<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-30939
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED AUGUST 19, 1997)
$219,737,268
[LOGO]
EMPIRE FUNDING HOME LOAN OWNER TRUST 1997-3
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<C> <S> <C> <C>
$ 17,215,000 CLASS A-1 9.09% HOME LOAN ASSET BACKED NOTES
$ 29,968,000 CLASS A-2 7.75% HOME LOAN ASSET BACKED NOTES
$ 32,492,000 CLASS A-3 7.35% HOME LOAN ASSET BACKED NOTES
$ 21,015,000 CLASS A-4 7.16% HOME LOAN ASSET BACKED NOTES
$ 24,232,000 CLASS A-5 7.21% HOME LOAN ASSET BACKED NOTES
$ 20,550,000 CLASS A-6 7.43% HOME LOAN ASSET BACKED NOTES
$ 12,851,519 CLASS A-7 7.62% HOME LOAN ASSET BACKED NOTES
$ 33,805,734 CLASS M-1 7.45% HOME LOAN ASSET BACKED NOTES
$ 14,085,722 CLASS M-2 7.41% HOME LOAN ASSET BACKED NOTES
$ 13,522,293 CLASS B-1 7.75% HOME LOAN ASSET BACKED NOTES
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PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV,
(DEPOSITOR)
EMPIRE FUNDING CORP.,
(TRANSFEROR AND SERVICER)
HOME LOAN ASSET BACKED NOTES, SERIES 1997-3
The Empire Funding Home Loan Owner Trust 1997-3 (the "Trust") will be formed
pursuant to a trust agreement dated as of August 1, 1997 (the "Trust Agreement")
and entered into by PaineWebber Mortgage Acceptance Corporation IV, as depositor
(the "Depositor"), Wilmington Trust Company, as owner trustee (the "Owner
Trustee"), U.S. Bank National Association, f/k/a First Bank National
Association, as co-owner trustee (in such capacity, the "Co-Owner Trustee") and
Empire Funding Corp., as Servicer ("Empire Funding"). The Trust will issue
eleven classes of Home Loan Asset Backed Notes (the "Notes") in the classes set
forth above (the "Offered Notes") and the Class B-2 Notes (each, a "Class")
pursuant to an indenture to be dated as of August 1, 1997 (the "Indenture"),
between the Trust and U.S. Bank National Association, f/k/a First Bank National
Association, as indenture trustee (in such capacity, the "Indenture Trustee").
The Trust also will issue certificates evidencing the residual interest in the
Trust (the "Residual Interest Certificates"). The Notes and the Residual
Interest Certificates are collectively referred to herein as the "Securities."
Only the Offered Notes are offered hereby.
The Trust will consist primarily of a pool (the "Pool") of closed-end,
fixed-rate home loans (the "Loans") as described herein under "The Pool" which
are either secured primarily by junior-lien mortgages, deeds of trust or other
similar security instruments (the "Mortgages") or unsecured. In addition,
substantially all of the Loans will be secured by Mortgaged Properties in which
the borrowers have little or no equity at the time of origination (i.e., the
related combined loan-to-value ratios approach or exceed 100%). Loans having an
aggregate unpaid principal balance as of August 1, 1997 of approximately
$225,371,558 (the "Loans") have been designated for inclusion in the Pool.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED NOTES, SEE THE INFORMATION HEREIN UNDER "RISK FACTORS" BEGINNING ON PAGE
S-14 AND IN THE PROSPECTUS BEGINNING ON PAGE 16.
---------------------
THE OFFERED NOTES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR,
SERVICER, OWNER TRUSTEE OR INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO
THE EXTENT PROVIDED HEREIN. NEITHER THE LOANS NOR THE OFFERED NOTES ARE INSURED
OR GUARANTEED BY ANY FINANCIAL GUARANTY INSURER OR ANY GOVERNMENTAL AGENCY OR
ANY OTHER PERSON.
--------------------------
THE OFFERED NOTES 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. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Offered Notes are being offered by PaineWebber Incorporated (the
"Underwriter") from time to time in negotiated transactions or otherwise at
varying prices to be determined at the time of sale. Proceeds to the Depositor
are expected to be $222,253,172 plus accrued interest from August 1, 1997 to,
but not including, August 22, 1997 (the "Closing Date"), before deducting
issuance expenses payable by the Depositor estimated to be $374,185.
The Offered Notes are offered by the Underwriter, subject to prior sale,
when, as and if delivered to and accepted by the Underwriter and subject to
approval of certain legal matters by counsel. It is expected that delivery of
the Offered Notes will be made in book-entry form only through the facilities of
The Depository Trust Company (the "Depository") on or about the Closing Date.
--------------------------
PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS AUGUST 19, 1997
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Distributions on the Notes will be made on the 25th day of each month or, if
such day is not a Business Day, the next succeeding Business Day (each, a
"Distribution Date"), beginning in September 1997. The Notes will be secured by
the assets of the Trust pursuant to the Indenture. Interest on the Classes of
Offered Notes will accrue at the above-specified fixed interest rates per annum.
On each Distribution Date, the holders of the Notes will be entitled to receive,
from and to the extent that funds are available therefor in the Note
Distribution Account, distributions with respect to interest and principal
calculated as described herein under "Description of the Offered
Notes--Distributions on the Offered Notes". Distributions of interest and
principal on the Class M-1 and Class M-2 Notes (the "Mezzanine Notes") will be
subordinated in priority to distributions of interest and principal,
respectively, on the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 Notes (the "Senior Notes") as described herein.
Distributions on the Class B Notes will be subordinated in priority to payments
due on the Senior Notes and Mezzanine Notes to the extent described herein.
Distributions on the Class B-2 Notes and the Residual Interest Certificates will
be subordinated in priority to payments due on the Senior Notes, Mezzanine Notes
and Class B-1 Notes to the extent described herein.
The yields to maturity of any Offered Notes may vary from the anticipated
yields to the extent such Offered Notes are purchased at a discount or a premium
and to the extent the rate and timing of payments thereof are sensitive to the
rate and timing of principal payments (including prepayments) of the Loans.
Prospective purchasers of the Offered Notes should consider, in the case of any
Offered Notes to be purchased at a discount, the risk that a lower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Offered Notes to be
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward looking statements that involve risks and uncertainties that may
adversely affect the distributions to be made on, or the yield of, the Offered
Notes, which risks and uncertainties are discussed under "Risk Factors" and
"Prepayment and Yield Considerations" herein. As a consequence, no assurance can
be given as to the actual distributions on, or the yield of, any Class of
Offered Notes.
