repossess and realize upon any Manufactured Home, if such action is
consistent with the Servicing Standard and a default on such Whole Loan or
Contract has occurred or, in the Master Servicer's judgment, is imminent.
Unless otherwise provided in the related Prospectus Supplement, if title to
any Mortgaged Property is acquired by a Trust Fund as to which a REMIC election
has been made, the Master Servicer, on behalf of the Trust Fund, will be
required to sell the Mortgaged Property within two years of acquisition, unless
(i) the Internal Revenue Service grants an extension of time to sell such
property or (ii) the Trustee receives an opinion of independent counsel to the
effect that the holding of the property by the Trust Fund subsequent to two
years after its acquisition will not result in the imposition of a tax on the
Trust Fund or cause the Trust Fund to fail to qualify as a REMIC under the Code
at any time that any Certificate is outstanding. Subject to the foregoing, the
Master Servicer will be required to (i) solicit bids for any Mortgaged Property
so acquired in such a manner as will be reasonably likely to realize a fair
price for such property and (ii) accept the first (and, if multiple bids are
contemporaneously received, the highest) cash bid received from any person that
constitutes a fair price.
The limitations imposed by the related Agreement and the REMIC provisions
of the Code (if a REMIC election has been made with respect to the related Trust
Fund) on the ownership and management of any Mortgaged Property acquired on
behalf of the Trust Fund may result in the recovery of an amount less than the
amount that would otherwise be recovered. See 'Certain Legal Aspects of Mortgage
Loans--Foreclosure.'
If recovery on a defaulted Whole Loan or Contract under any related
instrument of Credit Support is not available, the Master Servicer nevertheless
will be obligated to follow or cause to be followed such normal practices and
procedures as it deems necessary or advisable to realize upon the defaulted
Whole Loan or Contract. If the proceeds of any liquidation of the property
securing the defaulted Whole Loan or Contract are less than the outstanding
principal balance of the defaulted Whole Loan or Contract plus interest accrued
thereon at the Mortgage Rate or Contract Rate, as applicable, plus the aggregate
amount of expenses incurred by the Master Servicer in connection with such
proceedings and which are reimbursable under the Agreement, the Trust Fund will
realize a loss in the amount of such difference. The Master Servicer will be
entitled to withdraw or cause to be withdrawn from the Collection Account out of
the Liquidation Proceeds recovered on any defaulted Whole Loan or Contract,
prior to the distribution of such Liquidation Proceeds to Certificateholders,
amounts representing its normal servicing compensation on the Whole Loan or
Contract, unreimbursed servicing expenses incurred with respect to the Whole
Loan or Contract and any unreimbursed advances of delinquent payments made with
respect to the Whole Loan or Contract.
If any property securing a defaulted Whole Loan or Contract is damaged the
Master Servicer is not required to expend its own funds to restore the damaged
property unless it determines (i) that such restoration will increase the
proceeds to Certificateholders on liquidation of the Whole Loan or Contract
after reimbursement of the Master Servicer for its expenses and (ii) that such
expenses will be recoverable by it from related Insurance Proceeds or
Liquidation Proceeds.
As servicer of the Whole Loans or Contracts, a Master Servicer, on behalf
of itself, the Trustee and the Securityholders, will present claims to the
obligor under each instrument of Credit Support, and will take such reasonable
steps as are necessary to receive payment or to permit recovery thereunder with
respect to defaulted Whole Loans or Contracts.
If a Master Servicer or its designee recovers payments under any instrument
of Credit Support with respect to any defaulted Whole Loan or Contract, the
Master Servicer will be entitled to withdraw or cause to be withdrawn from the
Collection Account out of such proceeds, prior to distribution thereof to
Certificateholders, amounts representing its normal servicing compensation on
such Whole Loan or Contract, unreimbursed servicing expenses incurred with
respect to the Whole Loan or Contract and any unreimbursed advances of
delinquent payments made with respect to the Whole Loan or Contract. See 'Hazard
Insurance Policies' and 'Description of Credit Support.'
48
<PAGE>
HAZARD INSURANCE POLICIES
Whole Loans
Unless otherwise specified in the related Prospectus Supplement, each
Agreement for a Trust Fund comprised of Whole Loans will require the Master
Servicer to cause the mortgagor on each Whole Loan to maintain a hazard
insurance policy providing for such coverage as is required under the related
Mortgage or, if any Mortgage permits the holder thereof to dictate to the
mortgagor the insurance coverage to be maintained on the related Mortgaged
Property, then such coverage as is consistent with the Servicing Standard.
Unless otherwise specified in the related Prospectus Supplement, such coverage
will be in general in an amount equal to the lesser of the principal balance
owing on such Whole Loan and the amount necessary to fully compensate for any
damage or loss to the improvements on the Mortgaged Property on a replacement
cost basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the hazard insurance policy.
The ability of the Master Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being named as an additional
insured under any hazard insurance policy and under any other insurance policy
referred to below, or upon the extent to which information in this regard is
furnished by mortgagors. All amounts collected by the Master Servicer under any
such policy (except for amounts to be applied to the restoration or repair of
the Mortgaged Property or released to the mortgagor in accordance with the
Master Servicer's normal servicing procedures, subject to the terms and
conditions of the related Mortgage and Mortgage Note) will be deposited in the
Collection Account. The Agreement will provide that the Master Servicer may
satisfy its obligation to cause each mortgagor to maintain such a hazard
insurance policy by the Master Servicer's maintaining a blanket policy insuring
against hazard losses on the Whole Loans. If such blanket policy contains a
deductible clause, the Master Servicer will be required to deposit in the
Collection Account all sums that would have been deposited therein but for such
clause.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Whole Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
war, revolution, governmental actions, floods and other water-related causes,
earth movement (including earthquakes, landslides and mudflows), wet or dry rot,
vermin, domestic animals and certain other kinds of uninsured risks.
The hazard insurance policies covering the Mortgaged Properties securing
the Whole Loans will typically contain a co-insurance clause that in effect
requires the insured at all times to carry insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the improvements on the
property in order to recover the full amount of any partial loss. If the
insured's coverage falls below this specified percentage, such clause generally
provides that the insurer's liability in the event of partial loss does not
exceed the lesser of (i) the replacement cost of the improvements less physical
depreciation and (ii) such proportion of the loss as the amount of insurance
carried bears to the specified percentage of the full replacement cost of such
improvements.
Each Agreement for a Trust Fund comprised of Whole Loans will require the
Master Servicer to cause the mortgagor on each Whole Loan to maintain all such
other insurance coverage with respect to the related Mortgaged Property as is
consistent with the terms of the related Mortgage and the Servicing Standard,
which insurance may typically include flood insurance (if the related Mortgaged
Property was located at the time of origination in a federally designated flood
area).
Any cost incurred by the Master Servicer in maintaining any such insurance
policy will be added to the amount owing under the Mortgage Loan where the terms
of the Mortgage Loan so permit; provided, however, that the addition of such
cost will not be taken into account for purposes of calculating the distribution
to be made to Certificateholders. Such costs may be recovered by the Master
Servicer or Sub-Servicer, as the case may be, from the Collection Account, with
interest thereon, as provided by the Agreement.
Under the terms of the Whole Loans, mortgagors will generally be required
to present claims to insurers under hazard insurance policies maintained on the
related Mortgaged Properties. The Master Servicer, on behalf
49
<PAGE>
of the Trustee and Certificateholders, is obligated to present or cause to be
presented claims under any blanket insurance policy insuring against hazard
losses on Mortgaged Properties securing the Whole Loans. However, the ability of
the Master Servicer to present or cause to be presented such claims is dependent
upon the extent to which information in this regard is furnished to the Master
Servicer by mortgagors.
Contracts
Except as otherwise specified in the related Prospectus Supplement, the
terms of the Agreement for a Trust Fund comprised of Contracts will require the
Master Servicer to cause to be maintained with respect to each Contract one or
more hazard insurance policies which provide, at a minimum, the same coverage as
a standard form fire and extended coverage insurance policy that is customary
for manufactured housing, issued by a company authorized to issue such policies
in the state in which the Manufactured Home is located, and in an amount which
is not less than the maximum insurable value of such Manufactured Home or the
principal balance due from the obligor on the related Contract, whichever is
less; provided, however, that the amount of coverage provided by each such
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 special flood hazard area, the Master Servicer 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 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 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 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 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 hazard insurance policies. The Master Servicer shall pay the
premium for such blanket policy on the basis described therein and shall pay any
deductible amount with respect to claims under such policy relating to the
Contracts.
FIDELITY BONDS AND ERRORS AND OMISSIONS INSURANCE
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will require that the Master Servicer obtain and maintain in effect a
fidelity bond or similar form of insurance coverage (which may provide blanket
coverage) or any combination thereof insuring against loss occasioned by fraud,
theft or other intentional misconduct of the officers, employees and agents of
the Master Servicer. The related Agreement will allow the Master Servicer to
self-insure against loss occasioned by the errors and omissions of the officers,
employees and agents of the Master Servicer so long as certain criteria set
forth in the Agreement are met.
DUE-ON-SALE PROVISIONS
The Whole Loans may contain clauses requiring the consent of the mortgagee
to any sale or other transfer of the related Mortgaged Property, or due-on-sale
clauses entitling the mortgagee to accelerate payment of the Whole Loan upon any
sale, transfer or conveyance of the related Mortgaged Property. Unless otherwise
provided in the related Prospectus Supplement, the Master Servicer will
generally enforce any due-on-sale clause to the extent it has knowledge of the
conveyance or proposed conveyance of the underlying Mortgaged Property and it is
entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any action in relation to the enforcement of any
due-on-sale provision which would adversely affect or jeopardize coverage under
any applicable insurance policy. Unless otherwise specified in the related
Prospectus Supplement, any fee collected by or on behalf of the Master Servicer
for entering into an assumption agreement will be retained by or on behalf of
the Master Servicer as additional servicing compensation. See 'Certain Legal
Aspects of Mortgage Loans--Due-on-Sale and Due-on-Encumbrance.' The Contracts
may also contain such clauses. Unless otherwise provided in the related
Prospectus Supplement, the Master Servicer will permit such transfer so long as
50
<PAGE>
the transferee satisfies the Master Servicer's then applicable underwriting
standards. The purpose of such transfers is often to avoid a default by the
transferring obligor. See 'Certain Legal Aspects of the Contracts--Transfers of
Manufactured Homes; Enforceability of Due-on-Sale Clauses'.
RETAINED INTEREST; SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a series of Certificates will specify whether
there will be any Retained Interest in the Assets, and, if so, the initial owner
thereof. If so, the Retained Interest will be established on a loan-by-loan
basis and will be specified on an exhibit to the related Agreement. A 'Retained
Interest' in an Asset represents a specified portion of the interest payable
thereon. The Retained Interest will be deducted from mortgagor payments as
received and will not be part of the related Trust Fund.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer's and a Sub-Servicer's primary servicing compensation with respect to a
series of Certificates will come from the periodic payment to it of a portion of
the interest payment on each Asset. Since any Retained Interest and a Master
Servicer's primary compensation are percentages of the principal balance of each
Asset, such amounts will decrease in accordance with the amortization of the
Assets. The Prospectus Supplement with respect to a series of Certificates
evidencing interests in a Trust Fund that includes Whole Loans or Contracts may
provide that, as additional compensation, the Master Servicer or the
Sub-Servicers may retain all or a portion of assumption fees, modification fees,
late payment charges or Prepayment Premiums collected from mortgagors and any
interest or other income which may be earned on funds held in the Collection
Account or any account established by a Sub-Servicer pursuant to the Agreement.
The Master Servicer may, to the extent provided in the related Prospectus
Supplement, pay from its servicing compensation certain expenses incurred in
connection with its servicing and managing of the Assets, including, without
limitation, payment of the fees and disbursements of the Trustee and independent
accountants, payment of expenses incurred in connection with distributions and
reports to Certificateholders, and payment of any other expenses described in
the related Prospectus Supplement. Certain other expenses, including certain
expenses relating to defaults and liquidations on the Whole Loans or Contracts
and, to the extent so provided in the related Prospectus Supplement, interest
thereon at the rate specified therein may be borne by the Trust Fund.
If and to the extent provided in the related Prospectus Supplement, the
Master Servicer may be required to apply a portion of the servicing compensation
otherwise payable to it in respect of any Due Period to certain interest
shortfalls resulting from the voluntary prepayment of any Whole Loans or
Contracts in the related Trust Fund during such period prior to their respective
due dates therein.
EVIDENCE AS TO COMPLIANCE
Each Agreement relating to Assets which include Whole Loans or Contracts
will provide that on or before a specified date in each year, beginning with the
first such date at least six months after the related Cut-off Date, a firm of
independent public accountants will furnish a statement to the Trustee to the
effect that, on the basis of the examination by such firm conducted
substantially in compliance with either the Uniform Single Attestation Program
for Mortgage Bankers, the Audit Program for Mortgages serviced for the Federal
Home Loan Mortgage Corporation ('FHLMC') or such other program used by the
Master Servicer, the servicing by or on behalf of the Master Servicer of
mortgage loans under agreements substantially similar to each other (including
the related Agreement) was conducted in compliance with the terms of such
agreements or such program except for any significant exceptions or errors in
records that, in the opinion of the firm, either the Audit Program for Mortgages
serviced for FHLMC, or paragraph 4 of the Uniform Single Attestation Program for
Mortgage Bankers, or such other program, requires it to report. In rendering its
statement such firm may rely, as to matters relating to the direct servicing of
mortgage loans by Sub-Servicers, upon comparable statements for examinations
conducted substantially in compliance with the Uniform Single Attestation
Program for Mortgage Bankers or the Audit Program for Mortgages serviced for
FHLMC or such other program used by such Sub-Servicer (rendered within one year
of such statement) of firms of independent public accountants with respect to
the related Sub-Servicer.
Each such Agreement will also provide for delivery to the Trustee, on or
before a specified date in each year, of an annual statement signed by two
officers of the Master Servicer to the effect that the Master Servicer
51
<PAGE>
has fulfilled its obligations under the Agreement throughout the preceding
calendar year or other specified twelve-month period.
Unless otherwise provided in the related Prospectus Supplement, copies of
such annual accountants' statement and such statements of officers will be
obtainable by Certificateholders without charge upon written request to the
Master Servicer at the address set forth in the related Prospectus Supplement.
CERTAIN MATTERS REGARDING A MASTER SERVICER AND THE DEPOSITOR
The Master Servicer, if any, or a servicer for substantially all the Whole
Loans or Contracts under each Agreement will be named in the related Prospectus
Supplement. The entity serving as Master Servicer (or as such servicer) may be
an affiliate of the Depositor and may have other normal business relationships
with the Depositor or the Depositor's affiliates. Reference herein to the Master
Servicer shall be deemed to be to the servicer of substantially all of the Whole
Loans or Contracts, if applicable.
Unless otherwise specified in the related Prospectus Supplement, the
related Agreement will provide that the Master Servicer may resign from its
obligations and duties thereunder only upon a determination that its duties
under the Agreement are no longer permissible under applicable law or are in
material conflict by reason of applicable law with any other activities carried
on by it, the other activities of the Master Servicer so causing such a conflict
being of a type and nature carried on by the Master Servicer at the date of the
Agreement. No such resignation will become effective until the Trustee or a
successor servicer has assumed the Master Servicer's obligations and duties
under the Agreement.
Unless otherwise specified in the related Prospectus Supplement, each
Agreement will further provide that neither any Master Servicer, the Depositor
nor any director, officer, employee, or agent of a Master Servicer or the
Depositor will be under any liability to the related Trust Fund or
Securityholders for any action taken, or for refraining from the taking of any
action, in good faith pursuant to the Agreement; provided, however, that neither
a Master Servicer, the Depositor nor any such person will be protected against
any breach of a representation, warranty or covenant made in such Agreement, or
against any liability specifically imposed thereby, or against any liability
which would otherwise be imposed by reason of willful misfeasance, bad faith or
gross negligence in the performance of obligations or duties thereunder or by
reason of reckless disregard of obligations and duties thereunder. Unless
otherwise specified in the related Prospectus Supplement, each Agreement will
further provide that any Master Servicer, the Depositor and any director,
officer, employee or agent of a Master Servicer or the Depositor will be
entitled to indemnification by the related Trust Fund and will be held harmless
against any loss, liability or expense incurred in connection with any legal
action relating to the Agreement or the Securities; provided, however, that such
indemnification will not extend to any loss, liability or expense (i)
specifically imposed by such Agreement or otherwise incidental to the
performance of obligations and duties thereunder, including, in the case of a
Master Servicer, the prosecution of an enforcement action in respect of any
specific Whole Loan or Whole Loans or Contract or Contracts (except as any such
loss, liability or expense shall be otherwise reimbursable pursuant to such
Agreement); (ii) incurred in connection with any breach of a representation,
warranty or covenant made in such Agreement; (iii) incurred by reason of
misfeasance, bad faith or gross negligence in the performance of obligations or
duties thereunder, or by reason of reckless disregard of such obligations or
duties; (iv) incurred in connection with any violation of any state or federal
securities law; or (v) imposed by any taxing authority if such loss, liability
or expense is not specifically reimbursable pursuant to the terms of the related
Agreement. In addition, each Agreement will provide that neither any Master
Servicer nor the Depositor will be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its respective
responsibilities under the Agreement and which in its opinion may involve it in
any expense or liability. Any such Master Servicer or the Depositor may,
however, in its discretion undertake any such action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interests of the Securityholders thereunder. In such
event, the legal expenses and costs of such action and any liability resulting
therefrom will be expenses, costs and liabilities of the Securityholders, and
the Master Servicer or the Depositor, as the case may be, will be entitled to be
reimbursed therefor and to charge the Collection Account.
Any person into which the Master Servicer or the Depositor may be merged or
consolidated, or any person resulting from any merger or consolidation to which
the Master Servicer or the Depositor is a party, or any
52
<PAGE>
person succeeding to the business of the Master Servicer or the Depositor, will
be the successor of the Master Servicer or the Depositor, as the case may be,
under the related Agreement.
EVENTS OF DEFAULT UNDER THE AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a Trust
Fund that includes Whole Loans or Contracts, Events of Default under the related
Agreement will include (i) any failure by the Master Servicer to distribute or
cause to be distributed to Certificateholders, or to remit to the Trustee or
Indenture Trustee, as applicable, for distribution to Securityholders, any
required payment that continues after a grace period, if any; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any of
its other covenants or obligations under the Agreement which continues
unremedied for 30 days after written notice of such failure has been given to
the Master Servicer by the Trustee or the Depositor, or to the Master Servicer,
the Depositor and the Trustee by the holders of Securities evidencing not less
than 25% of the Voting Rights; (iii) any breach of a representation or warranty
made by the Master Servicer under the Agreement which materially and adversely
affects the interests of Securityholders and which continues unremedied for 30
days after written notice of such breach has been given to the Master Servicer
by the Trustee or the Depositor, or to the Master Servicer, the Depositor and
the Trustee by the holders of Securities evidencing not less than 25% of the
Voting Rights; and (iv) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by or on behalf of the Master Servicer indicating its insolvency or inability to
pay its obligations. Material variations to the foregoing Events of Default
(other than to shorten cure periods or eliminate notice requirements) will be
specified in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Trustee shall, not later than the later
of 60 days after the occurrence of any event which constitutes or, with notice
or lapse of time or both, would constitute an Event of Default and five days
after certain officers of the Trustee become aware of the occurrence of such an
event, transmit by mail to the Depositor and all Securityholders of the
applicable series notice of such occurrence, unless such default shall have been
cured or waived.
The manner of determining the 'Voting Rights' of a Security or class or
classes of Securities will be specified in the related Prospectus Supplement.
RIGHTS UPON EVENT OF DEFAULT UNDER THE AGREEMENT
So long as an Event of Default under an Agreement remains unremedied, the
Depositor or the Trustee may, and at the direction of holders of Securities
evidencing not less than 51% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights, the Trustee shall, terminate all of
the rights and obligations of the Master Servicer under the Agreement and in and
to the Mortgage Loans (other than as a Securityholder or as the owner of any
Retained Interest), whereupon the Trustee will succeed to all of the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement (except that if the Trustee is prohibited by law from obligating
itself to make advances regarding delinquent Mortgage Loans or Contracts, or if
the related Prospectus Supplement so specifies, then the Trustee will not be
obligated to make such advances) and will be entitled to similar compensation
arrangements. Unless otherwise specified in the related Prospectus Supplement,
in the event that the Trustee is unwilling or unable so to act, it may or, at
the written request of the holders of Securities entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights, it shall appoint, or petition a court of competent jurisdiction
for the appointment of, a loan servicing institution acceptable to the Rating
Agency with a net worth at the time of such appointment of at least $15,000,000
(or such other amount specified in the related Prospectus Supplement) to act as
successor to the Master Servicer under the Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and any such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation payable to the Master Servicer under
the Agreement.
Unless otherwise described in the related Prospectus Supplement, the
holders of Securities representing at least 66 2/3% (or such other percentage
specified in the related Prospectus Supplement) of the Voting Rights allocated
to the respective classes of Securities affected by any Event of Default will be
entitled to waive such Event of Default; provided, however, that an Event of
Default involving a failure to distribute a required payment to Securityholders
described in clause (i) under 'Events of Default under the Agreement' may be
waived only
53
<PAGE>
by all of the Securityholders. Upon any such waiver of an Event of Default, such
Event of Default shall cease to exist and shall be deemed to have been remedied
for every purpose under the Agreement.
No Securityholders will have the right under any Agreement to institute any
proceeding with respect thereto unless such holder previously has given to the
Trustee written notice of default and unless the holders of Securities
evidencing not less than 25% (or such other percentage specified in the related
Prospectus Supplement) of the Voting Rights have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for sixty days
(or such other number of days specified in the related Prospectus Supplement)
has neglected or refused to institute any such proceeding. The Trustee, however,
is under no obligation to exercise any of the trusts or powers vested in it by
any Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the holders of Securities covered by
such Agreement, unless such Securityholders have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the parties thereto, without the consent
of any of the holders of Securities covered by the Agreement, (i) to cure any
ambiguity or mistake, (ii) to correct, modify or supplement any provision
therein which may be inconsistent with any other provision therein or with the
related Prospectus Supplement, (iii) to make any other provisions with respect
to matters or questions arising under the Agreement which are not materially
inconsistent with the provisions thereof, or (iv) to comply with any
requirements imposed by the Code; provided that, in the case of clause (iii),
such amendment will not (as evidenced by an opinion of counsel to such effect)
adversely affect in any material respect the interests of any holder of
Securities covered by the Agreement. Unless otherwise specified in the related
Prospectus Supplement, each Agreement may also be amended by the Depositor, the
Master Servicer, if any, and the Trustee, with the consent of the holders of
Securities affected thereby evidencing not less than 51% (or such other
percentage specified in the related Prospectus Supplement) of the Voting Rights,
for any purpose; provided, however, that unless otherwise specified in the
related Prospectus Supplement, no such amendment may (i) reduce in any manner
the amount of or delay the timing of, payments received or advanced on Mortgage
Loans or Contracts which are required to be distributed on any Security without
the consent of the holder of such Security or (ii) reduce the consent
percentages described in this paragraph without the consent of the holders of
all Securities covered by such Agreement then outstanding. However, with respect
to any series of Certificates as to which a REMIC election is to be made, the
Trustee will not consent to any amendment of the Agreement unless it shall first
have received an opinion of counsel to the effect that such amendment will not
result in the imposition of a tax on the related Trust Fund or cause the related
Trust Fund to fail to qualify as a REMIC at any time that the related
Certificates are outstanding.
THE TRUSTEE
The Trustee under each Agreement or Trust Agreement will be named in the
related Prospectus Supplement. The commercial bank, national banking
association, banking corporation or trust company serving as Trustee may have a
banking relationship with the Depositor and its affiliates and with any Master
Servicer and its affiliates.
DUTIES OF THE TRUSTEE
The Trustee will make no representations as to the validity or sufficiency
of any Agreement or Trust Agreement, the Securities or any Asset or related
document and is not accountable for the use or application by or on behalf of
any Master Servicer of any funds paid to the Master Servicer or its designee in
respect of the Securities or the Assets, or deposited into or withdrawn from the
Collection Account or any other account by or on behalf of the Master Servicer.
If no Event of Default has occurred and is continuing, the Trustee is required
to perform only those duties specifically required under the related Agreement
or Trust Agreement, as applicable. However, upon receipt of the various
certificates, reports or other instruments required to be furnished to it, the
Trustee is required to examine such documents and to determine whether they
conform to the requirements of the Agreement or Trust Agreement, as applicable.