There is currently no secondary market for the Offered Notes and there can
be no assurance that such a market will develop or, if it does develop, that it
will continue.
------------------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS DATED AUGUST 19, 1997 (THE "PROSPECTUS") WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT AND PROSPECTIVE PURCHASERS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED NOTES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL NOVEMBER 19, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER THE PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
S-2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the "Commission")
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, on or subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Offered Notes. The Depositor
will provide without charge to each person to whom this Prospectus Supplement
and the Prospectus are delivered, on request of such person, a copy of any or
all of the documents incorporated herein by reference other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Requests should be made in writing to Office of General
Counsel of PaineWebber Mortgage Acceptance Corporation IV, at 1285 Avenue of the
Americas, New York, New York 10019, Attention: John Fearey, Esq.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information" in the
accompanying Prospectus, the Commission maintains a World Wide 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.
S-3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY OF CERTAIN PERTINENT INFORMATION IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS
PROSPECTUS SUPPLEMENT AND IN THE ACCOMPANYING PROSPECTUS. CERTAIN CAPITALIZED
TERMS USED HEREIN ARE DEFINED ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT OR IN THE
PROSPECTUS.
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Issuer.............................. Empire Funding Home Loan Owner Trust 1997-3 (the
"Trust" or the "Issuer"), a Delaware business trust,
will be established pursuant to a trust agreement
dated as of August 1, 1997 (the "Trust Agreement"),
among the Depositor, the Owner Trustee, the Co-Owner
Trustee and Empire Funding.
Depositor........................... PaineWebber Mortgage Acceptance Corporation IV (the
"Depositor"), a Delaware corporation. See "The
Depositor" in the Prospectus and "Method of
Distribution" herein. Neither the Depositor nor any
of its affiliates or any other person or entity will
insure or guarantee or otherwise be obligated with
respect to the Offered Notes.
Transferor and Servicer............. Empire Funding Corp. ("Empire Funding"), an Oklahoma
corporation. Pursuant to a Home Loan Purchase
Agreement dated as of August 1, 1997 (the "Home Loan
Purchase Agreement"), between Empire Funding and the
Depositor, Empire Funding (in such capacity, the
"Transferor") will sell the Loans to the Depositor.
Pursuant to a Sale and Servicing Agreement to be
dated as of August 1, 1997 (the "Sale and Servicing
Agreement") among the Trust, the Depositor, Empire
Funding, the Indenture Trustee and Co-Owner Trustee,
the Depositor will sell the Loans to the Trust.
Empire Funding will service the Loans (in such
capacity, the "Servicer") pursuant to the Sale and
Servicing Agreement. All references herein to the
"Servicer" shall mean "Master Servicer" for purposes
of this Prospectus Supplement.
Indenture Trustee, Co-Owner
Trustee, Custodian and
Administrator....................... U.S. Bank National Association, f/k/a First Bank
National Association, a national banking association,
as the indenture trustee (in such capacity, the
"Indenture Trustee") under an Indenture to be dated
as of August 1, 1997 (the "Indenture") between the
Trust and the Indenture Trustee, as the co-owner
trustee (in such capacity, the "Co-Owner Trustee")
under the Trust Agreement, as the custodian (the
"Custodian") under the Custodial Agreement to be
dated as of August 1, 1997 among the Owner Trustee,
the Indenture Trustee and the Custodian and as the
administrator (in such capacity, the "Administrator")
under the Administration Agreement to be dated as of
August 1, 1997 (the "Administration Agreement") among
the Issuer, the Administrator and the Servicer.
Owner Trustee....................... Wilmington Trust Company, a Delaware banking
corporation, as owner trustee under the Trust
Agreement (the "Owner Trustee").
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S-4
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Closing Date........................ August 22, 1997.
Cut-Off Date........................ The close of business on July 31, 1997.
Distribution Date................... The 25th day of each month or, if such day is not a
Business Day, the next succeeding Business Day,
commencing in September 1997 (each, a "Distribution
Date").
Due Period.......................... With respect to a Distribution Date, the calendar
month immediately preceding such Distribution Date
(each, a "Due Period").
Determination Date.................. The 14th calendar day of each month or, if such day
is not a Business Day, the immediately preceding
Business Day (each, a "Determination Date").
Record Date......................... The last Business Day of the month immediately
preceding the month in which each Distribution Date
occurs (each, a "Record Date").
Securities Issued:
THE NOTES........................... The Trust will issue the Classes of Notes pursuant to
the Indenture in the respective aggregate initial
principal amounts specified on the cover hereof, with
respect to the Offered Notes and $5,634,289 with
respect to the Class B-2 Notes (each such aggregate
principal amount being the "Original Class Principal
Balance" for the related Class). The Notes will be
secured by the assets of the Trust pursuant to the
Indenture and, except as described herein, will be
senior in right of payment to the Residual Interest
Certificates. In addition, as described herein, the
Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6 and Class A-7 Notes (the "Senior
Notes") will also be senior in right of payment to
the Class M-1 and Class M-2 Notes (the "Mezzanine
Notes") and the Class B-1 and Class B-2 Notes (the
"Class B Notes"). The Class B-2 Notes will be
privately placed and will not be offered hereby.
Interest will accrue on the Classes of Offered Notes
at the respective interest rates per annum set forth
on the cover hereof and 8.69% per annum with respect
to the Class B-2 Notes (as to each such Class, the
"Note Interest Rate"); provided, however, that
interest on the Class A-7 Notes will accrue at 8.12%
per annum commencing on the first day of the month in
which the Clean-up Call Date (as defined herein)
occurs. Interest on the Notes will accrue on the
basis of a 360-day year consisting of twelve 30-day
months. See "Description of the Offered
Notes--Distributions on the Offered Notes" herein.
RESIDUAL INTEREST CERTIFICATES...... The Trust also will issue certificates evidencing the
residual interest in the assets of the Trust (the
"Residual Interest Certificates"), which are not
being offered hereby. The Residual Interest
Certificates will have no Class Principal Balance and
will be subordinate in right of payment to the Notes.
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S-5
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Priority of Distributions:
REGULAR DISTRIBUTION AMOUNT......... The Regular Distribution Amount (as defined herein)
will be distributed on each Distribution Date in the
following order of priority:
(i) to pay accrued and unpaid interest on the
Senior Notes PRO RATA;
(ii) sequentially, to pay accrued and unpaid
interest on the Class M-1 Notes, the Class M-2
Notes, the Class B-1 Notes and the Class B-2
Notes, in that order;
(iii) sequentially, to pay as principal of the
Class A-1, Class A-2, Class A-3, Class A-4, Class
A-5, Class A-6 and Class A-7 Notes, in that
order, until the respective Class Principal
Balances thereof are reduced to zero, the amount
necessary to reduce the aggregate Class Princi-
pal Balance of such Senior Notes to the Senior
Optimal Principal Balance for such Distribution
Date; PROVIDED, HOWEVER, that on each
Distribution Date occurring on or after any
reduction of the Class Principal Balances of the
Class M-1 Notes, Class M-2 Notes, Class B-1 Notes
and Class B-2 Notes to zero through the
application of Allocable Loss Amounts,
distributions shall be made among the remaining
Senior Notes PRO RATA and not sequentially;
(iv) sequentially, to pay as principal of the
Class M-1 and Class M-2 Notes, in that order,
until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal
Balance and Class M-2 Optimal Principal Balance,
respectively;
(v) sequentially, to pay as principal of the
Class B-1 and the Class B-2 Notes, in that order,
until the Class Principal Balances thereof are
reduced to the Class B-1 Optimal Principal
Balance and Class B-2 Optimal Principal Balance,
respectively;
(vi) to the Class M-1 Notes, the Class M-2 Notes,
the Class B-1 Notes and the Class B-2 Notes, in
that order, their respective Loss Reimbursement
Deficiencies, if any; and
(vii) any remaining amount to the Residual
Interest Certificates.
EXCESS SPREAD....................... The Excess Spread (as defined herein) will be
distributed on each Distribution Date in the
following order of priority (after giving effect to
all distributions specified above under "--REGULAR
DISTRIBUTION AMOUNT"): (i) in an amount equal to the
Overcollateralization Deficiency Amount, if any, as
follows: (A) sequentially, as principal of the Class
A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-7 Notes, in that order, until
the respective Class Principal Balances thereof are
reduced to zero, the amount necessary to
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S-6
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<S> <C>
reduce the aggregate Class Principal Balance of such
Senior Notes to the Senior Optimal Principal Balance;
(B) sequentially, as principal of the Class M-1 and
Class M-2 Notes, in that order, until the respective
Class Principal Balances thereof are reduced to the
Class M-1 Optimal Principal Balance and Class M-2
Optimal Principal Balance, respectively; and (C)
sequentially, as principal of the Class B-1 and Class
B-2 Notes, in that order, until the respective Class
Principal Balances thereof are reduced to the Class
B-1 Optimal Principal Balance and Class B-2 Optimal
Principal Balance, respectively; (ii) sequentially,
to the Class M-1 Notes, the Class M-2 Notes, the
Class B-1 and the Class B-2 Notes, in that order,
their respective Loss Reimbursement Deficiencies, if
any; and (iii) any remaining amount to the Residual
Interest Certificates.
Final Scheduled Distribution Date... The Class Principal Balance of each Class of Offered
Notes, to the extent not previously paid, will be
payable in full on the Distribution Date in April
2023 (as to each such Class, the "Final Scheduled
Distribution Date"), although it is anticipated that
the actual final Distribution Date for each such
Class will occur significantly earlier than the Final
Scheduled Distribution Date.
Form and Registration of
the Offered Notes................. The Offered Notes will be issued only in book-entry
form. Persons acquiring beneficial ownership
interests in the Offered Notes ("Security Owners")
will hold such Offered Notes through the book-entry
facilities of The Depository Trust Company ("DTC").
Transfers within DTC will be in accordance with the
usual rules and operating procedures of DTC. So long
as each Class of Offered Notes is in book-entry form,
each such Class of Offered Notes will be evidenced by
one or more notes registered in the name of the
nominee of DTC. The interests of such Security Owners
will be represented by book-entries on the records of
DTC and participating members thereof. No Security
Owner will be entitled to receive a definitive note
representing such person's interest, except in the
event that definitive notes are issued under the
limited circumstances described herein. All
references in this Prospectus Supplement to any Class
of Offered Notes reflect the rights of the Security
Owners of such Class only as such rights may be
exercised through DTC and its participating members
so long as such Class of Offered Notes is held by
DTC. See "Risk Factors--Book-Entry Registration" in
the Prospectus and "Description of the
Securities--Book-Entry Registration of Securities" in
the Prospectus. The Security Owners' interests in
each Class of Offered Notes will be held only in
minimum denominations of $25,000 and integral mul-
tiples of $1,000 in excess thereof.
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S-7
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Assets of the Trust................. On the Closing Date, the Trust is expected to
purchase 7,096 closed-end, fixed-rate home loans (the
"Loans") having an aggregate unpaid principal balance
as of the Cut-Off Date of approximately $225,371,558
(the "Original Pool Principal Balance") pursuant to
the Sale and Servicing Agreement.
The assets of the Trust will consist primarily of a
pool (the "Pool") of Loans which are either secured
by mortgages, deeds of trust or other similar
security instruments (the "Mortgages") or unsecured.
The assets of the Trust also will include (i)
payments of principal and interest received in
respect of the Loans after the Cut-Off Date; (ii)
amounts on deposit in the Collection Account, Note
Distribution Account and Certificate Distribution
Account; (iii) the assignment of all rights of the
Depositor under the Home Loan Purchase Agreement; and
(iv) certain other ancillary or incidental funds,
rights and properties related to the foregoing. See
"The Trust--General" herein. The Trust will include
the unpaid principal balance of each Loan as of the
Cut-Off Date (the "Cut-Off Date Principal Balance").
The "Principal Balance" of a Loan on any day
subsequent to the Cut-Off Date is equal to its
Cut-Off Date Principal Balance minus all principal
reductions credited against the Principal Balance of
such Loan since the Cut-Off Date, including any
principal losses reported by the Servicer on account
of a modification of such Loan. With respect to any
date, the "Pool Principal Balance" will be equal to
the aggregate of the Principal Balances of the Loans
as of such date.
The Loans........................... All of the Loans will be closed-end, fixed-rate home
loans which are not insured or guaranteed by any
governmental agency and the related proceeds of which
were used to finance (i) property improvements, (ii)
the acquisition of personal property such as home
appliances or furnishings, (iii) debt consolidation,
(iv) the partial refinancing of residential
properties (which may include cash-out to the
borrower) or (v) a combination of property
improvements, debt consolidation and other consumer
purposes. The Loans may be (i) secured (the "Mortgage
Loans") by liens on residential properties (i.e.,
one- to four-family residences, condominium units and
townhouses, including investment properties) (the
"Mortgaged Properties") that are generally junior
(i.e., second or third) in priority to one or more
senior liens on the related Mortgaged Properties or
(ii) unsecured (the "Unsecured Loans"). The Loans
will not be insured by primary mortgage insurance
policies or any pool insurance policy or any
financial guaranty policy. Moreover, the Loans will
not be guaranteed by the Transferor, the Depositor or
any of their respective affiliates. A substantial
majority of the Loans will be either Mortgage Loans
secured by liens on Mortgaged Properties in which the
borrowers have little or no equity therein (i.e., the
related Combined Loan-to-Value Ratios
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S-8
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exceed 100%) at the time of origination of such Loans
or Unsecured Loans. See "The Pool" herein and "The
Trust Funds--Residential Loans" in the Prospectus.