54
<PAGE>
CERTAIN MATTERS REGARDING THE TRUSTEE
Unless otherwise specified in the related Prospectus Supplement, the
Trustee and any director, officer, employee or agent of the Trustee shall be
entitled to indemnification out of the Collection Account for any loss,
liability or expense (including costs and expenses of litigation, and of
investigation, counsel fees, damages, judgments and amounts paid in settlement)
incurred in connection with the Trustee's (i) enforcing its rights and remedies
and protecting the interests, of the Securityholders during the continuance of
an Event of Default, (ii) defending or prosecuting any legal action in respect
of the related Agreement or series of Securities (iii) being the mortgagee of
record with respect to the Mortgage Loans in a Trust Fund and the owner of
record with respect to any Mortgaged Property acquired in respect thereof for
the benefit of Securityholders, or (iv) acting or refraining from acting in good
faith at the direction of the holders of the related series of Securities
entitled to not less than 25% (or such other percentage as is specified in the
related Agreement with respect to any particular matter) of the Voting Rights
for such series; provided, however, that such indemnification will not extend to
any loss, liability or expense that constitutes a specific liability of the
Trustee pursuant to the related Agreement, or to any loss, liability or expense
incurred by reason of willful misfeasance, bad faith or negligence on the part
of the Trustee in the performance of its obligations and duties thereunder, or
by reason of its reckless disregard of such obligations or duties, or as may
arise from a breach of any representation, warranty or covenant of the Trustee
made therein.
RESIGNATION AND REMOVAL OF THE TRUSTEE
The Trustee may at any time resign from its obligations and duties under an
Agreement by giving written notice thereof to the Depositor, the Master
Servicer, if any, and all Securityholders. Upon receiving such notice of
resignation, the Depositor is required promptly to appoint a successor trustee
acceptable to the Master Servicer, if any. If no successor trustee shall have
been so appointed and have accepted appointment within 30 days after the giving
of such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible to continue as such
under the related Agreement, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, or if a change in
the financial condition of the Trustee has adversely affected or will adversely
affect the rating on any class of the Securities, then the Depositor may remove
the Trustee and appoint a successor trustee acceptable to the Master Servicer,
if any. Holders of the Securities of any series entitled to at least 51% (or
such other percentage specified in the related Prospectus Supplement) of the
Voting Rights for such series may at any time remove the Trustee without cause
and appoint a successor trustee.
Any resignation or removal of the Trustee and appointment of a successor
trustee shall not become effective until acceptance of appointment by the
successor trustee.
CERTAIN TERMS OF THE INDENTURE
Events of Default. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days (or such other number of days
specified in such Prospectus Supplement) or more in the payment of any principal
of or interest on any Note of such series; (ii) failure to perform any other
covenant of the Depositor or the Trust Fund in the Indenture which continues for
a period of sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iii) any
representation or warranty made by the Depositor or the Trust Fund in the
Indenture or in any certificate or other writing delivered pursuant thereto or
in connection therewith with respect to or affecting such series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days (or such other number of days specified in such
Prospectus Supplement) after notice thereof is given in accordance with the
procedures described in the related Prospectus Supplement; (iv) certain events
of bankruptcy, insolvency, receivership or liquidation of the Depositor or the
Trust Fund; or (v) any other Event of Default provided with respect to Notes of
that series.
55
<PAGE>
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, either the Indenture Trustee or the
holders of a majority of the then aggregate outstanding amount of the Notes of
such series may declare the principal amount (or, if the Notes of that series
are Accrual Securities, such portion of the principal amount as may be specified
in the terms of that series, as provided in the related Prospectus Supplement)
of all the Notes of such series to be due and payable immediately. Such
declaration may, under certain circumstances, be rescinded and annulled by the
holders of a majority in aggregate outstanding amount of the Notes of such
series.
If, following an Event of Default with respect to any series of Notes, the
Notes of such series have been declared to be due and payable, the Indenture
Trustee may, in its discretion, notwithstanding such acceleration, elect to
maintain possession of the collateral securing the Notes of such series and to
continue to apply distributions on such collateral as if there had been no
declaration of acceleration if such collateral continues to provide sufficient
funds for the payment of principal of and interest on the Notes of such series
as they would have become due if there had not been such a declaration. In
addition, the Indenture Trustee may not sell or otherwise liquidate the
collateral securing the Notes of a series following an Event of Default, other
than a default in the payment of any principal or interest on any Note of such
series for thirty (30) days or more, unless (a) the holders of 100% (or such
other percentage specified in the related Prospectus Supplement) of the then
aggregate outstanding amount of the Notes of such series consent to such sale,
(b) the proceeds of such sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding Notes of
such series at the date of such sale or (c) the Indenture Trustee determines
that such collateral would not be sufficient on an ongoing basis to make all
payments on such Notes as such payments would have become due if such Notes had
not been declared due and payable, and the Indenture Trustee obtains the consent
of the holders of 66 2/3% (or such other percentage specified in the related
Prospectus Supplement) of the then aggregate outstanding amount of the Notes of
such series.
In the event that the Indenture Trustee liquidates the collateral in
connection with an Event of Default involving a default for thirty (30) days (or
such other number of days specified in the related Prospectus Supplement) or
more in the payment of principal of or interest on the Notes of a series, the
Indenture provides that the Indenture Trustee will have a prior lien on the
proceeds of any such liquidation for unpaid fees and expenses. As a result, upon
the occurrence of such an Event of Default, the amount available for
distribution to the Noteholders would be less than would otherwise be the case.
However, the Indenture Trustee may not institute a proceeding for the
enforcement of its lien except in connection with a proceeding for the
enforcement of the lien of the Indenture for the benefit of the Noteholders
after the occurrence of such an Event of Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing
with respect to a series of Notes, the Indenture Trustee shall be under no
obligation to exercise any of the rights or powers under the Indenture at the
request or direction of any of the holders of Notes of such series, unless such
holders offered to the Indenture Trustee security or indemnity satisfactory to
it against the costs, expenses and liabilities which might be incurred by it in
complying with such request or direction. Subject to such provisions for
indemnification and certain limitations contained in the Indenture, the holders
of a majority of the then aggregate outstanding amount of the Notes of such
series shall have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Indenture Trustee or exercising
any trust or power conferred on the Indenture Trustee with respect to the Notes
of such series, and the holders of a majority of the then aggregate outstanding
amount of the Notes of such series may, in certain cases, waive any default with
respect thereto, except a default in the payment of principal or interest or a
default in respect of a covenant or provision of the Indenture that cannot be
modified without the waiver or consent of all the holders of the outstanding
Notes of such series affected thereby.
Discharge Indenture. The Indenture will be discharged with respect to a
series of Notes (except with respect to certain continuing rights specified in
the Indenture) upon the delivery to the Indenture Trustee for
56
<PAGE>
cancellation of all the Notes of such series or, with certain limitations, upon
deposit with the Indenture Trustee of funds sufficient for the payment in full
of all of the Notes of such series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such series, to replace stolen, lost or mutilated Notes of such series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Indenture Trustee, in trust, of money and/or direct obligations
of or obligations guaranteed by the United States of America which through the
payment of interest and principal in respect thereof in accordance with their
terms will provide money in an amount sufficient to pay the principal of and
each installment of interest on the Notes of such series on the maturity date
for such Notes and any installment of interest on such Notes in accordance with
the terms of the Indenture and the Notes of such series. In the event of any
such defeasance and discharge of Notes of such series, holders of Notes of such
series would be able to look only to such money and/or direct obligations for
payment of principal and interest, if any, on their Notes until maturity.
Indenture Trustee's Annual Report. The Indenture Trustee for each series
of Notes will be required to mail each year to all related Noteholders a brief
report relating to its eligibility and qualification to continue as Indenture
Trustee under the related Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by such Trust to the applicable Indenture Trustee in its individual
capacity, the property and funds physically held by such Indenture Trustee as
such and any action taken by it that materially affects such Notes and that has
not been previously reported.
The Indenture Trustee. The Indenture Trustee for a series of Notes will be
specified in the related Prospectus Supplement. The Indenture Trustee for any
series may resign at any time, in which event the Depositor will be obligated to
appoint a successor trustee for such series. The Depositor may also remove any
such Indenture Trustee if such Indenture Trustee ceases to be eligible to
continue as such under the related Indenture or if such Indenture Trustee
becomes insolvent. In such circumstances the Depositor will be obligated to
appoint a successor trustee for the applicable series of Notes. Any resignation
or removal of the Indenture Trustee and appointment of a successor trustee for
any series of Notes does not become effective until acceptance of the
appointment by the successor trustee for such series.
The bank or trust company serving as Indenture Trustee may have a banking
relationship with the Depositor or any of its affiliates or the Master Servicer
or any of its affiliates.
DESCRIPTION OF CREDIT SUPPORT
GENERAL
For any series of Securities Credit Support may be provided with respect to
one or more classes thereof or the related Assets. Credit Support may be in the
form of the subordination of one or more classes of Securities, letters of
credit, insurance policies, guarantees, the establishment of one or more reserve
funds or another method of Credit Support described in the related Prospectus
Supplement, or any combination of the foregoing. If so provided in the related
Prospectus Supplement, any form of Credit Support may be structured so as to be
drawn upon by more than one series to the extent described therein.
Unless otherwise provided in the related Prospectus Supplement for a series
of Securities Credit Support will not provide protection against all risks of
loss and will not guarantee repayment of the entire Security Balance of the
Securities and interest thereon. If losses or shortfalls occur that exceed the
amount covered by Credit Support or that are not covered by Credit Support,
Securityholders will bear their allocable share of deficiencies. Moreover, if a
form of Credit Support covers more than one series of Securities (each, a
'Covered Trust'), holders of Securities evidencing interests in any of such
Covered Trusts will be subject to the risk that such Credit Support will be
exhausted by the claims of other Covered Trusts prior to such Covered Trust
receiving any of its intended share of such coverage.
57
<PAGE>
If Credit Support is provided with respect to one or more classes of
Securities of a series, or the related Assets, the related Prospectus Supplement
will include a description of (a) the nature and amount of coverage under such
Credit Support, (b) any conditions to payment thereunder not otherwise described
herein, (c) the conditions (if any) under which the amount of coverage under
such Credit Support may be reduced and under which such Credit Support may be
terminated or replaced and (d) the material provisions relating to such Credit
Support. Additionally, the related Prospectus Supplement will set forth certain
information with respect to the obligor under any instrument of Credit Support,
including (i) a brief description of its principal business activities, (ii) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (iii) if applicable, the
identity of regulatory agencies that exercise primary jurisdiction over the
conduct of its business and (iv) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement. See 'Special Considerations--Credit Support
Limitations.'
SUBORDINATE CERTIFICATES
If so specified in the related Prospectus Supplement, one or more classes
of Securities of a series may be Subordinate Securities. To the extent specified
in the related Prospectus Supplement, the rights of the holders of Subordinate
Securities to receive distributions of principal and interest from the
Collection Account on any Distribution Date will be subordinated to such rights
of the holders of Senior Securities. If so provided in the related Prospectus
Supplement, the subordination of a class may apply only in the event of (or may
be limited to) certain types of losses or shortfalls. The related Prospectus
Supplement will set forth information concerning the amount of subordination of
a class or classes of Subordinate Securities in a series, the circumstances in
which such subordination will be applicable and the manner, if any, in which the
amount of subordination will be effected.
CROSS-SUPPORT PROVISIONS
If the Assets for a series are divided into separate groups, each
supporting a separate class or classes of Securities of a series, Credit Support
may be provided by cross-support provisions requiring that distributions be made
on Senior Securities evidencing interests in one group of Mortgage Assets prior
to distributions on Subordinate Securities evidencing interests in a different
group of Mortgage Assets within the Trust Fund. The Prospectus Supplement for a
series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
INSURANCE OR GUARANTEES WITH RESPECT TO THE WHOLE LOANS
If so provided in the Prospectus Supplement for a series of Securities, the
Whole Loans or Contracts in the related Trust Fund will be covered for various
default risks by insurance policies or guarantees.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more letters of credit, issued by a bank or
financial institution specified in such Prospectus Supplement (the 'L/C Bank').
Under a letter of credit, the L/C Bank will be obligated to honor draws
thereunder in an aggregate fixed dollar amount, net of unreimbursed payments
thereunder, generally equal to a percentage specified in the related Prospectus
Supplement of the aggregate principal balance of the Assets on the related
Cut-off Date or of the initial aggregate Security Balance of one or more classes
of Securities. If so specified in the related Prospectus Supplement, the letter
of credit may permit draws in the event of only certain types of losses and
shortfalls. The amount available under the letter of credit will, in all cases,
be reduced to the extent of the unreimbursed payments thereunder and may
otherwise be reduced as described in the related Prospectus Supplement. The
obligations of the L/C Bank under the letter of credit for each series of
Securities will expire at the earlier of the date specified in the related
Prospectus Supplement or the termination of the Trust Fund.
58
<PAGE>
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by insurance policies and/or surety bonds provided by
one or more insurance companies or sureties. Such instruments may cover, with
respect to one or more classes of Securities of the related series, timely
distributions of interest and/or full distributions of principal on the basis of
a schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement.
RESERVE FUNDS
If so provided in the Prospectus Supplement for a series of Securities,
deficiencies in amounts otherwise payable on such Securities or certain classes
thereof will be covered by one or more reserve funds in which cash, a letter of
credit, Permitted Investments, a demand note or a combination thereof will be
deposited, in the amounts so specified in such Prospectus Supplement. The
reserve funds for a series may also be funded over time by depositing therein a
specified amount of the distributions received on the related Assets as
specified in the related Prospectus Supplement.
Amounts on deposit in any reserve fund for a series, together with the
reinvestment income thereon, if any, will be applied for the purposes, in the
manner, and to the extent specified in the related Prospectus Supplement. A
reserve fund may be provided to increase the likelihood of timely distributions
of principal of and interest on the Certificates. If so specified in the related
Prospectus Supplement, reserve funds may be established to provide limited
protection against only certain types of losses and shortfalls. Following each
Distribution Date amounts in a reserve fund in excess of any amount required to
be maintained therein may be released from the reserve fund under the conditions
and to the extent specified in the related Prospectus Supplement and will not be
available for further application to the Securities.
Moneys deposited in any Reserve Funds will be invested in Permitted
Investments, except as otherwise specified in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to any related Master Servicer or another service provider as additional
compensation. The Reserve Fund, if any, for a series will not be a part of the
Trust Fund unless otherwise specified in the related Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the balance required to be maintained in the Reserve Fund, the manner in
which such required balance will decrease over time, the manner of funding such
Reserve Fund, the purposes for which funds in the Reserve Fund may be applied to
make distributions to Securityholders and use of investment earnings from the
Reserve Fund, if any.
CREDIT SUPPORT WITH RESPECT TO MBS
If so provided in the Prospectus Supplement for a series of Securities, the
MBS in the related Trust Fund and/or the Mortgage Loans underlying such MBS may
be covered by one or more of the types of Credit Support described herein. The
related Prospectus Supplement will specify as to each such form of Credit
Support the information indicated above with respect thereto, to the extent such
information is material and available.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The following discussion contains summaries, which are general in nature,
of certain legal aspects of loans secured by single-family or multi-family
residential properties. Because such legal aspects are governed primarily by
applicable state law (which laws may differ substantially), the summaries do not
purport to be complete nor to reflect the laws of any particular state, nor to
encompass the laws of all states in which the security for the Mortgage Loans is
situated. The summaries are qualified in their entirety by reference to the
applicable federal and state laws governing the Mortgage Loans. See 'Description
of the Trust Funds--Assets.'
59
<PAGE>
GENERAL
All of the Mortgage Loans are loans evidenced by a note or bond and secured
by instruments granting a security interest in real property which may be
mortgages, deeds of trust, security deeds or deeds to secure debt, depending
upon the prevailing practice and law in the state in which the Mortgaged
Property is located. Mortgages, deeds of trust and deeds to secure debt are
herein collectively referred to as 'mortgages.' Any of the foregoing types of
mortgages will create a lien upon, or grant a title interest in, the subject
property, the priority of which will depend on the terms of the particular
security instrument, as well as separate, recorded, contractual arrangements
with others holding interests in the mortgaged property, the knowledge of the
parties to such instrument as well as the order of recordation of the instrument
in the appropriate public recording office. However, recording does not
generally establish priority over governmental claims for real estate taxes and
assessments and other charges imposed under governmental police powers.
TYPES OF MORTGAGE INSTRUMENTS
A mortgage either creates a lien against or constitutes a conveyance of
real property between two parties--a mortgagor (the borrower and usually the
owner of the subject property) and a mortgagee (the lender). In contrast, a deed
of trust is a three-party instrument, among a trustor (the equivalent of a
mortgagor), a trustee to whom the mortgaged property is conveyed, and a
beneficiary (the lender) for whose benefit the conveyance is made. As used in
this Prospectus, unless the context otherwise requires, 'mortgagor' includes the
trustor under a deed of trust and a grantor under a security deed or a deed to
secure debt. Under a deed of trust, the mortgagor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale as
security for the indebtedness evidenced by the related note. A deed to secure
debt typically has two parties. By executing a deed to secure debt, the grantor
conveys title to, as opposed to merely creating a lien upon, the subject
property to the grantee until such time as the underlying debt is repaid,
generally with a power of sale as security for the indebtedness evidenced by the
related mortgage note. In case the mortgagor under a mortgage is a land trust,
there would be an additional party because legal title to the property is held
by a land trustee under a land trust agreement for the benefit of the mortgagor.
At origination of a mortgage loan involving a land trust, the mortgagor executes
a separate undertaking to make payments on the mortgage note. The mortgagee's
authority under a mortgage, the trustee's authority under a deed of trust and
the grantee's authority under a deed to secure debt are governed by the express
provisions of the mortgage, the law of the state in which the real property is
located, certain federal laws (including, without limitation, the Soldiers' and
Sailors' Civil Relief Act of 1940) and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
The Mortgages that encumber Multifamily Properties may contain an
assignment of rents and leases, pursuant to which the Mortgagor assigns to the
lender the Mortgagor's right, title and interest as landlord under each lease
and the income derived therefrom, while retaining a revocable license to collect
the rents for so long as there is no default. If the Mortgagor defaults, the
license terminates and the lender is entitled to collect the rents. Local law
may require that the lender take possession of the property and/or obtain a
court-appointed receiver before becoming entitled to collect the rents.
INTEREST IN REAL PROPERTY
The real property covered by a mortgage, deed of trust, security deed or
deed to secure debt is most often the fee estate in land and improvements.
However, such an instrument may encumber other interests in real property such
as a tenant's interest in a lease of land or improvements, or both, and the
leasehold estate created by such lease. An instrument covering an interest in
real property other than the fee estate requires special provisions in the
instrument creating such interest or in the mortgage, deed of trust, security
deed or deed to secure debt, to protect the mortgagee against termination of
such interest before the mortgage, deed of trust, security deed or deed to
secure debt is paid. Unless otherwise specified in the Prospectus Supplement,
the Depositor or the Asset Seller will make certain representations and
warranties in the Agreement with respect to any Mortgage Loans that are secured
by an interest in a leasehold estate. Such representation and warranties, if
applicable, will be set forth in the Prospectus Supplement.
60
<PAGE>
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of Offered
Securities, the Mortgage Loans may also consist of cooperative apartment loans
('Cooperative Loans') secured by security interests in shares issued by a
cooperative housing corporation (a 'Cooperative') and in the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
dwelling units in the cooperatives' buildings. The security agreement will
create a lien upon, or grant a title interest in, the property which 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.
Each cooperative owns in fee or has a leasehold interest in all the real
property and owns in fee or leases the building and all separate dwelling units
therein. The cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage or mortgages on
the cooperative apartment building 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, or lessee, as the case may be, is also
responsible for meeting these mortgage or rental obligations. A blanket mortgage
is ordinarily incurred by the cooperative in connection with either the
construction or purchase of the cooperative's apartment building or obtaining of
capital by the cooperative. The interest of the occupant 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 landlord's interest under 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
cooperatives's interest in the property and termination of all proprietary
leases and occupancy agreement. In either event, a foreclosure by the holder of
a blanket mortgage or the termination of the underlying lease could eliminate or
significantly diminish the value of any collateral held by the lender that
financed the purchase by an individual tenant stockholder of cooperative shares
or, in the case of the Mortgage Loans, the collateral securing the Cooperative
Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock or shares in the corporation, receive proprietary lease 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 an
assignment of and a security interest in the occupancy agreement or proprietary
lease and a security interest in the related cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. 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 'Foreclosure--Cooperative
Loans' below.
61
<PAGE>
FORECLOSURE
General
Foreclosure is a legal procedure that allows the mortgagee to recover its
mortgage debt by enforcing its rights and available legal remedies under the
mortgage. If the mortgagor defaults in payment or performance of its obligations
under the note or mortgage, the mortgagee has the right to institute foreclosure
proceedings to sell the mortgaged property at public auction to satisfy the
indebtedness.
Foreclosure procedures with respect to the enforcement of a mortgage vary
from state to state. Two primary methods of foreclosing a mortgage are judicial
foreclosure and non-judicial foreclosure pursuant to a power of sale granted in
the mortgage instrument. There are several other foreclosure procedures
available in some states that are either infrequently used or available only in
certain limited circumstances, such as strict foreclosure.
Judicial Foreclosure
A judicial foreclosure proceeding is conducted in a court having
jurisdiction over the mortgaged property. Generally, the action is initiated by
the service of legal pleadings upon all parties having an interest of record in
the real property. Delays in completion of the foreclosure may occasionally
result from difficulties in locating defendants. When the lender's right to
foreclose is contested, the legal proceedings can be time-consuming. Upon
successful completion of a judicial foreclosure proceeding, the court generally
issues a judgment of foreclosure and appoints a referee or other officer to
conduct a public sale of the mortgaged property, the proceeds of which are used
to satisfy the judgment. Such sales are made in accordance with procedures that
vary from state to state.
Equitable Limitations on Enforceability of Certain Provisions
United States courts have traditionally imposed general equitable
principles to limit the remedies available to a mortgagee in connection with
foreclosure. These equitable principles are generally designed to relieve the
mortgagor from the legal effect of mortgage defaults, to the extent that such
effect is perceived as harsh or unfair. Relying on such principles, a court may
alter the specific terms of a loan to the extent it considers necessary to
prevent or remedy an injustice, undue oppression or overreaching, or may require
the lender to undertake affirmative and expensive actions to determine the cause
of the mortgagor's default and the likelihood that the mortgagor will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's and have required that lenders reinstate loans or recast payment
schedules in order to accommodate mortgagors who are suffering from a temporary
financial disability. In other cases, courts have limited the right of the
lender to foreclose if the default under the mortgage is not monetary, e.g., the
mortgagor failed to maintain the mortgaged property adequately or the mortgagor
executed a junior mortgage on the mortgaged property. The exercise by the court
of its equity powers will depend on the individual circumstances of each case
presented to it. Finally, some courts have been faced with the issue of whether
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that a mortgagor receive notice in addition to
statutorily-prescribed minimum notice. For the most part, these cases have
upheld the reasonableness of the notice provisions or have found that a public
sale under a mortgage providing for a power of sale does not involve sufficient
state action to afford constitutional protections to the mortgagor.
Non-Judicial Foreclosure/Power of Sale
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale pursuant to the power of sale granted in the deed of trust. A
power of sale is typically granted in a deed of trust. It may also be contained
in any other type of mortgage instrument. A power of sale allows a non-judicial
public sale to be conducted generally following a request from the
beneficiary/lender to the trustee to sell the property upon any default by the
mortgagor under the terms of the mortgage note or the mortgage instrument and
after notice of sale is given in accordance with the terms of the mortgage
instrument, as well as applicable state law. In some states, prior to such sale,
the trustee under a deed of trust must record a notice of default and notice of
sale and send a copy to the mortgagor and to any other party who has recorded a
request for a copy of a notice of default and notice of sale. In addition, in
some states the trustee must provide notice to any other party having an
interest of record in the real property, including junior lienholders. A notice
of sale must be posted in a public place and, in most states, published for a
specified period of time in one or more newspapers. The mortgagor or junior
62
<PAGE>
lienholder may then have the right, during a reinstatement period required in
some states, to cure the default by paying the entire actual amount in arrears
(without acceleration) plus the expenses incurred in enforcing the obligation.
In other states, the mortgagor or the junior lienholder is not provided a period
to reinstate the loan, but has only the right to pay off the entire debt to
prevent the foreclosure sale. Generally, the procedure for public sale, the
parties entitled to notice, the method of giving notice and the applicable time
periods are governed by state law and vary among the states. Foreclosure of a
deed to secure debt is also generally accomplished by a non-judicial sale
similar to that required by a deed of trust, except that the lender or its
agent, rather than a trustee, is typically empowered to perform the sale in
accordance with the terms of the deed to secure debt and applicable law.
Public Sale
A third party may be unwilling to purchase a mortgaged property at a public
sale because of the difficulty in determining the value of such property at the
time of sale, due to, among other things, redemption rights which may exist and
the possibility of physical deterioration of the property during the foreclosure
proceedings. For these reasons, it is common for the lender to purchase the
mortgaged property for an amount equal to or less than the underlying debt and
accrued and unpaid interest plus the expenses of foreclosure. Generally, state
law controls the amount of foreclosure costs and expenses which may be recovered
by a lender. Thereafter, subject to the mortgagor's right in some states to
remain in possession during a redemption period, if applicable, the lender will
become the owner of the property and have both the benefits and burdens of
ownership of the mortgaged property. For example, the lender will become
obligated to pay taxes, obtain casualty insurance and to make 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. Moreover, a lender commonly
incurs substantial legal fees and court costs in acquiring a mortgaged property
through contested foreclosure and/or bankruptcy proceedings. Generally, state
law controls the amount of foreclosure expenses and costs, including attorneys'
fees, that may be recovered by a lender.
A junior mortgagee may not foreclose on the property securing the junior
mortgage unless it forecloses subject to senior mortgages and any other prior
liens, in which case it may be obliged to make payments on the senior mortgages
to avoid their foreclosure. In addition, in the event that the foreclosure of a
junior mortgage triggers the enforcement of a 'due-on-sale' clause contained in
a senior mortgage, the junior mortgagee may be required to pay the full amount
of the senior mortgage to avoid its foreclosure. Accordingly, with respect to
those Mortgage Loans, if any, that are junior mortgage loans, if the lender
purchases the property the lender's title will be subject to all senior
mortgages, prior liens and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied
first to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage under which the sale was conducted. Any
proceeds remaining after satisfaction of senior mortgage debt are generally
payable to the holders of junior mortgages and other liens and claims in order
of their priority, whether or not the mortgagor is in default. Any additional
proceeds are generally payable to the mortgagor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgage or a subsequent ancillary proceeding or may require the
institution of separate legal proceedings by such holders.
Rights of Redemption
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the mortgage being foreclosed, from
exercise of their 'equity of redemption.' The doctrine of equity of redemption
provides that, until the property covered by a mortgage has been sold in
accordance with a properly conducted foreclosure and foreclosure sale, those
having an interest which is subordinate to that of the foreclosing mortgagee
have an equity of redemption and may redeem the property by paying the entire
debt with interest. In addition, in some states, when a foreclosure action has
been commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must generally be made parties and joined in the
foreclosure proceeding in order for their equity of redemption to be cut off and
terminated.
63
<PAGE>
The equity of redemption is a common-law (non-statutory) right which exists
prior to completion of the foreclosure, is not waivable by the mortgagor, must
be exercised prior to foreclosure sale and should be distinguished from the
post-sale statutory rights of redemption. In some states, after sale pursuant to
a deed of trust or foreclosure of a mortgage, the mortgagor and foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, statutory redemption may occur only upon
payment of the foreclosure sale price. In other states, redemption may be
authorized if the former mortgagor pays only a portion of the sums due. The
effect of a statutory right of redemption is to diminish the ability of the
lender to sell the foreclosed property. The exercise of a right of redemption
would defeat the title of any purchaser from a foreclosure sale or sale under a
deed of trust. Consequently, the practical effect of the redemption right is to
force the lender to maintain the property and pay the expenses of ownership
until the redemption period has expired. In some states, a post-sale statutory
right of redemption may exist following a judicial foreclosure, but not
following a trustee's sale under a deed of trust.
Under the REMIC Provisions currently in effect, property acquired by
foreclosure generally must not be held for more than two years. Unless otherwise
provided in the related Prospectus Supplement, with respect to a series of
Securities for which an election is made to qualify the Trust Fund or a part
thereof as a REMIC, the Agreement will permit foreclosed property to be held for
more than two years if the Internal Revenue Service grants an extension of time
within which to sell such property or independent counsel renders an opinion to
the effect that holding such property for such additional period is permissible
under the REMIC Provisions.
Cooperative Loans
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer as set
forth in the Cooperative's Certificate of Incorporation and By-laws, as well as
the proprietary lease or occupancy agreement, and 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. The proprietary lease or occupancy agreement generally
permit the Cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder 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 the sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement. The total amount owed to the Cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the outstanding
principal balance of the Cooperative Loan and accrued and unpaid interest
thereon.
Recognition agreements also provide that in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
In some states, foreclosure on the Cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the UCC and the security
agreement relating to those shares. Article 9 of the UCC requires that a sale be
conducted in a 'commercially reasonable' manner. Whether a foreclosure sale has
been conducted in a 'commercially reasonable' manner will depend on the facts in
each case. In determining commercial reasonableness, a court will look to the
notice given the debtor and the method, manner, time, place and terms of the
foreclosure. Generally, a sale conducted according to the usual practice of
banks selling similar collateral will be considered reasonably conducted.
64
<PAGE>
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 Cooperatives 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.
In the case of foreclosure on a building which was converted from a rental
building to a building owned by a Cooperative 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 a building so converted.
JUNIOR MORTGAGES
Some of the Mortgage Loans may be secured by junior mortgages or deeds of
trust, which are subordinate to first or other senior mortgages or deeds of
trust held by other lenders. The rights of the Trust Fund as the holder of a
junior deed of trust or a junior mortgage are subordinate in lien and in payment
to those of the holder of the senior mortgage or deed of trust, including the
prior rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See '--Foreclosure' herein.
Furthermore, because the terms of the junior mortgage or deed of trust are
subordinate to the terms of the first mortgage or deed of trust, in the event of
a conflict between the terms of the first mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the first mortgage or deed of
trust will generally govern. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a first mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Statutes in some states limit the right of a beneficiary under a deed of
trust or a mortgagee under a mortgage to obtain a deficiency judgment against
the mortgagor following foreclosure or sale under a deed of trust. A deficiency
judgment would be a personal judgment against the former mortgagor equal to the
difference between the net amount realized upon the public sale of the real
property and the amount due to the lender. Some states require the lender to
exhaust the security afforded under a mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the mortgagor.
In certain other states, the lender has the option of bringing a personal action
against the mortgagor 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. In some cases, a lender
will be precluded from exercising any additional rights under the note or
mortgage if it has taken any prior enforcement action. Consequently, the
practical effect of the election requirement, in those states permitting such
election, is that lenders will usually proceed against the security first rather
than bringing a personal action against the mortgagor. Finally, other statutory
provisions limit any deficiency judgment against the former mortgagor following
a judicial sale to the excess of the outstanding debt over the fair market value
of the property at the time of the public sale. The purpose of these statutes is
generally to prevent a lender from obtaining a large deficiency judgment against
the former mortgagor as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other federal and state statutory provisions, including the federal bankruptcy
laws and state laws affording relief to debtors, may interfere with or affect
the ability of the secured mortgage lender to realize upon collateral or enforce
a deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor
65
<PAGE>
through his or her Chapter 11 or Chapter 13 rehabilitative plan to cure a
monetary default in respect of a mortgage loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original mortgage
loan payment schedule even though the lender accelerated the mortgage loan and
final judgment of foreclosure had been entered in state court (provided no sale
of the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular facts of the reorganization case, that effected the curing of a
mortgage loan default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have allowed modifications that include reducing the amount of each
monthly payment, changing the rate of interest, altering the repayment schedule,
forgiving all or a portion of the debt and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Generally, however, the terms of a mortgage
loan secured only by a mortgage on real property that is the debtor's principal
residence may not be modified pursuant to a plan confirmed pursuant to Chapter
11 or Chapter 13 except with respect to mortgage payment arrearages, which may
be cured within a reasonable time period.
In the case of income-producing Multifamily Properties, federal bankruptcy
law may also have the effect of interfering with or affecting the ability of the
secured lender to enforce the borrower's assignment of rents and leases related
to the mortgaged property. Under Section 362 of the Bankruptcy Code, the lender
will be stayed from enforcing the assignment, and the legal proceedings
necessary to resolve the issue could be time-consuming, with resulting delays in
the lender's receipt of the rents.
Certain tax liens arising under the Internal Revenue Code of 1986, as
amended, may in certain circumstances provide priority over the lien of a
mortgage or deed of trust. In addition, substantive requirements are imposed
upon mortgage lenders in connection with the origination and the servicing of
mortgage loans by numerous federal and some state consumer protection laws.
These laws include the federal Truth-in-Lending Act, Real Estate Settlement
Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes. These federal laws impose specific
statutory liabilities upon lenders who originate mortgage loans and who fail to
comply with the provisions of the law. In some cases this liability may affect
assignees of the mortgage loans.
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and under state law in a number of states, a secured party that
takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or becomes involved in the operation or management of a
property so as to be deemed an 'owner' or 'operator' of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a lender
(such as a Trust Fund) secured by residential real property. In the event that
title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund was
acquired by the Trust Fund and cleanup costs were incurred in respect of the
Mortgaged Property, the holders of the related series of Certificates might
realize a loss if such costs were required to be paid by the Trust Fund.
66
<PAGE>
DUE-ON-SALE CLAUSES
Unless the related Prospectus Supplement indicates otherwise, the Mortgage
Loans will contain due-on-sale clauses. These clauses generally provide that the
lender may accelerate the maturity of the loan if the mortgagor sells, transfers
or conveys the related Mortgaged Property. The enforceability of due-on-sale
clauses has been the subject of legislation or litigation in many states and, in
some cases, the enforceability of these clauses was limited or denied. However,
with respect to certain loans the Garn-St Germain Depository Institutions Act of
1982 preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses and permits lenders to enforce these clauses
in accordance with their terms, subject to certain limited exceptions.
Due-on-sale clauses contained in mortgage loans originated by federal savings
and loan associations of federal savings banks are fully enforceable pursuant to
regulations of the United States Federal Home Loan Bank Board, as succeeded by
the Office of Thrift Supervision, which preempt state law restrictions on the
enforcement of such clauses. Similarly, 'due-on-sale' clauses in mortgage loans
made by national banks and federal credit unions are now fully enforceable
pursuant to preemptive regulations of the Comptroller of the Currency and the
National Credit Union Administration, respectively.
The Garn-St Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the act (including federal savings and loan
associations and federal savings banks) may not exercise a 'due-on-sale' clause,
notwithstanding the fact that a transfer of the property may have occurred.
These include intra-family transfers, 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 a 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 that bears an interest rate below the current market rate being
assumed by a new home buyer rather than being paid off, which may affect the
average life of the Mortgage Loans and the number of Mortgage Loans which may
extend to maturity.
PREPAYMENT CHARGES
Under certain state laws, prepayment charges may not be imposed after a
certain period of time following the origination of mortgage loans secured by
liens encumbering owner-occupied residential properties, if such loans are paid
prior to maturity. With respect to Mortgaged Properties that are owner-occupied,
it is anticipated that prepayment charges may not be imposed with respect to
many of the Mortgage Loans. The absence of such a restraint on prepayment,
particularly with respect to fixed rate Mortgage Loans having higher Mortgage
Rates, may increase the likelihood of refinancing or other early retirement of
such loans.
SUBORDINATE FINANCING
Where a mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent any existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('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. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Office of Thrift Supervision is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The
67
<PAGE>
statute authorized any state to reimpose interest rate limits by adopting,
before April 1, 1983, a law or constitutional provision that expressly rejects
application of the federal law. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V. Certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
The Depositor believes that a court interpreting Title V would hold that
residential first mortgage loans that are originated on or after January 1, 1980
are subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of such mortgage
loans, any such limitation under such state's usury law would not apply to such
mortgage loans.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no mortgage
loan originated after the date of such state action will be eligible for
inclusion in a Trust Fund unless (i) such mortgage loan provides for such
interest rate, discount points and charges as are permitted in such state or
(ii) such mortgage loan provides that the terms thereof shall be construed in
accordance with the laws of another state under which such interest rate,
discount points and charges would not be usurious and the mortgagor's counsel
has rendered an opinion that such choice of law provision would be given effect.
Statutes differ in their provisions as to the consequences of a usurious
loan. One group of statutes requires the lender to forfeit the interest due
above the applicable limit or impose a specified penalty. Under this statutory
scheme, the mortgagor may cancel the recorded mortgage or deed of trust upon
paying its debt with lawful interest, and the lender may foreclose, but only for
the debt plus lawful interest. A second group of statutes is more severe. A
violation of this type of usury law results in the invalidation of the
transaction, thereby permitting the mortgagor to cancel the recorded mortgage or
deed of trust without any payment or prohibiting the lender from foreclosing.
ALTERNATIVE MORTGAGE INSTRUMENTS
Alternative mortgage instruments, including adjustable rate mortgage loans
and early ownership mortgage loans, originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender was in compliance with applicable law. These difficulties
were alleviated substantially as a result of the enactment of Title VIII of the
Garn-St Germain Act ('Title VIII'). Title VIII provides that, notwithstanding
any state law to the contrary, state-chartered banks may originate alternative
mortgage instruments in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks; state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National Credit Union Administration with respect to origination of
alternative mortgage instruments by federal credit unions; and all other
non-federally chartered housing creditors, including state-chartered savings and
loan associations, state-chartered savings banks and mutual savings banks and
mortgage banking companies, may originate alternative mortgage instruments in
accordance with the regulations promulgated by the Federal Home Loan Bank Board,
predecessor to the Office of Thrift Supervision, with respect to origination of
alternative mortgage instruments by federal savings and loan associations. Title
VIII provides that any state may reject applicability of the provisions of Title
VIII by adopting, prior to October 15, 1985, a law or constitutional provision
expressly rejecting the applicability of such provisions. Certain states have
taken such action.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended (the 'Relief Act'), a mortgagor who enters military service after the
origination of such mortgagor's Mortgage Loan (including a mortgagor who was in
reserve status and is called to active duty after origination of the Mortgage
Loan), may not be charged interest (including fees and charges) above an annual
rate of 6% during the period of such mortgagor's active duty status, unless a
court orders otherwise upon application of the lender. The Relief Act applies to
mortgagors who are members of the Army, Navy, Air Force, Marines, National
Guard, Reserves, Coast Guard and officers of the U.S. Public Health Service
assigned to duty with the military. Because the Relief Act
68
<PAGE>
applies to mortgagors who enter military service (including reservists who are
called to active duty) after origination of the related Mortgage Loan, no
information can be provided as to the number of loans that may be affected by
the Relief Act. Application of the Relief Act would adversely affect, for an
indeterminate period of time, the ability of any servicer to collect full
amounts of interest on certain of the Mortgage Loans. Any shortfalls in interest
collections resulting from the application of the Relief Act would result in a
reduction of the amounts distributable to the holders of the related series of
Certificates, and would not be covered by advances or, unless otherwise
specified in the related Prospectus Supplement, any form of Credit Support
provided in connection with such Certificates. In addition, the Relief Act
imposes limitations that would impair the ability of the servicer to foreclose
on an affected Mortgage Loan during the mortgagor's period of active duty
status, and, under certain circumstances, during an additional three month
period thereafter. Thus, in the event that such a Mortgage Loan goes into
default, there may be delays and losses occasioned thereby.
FORFEITURES IN DRUG AND RICO PROCEEDINGS
Federal law provides that property owned by persons convicted of
drug-related crimes or of criminal violations of the Racketeer Influenced and
Corrupt Organizations ('RICO') statute can be seized by the government if the
property was used in, or purchased with the proceeds of, such crimes. Under
procedures contained in the Comprehensive Crime Control Act of 1984 (the 'Crime
Control Act'), the government may seize the property even before conviction. The
government must publish notice of the forfeiture proceeding and may give notice
to all parties 'known to have an alleged interest in the property,' including
the holders of mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before commission
of the crime upon which the forfeiture is based, or (ii) the lender was, at the
time of execution of the mortgage, 'reasonably without cause to believe' that
the property was used in, or purchased with the proceeds of, illegal drug or
RICO activities.
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries, which are general in nature,
of certain legal matters relating to the Contracts. Because such legal aspects
are governed primarily by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor to reflect the
laws of any particular state, nor to encompass the laws of all states in which
the security for the Contracts is situated. The summaries are qualified in their
entirety by reference to the appropriate laws of the states in which Contracts
may be originated.
GENERAL
As a result of the assignment of the Contracts to the Trustee, the Trustee
will succeed collectively to all of the rights (including the right to receive
payment on the Contracts) of the obligee under the Contracts. Each Contract
evidences both (a) the obligation of the obligor to repay the loan evidenced
thereby, and (b) the grant of a security interest in the Manufactured Home to
secure repayment of such loan. Certain aspects of both features of the Contracts
are described more fully below.
The Contracts generally are 'chattel paper' as defined in the Uniform
Commercial Code (the 'UCC') in effect in the states in which the Manufactured
Homes initially were registered. Pursuant to the UCC, the sale of chattel paper
is treated in a manner similar to perfection of a security interest in chattel
paper. Under the Agreement, the Master Servicer will transfer physical
possession of the Contracts to the Trustee or its custodian or may retain
possession of the Contracts as custodian for the Trustee. 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 Company to the Trustee. Therefore, if, through negligence, fraud or
otherwise, a subsequent purchaser were able to take physical possession of the
Contracts without notice of such assignment, the Trustee's interest in Contracts
could be defeated.
69
<PAGE>
SECURITY INTERESTS IN THE MANUFACTURED HOMES
The Manufactured Homes securing the Contracts may be located in all 50
states. Security interests in manufactured homes may be perfected either by
notation of the secured party's lien on the certificate of title or by delivery
of the required documents and payment of a fee to the state motor vehicle
authority, depending on state law. In some nontitle states, perfection pursuant
to the provisions of the UCC is required. The Asset Seller 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 Asset Seller fails, due to clerical error, 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 Asset Seller may not have a first priority security
interest in the Manufactured Home securing a Contract. As manufactured homes
have become larger and often have been attached to their sites without any
apparent intention to move them, courts in many states have held that
manufactured homes, under certain circumstances, may become subject to real
estate title and recording laws. As a result, a security interest in a
manufactured home could be rendered subordinate to the interests of other
parties claiming an interest in the home under applicable state real estate law.
In order to perfect a security interest in a manufactured home under real estate
laws, the holder of the security interest must file either a 'fixture filing'
under the provisions of the UCC or a real estate mortgage under the real estate
laws of the state where the home is located. These filings must be made in the
real estate records office of the county where the home is located.
Substantially all of the Contracts contain provisions prohibiting the borrower
from permanently attaching the Manufactured Home to its site. So long as the
borrower does not violate this agreement, a security interest in the
Manufactured Home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to maintain the priority
of the security interest in the Manufactured Home. If, however, a Manufactured
Home is permanently attached to its site, other parties could obtain an interest
in the Manufactured Home which is prior to the security interest originally
retained by the Asset Seller and transferred to the Depositor. With respect to a
Series of Certificates and if so 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. The Warranting Party will
represent that as of the date of the sale to the Depositor it has obtained a
perfected first priority security interest by proper notation or delivery of the
required documents and fees with respect to substantially all of the
Manufactured Homes securing the Contracts.
The Depositor will cause the security interests in the Manufactured Homes
to be assigned 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 (or file UCC-3 statements)
to identify the Trustee as the new secured party, and neither the Depositor nor
the Master Servicer will deliver the certificates of title to the Trustee or
note thereon the interest of the Trustee. Accordingly, the Asset Seller (or
other originator of the Contracts) will continue to be named as the secured
party on the certificates of title relating to the Manufactured Homes. In some
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 Master Servicer's rights as the secured party.
However, in some states, in the absence of an amendment to the certificate of
title (or the filing of a UCC-3 statement), such assignment of the security
interest in the Manufactured Home may not be held effective or such security
interests may not be perfected and in the absence of such notation or delivery
to the Trustee, the assignment of the security interest in the Manufactured Home
may not be effective against creditors of the Asset Seller (or such other
originator of the Contracts) or a trustee in bankruptcy of the Asset Seller (or
such other originator).
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 Asset Seller
(or other originator of the Contracts) 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 Trustee 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 Trustee as the new secured
70
<PAGE>
party on the certificate of title that, through fraud or negligence, the
security interest of the Trustee 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 Master Servicer 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
Asset Seller (or other originator) would receive notice of surrender if the
security interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the Trustee would have the opportunity to re-perfect its security
interest in the Manufactured Home in the state of relocation. In states which do
not require a certificate of title for registration of a manufactured home,
re-registration could defeat perfection. In the ordinary course of servicing the
manufactured housing contracts, 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 contract sells a manufactured home, the Master Servicer must surrender
possession of the certificate of title or, if it is noted as lienholder on the
certificate of title, will receive notice as a result of its lien noted thereon
and accordingly will have an opportunity to require satisfaction of the related
manufactured housing conditional sales contract before release of the lien.
Under the Agreement, the Master Servicer 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 and liens for personal property taxes take priority even over
a perfected security interest. The Warranting Party will represent in the
Agreement that it has no knowledge of any such liens with respect to any
Manufactured Home securing payment on any Contract. However, such liens could
arise at any time during the term of a Contract. No notice will be given to the
Trustee or Certificateholders in the event such a lien arises.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES
The Master Servicer on behalf of the Trustee, to the extent required by the
related Agreement, may take action to enforce the Trustee's security interest
with respect to Contracts in default by repossession and resale of the
Manufactured Homes securing such Defaulted Contracts. 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, and in many
cases the defaulting borrower would have no assets with which to pay a judgment.
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.
Under the terms of the federal Soldiers' and Sailors' Civil Relief Act of
1940, as amended (the 'Relief Act'), an Obligor who enters military service
after the origination of such Obligor's Contract (including an
71
<PAGE>
Obligor who is a member of the National Guard or is in reserve status at the
time of the origination of the Contract and is later called to active duty) may
not be charged interest above an annual rate of 6% during the period of such
Obligor's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the Master Servicer to collect
full amounts of interest on certain of the Contracts. Any shortfall in interest
collections resulting from the application of the Relief Act, to the extent not
covered by the subordination of a Class of Subordinated Certificates, could
result in losses to the holders of a Series of Certificates. In addition, the
Relief Act imposes limitations which would impair the ability of the Master
Servicer to foreclose on an affected Contract during the Obligor's period of
active duty status. Thus, in the event that such a Contract goes into default,
there may be delays and losses occasioned by the inability to realize upon the
Manufactured Home in a timely fashion.
CONSUMER PROTECTION LAWS
The so-called 'Holder-in-Due-Course' rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a Contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee 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 Master Servicer and permit the
acceleration of the maturity of the Contracts by the Master Servicer upon any
such sale or transfer that is not consented to. Unless otherwise specified in
the related Prospectus Supplement, the Master Servicer expects that it will
permit most transfers of Manufactured Homes and not accelerate the maturity of
the related Contracts. In certain cases, the transfer may be made by a
delinquent obligor in order to avoid a repossession proceeding with respect to a
Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the 'due-on-sale' clause. The Garn-St Germain Depositary Institutions Act of
1982 preempts, subject to certain exceptions and conditions, state laws
prohibiting enforcement of 'due-on-sale' clauses applicable to the Manufactured
Homes. Consequently, in some states the 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 which is secured
by a first lien on certain kinds of manufactured housing. The Contracts would be
covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of or
foreclosure with respect to the related unit.
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
The related Asset Seller will represent that all of the Contracts comply with
applicable usury law.
72
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the anticipated material federal income tax
consequences of the purchase, ownership and disposition of Offered Certificates
is based on the advice of Brown & Wood LLP, counsel to the Depositor. This
summary is based on laws, regulations, including the REMIC regulations
promulgated by the Treasury Department (the 'REMIC Regulations'), rulings and
decisions now in effect or (with respect to regulations) proposed, all of which
are subject to change either prospectively or retroactively. This summary does
not address the federal income tax consequences of an investment in Securities
applicable to all categories of investors, some of which (for example, banks and
insurance companies) may be subject to special rules. Prospective investors
should consult their tax advisors regarding the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of
Securities.
Unless otherwise stated or unless the context otherwise requires, in the
following discussion a reference to the term 'Mortgage Loan' or 'Mortgage Asset'
will also be deemed to include a reference to a 'Contract'.
GENERAL
The federal income tax consequences to Securityholders will vary depending
on whether an election is made to treat the Trust Fund relating to a particular
Series of Securities as a REMIC under the Code. The Prospectus Supplement for
each Series of Securities will specify whether a REMIC election will be made.
GRANTOR TRUST FUNDS
If the related Prospectus Supplement indicates that the Trust Fund will be
treated as a grantor trust, then Brown & Wood LLP will deliver its opinion that
the Trust Fund will not be classified as an association taxable as a corporation
and that each such Trust Fund will be classified as a grantor trust under
subpart E, Part I of subchapter J of the Code. In this case, owners of
Certificates will be treated for federal income tax purposes as owners of a
portion of the Trust Fund's assets as described below.
A. SINGLE CLASS OF GRANTOR TRUST CERTIFICATES
Characterization. The Trust Fund may be created with one class of Grantor
Trust Certificates. In this case, each Grantor Trust Certificateholder will be
treated as the owner of a pro rata undivided interest in the interest and
principal portions of the Trust Fund represented by the Grantor Trust
Certificates and will be considered the equitable owner of a pro rata undivided
interest in each of the Mortgage Assets in the Pool. Any amounts received by a
Grantor Trust Certificateholder in lieu of amounts due with respect to any
Mortgage Asset because of a default or delinquency in payment will be treated
for federal income tax purposes as having the same character as the payments
they replace.
Each Grantor Trust Certificateholder will be required to report on its
federal income tax return in accordance with such Grantor Trust
Certificateholder's method of accounting its pro rata share of the entire income
from the Mortgage Loans in the Trust Fund represented by Grantor Trust
Certificates, including interest, original issue discount ('OID'), if any,
prepayment fees, assumption fees, any gain recognized upon an assumption and
late payment charges received by the Master Servicer. Under Code Sections 162 or
212 each Grantor Trust Certificateholder will be entitled to deduct its pro rata
share of servicing fees, prepayment fees, assumption fees, any loss recognized
upon an assumption and late payment charges retained by the Master Servicer,
provided that such amounts are reasonable compensation for services rendered to
the Trust Fund. Grantor Trust Certificateholders that are individuals, estates
or trusts will be entitled to deduct their share of expenses as itemized
deductions only to the extent such expenses plus all other Code Section 212
expenses exceed two percent of its adjusted gross income. In addition, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation) will be reduced by the lesser of (i) 3%
of the excess of adjusted gross income over the applicable amount and (ii) 80%
of the amount of itemized deductions otherwise allowable for such taxable year.