"Combined Loan-To-Value Ratio" means, with respect to
any Loan, the fraction, expressed as a percentage,
the numerator of which is the principal balance of
such Loan at origination plus, in the case of a
junior lien Loan, the aggregate outstanding principal
balance of the related senior lien loans on the date
of origination of such Loan, and the denominator of
which is the value of the related Mortgaged Property
at the time of origination of such Loan (as such
value is determined in a manner described herein
under "Empire Funding-- Underwriting Criteria").
The Transferor will be obligated either (i) to
repurchase any Loan as to which a representation or
warranty has been breached, which breach remains
uncured for a period of 60 days and has a materially
adverse effect on the value of such Loan or the
interests of the holders of the Securities therein (a
"Defective Loan"), or (ii) to remove such Defective
Loan and substitute a Qualified Substitute Loan. As
used herein, a "Qualified Substitute Loan" will have
characteristics that are generally the same as or
substantially similar to the characteristics of the
Loan which it replaces. The repurchase of any Loan
(rather than the replacement thereof through
substitution) will result in accelerated payments of
principal distributions on the Offered Notes. See
"Empire Funding--Repurchase or Substitution of Loans"
and "Prepayment and Yield Considerations" herein.
Credit Enhancement.................. Credit enhancement with respect to the Offered Notes
will be provided by (i) the subordination of the
right of the Residual Interest Certificates and of
certain Classes of Notes to receive distributions
with respect to interest and principal to the extent
described below and (ii) the overcollateralization
feature described below. See "Risk Factors--Adequacy
of Credit Enhancement" herein.
SUBORDINATION....................... The rights of the holders of the Class M-1 Notes to
receive distributions of interest on each
Distribution Date will generally be subordinated to
such rights of the holders of the Senior Notes, the
rights of the holders of the Class M-2 Notes to
receive distributions of interest on each
Distribution Date will generally be subordinated to
such rights of the holders of the Class M-1 Notes and
the Senior Notes, the rights of the holders of the
Class B-1 Notes to receive distributions of interest
on each Distribution Date will generally be subordi-
nated to such rights of the holders of the Senior
Notes and the Mezzanine Notes and the rights of the
holders of the Class B-2 Notes to receive
distributions of interest on each Distribution Date
will generally be subordinated to such rights of the
holders of the Senior Notes, the Mezzanine
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S-9
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Notes and the Class B-1 Notes. In addition, the
rights of the holders of the Class M-1 Notes to
receive distributions of principal on each
Distribution Date will generally be subordinated to
the rights of the holders of the Senior Notes to
receive distributions of interest and principal on
each Distribution Date, and the rights of the holders
of the Class M-2 Notes to receive distributions of
principal on each Distribution Date will generally be
subordinated to the rights of the holders of the
Senior Notes and the Class M-1 Notes to receive
distributions of interest and principal on each
Distribution Date. The rights of the holders of the
Class B-1 Notes to receive distributions of principal
on each Distribution Date will generally be
subordinated to the rights of the holders of the
Senior Notes and the Mezzanine Notes to receive
distributions of interest and principal on each
Distribution Date. The rights of the holders of the
Class B-2 Notes to receive distributions of principal
on each Distribution Date will generally be
subordinated to the rights of the holders of the
Senior Notes, the Mezzanine Notes and the Class B-1
Notes to receive distributions of interest and
principal on each Distribution Date. In addition, the
rights of the holders of the Residual Interest
Certificates to receive any distributions from
amounts available on each Distribution Date will be
subordinated to such rights of the holders of the
Offered Notes and the Class B-2 Notes. The
subordination described above is intended to enhance
the likelihood of receipt by the holders of the
Offered Notes of the full amount of interest and
principal distributions due to such holders and to
afford such holders protection against losses on the
Loans. The subordination of the Class B-2 Notes and
the Residual Interest Certificates to the Class B-1
Notes is intended to enhance the likelihood of
receipt by the holders of the Class B-1 Notes of the
full amount of interest and principal distributions
due to such holders and to afford such holders
protection against losses on the Loans. See
"Description of Credit Enhancement--Subordination and
Allocation of Losses" herein.
OVERCOLLATERALIZATION............... As of any date of determination, the
"Overcollateralization Amount" will equal the excess
of the Pool Principal Balance over the aggregate of
the Class Principal Balances of the Notes. On the
Closing Date, the Overcollateralization Amount will
be zero. As a result of the application of Excess
Spread in reduction of the Class Principal Balances
of the Notes, the Overcollateralization Amount is
expected to increase over time until such amount is
equal to the Overcollateralization Target Amount.
Generally, the "Overcollateralization Target Amount"
prior to the Stepdown Date will be equal to the
greater of (x) 4.5% of the Original Pool Principal
Balance and (y) the Net Delinquency Calculation
Amount (as defined herein); on and after the Stepdown
Date, the Overcollateralization Target Amount
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will be equal to the greater of (x) 9% of the Pool
Principal Balance as of the end of the related Due
Period and (y) the Net Delinquency Calculation
Amount. The Overcollateralization Target Amount will
not in any event be less than 0.50% of the Original
Pool Principal Balance or greater than the
outstanding Class Principal Balances of the Notes.
While the distribution of Excess Spread to holders of
the Offered Notes in reduction of their respective
Class Principal Balances has been designed to produce
and maintain a given level of overcollateralization
with respect to the Offered Notes, there can be no
assurance that Excess Spread will be generated in
sufficient amounts to ensure that such overcol-
lateralization level will be achieved or maintained
at all times. See "Description of Credit
Enhancement--Subordination and Allocation of Losses"
and "Risk Factors--Adequacy of Credit Enhancement"
herein.
Application of Allocable
Loss Amounts...................... In the event that (a) the aggregate of the Class
Principal Balances of all Classes of Notes on any
Distribution Date (after giving effect to all
distributions on such date) exceeds (b) the Pool
Principal Balance as of the end of the immediately
preceding Due Period (such excess, an "Allocable Loss
Amount"), such Allocable Loss Amount will be applied,
sequentially, in reduction of the Class Principal
Balances of the Class B-2, the Class B-1 Notes, the
Class M-2 Notes and the Class M-1 Notes, in that
order, until the respective Class Principal Balances
thereof have been reduced to zero. Allocable Loss
Amounts will not be applied in reduction of the Class
Principal Balance of any Class of Senior Notes.