A Grantor Trust Certificateholder using the cash method of accounting must take
into account its pro rata share of income and deductions as and when collected
by or paid to the Master Servicer. A Grantor Trust Certificateholder using an
accrual method of accounting must take into account its pro rata share of income
and deductions as they become due or are paid to the Master Servicer, whichever
is earlier. If the servicing fees paid
73
<PAGE>
to the Master Servicer are deemed to exceed reasonable servicing compensation,
the amount of such excess could be considered as an ownership interest retained
by the Master Servicer (or any person to whom the Master Servicer assigned for
value all or a portion of the servicing fees) in a portion of the interest
payments on the Mortgage Assets. The Mortgage Assets would then be subject to
the 'coupon stripping' rules of the Code discussed below.
Unless otherwise specified in the related Prospectus Supplement, as to each
Series of Certificates evidencing an interest in a Trust Fund comprised of
Mortgage Loans (not including Contracts, Unsecured Home Improvement Loans, SBA
Loans or SBA 504 Loans), Brown & Wood LLP will have advised the Depositor that:
(i) Grantor Trust Certificate owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) representing
principal and interest payments on Mortgage Assets will be considered to
represent 'loans........secured by an interest in real property which is
residential property' within the meaning of Code Section 7701(a)(19)(C)(v),
to the extent that the Mortgage Assets represented by that Grantor Trust
Certificate are of a type described in such Code section;
(ii) a Grantor Trust Certificate owned by a real estate investment
trust representing an interest in Mortgage Assets will be considered to
represent 'real estate assets' within the meaning of Code Section
856(c)(5)(A), and interest income on the Mortgage Assets will be considered
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), to the extent that the Mortgage
Assets represented by that Grantor Trust Certificate are of a type
described in such Code section; and
(iii) a Grantor Trust Certificate owned by a REMIC will represent
'obligation[s] ... which [are] principally secured by an interest in real
property' within the meaning of Code Section 860G(a)(3).
Under Code Section 7701(a)(19)(C)(v), 'loans secured by an interest in real
property' include loans secured by mobile homes not used on a transient basis.
The Treasury regulations under Code Section 593 define 'qualifying real property
loan' to include a loan secured by a mobile home unit 'permanently fixed to real
property' except during a brief period in which the unit is transported to its
site. The Treasury regulations under Code Section 856 state that the local law
definitions are not controlling in determining the meaning of the term 'real
property' for purposes of Code Section 856, and the Internal Revenue Service
('IRS') has ruled that obligations secured by permanently installed mobile home
units qualify as 'real estate assets' under this provision. Entities affected by
the foregoing Code provisions that are considering the purchase of Certificates
evidencing interests in Trust Fund comprised of Contracts should consult their
tax advisors regarding such provisions.
The Small Business Job Protection Act of 1996, as part of the repeal of the
bad debt reserve method for thrift institutions, repealed the application of
Code Section 593(d) to any taxable year beginning after December 31, 1995.
Stripped Bonds and Coupons. Certain Trust Funds may consist of Government
Securities which constitute 'stripped bonds' or 'stripped coupons' as those
terms are defined in section 1286 of the Code, and, as a result, such assets
would be subject to the stripped bond provisions of the Code. Under these rules,
such Government Securities are treated as having original issue discount based
on the purchase price and the stated redemption price at maturity of each
Security. As such, Grantor Trust Certificateholders would be required to include
in income their pro rata share of the original issue discount on each Government
Security recognized in any given year on an economic accrual basis even if the
Grantor Trust Certificateholder is a cash method taxpayer. Accordingly, the sum
of the income includible to the Grantor Trust Certificateholder in any taxable
year may exceed amounts actually received during such year.
Buydown Loans. The assets constituting certain Trust Funds may include
Buydown Loans. The characterization of any investment in Buydown Loans will
depend upon the precise terms of the related buydown agreement, but to the
extent that such Buydown Loans are secured in part by a bank account or other
personal property, they may not be treated in their entirety as assets described
in the foregoing sections of the Code. There are no directly applicable
precedents with respect to the federal income tax treatment or the
characterization of investments in Buydown Loans. Accordingly, Grantor Trust
Certificateholders should consult their own tax
74
<PAGE>
advisors with respect to the characterization of investments in Grantor Trust
Certificates representing an interest in a Trust Fund that includes Buydown
Loans.
Premium. The price paid for a Grantor Trust Certificate by a holder will
be allocated to such holder's undivided interest in each Mortgage Asset based on
each Mortgage Asset's relative fair market value, so that such holder's
undivided interest in each Mortgage Asset will have its own tax basis. A Grantor
Trust Certificateholder that acquires an interest in Mortgage Assets at a
premium may elect to amortize such premium under a constant interest method,
provided that the underlying mortgage loans with respect to such Mortgage Assets
were originated after September 27, 1985. Premium allocable to mortgage loans
originated on or before September 27, 1985 should be allocated among the
principal payments on such mortgage loans and allowed as an ordinary deduction
as principal payments are made. Amortizable bond premium will be treated as an
offset to interest income on such Grantor Trust Certificate. The basis for such
Grantor Trust Certificate will be reduced to the extent that amortizable premium
is applied to offset interest payments. It is not clear whether a reasonable
prepayment assumption should be used in computing amortization of premium
allowable under Code Section 171. A Certificateholder that makes this election
for a Certificate that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder acquires during the year of
the election or thereafter.
If a premium is not subject to amortization using a reasonable prepayment
assumption, the holder of a Grantor Trust Certificate acquired at a premium
should recognize a loss if a Mortgage Loan (or an underlying mortgage loan with
respect to a Mortgage Asset) prepays in full, equal to the difference between
the portion of the prepaid principal amount of such Mortgage Loan (or underlying
mortgage loan) that is allocable to the Certificate and the portion of the
adjusted basis of the Certificate that is allocable to such Mortgage Loan (or
underlying mortgage loan). If a reasonable prepayment assumption is used to
amortize such premium, it appears that such a loss would be available, if at
all, only if prepayments have occurred at a rate faster than the reasonable
assumed prepayment rate. It is not clear whether any other adjustments would be
required to reflect differences between an assumed prepayment rate and the
actual rate of prepayments.
Original Issue Discount. The IRS has stated in published rulings that, in
circumstances similar to those described herein, the special rules of the Code
relating to original issue discount ('OID') (currently Code Sections 1271
through 1273 and 1275) and Treasury regulations issued on January 27, 1994,
under such Sections (the 'OID Regulations'), will be applicable to a Grantor
Trust Certificateholder's interest in those Mortgage Assets meeting the
conditions necessary for these sections to apply. Rules regarding periodic
inclusion of OID income are applicable to mortgages of corporations originated
after May 27, 1969, mortgages of noncorporate mortgagors (other than
individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such OID could arise by the financing of points
or other charges by the originator of the mortgages in an amount greater than a
statutory irrevocable. de minimis exception to the extent that the points are
not currently deductible under applicable Code provisions or are not for
services provided by the lender. OID generally must be reported as ordinary
gross income as it accrues under a constant interest method. See '--Multiple
Classes of Grantor Trust Certificates--Accrual of Original Issue Discount'
below.
Market Discount. A Grantor Trust Certificateholder that acquires an
undivided interest in Mortgage Assets may be subject to the market discount
rules of Code Sections 1276 through 1278 to the extent an undivided interest in
a Mortgage Asset is considered to have been purchased at a 'market discount.'
Generally, the amount of market discount is equal to the excess of the portion
of the principal amount of such Mortgage Asset allocable to such holder's
undivided interest over such holder's tax basis in such interest. Market
discount with respect to a Grantor Trust Certificate will be considered to be
zero if the amount allocable to the Grantor Trust Certificate is less than 0.25%
of the Grantor Trust Certificate's stated redemption price at maturity
multiplied by the weighted average maturity remaining after the date of
purchase. Treasury regulations implementing the market discount rules have not
yet been issued; therefore, investors should consult their own tax advisors
regarding the application of these rules and the advisability of making any of
the elections allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986 shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment.
75
<PAGE>
The amount of accrued market discount for purposes of determining the tax
treatment of subsequent principal payments or dispositions of the market
discount bond is to be reduced by the amount so treated as ordinary income.
The Code also grants the Treasury Department authority to issue regulations
providing for the computation of accrued market discount on debt instruments,
the principal of which is payable in more than one installment. While the
Treasury Department has not yet issued regulations, rules described in the
relevant legislative history will apply. Under those rules, the holder of a
market discount bond may elect to accrue market discount either on the basis of
a constant interest rate or according to one of the following methods. If a
Grantor Trust Certificate is issued with OID, the amount of market discount that
accrues during any accrual period would be equal to the product of (i) the total
remaining market discount and (ii) a fraction, the numerator of which is the OID
accruing during the period and the denominator of which is the total remaining
OID at the beginning of the accrual period. For Grantor Trust Certificates
issued without OID, the amount of market discount that accrues during a period
is equal to the product of (i) the total remaining market discount and (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 accrual period. For
purposes of calculating market discount under any of the above methods in the
case of instruments (such as the Grantor Trust Certificates) that provide for
payments that may be accelerated by reason of prepayments of other obligations
securing such instruments, the same prepayment assumption applicable to
calculating the accrual of OID will apply. Because the regulations described
above have not been issued, it is impossible to predict what effect those
regulations might have on the tax treatment of a Grantor Trust Certificate
purchased at a discount or premium in the secondary market.
A holder who acquired a Grantor Trust Certificate at a market discount 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 Grantor Trust Certificate purchased with market discount. For these
purposes, the de minimis rule referred above applies. Any such deferred interest
expense would not exceed the market discount that accrues during such taxable
year and is, in general, allowed as a deduction not later than the year in which
such market discount is includible in income. 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.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method for Certificates acquired on or after April 4,
1994. If such an election were to be made with respect to a Grantor Trust
Certificate with market discount, the Certificateholder would be deemed to have
made an election to include in income currently market discount 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 will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder owns or acquires. See '--Regular Certificates--Premium'
herein. The election to accrue interest, discount and premium on a constant
yield method with respect to a Certificate is irrevocable.
B. MULTIPLE CLASSES OF GRANTOR TRUST CERTIFICATES
1. Stripped Bonds and Stripped Coupons
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the interest payments on an obligation from ownership of
the right to receive some or all of the principal payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of Code Sections 1271
through 1288, Code Section 1286 treats a stripped bond or a stripped coupon as
an obligation issued on the date that such stripped interest is created. If a
Trust Fund is created with two classes of Grantor Trust Certificates, one class
of Grantor Trust Certificates may represent the right to principal and interest,
or principal only, on all or a portion of the Mortgage Assets (the 'Stripped
Bond
76
<PAGE>
Certificates'), while the second class of Grantor Trust Certificates may
represent the right to some or all of the interest on such portion (the
'Stripped Coupon Certificates').
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e., 1% interest on the Mortgage Asset principal
balance) or the Certificates are initially sold with a de minimis discount
(assuming no prepayment assumption is required), any non-de minimis discount
arising from a subsequent transfer of the Certificates should be treated as
market discount. The IRS appears to require that reasonable servicing fees be
calculated on a Mortgage Asset by Mortgage Asset basis, which could result in
some Mortgage Assets being treated as having more than 100 basis points of
interest stripped off. See '--Non-REMIC Certificates' and 'Multiple Classes of
Grantor Trust Certificates--Stripped Bonds and Stripped Coupons' herein.
Although not entirely clear, a Stripped Bond Certificate generally should
be treated as an interest in Mortgage Assets issued on the day such Certificate
is purchased for purposes of calculating any OID. Generally, if the discount on
a Mortgage Asset is larger than a de minimis amount (as calculated for purposes
of the OID rules) a purchaser of such a Certificate will be required to accrue
the discount under the OID rules of the Code. See '--Non-REMIC Certificates' and
'--Single Class of Grantor Trust Certificates--Original Issue Discount' herein.
However, a purchaser of a Stripped Bond Certificate will be required to account
for any discount on the Mortgage Assets as market discount rather than OID if
either (i) the amount of OID with respect to the Mortgage Assets is treated as
zero under the OID de minimis rule when the Certificate was stripped or (ii) no
more than 100 basis points (including any amount of servicing fees in excess of
reasonable servicing fees) is stripped off of the Trust Fund's Mortgage Assets.
Pursuant to Revenue Procedure 91-49, issued on August 8, 1991, purchasers of
Stripped Bond Certificates using an inconsistent method of accounting must
change their method of accounting and request the consent of the IRS to the
change in their accounting method on a statement attached to their first timely
tax return filed after August 8, 1991.
The precise tax treatment of Stripped Coupon Certificates is substantially
uncertain. The Code could be read literally to require that OID computations be
made for each payment from each Mortgage Asset. However, based on the recent IRS
guidance, it appears that all payments from a Mortgage Asset underlying a
Stripped Coupon Certificate should be treated as a single installment obligation
subject to the OID rules of the Code, in which case, all payments from such
Mortgage Asset would be included in the Mortgage Asset's stated redemption price
at maturity for purposes of calculating income on such certificate under the OID
rules of the Code.
It is unclear under what circumstances, if any, the prepayment of Mortgage
Assets will give rise to a loss to the holder of a Stripped Bond Certificate
purchased at a premium or a Stripped Coupon Certificate. If such Certificate is
treated as a single instrument (rather than an interest in discrete mortgage
loans) and the effect of prepayments is taken into account in computing yield
with respect to such Grantor Trust Certificate, it appears that no loss will be
available as a result of any particular prepayment unless prepayments occur at a
rate faster than the assumed prepayment rate. However, if such Certificate is
treated as an interest in discrete Mortgage Assets, or if no prepayment
assumption is used, then when a Mortgage Asset is prepaid, the holder of such
Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of such Certificate that is allocable to such Mortgage
Asset.
Holders of Stripped Bond Certificates and Stripped Coupon Certificates are
urged to consult with their own tax advisors regarding the proper treatment of
these Certificates for federal income tax purposes.
Treatment of Certain Owners. Several Code sections provide beneficial
treatment to certain taxpayers that invest in Mortgage Assets of the type that
make up the Trust Fund. With respect to these Code sections, no specific legal
authority exists regarding whether the character of the Grantor Trust
Certificates, for federal income tax purposes, will be the same as that of the
underlying Mortgage Assets. While Code Section 1286 treats a stripped obligation
as a separate obligation for purposes of the Code provisions addressing OID, it
is not clear whether such characterization would apply with regard to these
other Code sections. Although the issue is not free from doubt, based on policy
considerations, each class of Grantor Trust Certificates, unless otherwise
specified in the related Prospectus Supplement, should be considered to
represent 'real estate assets' within the meaning of Code Section 856(c)(5)(A)
and 'loans ... secured by, an interest in real property which is ... residential
real property' within the meaning of Code Section 7701(a)(19)(C)(v), and
interest income attributable to Grantor Trust Certificates should be considered
to represent 'interest on obligations secured by mortgages on
77
<PAGE>
real property' within the meaning of Code Section 856(c)(3)(B), provided that in
each case the underlying Mortgage Assets and interest on such Mortgage Assets
qualify for such treatment. Prospective purchasers to which such
characterization of an investment in Certificates is material should consult
their own tax advisors regarding the characterization of the Grantor Trust
Certificates and the income therefrom. Grantor Trust Certificates will be
'obligation[s] which [are] principally secured, directly or indirectly, by an
interest in real property' within the meaning of Code Section 860G(a)(3).
2. Grantor Trust Certificates Representing Interests in Loans Other Than ARM
Loans
The original issue discount rules of Code Sections 1271 through 1275 will
be applicable to a Certificateholder's interest in those Mortgage Assets as to
which the conditions for the application of those sections are met. Rules
regarding periodic inclusion of original issue discount in income are applicable
to mortgages of corporations originated after May 27, 1969, mortgages of
noncorporate mortgagors (other than individuals) originated after July 1, 1982,
and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, such original issue discount could arise by the charging of points
by the originator of the mortgage in an amount greater than the statutory de
minimis exception, including a payment of points that is currently deductible by
the borrower under applicable Code provisions, or under certain circumstances,
by the presence of 'teaser' rates on the Mortgage Assets. OID on each Grantor
Trust Certificate must be included in the owner's ordinary income for federal
income tax purposes as it accrues, in accordance with a constant interest
method that takes into account the compounding of interest, in advance of
receipt of the cash attributable to such income. The amount of OID required to
be included in an owner's income in any taxable year with respect to a Grantor
Trust Certificate representing an interest in Mortgage Assets other than
Mortgage Assets with interest rates that adjust periodically ('ARM Loans')
likely will be computed as described below under 'Accrual of Original Issue
Discount.' The following discussion is based in part on the OID Regulations and
in part on the provisions of the Tax Reform Act of 1986 (the '1986 Act'). The
OID Regulations generally are effective for debt instruments issued on or after
April 4, 1994, but may be relied upon as authority with respect to debt
instruments, such as the Grantor Trust Certificates, issued after December 21,
1992. Alternatively, proposed Treasury regulations issued December 21, 1992 may
be treated as authority for debt instruments issued after December 21, 1992 and
prior to April 4, 1994, and proposed Treasury regulations issued in 1986 and
1991 may be treated as authority for instruments issued before December 21,
1992. In applying these dates, the issued date of the Mortgage Assets should be
used, or, in the case of Stripped Bond Certificates or Stripped Coupon
Certificates, the date such Certificates are acquired. The holder of a
Certificate should be aware, however, that neither the proposed OID Regulations
nor the OID Regulations adequately address certain issues relevant to prepayable
securities.
Under the Code, the Mortgage Assets underlying the Grantor Trust
Certificate will be treated as having been issued on the date they were
originated with an amount of OID equal to the excess of such Mortgage Asset's
stated redemption price at maturity over its issue price. The issue price of a
Mortgage Asset is generally the amount lent to the mortgagee, which may be
adjusted to take into account certain loan origination fees. The stated
redemption price at maturity of a Mortgage Asset is the sum of all payments to
be made on such Mortgage Asset other than payments that are treated as qualified
stated interest payments. The accrual of this OID, as described below under
'--Accrual of Original Issue Discount,' will, unless otherwise specified in the
related Prospectus Supplement, utilize the original yield to maturity of the
Grantor Trust Certificate calculated based on a reasonable assumed prepayment
rate for the mortgage loans underlying the Grantor Trust Certificates (the
'Prepayment Assumption'), and will take into account events that occur during
the calculation period. The Prepayment Assumption will be determined in the
manner prescribed by regulations that have not yet been issued. The legislative
history of the 1986 Act (the 'Legislative History') provides, however, that the
regulations will require that the Prepayment Assumption be the prepayment
assumption that is used in determining the offering price of such Certificate.
No representation is made that any Certificate will prepay at the Prepayment
Assumption or at any other rate. The prepayment assumption contained in the Code
literally only applies to debt instruments collateralized by other debt
instruments that are subject to prepayment rather than direct ownership
interests in such debt instruments, such as the Certificates represent. However,
no other legal authority provides guidance with regard to the proper method for
accruing OID on obligations that are subject to prepayment, and, until further
guidance is issued, the Master Servicer intends to calculate and report OID
under the method described below.
78
<PAGE>
Accrual of Original Issue Discount. Generally, the owner of a Grantor
Trust Certificate must include in gross income the sum of the 'daily portions,'
as defined below, of the OID on such Grantor Trust Certificate for each day on
which it owns such Certificate, including the date of purchase but excluding the
date of disposition. In the case of an original owner, the daily portions of OID
with respect to each component generally will be determined as set forth under
the OID Regulations. A calculation will be made by the Master Servicer or such
other entity specified in the related Prospectus Supplement of the portion of
OID that accrues during each successive monthly accrual period (or shorter
period from the date of original issue) that ends on the day in the calendar
year corresponding to each of the Distribution Dates on the Grantor Trust
Certificates (or the day prior to each such date). This will be done, in the
case of each full month accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the respective component under the Prepayment
Assumption) of all remaining payments to be received under the Prepayment
Assumption on the respective component and (b) any payments included in the
state redemption price at maturity received during such accrual period, and (ii)
subtracting from that total the 'adjusted issue price' of the respective
component at the beginning of such accrual period. The adjusted issue price of a
Grantor Trust Certificate at the beginning of the first accrual period is its
issue price; the adjusted issue price of a Grantor Trust Certificate at the
beginning of a subsequent accrual period is the adjusted issue price at the
beginning of the immediately preceding accrual period plus the amount of OID
allocable to that accrual period reduced by the amount of any payment other than
a payment of qualified stated interest made at the end of or during that accrual
period. The OID accruing during such accrual period will then be divided by the
number of days in the period to determine the daily portion of OID for each day
in the period. With respect to an initial accrual period shorter than a full
monthly accrual period, the daily portions of OID must be determined according
to an appropriate allocation under any reasonable method.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest as it accrues rather than when received. However, the
amount of original issue discount includible in the income of a holder of an
obligation is reduced when the obligation is acquired after its initial issuance
at a price greater than the sum of the original issue price and the previously
accrued original issue discount, less prior payments of principal. Accordingly,
if such Mortgage Assets acquired by a Certificateholder are purchased at a price
equal to the then unpaid principal amount of such Mortgage Asset, no original
issue discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Asset (i.e. points) will be
includible by such holder. Other original issue discount on the Mortgage Assets
(e.g., that arising from a 'teaser' rate) would still need to be accrued.
3. Grantor Trust Certificates Representing Interests in ARM Loans
The OID Regulations do not address the treatment of instruments, such as
the Grantor Trust Certificates, which represent interests in ARM Loans.
Additionally, the IRS has not issued guidance under the Code's coupon stripping
rules with respect to such instruments. In the absence of any authority, the
Master Servicer will report OID on Grantor Trust Certificates attributable to
ARM Loans ('Stripped ARM Obligations') to holders in a manner it believes is
consistent with the rules described above under the heading '--Grantor Trust
Certificates Representing Interests in Loans Other Than ARM Loans' and with the
OID Regulations. In general, application of these rules may require inclusion of
income on a Stripped ARM Obligation in advance of the receipt of cash
attributable to such income. Further, the addition of interest deferred by
reason of negative amortization ('Deferred Interest') to the principal balance
of an ARM Loan may require the inclusion of such amount in the income of the
Grantor Trust Certificateholder when such amount accrues. Furthermore, the
addition of Deferred Interest to the Grantor Trust Certificate's principal
balance will result in additional income (including possibly OID income) to the
Grantor Trust Certificateholder over the remaining life of such Grantor Trust
Certificates.
Because the treatment of Stripped ARM Obligations is uncertain, investors
are urged to consult their tax advisors regarding how income will be includible
with respect to such Certificates.
79
<PAGE>
C. SALE OR EXCHANGE OF A GRANTOR TRUST CERTIFICATE
Sale or exchange of a Grantor Trust Certificate prior to its maturity will
result in gain or loss equal to the difference, if any, between the amount
received and the owner's adjusted basis in the Grantor Trust Certificate. Such
adjusted basis generally will equal the seller's purchase price for the Grantor
Trust Certificate, increased by the OID included in the seller's gross income
with respect to the Grantor Trust Certificate, and reduced by principal payments
on the Grantor Trust Certificate previously received by the seller. Such gain or
loss will be capital gain or loss to an owner for which a Grantor Trust
Certificate is a 'capital asset' within the meaning of Code Section 1221, and
will be long-term or short-term depending on whether the Grantor Trust
Certificate has been owned for the long-term capital gain holding period
(currently more than one year).
Grantor Trust Certificates will be 'evidences of indebtedness' within the
meaning of Code Section 582(c)(1), so that gain or loss recognized from the sale
of a Grantor Trust Certificate by a bank or a thrift institution to which such
section applies will be treated as ordinary income or loss.
D. NON-U.S. PERSONS
Generally, to the extent that a Grantor Trust Certificate evidences
ownership in underlying Mortgage Assets that were issued on or before July 18,
1984, interest or OID paid by the person required to withhold tax under Code
Section 1441 or 1442 to (i) an owner that is not a U.S. Person (as defined
below) or (ii) a Grantor Trust Certificateholder holding on behalf of an owner
that is not a U.S. Person will be subject to federal income tax, collected by
withholding, at a rate of 30% or such lower rate as may be provided for interest
by an applicable tax treaty. Accrued OID recognized by the owner on the sale or
exchange of such a Grantor Trust Certificate also will be subject to federal
income tax at the same rate. Generally, such payments would not be subject to
withholding to the extent that a Grantor Trust Certificate evidences ownership
in Mortgage Assets issued after July 18, 1984, by natural persons if such
Grantor Trust Certificateholder complies with certain identification
requirements (including delivery of a statement, signed by the Grantor Trust
Certificateholder under penalties of perjury, certifying that such Grantor Trust
Certificateholder is not a U.S. Person and providing the name and address of
such Grantor Trust Certificateholder). Additional restrictions apply to Mortgage
Assets where the mortgagor is not a natural person in order to qualify for the
exemption from withholding.
As used herein, a 'U.S. Person' means a citizen or resident of the United
States, a corporation or a partnership organized in or under the laws of the
United States or any political subdivision thereof, an estate, the income of
which from sources outside the United States is includible in gross income for
federal income tax purposes regardless of its connection with the conduct of a
trade or business within the United States, or a trust if a court within the
United States is able to exercise primary supervision over the administration of
the trust and one or more United States trustees have authority to control all
substantial decisions of the trust.
E. INFORMATION REPORTING AND BACKUP WITHHOLDING
The Master Servicer will furnish or make available, within a reasonable
time after the end of each calendar year, to each person who was a
Certificateholder at any time during such year, such information as may be
deemed necessary or desirable to assist Certificateholders in preparing their
federal income tax returns, or to enable holders to make such information
available to beneficial owners or financial intermediaries that hold such
Certificates as nominees on behalf of beneficial owners. If a holder, beneficial
owner, financial intermediary or other recipient of a payment on behalf of a
beneficial owner fails to supply a certified taxpayer identification number or
if the Secretary of the Treasury determines that such person has not reported
all interest and dividend income required to be shown on its federal income tax
return, 31% backup withholding may be required with respect to any payments. Any
amounts deducted and withheld from a distribution to a recipient would be
allowed as a credit against such recipient's federal income tax liability.
REMICS
THE DISCUSSION UNDER THIS HEADING 'REMICS' DOES NOT APPLY TO ANY TRUST FUND
CONTAINING UNSECURED HOME IMPROVEMENT LOANS, SBA LOANS OR SBA 504 LOANS.
The Trust Fund relating to a Series of Certificates may elect to be treated
as a REMIC. Qualification as a REMIC requires ongoing compliance with certain
conditions. Although a REMIC is not generally subject to
80
<PAGE>
federal income tax (see, however '--Taxation of Owners of REMIC Residual
Certificates' and '--Prohibited Transactions' below), if a Trust Fund with
respect to which a REMIC election is made fails to comply with one or more of
the ongoing requirements of the Code for REMIC status during any taxable year,
including the implementation of restrictions on the purchase and transfer of the
residual interests in a REMIC as described below under 'Taxation of Owners of
REMIC Residual Certificates,' the Code provides that a Trust Fund will not be
treated as a REMIC for such year and thereafter. In that event, such entity may
be taxable as a separate corporation, and the related Certificates (the 'REMIC
Certificates') may not be accorded the status or given the tax treatment
described below. While the Code authorizes the Treasury Department to issue
regulations providing relief in the event of an inadvertent termination of the
status of a trust fund as a REMIC, no such regulations have been issued. Any
such relief, moreover, 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 in
which the requirements for such status are not satisfied. With respect to each
Trust Fund that elects REMIC status, Brown & Wood LLP will deliver its opinion
generally to the effect that, under then existing law and assuming compliance
with all provisions of the related Pooling and Servicing Agreement, such Trust
Fund will qualify as a REMIC, and the related Certificates will be considered to
be regular interests ('REMIC Regular Certificates') or a sole class of residual
interests ('REMIC Residual Certificates') in the REMIC. The related Prospectus
Supplement for each Series of Certificates will indicate whether the Trust Fund
will make a REMIC election and whether a class of Certificates will be treated
as a regular or residual interest in the REMIC.
In general, with respect to each Series of Certificates for which a REMIC
election is made, (i) such Certificates held by a thrift institution taxed as a
'domestic building and loan association' will constitute assets described in
Code Section 7701(a)(19)(C); (ii) such Certificates held by a real estate
investment trust will constitute 'real estate assets' within the meaning of Code
Section 856(c)(5)(A); and (iii) interest on such Certificates held by a real
estate investment trust will be considered 'interest on obligations secured by
mortgages on real property' within the meaning of Code Section 856(c)(3)(B).
Under Code Section 7701(a)(19)(C)(v), 'loans secured by an interest in real
property' include loans secured by mobile homes not used on a transient basis.
The Treasury regulations under Code Section 856 state that the local law
definitions are not controlling in determining the meaning of the term 'real
property' for purposes of Section 856, and the IRS has ruled that obligations
secured by permanently installed mobile home units qualify as 'real estate
assets' under this provision. Entities affected by the foregoing Code provisions
that are considering the purchase of Certificates evidencing interests in a
Trust Fund comprised of Contracts should consult their tax advisors regarding
such provisions. If less than 95% of the REMIC's assets are assets qualifying
under any of the foregoing Code sections, the Certificates will be qualifying
assets only to the extent that the REMIC's assets are qualifying assets. In
addition, payments on Mortgage Assets held pending distribution on the REMIC
Certificates will be considered to be real estate assets for purposes of Code
Section 856(c). The Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift institutions, repealed the
application of Code Section 593(d) to any taxable year beginning after December
31, 1995.
In some instances the Mortgage Assets may not be treated entirely as assets
described in the foregoing sections. See, in this regard, the discussion of
Buydown Loans contained in '--Non-REMIC Certificates--Single Class of Grantor
Trust Certificates' above. REMIC Certificates held by a real estate investment
trust will not constitute 'Government Securities' within the meaning of Code
Section 856(c)(5)(A), and REMIC Certificates held by a regulated investment
company will not constitute 'Government Securities' within the meaning of Code
Section 851(b)(4)(A)(ii). REMIC Certificates held by certain financial
institutions will constitute 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1).
A 'qualified mortgage' for REMIC purposes is any obligation (including
certificates of participation in such an obligation) that is principally secured
by an interest in real property and that is transferred to the REMIC within a
prescribed time period in exchange for regular or residual interests in the
REMIC. The REMIC Regulations provide that manufactured housing or mobile homes
(not including recreational vehicles, campers or similar vehicles) that are
'single family residences' under Code Section 25(e)(10) will qualify as real
property without regard to state law classifications. 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.
81
<PAGE>
Tiered REMIC Structures. For certain Series of Certificates, two separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs (respectively, the 'Subsidiary REMIC' and the 'Master REMIC') for federal
income tax purposes. Upon the issuance of any such Series of Certificates, Brown
& Wood LLP, counsel to the Depositor, will deliver its opinion generally to the
effect that, assuming compliance with all provisions of the related Agreement,
the Master REMIC as well as any Subsidiary REMIC will each qualify as a REMIC,
and the REMIC Certificates issued by the Master REMIC and the Subsidiary REMIC,
respectively, 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.
Only REMIC Certificates, other than the residual interest in the Subsidiary
REMIC, issued by the Master REMIC will be offered hereunder. The Subsidiary
REMIC and the Master REMIC will be treated as one REMIC solely for purposes of
determining whether the REMIC Certificates will be (i) 'real estate assets'
within the meaning of Section 856(c)(5)(A) of the Code; (ii) 'loans secured by
an interest in real property' under Section 7701(a)(19)(C) of the Code; and
(iii) whether the income on such Certificates is interest described in Section
856(c)(3)(B) of the Code.
A. TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
General. Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that 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.
Original Issue Discount and Premium. The REMIC Regular Certificates may be
issued with OID. Generally, such OID, if any, will equal the difference between
the 'stated redemption price at maturity' of a REMIC Regular Certificate and its
'issue price.' Holders of any class of Certificates issued with OID will be
required to include such OID in gross income for federal income tax purposes as
it accrues, in accordance with a constant interest method based on the
compounding of interest as it accrues rather than in accordance with receipt of
the interest payments. The following discussion is based in part on the OID
Regulations and in part on the provisions of the Tax Reform Act of 1986 (the
'1986 Act'). Holders of REMIC Regular Certificates (the 'REMIC Regular
Certificateholders') should be aware, however, that the OID Regulations do not
adequately address certain issues relevant to prepayable securities, such as the
REMIC Regular Certificates.
Rules governing OID are set forth in Code Sections 1271 through 1273 and
1275. These rules require that the amount and rate of accrual of OID be
calculated based on the Prepayment Assumption and the anticipated reinvestment
rate, if any, relating to the REMIC Regular Certificates and prescribe a method
for adjusting the amount and rate of accrual of such discount where the actual
prepayment rate differs from the Prepayment Assumption. Under the Code, the
Prepayment Assumption must be determined in the manner prescribed by
regulations, which regulations have not yet been issued. The Legislative History
provides, however, that Congress intended the regulations to require that the
Prepayment Assumption be the prepayment assumption that is used in determining
the initial offering price of such REMIC Regular Certificates. The Prospectus
Supplement for each Series of REMIC Regular Certificates will specify the
Prepayment Assumption to be used for the purpose of determining the amount and
rate of accrual of OID. No representation is made that the REMIC Regular
Certificates will prepay at the Prepayment Assumption or at any other rate.
In general, each REMIC Regular Certificate will be treated as a single
installment obligation issued with an amount of OID equal to the excess of its
'stated redemption price at maturity' over its 'issue price.' The issue price of
a REMIC Regular Certificate is the first price at which a substantial amount of
REMIC Regular Certificates of that class are first sold to the public (excluding
bond houses, brokers, underwriters or wholesalers). If less than a substantial
amount of a particular class of REMIC Regular Certificates is sold for cash on
or prior to the date of their initial issuance (the 'Closing Date'), the issue
price for such class will be treated as the fair market value of such class on
the Closing Date. The issue price of a REMIC Regular Certificate also includes
the amount paid by an initial Certificateholder for accrued interest that
relates to a period prior to the issue date of the REMIC Regular Certificate.
The stated redemption price at maturity of a REMIC Regular Certificate includes
the original principal amount of the REMIC Regular Certificate, but generally
will not include distributions of interest if such distributions constitute
'qualified stated interest.' Qualified stated interest generally means
82
<PAGE>
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the REMIC Regular
Certificate. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on REMIC Regular Certificates with respect to which
Deferred Interest will accrue will not constitute qualified stated interest
payments, and the stated redemption price at maturity of such REMIC Regular
Certificates includes all distributions of interest as well as principal
thereon.
Where the interval between the issue date and the first Distribution Date
on a REMIC Regular Certificate is longer than the interval between subsequent
Distribution Dates, the greater of any original issue discount (disregarding the
rate in the first period) and any interest foregone during the first period is
treated as the amount by which the stated redemption price at maturity of the
Certificate exceeds its issue price for purposes of the de minimis rule
described below. The OID Regulations suggest that all interest on a long first
period REMIC Regular Certificate that is issued with non-de minimis OID, as
determined under the foregoing rule, will be treated as OID. Where the interval
between the issue date and the first Distribution Date on a REMIC Regular
Certificate is shorter than the interval between subsequent Distribution Dates,
interest due on the first Distribution Date in excess of the amount that accrued
during the first period would be added to the Certificates stated redemption
price at maturity. REMIC Regular Certificateholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a REMIC Regular Certificate.
Under the de minimis rule, OID on a REMIC Regular Certificate will be
considered to be zero if such OID is less than 0.25% of the stated redemption
price at maturity of the REMIC Regular Certificate multiplied by the weighted
average maturity of the REMIC Regular Certificate. For this purpose, the
weighted average maturity of the REMIC Regular Certificate is computed as the
sum of the amounts determined by multiplying the number of full years (i.e.,
rounding down partial years) from the issue date until each distribution in
reduction of stated redemption price at maturity is scheduled to be made by a
fraction, the numerator of which is the amount of each distribution included in
the stated redemption price at maturity of the REMIC Regular Certificate and the
denominator of which is the stated redemption price at maturity of the REMIC
Regular Certificate. Although currently unclear, it appears that the schedule of
such distributions should be determined in accordance with the Prepayment
Assumption. The Prepayment Assumption with respect to a Series of REMIC Regular
Certificates will be set forth in the related Prospectus Supplement. Holders
generally must report de minimis OID pro rata as principal payments are
received, and such income will be capital gain if the REMIC Regular Certificate
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
The Prospectus Supplement with respect to a Trust Fund may provide for
certain REMIC Regular Certificates to be issued at prices significantly
exceeding their principal amounts or based on notional principal balances (the
'Super-Premium Certificates'). The income tax treatment of such REMIC Regular
Certificates is not entirely certain. For information reporting purposes, the
Trust Fund intends to take the position that the stated redemption price at
maturity of such REMIC Regular Certificates is the sum of all payments to be
made on such REMIC Regular Certificates determined under the Prepayment
Assumption, with the result that such REMIC Regular Certificates would be issued
with OID. The calculation of income in this manner could result in negative
original issue discount (which delays future accruals of OID rather than being
immediately deductible) when prepayments on the Mortgage Assets exceed those
estimated under the Prepayment Assumption. The IRS might contend, however, that
certain proposed contingent payment rules contained in regulations issued on
December 15, 1994, with respect to original issue discount, should apply to such
Certificates. Although such rules are not applicable to instruments governed by
Code Section 1272(a)(6), they represent the only guidance regarding the current
views of the IRS with respect to contingent payment instruments. In the
alternative, the IRS could assert that the stated redemption price at maturity
of such REMIC Regular Certificates should be limited to their principal amount
(subject to the discussion below under '--Accrued Interest Certificates'), so
that such REMIC Regular Certificates would be considered for federal income tax
purposes to be issued at a premium. If such a position were to prevail, the
rules described below under '--Taxation of Owners of REMIC Regular
Certificates--Premium' would apply. It is unclear when a loss may be claimed for
any unrecovered basis for a Super-Premium Certificate. It is possible that a
holder of a Super-Premium Certificate may only claim a loss
83
<PAGE>
when its remaining basis exceeds the maximum amount of future payments, assuming
no further prepayments or when the final payment is received with respect to
such Super-Premium Certificate.
Under the REMIC Regulations, if the issue price of a REMIC Regular
Certificate (other than REMIC Regular Certificate based on a notional amount)
does not exceed 125% of its actual principal amount, the interest rate is not
considered disproportionately high. Accordingly, such REMIC Regular Certificate
generally should not be treated as a Super-Premium Certificate and the rules
described below under '--REMIC Regular Certificates--Premium' should apply.
However, it is possible that holders of REMIC Regular Certificates issued at a
premium, even if the premium is less than 25% of such Certificate's actual
principal balance, will be required to amortize the premium under an original
issue discount method or contingent interest method even though no election
under Code Section 171 is made to amortize such premium.
Generally, a REMIC Regular Certificateholder must include in gross income
the 'daily portions,' as determined below, of the OID that accrues on a REMIC
Regular Certificate for each day a Certificateholder holds the REMIC Regular
Certificate, including the purchase date but excluding the disposition date. In
the case of an original holder of a REMIC Regular Certificate, a calculation
will be made of the portion of the OID that accrues during each successive
period ('an accrual period') that ends on the day in the calendar year
corresponding to a Distribution Date (or if Distribution Dates are on the first
day or first business day of the immediately preceding month, interest may be
treated as payable on the last day of the immediately preceding month) and
begins on the day after the end of the immediately preceding accrual period (or
on the issue date in the case of the first accrual period). This will be done,
in the case of each full accrual period, by (i) adding (a) the present value at
the end of the accrual period (determined by using as a discount factor the
original yield to maturity of the REMIC Regular Certificates as calculated under
the Prepayment Assumption) of all remaining payments to be received on the REMIC
Regular Certificates under the Prepayment Assumption and (b) any payments
included in the stated redemption price at maturity received during such accrual
period, and (ii) subtracting from that total the adjusted issue price of the
REMIC Regular Certificates at the beginning of such accrual period. The adjusted
issue price of a REMIC Regular Certificate at the beginning of the first accrual
period is its issue price; the adjusted issue price of a REMIC Regular
Certificate at the beginning of a subsequent accrual period is the adjusted
issue price at the beginning of the immediately preceding accrual period plus
the amount of OID allocable to that accrual period and reduced by the amount of
any payment other than a payment of qualified stated interest made at the end of
or during that accrual period. The OID accrued during an accrual period will
then be divided by the number of days in the period to determine the daily
portion of OID for each day in the accrual period. The calculation of OID under
the method described above will cause the accrual of OID to either increase or
decrease (but never below zero) in a given accrual period to reflect the fact
that prepayments are occurring faster or slower than under the Prepayment
Assumption. With respect to an initial accrual period shorter than a full
accrual period, the daily portions of OID may be determined according to an
appropriate allocation under any reasonable method.
A subsequent purchaser of a REMIC Regular Certificate issued with OID who
purchases the REMIC Regular Certificate at a cost less than the remaining stated
redemption price at maturity will also be required to include in gross income
the sum of the daily portions of OID on that REMIC Regular Certificate. In
computing the daily portions of OID for such a purchaser (as well as an initial
purchaser that purchases at a price higher than the adjusted issue price but
less than the stated redemption price at maturity), however, the daily portion
is reduced by the amount that would be the daily portion for such day (computed
in accordance with the rules set forth above) multiplied by a fraction, the
numerator of which is the amount, if any, by which the price paid by such holder
for that REMIC Regular Certificate exceeds the following amount: (a) the sum of
the issue price plus the aggregate amount of OID that would have been includible
in the gross income of an original REMIC Regular Certificateholder (who
purchased the REMIC Regular Certificate at its issue price), less (b) any prior
payments included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for that REMIC Regular
Certificate for all days beginning on the date after the purchase date and
ending on the maturity date computed under the Prepayment Assumption. A holder
who pays an acquisition premium instead may elect to accrue OID by treating the
purchase as a purchase at original issue.
Variable Rate REMIC Regular Certificates. REMIC Regular Certificates may
provide for interest based on a variable rate. Interest based on a variable rate
will constitute qualified stated interest and not contingent interest if,
generally, (i) such interest is unconditionally payable at least annually, (ii)
the issue price of the debt instrument does not exceed the total noncontingent
principal payments and (iii) interest is based on a 'qualified
84
<PAGE>
floating rate,' an 'objective rate,' a combination of a single fixed rate and
one or more 'qualified floating rates,' one 'qualified inverse floating rate,'
or a combination of 'qualified floating rates' that do not operate in a manner
that significantly accelerates or defers interest payments on such REMIC Regular
Certificate.
The amount of OID with respect to a REMIC Regular Certificate bearing a
variable rate of interest will accrue in the manner described above under
'--Original Issue Discount and Premium' by assuming generally that the index
used for the variable rate will remain fixed throughout the term of the
Certificate. Appropriate adjustments are made for the actual variable rate.
Although unclear at present, the Depositor intends to treat interest on a
REMIC Regular Certificate that is a weighted average of the net interest rates
on Mortgage Loans as qualified stated interest. In such case, the weighted
average rate used to compute the initial pass-through rate on the REMIC Regular
Certificates will be deemed to be the index in effect through the life of the
REMIC Regular Certificates. It is possible, however, that the IRS may treat some
or all of the interest on REMIC Regular Certificates with a weighted average
rate as taxable under the rules relating to obligations providing for contingent
payments. Such treatment may effect the timing of income accruals on such REMIC
Regular Certificates.
Election to Treat All Interest as OID. The OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including de
minimis market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were to be made with
respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include in income
currently market discount 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 will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such Certificateholder owns or acquires. See
'--REMIC Regular Certificates--Premium' herein. The election to accrue interest,
discount and premium on a constant yield method with respect to a Certificate is
irrevocable.
Market Discount. A purchaser of a REMIC Regular Certificate may also be
subject to the market discount provisions of Code Sections 1276 through 1278.
Under these provisions and the OID Regulations, 'market discount' equals the
excess, if any, of (i) the REMIC Regular Certificate's stated principal amount
or, in the case of a REMIC Regular Certificate with OID, the adjusted issue
price (determined for this purpose as if the purchaser had purchased such REMIC
Regular Certificate from an original holder) over (ii) the price for such REMIC
Regular Certificate paid by the purchaser. A Certificateholder that purchases a
REMIC Regular Certificate at a market discount will recognize income upon
receipt of each distribution representing amounts included in such certificate's
stated redemption price at maturity. In particular, under Section 1276 of the
Code such a holder generally will be required to allocate each such distribution
first to accrued market discount not previously included in income, and to
recognize ordinary income to that extent. A Certificateholder may elect to
include market discount in income currently as it accrues rather than including
it on a deferred basis 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.
Market discount with respect to a REMIC Regular Certificate will be
considered to be zero if the amount allocable to the REMIC Regular Certificate
is less than 0.25% of such REMIC Regular Certificate's stated redemption price
at maturity multiplied by such REMIC Regular Certificate's weighted average
maturity remaining after the date of purchase. If market discount on a REMIC
Regular Certificate is considered to be zero under this rule, the actual amount
of market discount must be allocated to the remaining principal payments on the
REMIC Regular Certificate, and gain equal to such allocated amount will be
recognized when the corresponding principal payment is made. Treasury
regulations implementing the market discount rules have not yet been issued;
therefore, investors should consult their own tax advisors regarding the
application of these rules and the advisability of making any of the elections
allowed under Code Sections 1276 through 1278.
The Code provides that any principal payment (whether a scheduled payment
or a prepayment) or any gain on disposition of a market discount bond acquired
by the taxpayer after October 22, 1986, shall be treated as ordinary income to
the extent that it does not exceed the accrued market discount at the time of
such payment. The amount of accrued market discount for purposes of determining
the tax treatment of subsequent principal
85
<PAGE>
payments or dispositions of the market discount bond is to be reduced by the
amount so treated as ordinary income.
The Code also grants authority to the Treasury Department to issue
regulations providing for the computation of accrued market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury, rules described in
the Legislative History will apply. Under those rules, the holder of a market
discount bond may elect to accrue market discount either on the basis of a
constant interest method rate or according to one of the following methods. For
REMIC Regular Certificates issued with OID, the amount of market discount that
accrues during a period is equal to the product of (i) the total remaining
market discount and (ii) a fraction, the numerator of which is the OID accruing
during the period and the denominator of which is the total remaining OID at the
beginning of the period. For REMIC Regular Certificates issued without OID, the
amount of market discount that accrues during a period is equal to the product
of (a) the total remaining market discount and (b) 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. For purposes of calculating market discount
under any of the above methods in the case of instruments (such as the REMIC
Regular Certificates) that provide for payments that may be accelerated by
reason of prepayments of other obligations securing such instruments, the same
Prepayment Assumption applicable to calculating the accrual of OID will apply.
A holder who acquired a REMIC Regular Certificate at a market discount 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 Certificate purchased with market discount. For these purposes, the de
minimis rule referred to above applies. Any such deferred interest expense would
not exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. 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.
Premium. A purchaser of a REMIC Regular Certificate that purchases the
REMIC Regular Certificate at a cost (not including accrued qualified stated
interest) greater than its remaining stated redemption price at maturity will be
considered to have purchased the REMIC Regular Certificate at a premium and may
elect to amortize such premium under a constant yield method. A
Certificateholder that makes this election for a Certificate that is acquired at
a premium will be deemed to have made an election to amortize bond premium with
respect to all debt instruments having amortizable bond premium that such
Certificateholder acquires during the year of the election or thereafter. It is
not clear whether the Prepayment Assumption would be taken into account in
determining the life of the REMIC Regular Certificate for this purpose. However,
the Legislative History states that the same rules that apply to accrual of
market discount (which rules require use of a Prepayment Assumption in accruing
market discount with respect to REMIC Regular Certificates without regard to
whether such Certificates have OID) will also apply in amortizing bond premium
under Code Section 171. The Code provides that amortizable bond premium will be
allocated among the interest payments on such REMIC Regular Certificates and
will be applied as an offset against such interest payment. On June 27, 1996,
the IRS published in the Federal Register proposed regulations on the
amortization of bond premium. The foregoing discussion is based in part on such
proposed regulations. The proposed regulations generally would be effective for
Certificates acquired on or after the date 60 days after the date they are
published as final regulations in the Federal Register. Certificateholders
should consult their tax advisors regarding the possibility of making an
election to amortize any such bond premium.
Deferred Interest. Certain classes of REMIC Regular Certificates may
provide for the accrual of Deferred Interest with respect to one or more ARM
Loans. Any Deferred Interest that accrues with respect to a class of REMIC
Regular Certificates will constitute income to the holders of such Certificates
prior to the time distributions of cash with respect to such Deferred Interest
are made. It is unclear, under the OID Regulations, whether any of the interest
on such Certificates will constitute qualified stated interest or whether all or
a portion of the interest payable on such Certificates must be included in the
stated redemption price at maturity of the Certificates and accounted for as OID
(which could accelerate such inclusion). Interest on REMIC Regular Certificates
must in any event be accounted for under an accrual method by the holders of
such Certificates and,
86
<PAGE>
therefore, applying the latter analysis may result only in a slight difference
in the timing of the inclusion in income of interest on such REMIC Regular
Certificates.
Effects of Defaults and Delinquencies. Certain Series of Certificates may
contain one or more classes of Subordinated Certificates, and in the event there
are defaults or delinquencies on the Mortgage Assets, amounts that would
otherwise be distributed on the Subordinated Certificates may instead be
distributed on the Senior Certificates. Subordinated Certificateholders
nevertheless will be required to report income with respect to such Certificates
under an accrual method without giving effect to delays and reductions in
distributions on such Subordinated Certificates attributable to defaults and
delinquencies on the Mortgage Assets, except to the extent that it can be
established that such amounts are uncollectible. As a result, the amount of
income reported by a Subordinated Certificateholder in any period could
significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Subordinated Certificate is reduced as a result of defaults
and delinquencies on the Mortgage Assets. Timing and characterization of such
losses is discussed in '--REMIC Regular Certificates--Treatment of Realized
Losses' below.