Allocable Loss Amounts applied to any applicable
Class of Offered Notes will entitle such Class to
reimbursement (such entitlement, a "Loss
Reimbursement Deficiency") under the circumstances
and to the extent described herein. See "Description
of the Offered Notes--Application of Allocable Loss
Amounts" herein.
Fees and Expenses of the Trust...... On each Distribution Date, prior to distributions on
the Notes, amounts from the Available Collection
Amount (as defined herein) will be distributed to pay
the following periodic fees: (1) the unpaid and
accrued fees of the Servicer (the "Servicing
Compensation"), (2) the unpaid and accrued fees of
the Indenture Trustee (the "Indenture Trustee Fee"),
(3) the unpaid and accrued fees of the Owner Trustee
(the "Owner Trustee Fee") and (4) the unpaid and
accrued fees of the Custodian (the "Custodian Fee")
(collectively, the "Trust Fees And Expenses").
Optional Termination................ The holders of Residual Interest Certificates
exceeding in the aggregate a 50% percentage interest
therein (the "Majority Residual Interestholders")
may, at their option, effect an early termination of
the Trust on or after any Distribution
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Date on which the Pool Principal Balance declines to
10% or less of the Original Pool Principal Balance
(the first such Distribution Date, the "Clean-up Call
Date"), by purchasing all of the Loans at a price
equal to or greater than the Termination Price. The
proceeds from any such sale will be distributed (i)
first, to the payment of Trust Fees and Expenses,
(ii) second, to the Servicer for unreimbursed Ser-
vicing Advances including such Servicing Advances
deemed to be nonrecoverable, (iii) third, to the
holders of each Class of Notes in an amount equal to
the then outstanding Class Principal Balance thereof
plus all accrued and unpaid interest thereon, and
(iv) fourth, to the holders of the Residual Interest
Certificates, the amount remaining, if any, after the
distributions specified in clauses (i)-(iii) above.
See "Description of the Offered Notes--Optional
Termination of the Trust" herein.
Servicing of the Loans.............. The Servicer will perform the loan servicing
functions with respect to the Loans pursuant to the
Sale and Servicing Agreement and will be entitled to
receive a fee (the "Servicing Fee") and other
servicing compensation (together with the Servicing
Fee, the "Servicing Compensation"), payable monthly,
as described herein (See "Description of the Trans-
fer and Servicing Agreements--Servicing" herein). The
Servicer may subcontract its servicing obligations
and duties with respect to the Loans to qualified
servicers pursuant to a subservicing agreement (each
such servicer, in this capacity, a "Subservicer"). As
of the Closing Date, the Servicer will not have
subcontracted its servicing obligations and duties
with respect to any of the Loans. The Servicer will
not be relieved of its servicing obligations and
duties with respect to any subserviced Loans. In
addition, the Servicer will be responsible for paying
the fees of any such Subservicer.
Tax Status.......................... In the opinion of Cadwalader, Wickersham & Taft,
special counsel to the Depositor and the Underwriter,
for federal income tax purposes, the Offered Notes
will be treated as debt and the Trust will not be
characterized as an association (or a publicly traded
partnership) taxable as a corporation for federal
income tax purposes. Each holder of a Note, by the
acceptance of an Offered Note, will agree to treat
the Offered Notes as indebtedness for federal income
tax purposes. It is anticipated that the Offered
Notes will not be issued with original issue discount
for federal income tax purposes. The prepayment
assumption that will be used for purpose of computing
original issue discount for federal income tax pur-
poses is 100% of the Prepayment Assumption. See
"Federal Income Tax Consequences" herein and "Certain
Federal Income Tax Consequences" in the Prospectus
for additional information concerning the application
of federal income tax laws to the Trust and the
Offered Notes.
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ERISA............................... A fiduciary of an employee benefit plan or other
retirement plan or arrangement subject to Title I of
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or Section 4975 of the Internal
Revenue Code of 1986, as amended (the "Code"), should
carefully review with its legal advisors whether the
purchase or holding of the Offered Notes could give
rise to a transaction prohibited or not otherwise
permissible under ERISA or Section 4975 of the Code.
Subject to the conditions set forth herein, the
Offered Notes may, in general, be purchased by and on
behalf of such plans and arrangements. See "ERISA
Considerations" herein and in the Prospectus.
Legal Investment.................... The Offered Notes will NOT constitute "mortgage
related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984, as amended
("SMMEA"), because substantially all of the Loans are
either unsecured or secured by Mortgages that are not
first mortgages. The appropriate characterization of
the Offered Notes under various legal investment
restrictions, and thus the ability of investors
subject to these restrictions to purchase the Offered
Notes, may be subject to significant interpretative
uncertainties. Accordingly, investors should consult
their own legal advisors to determine whether and to
what extent the Offered Notes constitute legal
investments for them. See "Legal Investment Matters"
herein and "Legal Investment" in the Prospectus.
Ratings of the Offered Notes........ It is a condition to the issuance of the Offered
Notes that each of the Senior Notes be rated "AAA" by
Standard & Poor's, a division of The McGraw-Hill
Companies ("Standard & Poor's") and Duff & Phelps
Credit Rating Co. ("DCR" and together with Standard &
Poor's, the "Rating Agencies"), and that the Class
M-1 Notes be rated "AA", the Class M-2 Notes be rated
"A" and the Class B-1 Notes be rated "BBB" by
Standard & Poor's and DCR. A security rating does not
address the frequency of principal prepayments or the
corresponding effect on yield to holders of the
Offered Notes. None of the Depositor, Transferor,
Servicer, Indenture Trustee, Owner Trustee, Co-Owner
Trustee or any other person is obligated to maintain
the rating on any Class of Offered Notes.
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RISK FACTORS
PROSPECTIVE INVESTORS IN THE OFFERED NOTES SHOULD CONSIDER THE FOLLOWING
RISK FACTORS (AS WELL AS THE FACTORS SET FORTH UNDER "RISK FACTORS" IN THE
PROSPECTUS) IN CONNECTION WITH THE PURCHASE OF OFFERED NOTES. THESE FACTORS ARE
INTENDED TO IDENTIFY CERTAIN SIGNIFICANT SOURCES OF RISK AFFECTING AN INVESTMENT
IN THE OFFERED NOTES. UNLESS THE CONTEXT INDICATES OTHERWISE, ANY NUMERICAL OR
STATISTICAL INFORMATION PRESENTED IS BASED UPON THE CHARACTERISTICS OF THE LOANS
PROPOSED TO BE INCLUDED IN THE POOL AS OF THE DATE OF THIS PROSPECTUS
SUPPLEMENT.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rates of principal payment on the Offered Notes and the aggregate amount
of distributions and yields to maturity of the Offered Notes will be related to,
among other things, the rate and timing of payments of principal on the Loans.