Sale, Exchange or Redemption. If a REMIC Regular Certificate is sold,
exchanged, redeemed or retired, the seller will recognize gain or loss equal to
the difference between the amount realized on the sale, exchange, redemption, or
retirement and the seller's adjusted basis in the REMIC Regular Certificate.
Such adjusted basis generally will equal the cost of the REMIC Regular
Certificate to the seller, increased by any OID and market discount included in
the seller's gross income with respect to the REMIC Regular Certificate, and
reduced (but not below zero) by payments included in the stated redemption price
at maturity previously received by the seller and by any amortized premium.
Similarly, a holder who receives a payment that is part of the stated redemption
price at maturity of a REMIC Regular Certificate will recognize gain equal to
the excess, if any, of the amount of the payment over the holder's adjusted
basis in the REMIC Regular Certificate. A REMIC Regular Certificateholder who
receives a final payment that is less than the holder's adjusted basis in the
REMIC Regular Certificate will generally recognize a loss. Except as provided in
the following paragraph and as provided under '--Market Discount' above, any
such gain or loss will be capital gain or loss, provided that the REMIC Regular
Certificate is held as a 'capital asset' (generally, property held for
investment) within the meaning of Code Section 1221.
Gain from the sale or other disposition of a REMIC Regular Certificate that
might otherwise be 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 with respect to the REMIC Regular
Certificate had income accrued thereon at a rate equal to 110% of the AFR as
defined in Code Section 1274(d) determined as of the date of purchase of such
REMIC Regular Certificate, over (ii) the amount actually includible in such
holder's income.
The Certificates will be 'evidences of indebtedness' within the meaning of
Code Section 582(c)(1), so that gain or loss recognized from the sale of a REMIC
Regular Certificate by a bank or a thrift institution to which such section
applies will be ordinary income or loss.
The REMIC Regular Certificate information reports will include a statement
of the adjusted issue price of the REMIC Regular Certificate at the beginning of
each accrual period. In addition, the reports will include information 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 may not have, it appears that the
information reports will only require information pertaining to the appropriate
proportionate method of accruing market discount.
Accrued Interest Certificates. Certain of the REMIC Regular Certificates
('Payment Lag Certificates') may provide for payments of interest based on a
period that corresponds to the interval between Distribution Dates but that ends
prior to each such Distribution Date. The period between the Closing Date for
Payment Lag Certificates and their first Distribution Date may or may not exceed
such interval. Purchasers of Payment Lag Certificates for which the period
between the Closing Date and the first Distribution Date does not exceed such
interval could pay upon purchase of the REMIC Regular Certificates accrued
interest in excess of the accrued interest that would be paid if the interest
paid on the Distribution Date were interest accrued from Distribution
87
<PAGE>
Date to Distribution Date. If a portion of the initial purchase price of a REMIC
Regular Certificate is allocable to interest that has accrued prior to the issue
date ('pre-issuance accrued interest') and the REMIC Regular Certificate
provides for a payment of stated interest on the first payment date (and the
first payment date is within one year of the issue date) that equals or exceeds
the amount of the pre-issuance accrued interest, then the REMIC Regular
Certificates' issue price may be computed by subtracting from the issue price
the amount of pre-issuance accrued interest, rather than as an amount payable on
the REMIC Regular Certificate. However, it is unclear under this method how the
OID Regulations treat interest on Payment Lag Certificates. Therefore, in the
case of a Payment Lag Certificate, the Trust Fund intends to include accrued
interest in the issue price and report interest payments made on the first
Distribution Date as interest to the extent such payments represent interest for
the number of days that the Certificateholder has held such Payment Lag
Certificate during the first accrual period.
Investors should consult their own tax advisors concerning the treatment
for federal income tax purposes of Payment Lag Certificates.
Non-Interest Expenses of the REMIC. Under temporary Treasury regulations,
if the REMIC is considered to be a 'single-class REMIC,' a portion of the
REMIC's servicing, administrative and other non-interest expenses will be
allocated as a separate item to those REMIC Regular Certificateholders that are
'pass-through interest holders.' Certificateholders that are pass-through
interest holders should consult their own tax advisors about the impact of these
rules on an investment in the REMIC Regular Certificates. See 'Pass-Through of
Non-Interest Expenses of the REMIC' under 'Taxation of Owners of REMIC Residual
Certificates' below.
Treatment of Realized Losses. Although not entirely clear, it appears that
holders of REMIC Regular Certificates that are corporations should in general be
allowed to deduct as an ordinary loss any loss sustained during the taxable year
on account of any such Certificates becoming wholly or partially worthless, and
that, in general, holders of Certificates that are not corporations should be
allowed to deduct as a short-term capital loss any loss sustained during the
taxable year on account of any such Certificates becoming wholly worthless.
Although the matter is not entirely clear, non-corporate holders of Certificates
may be allowed a bad debt deduction at such time that the principal balance of
any such Certificate is reduced to reflect realized losses resulting from any
liquidated Mortgage Assets. The Internal Revenue Service, however, could take
the position that non-corporate holders will be allowed a bad debt deduction to
reflect realized losses only after all Mortgage Assets remaining in the related
Trust Fund have been liquidated or the Certificates of the related Series have
been otherwise retired. Potential investors and holders of the Certificates are
urged to consult their own tax advisors regarding the appropriate timing, amount
and character of any loss sustained with respect to such Certificates, including
any loss resulting from the failure to recover previously accrued interest or
discount income. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Certificates.
Non-U.S. Persons. Generally, payments of interest (including any payment
with respect to accrued OID) on the REMIC Regular Certificates to a REMIC
Regular Certificateholder who is not a U.S. Person and is not engaged in a trade
or business within the United States will not be subject to federal withholding
tax if (i) such REMIC Regular Certificateholder does not actually or
constructively own 10 percent or more of the combined voting power of all
classes of equity in the Issuer; (ii) such REMIC Regular Certificateholder is
not a controlled foreign corporation (within the meaning of Code Section 957)
related to the Issuer; and (iii) such REMIC Regular Certificateholder complies
with certain identification requirements (including delivery of a statement,
signed by the REMIC Regular Certificateholder under penalties of perjury,
certifying that such REMIC Regular Certificateholder is a foreign person and
providing the name and address of such REMIC Regular Certificateholder). If a
REMIC Regular Certificateholder is not exempt from withholding, distributions of
interest to such holder, including distributions in respect of accrued OID, may
be subject to a 30% withholding tax, subject to reduction under any applicable
tax treaty.
88
<PAGE>
Further, a REMIC Regular Certificate will not be included in the estate of
a non-resident alien individual and will not be subject to United States estate
taxes. However, Certificateholders who are non-resident alien individuals should
consult their tax advisors concerning this question.
REMIC Regular Certificateholders who are not U.S. Persons and persons
related to such holders should not acquire any REMIC Residual Certificates, and
holders of REMIC Residual Certificates (the 'REMIC Residual Certificateholder')
and persons related to REMIC Residual Certificateholders should not acquire any
REMIC Regular Certificates without consulting their tax advisors as to the
possible adverse tax consequences of doing so.
Information Reporting and Backup Withholding. The Master Servicer will
furnish or make available, within a reasonable time after the end of each
calendar year, to each person who was a REMIC Regular Certificateholder at any
time during such year, such information as may be deemed necessary or desirable
to assist REMIC Regular Certificateholders in preparing their federal income tax
returns, or to enable holders to make such information available to beneficial
owners or financial intermediaries that hold such REMIC Regular Certificates on
behalf of beneficial owners. If a holder, beneficial owner, financial
intermediary or other recipient of a payment on behalf of a beneficial owner
fails to supply a certified taxpayer identification number or if the Secretary
of the Treasury determines that such person has not reported all interest and
dividend income required to be shown on its federal income tax return, 31%
backup withholding may be required with respect to any payments. Any amounts
deducted and withheld from a distribution to a recipient would be allowed as a
credit against such recipient's federal income tax liability.
B. TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
Allocation of the Income of the REMIC to the REMIC Residual
Certificates. The REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and certain other transactions.
See '--Prohibited Transactions and Other Taxes' below. Instead, each original
holder of a REMIC Residual Certificate will report on its federal income tax
return, as ordinary income, its share of the taxable income of the REMIC for
each day during the taxable year on which such holder owns any REMIC Residual
Certificates. The taxable income of the REMIC for each day will be determined by
allocating the taxable income of the REMIC for each calendar quarter ratably to
each day in the quarter. Such a holder's share of the taxable income of the
REMIC for each day will be based on the portion of the outstanding REMIC
Residual Certificates that such holder owns on that day. The taxable income of
the REMIC will be determined under an accrual method and will be taxable to the
holders of REMIC Residual Certificates without regard to the timing or amounts
of cash distributions by the REMIC. Ordinary income derived from REMIC Residual
Certificates will be 'portfolio income' for purposes of the taxation of
taxpayers subject to the limitations on the deductibility of 'passive losses.'
As residual interests, the REMIC Residual Certificates will be subject to tax
rules, described below, that differ from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Certificates or as debt instruments issued by the
REMIC.
A REMIC Residual Certificateholder may be required to include taxable
income from the REMIC Residual Certificate in excess of the cash distributed.
For example, a structure where principal distributions are made serially on
regular interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, 'phantom income'). This
mismatching may be caused by the use of certain required tax accounting methods
by the REMIC, variations in the prepayment rate of the underlying Mortgage
Assets and certain other factors. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a REMIC Residual Certificate to a REMIC Residual Certificateholder.
Investors should consult their own tax advisors concerning the federal income
tax treatment of a REMIC Residual Certificate and the impact of such tax
treatment on the after-tax yield of a REMIC Residual Certificate.
A subsequent REMIC Residual Certificateholder also will report on its
federal income tax return amounts representing a daily share of the taxable
income of the REMIC for each day that such REMIC Residual Certificateholder owns
such REMIC Residual Certificate. Those daily amounts generally would equal the
amounts that would have been reported for the same days by an original REMIC
Residual Certificateholder, as described above. The Legislative History
indicates that certain adjustments may be appropriate to reduce (or increase)
the income of a subsequent holder of a REMIC Residual Certificate that purchased
such REMIC Residual Certificate at a price greater than (or less than) the
adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder. See '--Sale or Exchange of REMIC
Residual Certificates' below. It is not clear, however, whether such adjustments
will in fact be permitted or required and, if so, how they would be made. The
REMIC Regulations do not provide for any such adjustments.
89
<PAGE>
Taxable Income of the REMIC Attributable to Residual Interests. The
taxable income of the REMIC will reflect a netting of (i) the income from the
Mortgage Assets and the REMIC's other assets and (ii) the deductions allowed to
the REMIC for interest and OID on the REMIC Regular Certificates and, except as
described above under '--Taxation of Owners of REMIC Regular
Certificates--Non-Interest Expenses of the REMIC,' other expenses. REMIC taxable
income is generally determined in the same manner as the taxable income of an
individual using the accrual method of accounting, except that (i) the
limitations on deductibility of investment interest expense and expenses for the
production of income do not apply, (ii) all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC's gross income
includes interest, original issue discount income, and market discount income,
if any, on the Mortgage Loans, reduced by amortization of any premium on the
Mortgage Loans, plus income on reinvestment of cash flows and reserve assets,
plus any cancellation of indebtedness income upon allocation of realized losses
to the REMIC Regular Certificates. Note that the timing of cancellation of
indebtedness income recognized by REMIC Residual Certificateholders resulting
from defaults and delinquencies on Mortgage Assets may differ from the time of
the actual loss on the Mortgage Asset. The REMIC's deductions include interest
and original issue discount expense on the REMIC Regular Certificates, servicing
fees on the Mortgage Loans, other administrative expenses of the REMIC and
realized losses on the Mortgage Loans. The requirement that REMIC Residual
Certificateholders report their pro rata share of taxable income or net loss of
the REMIC will continue until there are no Certificates of any class of the
related Series outstanding.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Certificates and the REMIC Residual Certificates (or, if a
class of Certificates is not sold initially, its fair market value). Such
aggregate basis will be allocated among the Mortgage Assets and other assets of
the REMIC in proportion to their respective fair market value. A Mortgage Asset
will be deemed to have been acquired with discount or premium to the extent that
the REMIC's basis therein is less than or greater than its principal balance,
respectively. Any such discount (whether market discount or OID) will be
includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing OID on the REMIC Regular Certificates. The REMIC
expects to elect under Code Section 171 to amortize any premium on the Mortgage
Assets. Premium on any Mortgage Asset to which such election applies would be
amortized under a constant yield method. It is not clear whether the yield of a
Mortgage Asset would be calculated for this purpose based on scheduled payments
or taking account of the Prepayment Assumption. Additionally, such an election
would not apply to the yield with respect to any underlying mortgage loan
originated on or before September 27, 1985. Instead, premium with respect to
such a mortgage loan would be allocated among the principal payments thereon and
would be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for interest and OID on the REMIC
Regular Certificates. The amount and method of accrual of OID will be calculated
for this purpose in the same manner as described above with respect to REMIC
Regular Certificates except that the 0.25% per annum de minimis rule and
adjustments for subsequent holders described therein will not apply.
A REMIC Residual Certificateholder will not be permitted to amortize the
cost of the REMIC Residual Certificate as an offset to its share of the REMIC's
taxable income. However, REMIC taxable income will not include cash received by
the REMIC that represents a recovery of the REMIC's basis in its assets, and, as
described above, the issue price of the REMIC Residual Certificates will be
added to the issue price of the REMIC Regular Certificates in determining the
REMIC's initial basis in its assets. See '--Sale or Exchange of REMIC Residual
Certificates' below. For a discussion of possible adjustments to income of a
subsequent holder of a REMIC Residual Certificate to reflect any difference
between the actual cost of such REMIC Residual Certificate to such holder and
the adjusted basis such REMIC Residual Certificate would have in the hands of an
original REMIC Residual Certificateholder, see '--Allocation of the Income of
the REMIC to the REMIC Residual Certificates' above.
Net Losses of the REMIC. The REMIC will have a net loss for any calendar
quarter in which its deductions exceed its gross income. Such net loss would be
allocated among the REMIC Residual Certificateholders in the same manner as the
REMIC's taxable income. The net loss allocable to any REMIC Residual Certificate
will not be deductible by the holder to the extent that such net loss exceeds
such holder's adjusted basis in such REMIC Residual Certificate. Any net loss
that is not currently deductible by reason of this limitation may only be used
by such REMIC Residual Certificateholder to offset its share of the REMIC's
taxable income in future periods (but
90
<PAGE>
not otherwise). The ability of REMIC Residual Certificateholders that are
individuals or closely held corporations to deduct net losses may be subject to
additional limitations under the Code.
Mark to Market Rules. Prospective purchasers of a REMIC Residual
Certificate should be aware that the IRS recently finalized regulations (the
'Mark-to-Market Regulations') which provide that a REMIC Residual Certificate
acquired after January 3, 1995 cannot be marked to market. The Mark-to-Market
Regulations replaced the temporary regulations which allowed a Residual
Certificate to be marked to market provided that it was not a 'negative value'
residual interest and did not have the same economic effect as a 'negative
value' residual interest.
Pass-Through of Non-Interest Expenses of the REMIC. As a general rule, all
of the fees and expenses of a REMIC will be taken into account by holders of the
REMIC Residual Certificates. In the case of a single class REMIC, however, the
expenses and a matching amount of additional income will be allocated, under
temporary Treasury regulations, among the REMIC Regular Certificateholders and
the REMIC Residual Certificateholders on a daily basis in proportion to the
relative amounts of income accruing to each Certificateholder on that day. In
general terms, a single class REMIC is one that either (i) would qualify, under
existing Treasury regulations, as a grantor trust if it were not a REMIC
(treating all interests as ownership interests, even if they would be classified
as debt for federal income tax purposes) or (ii) is similar to such a trust and
is structured with the principal purpose of avoiding the single class REMIC
rules. Unless otherwise stated in the applicable Prospectus Supplement, the
expenses of the REMIC will be allocated to holders of the related REMIC Residual
Certificates in their entirety and not to holders of the related REMIC Regular
Certificates.
In the case of individuals (or trusts, estates or other persons that
compute their income in the same manner as individuals) who own an interest in a
REMIC Regular Certificate or a REMIC Residual Certificate directly or through a
pass-through interest holder that is required to pass miscellaneous itemized
deductions through to its owners or beneficiaries (e.g., a partnership, an S
corporation or a grantor trust), such expenses will be deductible under Code
Section 67 only to the extent that such expenses, plus other 'miscellaneous
itemized deductions' of the individual, exceed 2% of such individual's adjusted
gross income. In addition, Code Section 68 provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a certain amount (the 'Applicable Amount') will be reduced by the lesser
of (i) 3% of the excess of the individual's adjusted gross income over the
Applicable Amount or (ii) 80% of the amount of itemized deductions otherwise
allowable for the taxable year. The amount of additional taxable income
recognized by REMIC Residual Certificateholders who are subject to the
limitations of either Code Section 67 or Code Section 68 may be substantial.
Further, holders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. The REMIC is required to report to
each pass-through interest holder and to the IRS such holder's allocable share,
if any, of the REMIC's non-interest expenses. The term 'pass-through interest
holder' generally refers to individuals, entities taxed as individuals and
certain pass-through entities, but does not include real estate investment
trusts. REMIC Residual Certificateholders that are pass-through interest holders
should consult their own tax advisors about the impact of these rules on an
investment in the REMIC Residual Certificates.
Excess Inclusions. A portion of the income on a REMIC Residual Certificate
(referred to in the Code as an 'excess inclusion') for any calendar quarter will
be subject to federal income tax in all events. Thus, for example, an excess
inclusion (i) may not, except as described below, be offset by any unrelated
losses, deductions or loss carryovers of a REMIC Residual Certificateholder;
(ii) will be treated as 'unrelated business taxable income' within the meaning
of Code Section 512 if the REMIC Residual Certificateholder is a pension fund or
any other organization that is subject to tax only on its unrelated business
taxable income (see '--Tax-Exempt Investors' below); and (iii) is not eligible
for any reduction in the rate of withholding tax in the case of a REMIC Residual
Certificateholder that is a foreign investor. See '--Non-U.S. Persons' below.
The exception for thrift institutions is available only to the institution
holding the REMIC Residual Certificate and not to any affiliate of the
institution, unless the affiliate is a subsidiary all the stock of which, and
substantially all the indebtedness of which, is held by the institution, and
which is organized and operated exclusively in connection with the organization
and operation of one or more REMICs.
Except as discussed in the following paragraph, with respect to any REMIC
Residual Certificateholder, the excess inclusions for any calendar quarter is
the excess, if any, of (i) the income of such REMIC Residual Certificateholder
for that calendar quarter from its REMIC Residual Certificate over (ii) the sum
of the 'daily accruals' (as defined below) for all days during the calendar
quarter on which the REMIC Residual Certificateholder holds such REMIC Residual
Certificate. For this purpose, the daily accruals with respect to a REMIC
Residual Certificate are determined by allocating to each day in the calendar
quarter its ratable portion of
91
<PAGE>
the product of the 'adjusted issue price' (as defined below) of the REMIC
Residual Certificate at the beginning of the calendar quarter and 120 percent of
the 'Federal long-term rate' in effect at the time the REMIC Residual
Certificate is issued. For this purpose, the 'adjusted issue price' of a REMIC
Residual Certificate at the beginning of any calendar quarter equals the issue
price of the REMIC Residual Certificate, increased by the amount of daily
accruals for all prior quarters, and decreased (but not below zero) by the
aggregate amount of payments made on the REMIC Residual Certificate before the
beginning of such quarter. The 'federal long-term rate' is an average of current
yields on Treasury securities with a remaining term of greater than nine years,
computed and published monthly by the IRS.
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. Regulated investment companies, common trust funds and certain
cooperatives are subject to similar rules.
The Small Business Job Protection Act 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 Residual Certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect of excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, the amount of any
alternative minimum tax net operating loss deductions must be computed without
regard to any excess inclusions. Third, a residual holder's alternative minimum
taxable income for a tax year cannot be less than excess inclusions for the
year. The effect of this last statutory amendment is to prevent the use of
nonrefundable tax credits to reduce a taxpayer's income tax below its tentative
minimum tax computed only on excess inclusions. These rules are effective for
tax years beginning after December 31, 1986, unless a residual holder elects to
have such rules apply only to tax years beginning after August 20, 1996.
Payments. Any distribution made on a REMIC Residual Certificate to a REMIC
Residual Certificateholder will be treated as a non-taxable return of capital to
the extent it does not exceed the REMIC Residual Certificateholder's adjusted
basis in such REMIC Residual Certificate. To the extent a distribution exceeds
such adjusted basis, it will be treated as gain from the sale of the REMIC
Residual Certificate.
Sale or Exchange of REMIC Residual Certificates. If a REMIC Residual
Certificate is sold or exchanged, the seller will generally recognize gain or
loss equal to the difference between the amount realized on the sale or exchange
and its adjusted basis in the REMIC Residual Certificate (except that the
recognition of loss may be limited under the 'wash sale' rules described below).
A holder's adjusted basis in a REMIC Residual Certificate generally equals the
cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder, increased by the taxable income of the REMIC that was
included in the income of such REMIC Residual Certificateholder with respect to
such REMIC Residual Certificate, and decreased (but not below zero) by the net
losses that have been allowed as deductions to such REMIC Residual
Certificateholder with respect to such REMIC Residual Certificate and by the
distributions received thereon by such REMIC Residual Certificateholder. In
general, any such gain or loss will be capital gain or loss provided the REMIC
Residual Certificate is held as a capital asset. However, REMIC Residual
Certificates will be 'evidences of indebtedness' within the meaning of Code
Section 582(c)(1), so that gain or loss recognized from sale of a REMIC Residual
Certificate by a bank or thrift institution to which such section applies would
be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a REMIC Residual Certificate reacquires such REMIC Residual Certificate, or
acquires any other REMIC Residual Certificate, any residual interest in another
REMIC or similar interest in a 'taxable mortgage pool' (as defined in Code
Section 7701(i)) during the period beginning six months before, and ending six
months after, the date of such sale, such sale will be subject to the 'wash
sale' rules of Code Section 1091. In that event, any loss realized by the REMIC
Residual Certificateholder on the sale will not be deductible, but, instead,
will increase such REMIC Residual Certificateholder's adjusted basis in the
newly acquired asset.
92
<PAGE>
C. PROHIBITED TRANSACTIONS AND OTHER TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from 'prohibited transactions' (the 'Prohibited Transactions Tax'). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Asset, the receipt of income from a source other than
a Mortgage Asset 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 Assets for temporary investment pending
distribution on the Certificates. It is not anticipated that the Trust Fund for
any Series of Certificates will engage in any prohibited transactions in which
it would recognize a material amount of net income.
In addition, certain contributions to a Trust Fund as to which an election
has been made to treat such Trust Fund as a REMIC made after the day on which
such Trust Fund issues all of its interests could result in the imposition of a
tax on the Trust Fund equal to 100% of the value of the contributed property
(the 'Contributions Tax'). No Trust Fund for any Series of Certificates will
accept contributions that would subject it to such tax.
In addition, a Trust Fund as to which an election has been made to treat
such Trust Fund as a REMIC may also be subject to federal income tax at the
highest corporate rate on 'net income from foreclosure property,' determined by
reference to the rules applicable to real estate investment trusts. 'Net income
from foreclosure property' generally means income from foreclosure property
other than qualifying income for a real estate investment trust.
Where any Prohibited Transactions Tax, Contributions Tax, tax on net income
from foreclosure property or state or local income or franchise tax that may be
imposed on a REMIC relating to any Series of Certificates arises out of or
results from (i) a breach of the related Master Servicer's, Trustee's or Asset
Seller's obligations, as the case may be, under the related Agreement for such
Series, such tax will be borne by such Master Servicer, Trustee or Asset Seller,
as the case may be, out of its own funds or (ii) the Asset Seller's obligation
to repurchase a Mortgage Loan, such tax will be borne by the Asset Seller. In
the event that such Master Servicer, Trustee or Asset Seller, as the case may
be, fails to pay or is not required to pay any such tax as provided above, such
tax will be payable out of the Trust Fund for such Series and will result in a
reduction in amounts available to be distributed to the Certificateholders of
such Series.
D. LIQUIDATION AND TERMINATION
If the REMIC adopts a plan of complete liquidation, within the meaning of
Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which such adoption is deemed to occur, and
sells all of its assets (other than cash) within a 90-day period beginning on
such date, the REMIC will not be subject to any Prohibited Transaction Tax,
provided that the REMIC credits or distributes in liquidation all of the sale
proceeds plus its cash (other than the amounts retained to meet claims) to
holders of Regular and REMIC Residual Certificates within the 90-day period.