The rate of principal payments on the Loans will in turn be affected by the
amortization of the Loans and by the rate of principal prepayments thereon
(including for this purpose, prepayments resulting from (i) refinancing, (ii)
liquidations of the Loans due to defaults, casualties and condemnations and
(iii) repurchases by the Transferor as required pursuant to the Home Loan
Purchase Agreement). Generally, if prevailing interest rates on similar loans
fall significantly below the interest rates on the Loans, the Loans may be
subject to higher prepayment rates than if prevailing rates remain at or above
the interest rates on the Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Loans, the rate of prepayments may
decrease. The Loans may be prepaid by the obligors thereunder (the "Obligors")
at any time. Certain of the Loans contain prepayment penalty provisions which
generally obligate the related Obligor to pay a penalty in connection with a
prepayment of the Obligor's Loan. Substantially all of the Mortgage Loans are
subject to the "due-on-sale" provisions included therein. Prepayments,
liquidations and purchases of the Loans (including any purchase of the remaining
Loans in connection with the optional redemption of the Offered Notes by the
Majority Residual Interestholders) will, subject to certain conditions, result
in distributions to holders of the Offered Notes then entitled to receive
principal distributions of principal that would otherwise be distributed over
the remaining terms of such Loans. In addition, the overcollateralization
provisions will result in a limited acceleration of principal payments to the
holders of the Offered Notes. See "Description of the Offered Notes--Priority of
Distributions" herein. Since the rate of payment of principal on the Loans will
depend on future events and a variety of factors, no assurance can be given as
to such rate or the rate of principal prepayments.
All of the Loans may be prepaid by the Obligors thereunder in whole or in
part at any time. Home loans such as the Loans have been originated in
significant volume only during the past few years and none of the Transferor,
the Depositor or the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such loans. The Trust's prepayment
experience may be affected by a wide variety of factors, including general
economic conditions, interest rates, the availability of alternative financing,
the Combined Loan-to-Value Ratio of the Mortgage Loans, the existence and
enforceability of prepayment penalties and homeowner mobility. In addition,
substantially all of the Mortgage Loans contain due-on-sale provisions and the
Servicer intends to enforce such provisions unless (i) the Servicer, in a manner
consistent with accepted servicing practices, permits the purchaser of the
related Mortgaged Property to assume the Mortgage Loan or (ii) such enforcement
is not permitted by applicable law. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See "Certain Legal Aspects of Residential
Loans--Enforceability of Certain Provisions" in the Prospectus.
The extent to which the yield to maturity of an Offered Note may vary from
the anticipated yield will depend upon (i) the degree to which it is purchased
at a premium or a discount, (ii) the degree to which the timing of distributions
to holders thereof is sensitive to scheduled payments, prepayments,
liquidations, defaults, delinquencies, substitutions, modifications and
repurchases of Loans and to the distribution of Excess Spread and (iii) to the
application of Allocable Loss Amounts to certain Classes of Offered Notes as
specified herein. In the case of any Offered Note purchased at a discount, an
investor should consider
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the risk that a slower than anticipated rate of principal distributions to the
holders of such Offered Note (including, without limitation, principal
prepayments on the Loans) could result in an actual yield to such investor that
is lower than the anticipated yield and, in the case of any Offered Note
purchased at a premium, the risk that a faster than anticipated rate of
principal distributions to the holders of such Offered Note (including, without
limitation, principal prepayments on the Loans) could result in an actual yield
to such investor that is lower than the anticipated yield. On each Distribution
Date, until the Overcollateralization Amount is at least equal to the
Overcollateralization Target Amount, the allocation of the Excess Spread for
such Distribution Date as an additional distribution of principal on one or more
Classes of the Offered Notes will accelerate the amortization of such Classes of
the Offered Notes relative to the amortization of the Loans. Further, in the
event that significant distributions of principal are made to holders of the
Offered Notes as a result of prepayments, liquidations and repurchases of the
Loans or distributions of Excess Spread, there can be no assurance that holders
of the Offered Notes will be able to reinvest such distributions in a comparable
alternative investment having a comparable yield. See "Prepayment and Yield
Considerations" herein.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Notes will be provided by (i)
the subordination of distributions in respect of the Residual Interest
Certificates and the Class B-2 Notes (as well as the subordination of certain
Classes of Offered Notes to other Classes of Offered Notes, as described herein)
and (ii) the overcollateralization feature which results from the limited
acceleration of the principal amortization of one or more Classes of the Offered
Notes relative to the amortization of the Loans by the application of Excess
Spread, as described herein. If the Loans experience higher rates of
delinquencies, defaults and losses than initially anticipated, the amounts
available from the credit enhancement may not be adequate to cover the delays or
shortfalls in distributions to the holders of the Offered Notes that result from
such higher delinquencies, defaults and losses. If the amounts available from
the credit enhancement are inadequate, the holders of the Offered Notes will
bear the risk of any delays and losses resulting from the delinquencies,
defaults and losses on the Loans.
The rights of the holders of the Class M-1 Notes to receive distributions of
interest on each Distribution Date will generally be subordinated to such rights
of the holders of the Senior Notes, the rights of the holders of the Class M-2
Notes to receive distributions of interest on each Distribution Date will
generally be subordinated to such rights of the holders of the Class M-1 Notes
and the Senior Notes, the rights of the holders of the Class B-1 Notes to
receive distributions of interest on each Distribution Date will generally be
subordinated to such rights of the holders of the Senior Notes and the Mezzanine
Notes and the rights of the holders of the Class B-2 Notes to receive
distributions of interest on each Distribution Date will generally be
subordinated to such rights of the holders of the Senior Notes, the Mezzanine
Notes and the Class B-1 Notes. In addition, the rights of the holders of the
Class M-1 Notes to receive distributions of principal on each Distribution Date
will generally be subordinated to the rights of the holders of the Senior Notes
to receive distributions of interest and principal on each Distribution Date,
the rights of the holders of the Class M-2 Notes to receive distributions of
principal on each Distribution Date will generally be subordinated to the rights
of the holders of the Senior Notes and the Class M-1 Notes to receive
distributions of interest and principal on each Distribution Date, the rights of
the holders of the Class B-1 Notes to receive distributions of principal on each
Distribution Date will generally be subordinated to the rights of the Senior
Notes and the Mezzanine Notes to receive distributions of interest and principal
on each Distribution Date and the rights of the holders of the Class B-2 Notes
to receive distributions of principal on each Distribution Date will generally
be subordinated to the rights of the Senior Notes, the Mezzanine Notes and the
Class B-1 Notes to receive distributions of interest and principal on each
Distribution Date. Consequently, the holders of the Class B-1 Notes may receive
no distributions of interest on a Distribution Date until all amounts due on the
Senior Notes and the Mezzanine Notes on account of interest have been
distributed, and may receive no distributions of principal on a Distribution
Date until all amounts due on the Senior Notes and the Mezzanine Notes on
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account of interest and principal have been distributed. See "Description of
Credit Enhancement-- Subordination and Allocation of Losses" herein.
While the distribution of Excess Spread to the holders of the Offered Notes
in the manner specified herein has been designed to produce and maintain a given
level of overcollateralization with respect to the Offered Notes, there can be
no assurance that Excess Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will be achieved or maintained at
all times. In particular, as a result of delinquencies on the Loans during any
Due Period, the Excess Spread that will be available on the related Distribution
Date will be reduced. Such an occurrence will cause the Class Principal Balances
of the Offered Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount.
The holders of the Class B-2 Notes and the Residual Interest Certificates
will not be required to refund any amounts previously distributed to such
holders pursuant to the Transfer and Servicing Agreements (as such term is
defined herein), including any distributions of Excess Spread, regardless of
whether there are sufficient funds on a subsequent Distribution Date to pay all
amounts then payable to holders of the Offered Notes.
GEOGRAPHIC CONCENTRATION
Approximately 39.90% of the Original Pool Principal Balance will consist of
Loans that either are secured by Mortgaged Properties located in or have the
related borrowers residing in the State of California. Because of the relative
geographic concentration of Mortgaged Properties and borrowers within
California, delinquencies and losses on the Loans may be higher than would be
the case if the Loans were more geographically diversified. Adverse economic
conditions, including a recession, in California (which may or may not affect
real property values) may affect the ability of the related borrowers to make
timely payments of their scheduled monthly payments of principal and interest
and, accordingly, the actual rates of delinquencies, defaults and losses on such
Loans could be higher than those currently experienced in the home lending and
consumer finance industry for similar types of loans. In addition, with respect
to the Loans secured by Mortgaged Properties located in California, certain of
such Mortgaged Properties may be more susceptible to certain types of special
hazards that are not covered by any casualty insurance, such as earthquakes,
floods and other natural disasters and major civil disturbances, than
residential properties located in other parts of the country. In general,
declines in the California residential real estate market may adversely affect
the values of the Mortgaged Properties located in California such that the
outstanding principal balance of such Mortgage Loans, together with the
outstanding principal amount of any senior liens on such Mortgaged Properties,
will further increase relative to the value of such Mortgaged Properties.
Accordingly, the actual rates of defaults and losses on such Loans secured by
Mortgaged Properties located in California could be higher than those currently
experienced in the home lending and consumer finance industry in general.
UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of the Transferor, the assessment of
the creditworthiness of the related Obligor is the primary consideration in
underwriting the Loans, and with respect to any Mortgage Loans, the evaluation
of the adequacy of the value of the related Mortgaged Property or other secured
property in relation to the Mortgage Loan, together with the amount of all liens
senior to the lien of the Mortgage Loan, is given less consideration, and in
many cases no consideration, in underwriting the Loans. See "Empire
Funding--Underwriting Criteria" herein. The credit quality of some of the
borrowers under the Loans is lower than that of mortgage loans conforming to the
underwriting guidelines of the Federal National Mortgage Association ("FNMA") or
the Federal Home Loan Mortgage Corporation ("FHLMC") for first lien, single
family mortgage loans. Accordingly, certain Loans are likely to experience
higher rates of delinquencies, defaults and losses (which rates could be
substantially higher) than those rates that would be experienced by similar
types of loans underwritten in conformity with FNMA or
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FHLMC underwriting guidelines for first lien, single family mortgage loans. In
addition, the losses sustained from defaulted Loans are likely to be more severe
(and will frequently be total losses), because (i) the costs incurred in the
collection and liquidation of defaulted Loans in relation to the smaller
principal balances thereof are proportionately higher than for first lien,
single family mortgage loans, (ii) in the case of the Mortgage Loans, the
majority of such Loans are secured by junior liens on Mortgaged Properties in
which the Obligors had no equity (i.e., the related Combined Loan-to-Value Ratio
exceeded 100%) at the time of origination of such Loans, and (iii) in the case
of the Unsecured Loans, are not secured by any property of the Obligor.
Furthermore, with respect to substantially all of the Mortgage Loans, the
Combined Loan-to-Value Ratios were based upon the Obligor's representations as
to the value of the Mortgaged Property. Accordingly, there can be no assurance
that such values accurately reflect prevailing market values. See "--Realization
Upon Defaulted Mortgage Loans" below.
Although the creditworthiness of the related Obligor is the primary
consideration in the underwriting of the Loans, no assurance can be given that
such creditworthiness will not deteriorate as a result of future economic and
social factors and lead to increased levels of delinquency and default.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE MORTGAGE LOANS
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio of
the Loans (excluding the Unsecured Loans) was approximately 114.89%. As of the
Cut-Off Date, 1.70% of the Loans (by Original Pool Principal Balance) were
Unsecured Loans. As a result of the level of Combined Loan-to-Value Ratios, the
Mortgaged Properties are highly unlikely to provide adequate security for the
Mortgage Loans. Even assuming that a Mortgaged Property provides adequate
security for the related Mortgage Loan, substantial delays could be encountered
in connection with the liquidation of a Mortgage Loan that would result in
current shortfalls in distributions to the holders of the Offered Notes to the
extent such shortfalls are not covered by the credit enhancement described
herein. In addition, liquidation expenses relating to any defaulted Mortgage
Loan (such as legal fees, real estate taxes and maintenance and preservation
expenses) would reduce the liquidation proceeds otherwise payable to the holders
of the Offered Notes. In the event that any Mortgaged Property fails to provide
adequate security for the related Mortgage Loan, any losses in connection with
such Mortgage Loan will be borne by holders of the Offered Notes as described
herein to the extent that the credit enhancement described herein is
insufficient to absorb all such losses. See "Realization Upon Defaulted Mortgage
Loans" below.