The REMIC will terminate shortly following the retirement of the REMIC
Regular Certificates. If a REMIC Residual Certificateholder's adjusted basis in
the REMIC Residual Certificate exceeds the amount of cash distributed to such
REMIC Residual Certificateholder in final liquidation of its interest, then it
would appear that the REMIC Residual Certificateholder would be entitled to a
loss equal to the amount of such excess. It is unclear whether such a loss, if
allowed, will be a capital loss or an ordinary loss.
E. ADMINISTRATIVE MATTERS
Solely for the purpose of the administrative provisions of the Code, the
REMIC generally will be treated as a partnership and the REMIC Residual
Certificateholders will be treated as the partners. Certain information will be
furnished quarterly to each REMIC Residual Certificateholder who held a REMIC
Residual Certificate on any day in the previous calendar quarter.
Each REMIC Residual Certificateholder is required to treat items on its
return consistently with their treatment on the REMIC's return, unless the REMIC
Residual Certificateholder either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. The REMIC does not intend to
register as a tax shelter pursuant to Code Section 6111 because it is not
anticipated that the REMIC will have a net loss for any of the first five
taxable years of its existence. Any person that holds a REMIC Residual
Certificate as a nominee for another person may be required to furnish the
REMIC, in a manner to be provided in Treasury regulations, with the name and
address of such person and other information.
93
<PAGE>
F. TAX-EXEMPT INVESTORS
Any REMIC Residual Certificateholder that is a pension fund or other entity
that is subject to federal income taxation only on its 'unrelated business
taxable income' within the meaning of Code Section 512 will be subject to such
tax on that portion of the distributions received on a REMIC Residual
Certificate that is considered an excess inclusion. See '--Taxation of Owners of
REMIC Residual Certificates--Excess Inclusions' above.
G. RESIDUAL CERTIFICATE PAYMENTSNON-U.S. PERSONS
Amounts paid to REMIC Residual Certificateholders who are not U.S. Persons
(see '--Taxation of Owners of REMIC Regular Certificates--Non-U.S. Persons'
above) are treated as interest for purposes of the 30% (or lower treaty rate)
United States withholding tax. Amounts distributed to holders of REMIC Residual
Certificates should qualify as 'portfolio interest,' subject to the conditions
described in '--Taxation of Owners of REMIC Regular Certificates' above, but
only to the extent that the underlying mortgage loans were originated after July
18, 1984. Furthermore, the rate of withholding on any income on a REMIC Residual
Certificate that is excess inclusion income will not be subject to reduction
under any applicable tax treaties. See '--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions' above. If the portfolio interest exemption is
unavailable, such amount will be subject to United States withholding tax when
paid or otherwise distributed (or when the REMIC Residual Certificate is
disposed of) under rules similar to those for withholding upon disposition of
debt instruments that have OID. The Code, however, grants the Treasury
Department authority to issue regulations requiring that those amounts be taken
into account earlier than otherwise provided where necessary to prevent
avoidance of tax (for example, where the REMIC Residual Certificates do not have
significant value). See '--Taxation of Owners of REMIC Residual
Certificates--Excess Inclusions' above. If the amounts paid to REMIC Residual
Certificateholders that are not U.S. Persons are effectively connected with
their conduct of a trade or business within the United States, the 30% (or lower
treaty rate) withholding will not apply. Instead, the amounts paid to such
non-U.S. Person will be subject to U.S. federal income taxation at regular
graduated rates. For special restrictions on the transfer of REMIC Residual
Certificates, see '--Tax-Related Restrictions on Transfers of REMIC Residual
Certificates' below.
REMIC Regular Certificateholders and persons related to such holders should
not acquire any REMIC Residual Certificates, and REMIC Residual
Certificateholders and persons related to REMIC Residual Certificateholders
should not acquire any REMIC Regular Certificates, without consulting their tax
advisors as to the possible adverse tax consequences of such acquisition.
TAX-RELATED RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES
Disqualified Organizations. An entity may not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that residual interests in
such entity are not held by 'disqualified organizations' (as defined below).
Further, a tax is imposed on the transfer of a residual interest in a REMIC to a
'disqualified organization.' The amount of the tax equals the product of (A) an
amount (as determined under the REMIC Regulations) equal to the present value of
the total anticipated 'excess inclusions' with respect to such interest for
periods after the transfer and (ii) the highest marginal federal income tax rate
applicable to corporations. The tax is imposed on the transferor unless the
transfer is through an agent (including a broker or other middleman) for a
disqualified organization, in which event the tax is imposed on the agent. The
person otherwise liable for the tax shall be relieved of liability for the tax
if the transferee furnished to such person an affidavit that the transferee is
not a disqualified organization and, at the time of the transfer, such person
does not have actual knowledge that the affidavit is false. A 'disqualified
organization' means (A) the United States, any State, possession or political
subdivision thereof, any foreign government, any international organization or
any agency or instrumentality of any of the foregoing (provided that such term
does not include an instrumentality if all its activities are subject to tax
and, except for FHLMC, a majority of its board of directors is not selected by
any such governmental agency), (B) any organization (other than certain farmers'
cooperatives) generally exempt from federal income taxes unless such
organization is subject to the tax on 'unrelated business taxable income' and
(C) a rural electric or telephone cooperative.
A tax is imposed on a 'pass-through entity' (as defined below) holding a
residual interest in a REMIC if at any time during the taxable year of the
pass-through entity a disqualified organization is the record holder of an
interest in such entity. The amount of the tax is equal to the product of (A)
the amount of excess inclusions for the taxable year allocable to the interest
held by the disqualified organization and (B) the highest marginal federal
income tax rate applicable to corporations. The pass-through entity otherwise
liable for the tax, for any period during which the disqualified organization is
the record holder of an interest in such entity, will be relieved of
94
<PAGE>
liability for the tax if such record holder furnishes to such entity an
affidavit that such record holder is not a disqualified organization and, for
such period, the pass-through entity does not have actual knowledge that the
affidavit is false. For this purpose, a 'pass-through entity' means (i) a
regulated investment company, real estate investment trust or common trust fund,
(ii) a partnership, trust or estate and (iii) certain cooperatives. Except as
may be provided in Treasury regulations not yet issued, any person holding an
interest in a pass-through entity as a nominee for another will, with respect to
such interest, be treated as a pass-through entity. The tax on pass-through
entities is generally effective for periods after March 31, 1988, except that in
the case of regulated investment companies, real estate investment trusts,
common trust funds and publicly-traded partnerships the tax shall apply only to
taxable years of such entities beginning after December 31, 1988. Under proposed
legislation, large partnerships (generally with 250 or more partners) will be
taxable on excess inclusion income as if all partners were disqualified
organizations.
In order to comply with these rules, the Agreement will provide that no
record or beneficial ownership interest in a REMIC Residual Certificate may be
purchased, transferred or sold, directly or indirectly, without the express
written consent of the Master Servicer. The Master Servicer will grant such
consent to a proposed transfer only if it receives the following: (i) an
affidavit from the proposed transferee to the effect that it is not a
disqualified organization and is not acquiring the REMIC Residual Certificate as
a nominee or agent for a disqualified organization and (ii) a covenant by the
proposed transferee to the effect that the proposed transferee agrees to be
bound by and to abide by the transfer restrictions applicable to the REMIC
Residual Certificate.
Noneconomic REMIC Residual Certificates. The REMIC Regulations disregard,
for federal income tax purposes, any transfer of a Noneconomic REMIC Residual
Certificate to a 'U.S. Person,' as defined above, unless no significant purpose
of the transfer is to enable the transferor to impede the assessment or
collection of tax. A Noneconomic REMIC Residual Certificate is any REMIC
Residual Certificate (including a REMIC Residual Certificate with a positive
value at issuance) unless, at the time of transfer, taking into account the
Prepayment Assumption and any required or permitted clean up calls or required
liquidation provided for in the REMIC's organizational documents, (i) the
present value of the expected future distributions on the REMIC Residual
Certificate at least equals the product of the present value of the anticipated
excess inclusions and the highest corporate income tax rate in effect for the
year in which the transfer occurs and (ii) the transferor reasonably expects
that the transferee will receive distributions from the REMIC at or after the
time at which taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A transferor is presumed not to have such knowledge if (i) the transferor
conducted a reasonable investigation of the transferee and (ii) the transferee
acknowledges to the transferor that the residual interest may generate tax
liabilities in excess of the cash flow and the transferee represents that it
intends to pay such taxes associated with the residual interest as they become
due. If a transfer of a Noneconomic REMIC Residual Certificate is disregarded,
the transferor would continue to be treated as the owner of the REMIC Residual
Certificate and would continue to be subject to tax on its allocable portion of
the net income of the REMIC.
Foreign Investors. The REMIC Regulations provide that the transfer of a
REMIC Residual Certificate that has a 'tax avoidance potential' to a 'foreign
person' will be disregarded for federal income tax purposes. This rule appears
to apply to a transferee who is not a U.S. Person unless such transferee's
income in respect of the REMIC Residual Certificate is effectively connected
with the conduct of a United States trade or business. A REMIC Residual
Certificate is deemed to have a tax avoidance potential unless, at the time of
transfer, the transferor reasonably expects that the REMIC will distribute to
the transferee amounts that will equal at least 30 percent of each excess
inclusion, and that such amounts will be distributed at or after the time the
excess inclusion accrues and not later than the end of the calendar year
following the year of accrual. If the non-U.S. Person transfers the REMIC
Residual Certificate to a U.S. Person, the transfer will be disregarded, and the
foreign transferor will continue to be treated as the owner, if the transfer has
the effect of allowing the transferor to avoid tax on accrued excess inclusions.
The provisions in the REMIC Regulations regarding transfers of REMIC Residual
Certificates that have tax avoidance potential to foreign persons are effective
for all transfers after June 30, 1992. The Agreement will provide that no record
or beneficial ownership interest in a REMIC Residual Certificate may be
transferred, directly or indirectly, to a non-U.S. Person unless such person
provides the Trustee with a duly completed IRS Form 4224 and the Trustee
consents to such transfer in writing.
Any attempted transfer or pledge in violation of the transfer restrictions
shall be absolutely null and void and shall vest no rights in any purported
transferee. Investors in REMIC Residual Certificates are advised to consult
95
<PAGE>
their own tax advisors with respect to transfers of the REMIC Residual
Certificates and, in addition, pass-through entities are advised to consult
their own tax advisors with respect to any tax which may be imposed on a pass-
through entity.
TAX CHARACTERIZATION OF A TRUST FUND AS A PARTNERSHIP
Brown & Wood LLP, special counsel to the Depositor, will deliver its
opinion that a Trust Fund for which a partnership election is made will not be
an association (or publicly traded partnership) taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
A. TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, etc. The discussion below assumes that all payments on the Notes are
denominated in U.S. dollars. Moreover, the discussion assumes that the interest
formula for the Notes meets the requirements for 'qualified stated interest'
under the OID regulations, and that any OID on the Notes (i.e., any excess of
the principal amount of the Notes over their issue price) does not exceed a de
minimis amount (i.e., 1/4% of their principal amount multiplied by the number of
full years included in their term), all within the meaning of the OID
regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
96
<PAGE>
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest,' and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Depositor (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust Fund or the Asset Seller is a 'related person' within the meaning of the
Code and (ii) provides the Owner Trustee or other person who is otherwise
required to withhold U.S. tax with respect to the Notes with an appropriate
statement (on Form W-8 or a similar form), signed under penalties of perjury,
certifying that the beneficial owner of the Note is a foreign person and
providing the foreign person's name and address. If a Note is held through a
securities clearing organization or certain other financial institutions, the
organization or institution may provide the relevant signed statement to the
withholding agent; in that case, however, the signed statement must be
accompanied by a Form W-8 or substitute form provided by the foreign person that
owns the Note. If such interest is not portfolio interest, then it will be
subject to United States federal income and withholding tax at a rate of 30
percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Depositor, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund would likely be treated as a publicly traded partnership that would
not be taxable as a corporation because it would meet certain qualifying income
tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income,' income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
B. TAX CONSEQUENCES TO HOLDER OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Depositor will agree,
and the Certificateholders will agree by their purchase of Certificates, to
treat the Trust Fund as a partnership for purposes of federal and state income
tax, franchise tax and any other tax measured in whole or in part by income,
with the assets of the partnership being the assets held by the Trust Fund, the
partners of the partnership being the Certificateholders, and the Notes being
debt of the partnership. However, the proper characterization of the arrangement
involving the Trust Fund, the Certificates, the Notes, the Trust Fund and the
Master Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
97
<PAGE>
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Mortgage Loans
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Mortgage Loans. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Mortgage Loans.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass-Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Mortgage Loans that
corresponds to any excess of the principal amount of the Certificates over their
initial issue price; (iii) prepayment premium payable to the Certificateholders
for such month; and (iv) any other amounts of income payable to the
Certificateholders for such month. Such allocation will be reduced by any
amortization by the Trust Fund of premium on Mortgage Loans that corresponds to
any excess of the issue price of Certificates over their principal amount. All
remaining taxable income of the Trust Fund will be allocated to the Company.
Based on the economic arrangement of the parties, this approach for allocating
Trust Fund income should be permissible under applicable treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Certificateholders. Moreover, even under the
foregoing method of allocation, Certificateholders may be allocated income equal
to the entire Pass-Through Rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Certificates on the accrual basis and Certificateholders may
become liable for taxes on Trust Fund income even if they have not received cash
from the Trust Fund to pay such taxes. In addition, because tax allocations and
tax reporting will be done on a uniform basis for all Certificateholders but
Certificateholders may be purchasing Certificates at different times and at
different prices Certificateholders may be required to report on their tax
returns taxable income that is greater or less than the amount reported to them
by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Master Servicer but not interest expense) would be miscellaneous
itemized deductions. Such deductions might be disallowed to the individual in
whole or in part and might result in such holder being taxed on an amount of
income that exceeds the amount of cash actually distributed to such holder over
the life of the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Mortgage Loan, the
Trust Fund might be required to incur additional expense but it is believed that
there would not be a material adverse effect on Certificateholders.
98
<PAGE>
Discount and Premium. It is believed that the Loans were not issued with
OID, and, therefore, the Trust should not have OID income. However, the purchase
price paid by the Trust Fund for the Mortgage Loans may be greater or less than
the remaining principal balance of the Loans at the time of purchase. If so, the
Loan will have been acquired at a premium or discount, as the case may be. (As
indicated above, the Trust Fund will make this calculation on an aggregate
basis, but might be required to recompute it on a Mortgage Loan by Mortgage Loan
basis.)
If the Trust Fund acquires the Mortgage Loans at a market discount or
premium, the Trust Fund will elect to include any such discount in income
currently as it accrues over the life of the Mortgage Loans or to offset any
such premium against interest income on the Mortgage Loans. As indicated above,
a portion of such market discount income or premium deduction may be allocated
to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share of Trust Fund income (includible
in income) and decreased by any distributions received with respect to such
Certificate. In addition, both the tax basis in the Certificates and the amount
realized on a sale of a Certificate would include the holder's share of the
Notes and other liabilities of the Trust Fund. A holder acquiring Certificates
at different prices may be required to maintain a single aggregate adjusted tax
basis in such Certificates, and, upon sale or other disposition of some of the
Certificates, allocate a portion of such aggregate tax basis to the Certificates
sold (rather than maintaining a separate tax basis in each Certificate for
purposes of computing gain or loss on a sale of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Mortgage Loans would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the Trust Fund were to file an election under
Section 754 of the Code. In order to avoid the administrative
99
<PAGE>
complexities that would be involved in keeping accurate accounting records, as
well as potentially onerous information reporting requirements, the Trust Fund
will not make such election. As a result, Certificateholders might be allocated
a greater or lesser amount of Trust Fund income than would be appropriate based
on their own purchase price for Certificates.
Administrative Matters. The Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the Trust Fund on or before the
following January 31. Nominees, brokers and financial institutions that fail to
provide the Trust Fund with the information described above may be subject to
penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust Fund to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder
100
<PAGE>
must obtain a taxpayer identification number from the IRS and submit that number
to the Trust Fund on Form W-8 in order to assure appropriate crediting of the
taxes withheld. A foreign holder generally would be entitled to file with the
IRS a claim for refund with respect to taxes withheld by the Trust Fund taking
the position that no taxes were due because the Trust Fund was not engaged in a
U.S. trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
TAX TREATMENT OF CERTIFICATES AS DEBT FOR TAX PURPOSES
A. CHARACTERIZATION OF THE CERTIFICATES AS INDEBTEDNESS
If the related Prospectus Supplement indicates that the Certificates will
be treated as indebtedness for federal income tax purposes, then based on the
application of existing law to the facts as set forth in the Trust Agreement and
other relevant documents and assuming compliance with the terms of the Trust
Agreement as in effect on the date of issuance of the Certificates, Brown and
Wood LLP, special tax counsel to the Depositor ('Tax Counsel'), will deliver its
opinion that the Certificates will be treated as debt instruments for federal
income tax purposes of such date.
The Depositor and the Certificateholders will express in the related Trust
Agreement their intent that, for applicable tax purposes, the Certificates will
be indebtedness secured by the related Assets. The Depositor and the
Certificateholders, by accepting the Certificates, and each Certificate owner by
its acquisition of a beneficial interest in a Certificate, have agreed to treat
the Certificates as indebtedness for U.S. federal income tax purposes. However,
because different criteria are used to determine the non-tax accounting
characterization of the transaction, the Depositor may treat this transaction as
a sale of an interest in the related Assets for financial accounting and certain
regulatory purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or a loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax Counsel will analyze and rely on several factors in
reaching its opinion that the weight of the benefits and burdens of ownership of
the Mortgage Loans will be retained by the Depositor and not transferred to the
Certificate Owners.
In some instances, courts have held that the taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax Counsel will advise that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions of the documents either
accords with the characterization of the Certificates as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
B. TAXATION OF INTEREST INCOME OF CERTIFICATE OWNERS
Assuming that the Certificate Owners are holders of debt obligations for
U.S. federal tax purposes, the Certificates generally will be taxable in the
following manner. While it is not anticipated that the Certificates will be
issued at a greater than de minimis discount, under the OID Regulations it is
possible that the certificates
101
<PAGE>
could nevertheless be deemed to have been issued with OID if the interest were
not treated as 'unconditionally payable' under the Old Regulations. If such
regulations were to apply, all of the taxable income to be recognized with
respect to the Certificates would be includible in income of Certificate owners
as OID, but would not be includable again when the interest is actually
received.
C. POSSIBLE CLASSIFICATION OF THE TRUST FUND AS A PARTNERSHIP OR ASSOCIATION
TAXABLE AS A CORPORATION
Based on application of existing laws to the facts as set forth in the
Trust Agreement and other relevant documents and assuming compliance with the
terms of the Trust Agreement, Tax Counsel will deliver its opinion that the
transaction will not be treated as a partnership or an association taxable as a
corporation. The opinion of Tax Counsel is not binding on the courts or the IRS.
It is possible that the IRS could assert that, for purposes of the Code, the
transaction contemplated by this Prospectus Supplement with respect to the
Certificates constitutes a sale of the Mortgage Loans (or an interest therein)
to the Certificate Owners and that the proper classification of the legal
relationship between the Depositor and the Certificate Owners resulting from
this transaction is that of a partnership (including a publicly traded
partnership treated as a corporation), or an association taxable as a
corporation. Since Tax Counsel will advise that the Certificates will be treated
as indebtedness in the hands of the Certificateholders for U.S. federal income
tax purposes and that the entity constituted by the Trust will not be a publicly
traded partnership treated as a corporation or an association taxable as a
corporation, the Depositor will not attempt to comply with U.S. federal income
tax reporting requirements applicable to partnerships or corporations as such
requirements would apply if the Certificates were treated as indebtedness.
If it were determined that this transaction created an entity classified as
a corporation (including a publicly traded partnership taxable as a
corporation), the Trust Fund would be subject to U.S. federal income tax at
corporate income tax rates on the income it derives from the Mortgage Loans,
which would reduce the amounts available for distribution to the Certificate
Owners. Cash distributions to the Certificate Owners generally would be treated
as dividends for tax purposes to the extent of such corporation's earnings and
profits.
If the transaction were treated as creating a partnership between the
Certificate Owners and the Transferor, the partnership itself would not be
subject to U.S. federal income tax (unless it were to be characterized as a
publicly traded partnership taxable as a corporation); rather, the Depositor and
each Certificate Owner would be taxed individually on their respective
distributive shares of the partnership's income, gain, loss, deductions and
credits. The amount and timing of items of income and deductions of the
Certificate Owner could differ if the Certificates were held to constitute
partnership interests rather than indebtedness.
D. POSSIBLE CLASSIFICATION AS A TAXABLE MORTGAGE POOL
In relevant part, Section 7701(i) of the Code provides that any entity (or
portion of an entity) that is a 'taxable mortgage pool' will be classified as a
taxable corporation and will not be permitted to file a consolidated U.S.
federal income tax return with another corporation. Any entity (or portion of
any entity) will be a taxable mortgage pool if (i) substantially all of its
assets consist of debt instruments, more than 50% of which are real estate
mortgages, (ii) the entity is the obligor under debt obligations with two or
more maturities, and (iii) under the terms of the entity's debt obligations (or
an underlying arrangement), payments on such debt obligations bear a
relationship to the debt instruments held by the entity.
In the case of a Trust Fund containing Mortgage Assets, assuming that all
of the provisions of the Trust Agreement, as in effect on the date of issuance,
will be complied with, Tax Counsel will deliver its opinion that the arrangement
created by the Agreement will not be a taxable mortgage pool under Section
7701(i) of the Code because only one class of indebtedness secured by the
Mortgage Loans will be issued.
The opinion of Tax Counsel is not binding on the IRS or the courts. If the
IRS were to contend successfully (or future regulations were to provide) that
the arrangement created by the Trust Agreement is a taxable mortgage pool, such
arrangement would be subject to U.S. federal corporate income tax on its taxable
income generated by ownership of the Mortgage Loans. Such a tax might reduce
amounts available for distributions to Certificate Owners. The amount of such a
tax would depend upon whether distributions to Certificate Owners would be
deductible as interest expense in computing the taxable income of such an
arrangement as a taxable mortgage pool.
102
<PAGE>
E. FOREIGN INVESTORS
In general, subject to certain exception, interest (including OID) paid on
a Certificate to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax provided that
such interest is not effectively connected with a trade or business of the
recipient in the United States and the Certificate Owner provides the required
foreign person information certification.
If the interest of the Certificate Owners were deemed to be partnership
interest, the partnership would be required, on a quarterly basis, to pay
withholding tax equal to the product, for each foreign partner, of such foreign
partner's distributive share of 'effectively connected' income of the
partnership multiplied by the highest rate of tax applicable to that foreign
partner. In addition, such foreign partner would be subject to branch profits
tax. Each non-foreign partner would be required to certify to the partnership
that it is not a foreign person. The tax withheld from each foreign partner
would be credited against such foreign partner's U.S. income tax liability.
If the Trust were taxable as a corporation, distributions to foreign
persons, to the extent treated as dividends, would generally be subject to
withholding at the rate of 30%, unless such rate were reduced by an applicable
tax treaty.
The Small Business Job Protection Act of 1996 changed the definition of a
'foreign' trust. Under prior law, the definition was based on whether a trust's
foreign source income would be subject to U.S. tax. The new definition contains
two objective requirements which, if satisfied, will cause a trust to be treated
as a U.S. trust. It looks first to whether the trust's administration is subject
to a U.S. court's 'primary supervision' and second to whether U.S. fiduciaries
control all substantial decisions of the trust. If both these requirements are
met, the trust is a U.S. trust. All other trusts are 'foreign' trust.
F. BACKUP WITHHOLDING
Certain Certificate owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Certificates if the Certificate
Owners, upon issuance of the Certificates, fail to supply the Trustee or the
Certificate Owners' brokers with their respective taxpayer identification
numbers, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other 'reportable payments' (as defined in the Code)
properly, or, under certain circumstances, fail to provide the Trust of the
Certificate Owners' brokers with certified statements, under penalty of perjury,
that they are not subject to backup withholding.
The Trust will be required to report annually to the IRS, and to each
Certificateholder of record, the amount of interest paid (and OID accrued, if
any) on the Certificates (and the amount of interest withheld for U.S. federal
income taxes, if any) for each calendar year, except as to exempt holders
(generally, holders that are corporations, certain tax-exempt organizations or
non-resident aliens who provide certification as to their status as non-
residents). As long as the only 'Certificateholder' of record is Cede, as
nominee for DTC, Certificate Owners and the IRS will receive tax and other
information including the amount of interest paid on the Certificates owned from
Participants and Indirect Participants rather than from the Trustee. (The
Trustee, however, will respond to requests for necessary information to enable
Participants, Indirect Participants and certain other persons to complete their
reports.) Each non-exempt Certificate Owner will be required to provide, under
penalty of perjury, a certificate on IRS Form W-9 containing his or her name,
address, correct federal taxpayer identification number and a statement that he
or she is not subject to backup withholding. Should a non-exempt Certificate
Owner fail to provide the required certification, the Participants or Indirect
Participants (or the Paying Agent) will be required to withhold 31% of the
interest (and principal) otherwise payable to the holder, and remit the withheld
amount to the IRS as a credit against the holder's federal income tax liability.