UNSECURED LOANS
A default by the Obligor on an Unsecured Loan or the application of federal
bankruptcy laws and state debtor relief laws with respect to an Unsecured Loan
could result in such Loan being written off by the Servicer. In the event of a
default of an Unsecured Loan, the Trust and, accordingly, to the extent that
amounts available from credit enhancement as described herein are inadequate,
the holders of the Offered Notes will bear (i) the risk of delay in
distributions while a judgment against the Obligor is obtained and (ii) the risk
of loss if the judgment cannot be obtained or is not realized upon.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
Substantially all of the Mortgage Loans are junior liens and the related
senior liens are not included in the Pool. The primary risk to holders of
Mortgage Loans secured by junior liens is the very high likelihood that adequate
funds will not be received in connection with a foreclosure of the related
Mortgaged Property to satisfy fully both the senior lien(s) and the Mortgage
Loan. See "Risk Factors--Nature of Mortgages" in the Prospectus. In accordance
with the loan servicing practices of the Servicer for home loans secured by
junior liens in its portfolio and based upon a determination that the
foreclosure of a defaulted junior lien Mortgage Loan may not be an economically
viable alternative, the Servicer, in most cases, will not (i) pursue the
foreclosure of the defaulted Mortgage Loan, (ii) satisfy the related senior
mortgage(s) at or prior to the foreclosure sale of the Mortgaged Property, or
(iii) advance funds to keep
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the related senior mortgage(s) current. The Trust will have no source of funds
to satisfy the senior mortgage(s) or make payments due thereon and, therefore,
holders of the Offered Notes should not expect that any senior mortgage(s) will
be kept current by the Trust for the purpose of protecting any junior lien
Mortgage Loan. As a result, the Servicer may pursue alternative methods of
servicing defaulted Mortgage Loans to maximize proceeds therefrom, including,
without limitation, accepting short pay-offs, short sales, assumptions and the
modification of such Mortgage Loans, which, among other things, may include the
abatement of accrued interest or the reduction of a portion of the outstanding
principal balance of such Loans. Because substantially all of the Mortgage Loans
had or are expected to have Combined Loan-to-Value Ratios at the time of
origination in excess of 100%, losses sustained from defaulted Mortgage Loans
are likely to be more severe (and will likely be total losses) in relation to
the outstanding principal balance of such defaulted Mortgage Loans. In fact, no
assurance can be given that any proceeds, or a significant amount of proceeds,
will be recovered from the liquidation of defaulted Mortgage Loans. See "Certain
Legal Aspects of the Loans--Foreclosure on Mortgages" and "--Junior Mortgages"
in the Prospectus.
The underwriting requirements of the Transferor generally require that an
Obligor obtain fire and casualty insurance as a condition to the closing of a
Mortgage Loan. However, the Transferor does not monitor the maintenance of
insurance thereafter. Accordingly, if the Mortgaged Property suffers any
uninsured hazard or casualty losses, holders of any Offered Notes may bear the
risk of loss resulting from a default by the related Obligor to the extent such
loss is not recovered by foreclosure or liquidation proceeds on such defaulted
Mortgage Loan or from amounts available from the credit enhancement provided for
the Offered Notes.
RELOCATION AND RELOADING OF DEBT
With respect to Loans which have Combined Loan-to-Value Ratios in excess of
100%, there is a risk that if the related borrowers relocate, such borrowers
will be unable to discharge the Mortgage Loans in full from the sale proceeds of
the related Mortgaged Properties and any other funds available to these
borrowers, in which case the Mortgage Loans could experience higher rates of
delinquencies, defaults and losses. With respect to any Loans, the proceeds of
which were used in whole or in part for debt consolidation, there can be no
assurance that, following the debt consolidation, the related borrower will not
incur further consumer debt to third party lenders. This reloading of debt could
impair the ability of such borrowers to service their debts, which in turn could
result in higher rates of delinquencies, defaults and losses on the Loans.
RECENT ORIGINATION OF LOANS
As of the Cut-Off Date, nine of the Loans, representing approximately 0.11%
of the Original Pool Principal Balance were 30 days or more delinquent in their
scheduled monthly payments of principal and interest; since, however, Loans
representing approximately 59.38% of the Original Pool Principal Balance have a
first scheduled monthly payment due date occurring on or after July 1, 1997, it
was not possible for such Loans to have had a scheduled monthly payment that was
30 days or more delinquent as of the Cut-Off Date.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
Since January 1995, the Servicer has substantially increased the volume of
its originations, purchases, sales and servicing of conventional home loans,
including additional types of home loans (e.g., debt consolidation loans and
high Combined Loan-to-Value Ratio home equity loans) and thus it has limited
historical experience with respect to the performance, including the delinquency
and loss experience and the rate of prepayments, of these various types of
conventional home loans vis-a-vis its entire portfolio of loans. Accordingly,
neither the delinquency experience and loan loss and liquidation experience set
forth under "Empire Funding--Delinquency Experience," herein nor the prepayment
scenarios set forth under "Prepayment and Yield Considerations--Weighted Average
Lives of the Offered Notes" herein may be
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indicative of the performance of the Loans included in the Pool. Prospective
investors should make their investment determination based on the Loan
underwriting criteria, the availability of the credit enhancement described
herein, the characteristics of the Loans and other information provided herein,
and not based on any prior delinquency experience and loan loss and liquidation
experience information set forth herein or on any rate of prepayments assumed
herein.
NO SERVICER DELINQUENCY ADVANCES
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the Excess Spread that will be available on the related Distribution Date will
be reduced. Such an occurrence will cause the Class Principal Balances of the
Offered Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a reduction of the Overcollateralization Amount and, in
some circumstances, an Allocable Loss Amount. The Servicer, however, will make
such reasonable and customary expense advances with respect to the Loans as
would generally be required in accordance with its servicing practices. See
"Description of the Transfer and Servicing Agreements--Servicing" herein.
LEGAL CONSIDERATIONS
The sale of the Loans from the Transferor to the Depositor pursuant to the
Home Loan Purchase Agreement will be treated by the Transferor and the Depositor
as a sale of the Loans. The Transferor will warrant that such transfer is a sale
of the Transferor's interest in the Loans. In the event of an insolvency of the
Transferor, the receiver or bankruptcy trustee of the Transferor may attempt to
recharacterize the sale of the Loans as a borrowing by the Transferor secured by
a pledge of the Loans. If the receiver or bankruptcy trustee decided to
challenge such transfer, delays in payments on the Offered Notes and possible
reductions in the amount thereof could occur. The Depositor will warrant in the
Sale and Servicing Agreement that the transfer of the Loans to the Trust is a
valid transfer to the Trust of all of the