RECENT LEGISLATION
During 1996, President Clinton signed into law the 'Small Business Job
Protection Act of 1996' (the 'Act'). The Act creates a new type of entity for
federal income tax purposes called a 'financial asset securitization investment
trust' or 'FASIT.' Beginning in September of 1997, the Act generally enables
certain arrangements similar to a Trust Fund that is treated as a partnership to
elect to be treated as a FASIT. Under the Act, a FASIT generally would avoid
federal income taxation and could issue securities substantially similar to the
103
<PAGE>
Certificates and Notes, and those securities would be treated as debt for
federal income tax purposes. If so provided in the related Prospectus
Supplement, the Agreement, the Trust Agreement and/or the Indenture will set
forth certain conditions which, if satisfied, will permit the Depositor to amend
such Agreement, Trust Agreement and/or Indenture in order to enable all or a
portion of the Trust Fund to qualify as a FASIT and to permit a FASIT election
to be made with respect thereto, and to make such modifications to such
Agreement, Trust Agreement and/or Indenture as may be permitted by reason of the
making of such an election. However, the Depositor may, but is not obligated to,
cause a FASIT election and there can be no assurance that the Depositor will or
will not cause any permissible FASIT election to be made with respect to a Trust
Fund or amend the related Agreement, Trust Agreement and/or the Indenture in
connection with any election. Furthermore, any such election will be made only
if an opinion of federal tax counsel or special federal tax counsel is rendered
that such election will not have material adverse federal income consequences to
any holder of a Note or Certificate.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Offered Securities. State and local 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 or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Offered Securities.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans') and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are subject to ERISA's general fiduciary requirements,
including the requirement of investment prudence and diversification and the
requirement that a Plan's investments be made in accordance with the documents
governing the Plan.
PROHIBITED TRANSACTIONS
General
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to Section 502(i) of ERISA) on parties in interest which
engage in non-exempt prohibited transactions.
The United States Department of Labor ('Labor') has issued a final
regulation (29 C.F.R. Section 2510.3-101) containing rules for determining what
constitutes the assets of a Plan. This regulation provides that, as a general
rule, the underlying assets and properties of corporations, partnerships, trusts
and certain other entities in which a Plan makes an 'equity investment' will be
deemed for purposes of ERISA to be assets of the Plan unless certain exceptions
apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Mortgage Loans or
104
<PAGE>
Contracts and any other assets held by the Trust Fund. In such an event, the
Asset Seller, the Master Servicer, the Trustee, any insurer of the Assets and
other persons, in providing services with respect to the assets of the Trust
Fund, may be parties in interest, subject to the fiduciary responsibility
provisions of Title I of ERISA, including the prohibited transaction provisions
of Section 406 of ERISA (and of Section 4975 of the Code), with respect to
transactions involving such assets unless such transactions are subject to a
statutory or administrative exemption.
The regulations contain a de minimis safe-harbor rule that exempts any
entity from plan assets status as long as the aggregate equity investment in
such entity by plans is not significant. For this purpose, equity participation
in the entity will be significant if immediately after any acquisition of any
equity interest in the entity, 'benefit plan investors' in the aggregate, own at
least 25% of the value of any class of equity interest. 'Benefit plan investors'
are defined as Plans as well as employee benefit plans not subject to ERISA
(e.g., governmental plans). The 25% limitation must be met with respect to each
class of certificates, regardless of the portion of total equity value
represented by such class, on an ongoing basis.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interest' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Availability of Underwriter's Exemption for Certificates
Labor has granted to Merrill Lynch, Pierce, Fenner & Smith Incorporated
Prohibited Transaction Exemption 90-29, Exemption Application No. D-8012, 55
Fed. Reg. 21,459 (1990) (the 'Exemption') which exempts from the application of
the prohibited transaction rules transactions relating to: (1) the acquisition,
sale and holding by Plans of certain certificates representing an undivided
interest in certain asset-backed pass-through trusts, with respect to which
Merrill Lynch, Pierce, Fenner & Smith Incorporated or any of its affiliates is
the sole underwriter or the manager or co-manager of the underwriting syndicate;
and (2) the servicing, operation and management of such asset-backed
pass-through trusts, provided that the general conditions and certain other
conditions set forth in the Exemption are satisfied. The Exemption does not
apply to Certificates evidencing an interest in a Trust Fund containing
Unsecured Home Improvement Loans, SBA Loans or SBA 504 Loans. With respect to a
series of Notes, the related Prospectus Supplement will discuss whether the
Exemption may be applicable to such Notes.
General Conditions of the Exemption. Section II of the Exemption sets
forth the following general conditions which must be satisfied before a
transaction involving the acquisition, sale and holding of the Certificates or a
transaction in connection with the servicing, operation and management of the
Trust may be eligible for exemptive relief thereunder:
(1) The acquisition of the Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust;
(3) The 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 any of Duff & Phelps Inc., Fitch Investors Service
Inc., Moody's Investors Service, Inc. and Standard & Poor's Ratings Group.;
(4) The Trustee is not an affiliate of the Underwriter, the Asset
Seller, the Master Servicer, any insurer of the Mortgage Assets, any
borrower whose obligations under one or more Assets constitute more than 5%
of the aggregate unamortized principal balance of the assets in the Trust
Fund, or any of their respective affiliates (the 'Restricted Group');
(5) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Certificates represents not more
than reasonable compensation for underwriting such
105
<PAGE>
Certificates; the sum of all payments made to and retained by the Asset
Seller pursuant to the sale of the Assets to the Trust Fund represents not
more than the fair market value of such Assets; the sum of all payments
made to and retained by the Master Servicer represent not more than
reasonable compensation for the Master Servicer's services under the
Agreement and reimbursement of the Master Servicer's reasonable expenses in
connection therewith; and
(6) The Plan investing in the 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 as amended.
Before purchasing a Certificate, a fiduciary of a Plan should itself
confirm (a) that the Certificates constitute 'certificates' for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption and the other requirements set forth in the Exemption would be
satisfied.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Securities on behalf
of a Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any Securities, a
fiduciary of a Plan subject to the fiduciary responsibility provisions of ERISA
or an employee benefit plan subject to the prohibited transaction provisions of
the Code should make its own determination as to the availability of the
exemptive relief provided in the Exemption, and also consider the availability
of any other prohibited transaction exemptions. In particular, in connection
with a contemplated purchase of Securities representing a beneficial ownership
interest in a pool of single family residential first mortgage loans, such Plan
fiduciary should consider the availability of the Exemption or Prohibited
Transaction Class Exemption 83-1 ('PTCE 83-1') for certain transactions
involving mortgage pool investment trusts. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption, PTCE 83-1, or any other exemption, with
respect to the Securities offered thereby. PTCE 83-1 is not applicable to
manufactured housing contract pool investment trusts or multifamily mortgage
pool investment trusts.
Purchasers that are insurance companies should consult with their counsel
with respect to the United States Supreme Court case interpreting the fiduciary
responsibility rules of ERISA, John Hancock Mutual Life Insurance Co. v. Harris
Trust & Savings Bank (decided December 13, 1993). In John Hancock, the Supreme
Court ruled that assets held in an insurance company's general account may be
deemed to be 'plan assets' for ERISA purposes under certain circumstances.
Prospective purchasers should determine whether the decision affects their
ability to make purchases of the Securities. In particular, such an insurance
company should consider the exemptive relief granted by Labor for transactions
involving insurance company general accounts in Prohibited Transactions
Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995).
LEGAL INVESTMENT
Each class of Offered Securities will be rated at the date of issuance in
one of the four highest rating categories by at least one Rating Agency. The
related Prospectus Supplement will specify which classes of the Securities, if
any, will constitute 'mortgage related securities' ('SMMEA Securities') for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA').
SMMEA Securities will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including, but not limited to, state chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or of any state (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to state
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York, North Carolina,
Ohio, South Dakota, Utah, Virginia and West Virginia enacted legislation before
the October 4, 1991 cutoff established by SMMEA 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.
Investors affected by
106
<PAGE>
such legislation will be authorized to invest in SMMEA Certificates only to the
extent provided in such legislation. SMMEA provides, however, that in no event
will the enactment of any such legislation affect the validity of any
contractual commitment to purchase, hold or invest in 'mortgage related
securities,' or require the sale or other disposition of such securities, so
long as such contractual commitment was made or such securities acquired prior
to the enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal with 'mortgage
related securities' without limitation as to the percentage of their assets
represented thereby, federal credit unions may invest in such securities, and
national banks may purchase such securities for their own account without regard
to the limitations generally applicable to investment securities set forth in 12
U.S.C. 24 (Seventh), subject in each case to such regulations as the applicable
federal regulatory authority may prescribe. In this connection, federal credit
unions should review the National Credit Union Administration ('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, and the NCUA's regulation 'Investment
and Deposit Activities' (12 C.F.R. Part 703), which sets forth certain
restrictions on investment by federal credit unions in mortgage related
securities.
Institutions where investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain classes of Offered Securities. Any
financial institution which is subject to the jurisdiction of the Comptroller of
the Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ('FDIC'), the Office of Thrift Supervision
('OTS'), the NCUA or other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Offered Security. The Federal Financial Institutions Examination
Council, for example, has issued a Supervisory Policy Statement on Securities
Activities effective February 10, 1992 (the 'Policy Statement') setting forth
guidelines for and significant restrictions on investments in 'high-risk
mortgage securities.' The Policy Statement has been adopted by the Comptroller
of the Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement generally indicates that a mortgage derivative
product will be deemed to be high risk if it exhibits greater price volatility
than a standard fixed rate thirty-year mortgage security. According to the
Policy Statement, prior to purchase, a depository institution will be required
to determine whether a mortgage derivative product that it is considering
acquiring is high-risk, and if so that the proposed acquisition would reduce the
institution's overall interest rate risk. Reliance on analysis and documentation
obtained from a securities dealer or other outside party without internal
analysis by the institution would be unacceptable. There can be no assurance
that any classes of Offered Securities will not be treated as high-risk under
the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, 'Mortgage
Derivative Products and Mortgage Swaps,' which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain 'high-risk' mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise 'troubled' institutions. According to the
bulletin, such 'high-risk' mortgage derivative securities include securities
having certain specified characteristics, which may include certain classes of
Securities. In accordance with Section 402 of the Financial Institutions Reform,
Recovery and Enhancement Act of 1989, the foregoing bulletin will remain in
effect unless and until modified, terminated, set aside or superseded by the
FDIC. Similar policy statements have been issued by regulators having
jurisdiction over the types of depository institutions.
In September 1993 the National Association of Insurance Commissioners
released a draft model investment law (the 'Model Law') which sets forth model
investment guidelines for the insurance industry. Institutions subject to
insurance regulatory authorities may be subject to restrictions on investment
similar to those set forth in the Model Law and other restrictions.
If specified in the related Prospectus Supplement, other classes of Offered
Securities offered pursuant to this Prospectus will not constitute 'mortgage
related securities' under SMMEA. The appropriate characterization of this
Offered Security under various legal investment restrictions, and thus the
ability of investors subject to these restrictions to purchase such Offered
Securities, may be subject to significant interpretive uncertainties.
107
<PAGE>
Except as to the status of SMMEA Securities identified in the Prospectus
Supplement for a series as 'mortgage related securities' under SMMEA, the
Depositor will make no representations as to the proper characterization of the
Offered Certificates for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase any Offered
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 Offered
Securities) may adversely affect the liquidity of the Offered Securities.
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 and provisions
which may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying.'
There may be other restrictions on the ability of certain investors,
including depository institutions, either to purchase Offered Securities or to
purchase Offered Securities representing more than a specified percentage of the
investor's assets. Accordingly, all investors whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Securities
of any class constitute legal investments or are subject to investment, capital
or other restrictions, and, if applicable, whether SMMEA has been overridden in
any jurisdiction relevant to such investor.
PLAN OF DISTRIBUTION
The Offered Securities offered hereby and by the Supplements to this
Prospectus will be offered in series. The distribution of the Securities may be
effected from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices to be
determined at the time of sale or at the time of commitment therefor. If so
specified in the related Prospectus Supplement, the Offered Securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch') acting as underwriter with other
underwriters, if any, named therein. In such event, the Prospectus Supplement
may also specify that the underwriters will not be obligated to pay for any
Offered Securities agreed to be purchased by purchasers pursuant to purchase
agreements acceptable to the Depositor. In connection with the sale of Offered
Certificates, underwriters may receive compensation from the Depositor or from
purchasers of Offered Securities in the form of discounts, concessions or
commissions. The Prospectus Supplement will describe any such compensation paid
by the Depositor.
Alternatively, the Prospectus Supplement may specify that Offered
Securities will be distributed by Merrill Lynch acting as agent or in some cases
as principal with respect to Offered Securities that it has previously purchased
or agreed to purchase. If Merrill Lynch acts as agent in the sale of Offered
Securities, Merrill Lynch will receive a selling commission with respect to such
Offered Securities, depending on market conditions, expressed as a percentage of
the aggregate Certificate Balance or notional amount of such Offered Securities
as of the Cut-off Date. The exact percentage for each series of Securities will
be disclosed in the related Prospectus Supplement. To the extent that Merrill
Lynch elects to purchase Offered Securities as principal, Merrill Lynch may
realize losses or profits based upon the difference between its purchase price
and the sales price. The Prospectus Supplement with respect to any series
offered other than through underwriters will contain information regarding the
nature of such offering and any agreements to be entered into between the
Depositor and purchasers of Offered Securities of such series.
The Depositor will indemnify Merrill Lynch and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments Merrill Lynch and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, Merrill Lynch and the Depositor may
engage in various securities and financing transactions, including repurchase
agreements to provide interim financing of the Depositor's or Asset Seller's
Assets pending the sale of such Assets or interests therein, including the
Securities.
108
<PAGE>
Offered Securities will often be sold primarily to institutional investors.
Purchasers of Offered Securities, including dealers, may, depending on the facts
and circumstances of such purchases, be deemed to be 'underwriters' within the
meaning of the Securities Act of 1933 in connection with reoffers and sales by
them of Offered Securities. Securityholders should consult with their legal
advisors in this regard prior to any such reoffer or sale.
As to each series of Securities, only those classes rated in an investment
grade rating category by any Rating Agency will be offered hereby. Any
non-investment-grade class may be initially retained by the Depositor or Asset
Seller, and may be sold by the Depositor or Asset Seller at any time in private
transactions.
Upon receipt of a request by an investor who has received an electronic
Prospectus Supplement and Prospectus from the Underwriter or a request by such
investor's representative within the period during which there is an obligation
to deliver a Prospectus Supplement and Prospectus, the Depositor or the
Underwriter will promptly deliver, or cause to be delivered, without charge, a
paper copy of the Prospectus Supplement and Prospectus.
LEGAL MATTERS
Unless otherwise stated in the Prospectus Supplement, certain legal matters
in connection with the Securities, including certain federal income tax
consequences, will be passed upon for the Depositor by Brown & Wood LLP, New
York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
It is a condition to the issuance of any class of Offered Securities that
they shall have been rated not lower than investment grade, that is, in one of
the four highest rating categories, by a Rating Agency.
Ratings on mortgage pass-through certificates address the likelihood of
receipt by certificateholders of all distributions on the underlying mortgage
loans. These ratings address the structural, legal and issuer-related aspects
associated with such certificates, the nature of the underlying assets and the
credit quality of the guarantor, if any. Ratings on mortgage pass-through
certificates and other asset backed securities do not represent any assessment
of the likelihood of principal prepayments by borrowers or of the degree by
which such prepayments might differ from those originally anticipated. As a
result, securityholders might suffer a lower than anticipated yield, and, in
addition, holders of stripped interest certificates in extreme cases might fail
to recoup their initial investments.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating.
109
<PAGE>
INDEX OF PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
1986 Act........................................................................................ 78, 82
Accrual Securities.............................................................................. 10,31
Accrued Security Interest....................................................................... 33
Agreements...................................................................................... 10
Applicable Amount............................................................................... 91
ARM Contracts................................................................................... 24
ARM Loans....................................................................................... 21, 78
Asset Seller.................................................................................... 20
Assets.......................................................................................... 1, 6, 20
Available Distribution Amount................................................................... 43
Balloon Mortgage Loans.......................................................................... 17
Book-Entry Securities........................................................................... 32
Buydown Mortgage Loans.......................................................................... 29
Buydown Period.................................................................................. 29
Cash Flow Agreement............................................................................. 9, 26
Cash Flow Agreements............................................................................ 1
CDC............................................................................................. 25
Cede............................................................................................ 3, 38
Certificates.................................................................................... 1, 6
Certified Lender................................................................................ 25
Closing Date.................................................................................... 82
Code............................................................................................ 13
Collection Account.............................................................................. 43
Commission...................................................................................... 3
Contract Group.................................................................................. 11, 31
Contract Rate................................................................................... 8, 24
Contracts....................................................................................... 1, 20
Contributions Tax............................................................................... 93
Cooperative..................................................................................... 61
Cooperative Loans............................................................................... 61
Cooperatives.................................................................................... 21
Covered Trust................................................................................... 19, 57
CPR............................................................................................. 28
Credit Support.................................................................................. 1, 9, 26
Crime Control Act............................................................................... 69
Cut-off Date.................................................................................... 11
Deferred Interest............................................................................... 79
Definitive Securities........................................................................... 32, 38
Depositor....................................................................................... 6, 20
Determination Date.............................................................................. 32
Distribution Date............................................................................... 14
DTC............................................................................................. 3, 37
Due Period...................................................................................... 32
ERISA........................................................................................... 14, 104
Exchange Act.................................................................................... 4
Exemption....................................................................................... 105
FDIC............................................................................................ 43, 107
FHLMC........................................................................................... 51
Government Securities........................................................................... 1, 8, 20
Grantor Trust Certificates...................................................................... 13
Home Equity Loans............................................................................... 7, 21
Home Improvement Contracts...................................................................... 7, 21
Indenture....................................................................................... 31, 39
Indenture Trustee............................................................................... 39
</TABLE>
110
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
Indirect Participants........................................................................... 38
Insurance Proceeds.............................................................................. 44
IRS............................................................................................. 99
Labor........................................................................................... 104
L/C Bank........................................................................................ 58
Legislative History............................................................................. 78
Liquidation Proceeds............................................................................ 44
Loan-to-Value Ratio............................................................................. 28
Lock-out Date................................................................................... 21
Lock-out Period................................................................................. 21
Manufactured Home............................................................................... 8
Mark-to-Market Regulations...................................................................... 91
Master Servicer................................................................................. 6
MBS............................................................................................. 1, 6, 20
MBS Agreement................................................................................... 22
MBS Issuer...................................................................................... 22
MBS Servicer.................................................................................... 22
MBS Trustee..................................................................................... 22
Merrill Lynch................................................................................... 108
Model Law....................................................................................... 107
Mortgage Assets................................................................................. 1, 20
Mortgage Loan Group............................................................................. 11, 31
Mortgage Loans.................................................................................. 1, 6, 20, 27
Mortgage Notes.................................................................................. 21
Mortgage Participations......................................................................... 1, 6, 20
Mortgage Rate................................................................................... 7, 21
Mortgages....................................................................................... 21
Multifamily Mortgage Loan....................................................................... 21
Multifamily Properties.......................................................................... 7
Multifamily Property............................................................................ 21
NCUA............................................................................................ 107
Nonrecoverable Advance.......................................................................... 35
Notes........................................................................................... 1, 6
Offered Securities.............................................................................. 1
OID............................................................................................. 73, 75
OID Regulations................................................................................. 75
Originator...................................................................................... 21
OTS............................................................................................. 107
Participants.................................................................................... 37
Pass-Through Rate............................................................................... 10, 33
Payment Lag Certificates........................................................................ 87
Permitted Investments........................................................................... 43
Plans........................................................................................... 104
Pooling and Servicing Agreement................................................................. 38
Pre-Funded Amount............................................................................... 10, 25
Preferred Lender................................................................................ 25
Prepayment Assumption........................................................................... 78
Prepayment Premium.............................................................................. 21
Prohibited Transactions Tax..................................................................... 93
PTCE 83-1....................................................................................... 106
Purchase Price.................................................................................. 42
Rating Agency................................................................................... 14
Record Date..................................................................................... 32
Refinance Loans................................................................................. 21
Related Proceeds................................................................................ 35
Relief Act...................................................................................... 68, 71
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
PAGE(S) ON WHICH
TERM IS DEFINED
TERMS IN THE PROSPECTUS
- ------------------------------------------------------------------------------------------------ -----------------
<S> <C>
REMIC........................................................................................... 12
REMIC Certificates.............................................................................. 81
REMIC Regular Certificateholders................................................................ 82
REMIC Regular Certificates...................................................................... 12, 81
REMIC Regulations............................................................................... 73
REMIC Residual Certificateholder................................................................ 89
REMIC Residual Certificates..................................................................... 12, 81
Restricted Group................................................................................ 105
Retained Interest............................................................................... 51
RICO............................................................................................ 69
SBA............................................................................................. 8, 24, 28
SBA 504 Loan Program............................................................................ 8, 25
SBA 504 Loans................................................................................... 8, 20
SBA Act......................................................................................... 8, 24
SBA Loans....................................................................................... 8, 20
Section 7(a) Program............................................................................ 8, 24
Securities...................................................................................... 1, 6
Security Balance................................................................................ 10, 34
Security Owners................................................................................. 38
Securityholders................................................................................. 3, 26
Senior Securities............................................................................... 10, 31
Servicing Agreement............................................................................. 39
Servicing Standard.............................................................................. 46
Short-Term Note................................................................................. 96
Single Family Mortgage Loan..................................................................... 21
Single Family Properties........................................................................ 6
Single Family Property.......................................................................... 21
SMMEA........................................................................................... 14, 106
SPA............................................................................................. 38
Stripped ARM Obligations........................................................................ 79
Stripped Bond Certificates...................................................................... 76
Stripped Coupon Certificates.................................................................... 77
Stripped Interest Securities.................................................................... 10, 31
Stripped Principal Securities................................................................... 10, 31
Sub-Servicer.................................................................................... 47
Sub-Servicing Agreement......................................................................... 47
Subordinate Securities.......................................................................... 10, 31
Subsequent Assets............................................................................... 10, 25
Super-Premium Certificates...................................................................... 83
Tax Counsel..................................................................................... 101
Title V......................................................................................... 67, 72
Title VIII...................................................................................... 68
Trust Agreement................................................................................. 39
Trust Assets.................................................................................... 3
Trust Fund...................................................................................... 1
Trustee......................................................................................... 6
UCC............................................................................................. 37, 69
Underlying MBS.................................................................................. 20
Underlying Mortgage Loans....................................................................... 20
Unsecured Home Improvement Loans................................................................ 1, 7, 20
Value........................................................................................... 21
Voting Rights................................................................................... 53
Warranting Party................................................................................ 42
Whole Loans..................................................................................... 20
</TABLE>
112
<PAGE>
------------------------------------------------------
------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE
SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH THE PERSON
MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM
IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION HEREIN OR
THEREIN IS CORRECT AS OF ANY TIME SINCE THE DATE OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary........................................ S-3
Risk Factors................................... S-12
Description of the Home Equity Pool............ S-14
The Seller..................................... S-35
The Issuer..................................... S-36
The Owner Trustee.............................. S-36
The Indenture Trustee.......................... S-36
MBIA Insurance Corporation..................... S-36
Description of the Bonds....................... S-38
Certain Yield and Prepayment Considerations.... S-47
Description of the Servicing Agreement......... S-52
The Indenture.................................. S-54
Federal Income Tax Consequences................ S-56
Method of Distribution......................... S-56
Legal Opinions................................. S-57
Ratings........................................ S-57
Legal Investment............................... S-58
ERISA Considerations........................... S-58
Experts........................................ S-58
PROSPECTUS
Prospectus Supplement.......................... 3
Available Information.......................... 3
Incorporation of Certain Information by
Reference.................................... 4
Summary of Prospectus.......................... 6
Special Considerations......................... 15
Description of the Trust Funds................. 20
Use of Proceeds................................ 26
Yield Considerations........................... 26
The Depositor.................................. 31
Description of the Securities.................. 31
Description of the Agreements.................. 38
Description of Credit Support.................. 57
Certain Legal Aspects of Mortgage Loans........ 59
Certain Legal Aspects of the Contracts......... 69
Certain Federal Income Tax Consequences........ 73
State Tax Considerations....................... 104
ERISA Considerations........................... 104
Legal Investment............................... 106
Plan of Distribution........................... 108
Legal Matters.................................. 109
Financial Information.......................... 109
Rating......................................... 109
Index of Principal Definitions................. 110
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$212,113,000
[LOGO]
NOVASTAR
HOME EQUITY LOAN
ASSET-BACKED BONDS,
SERIES 1997-2
NOVASTAR FINANCIAL, INC.
SELLER
MERRILL LYNCH
MORTGAGE INVESTORS, INC.
COMPANY
------------------------
PROSPECTUS SUPPLEMENT
------------------------
MERRILL LYNCH & CO.
DECEMBER 3, 1997
------------------------------------------------------
------------------------------------------------------
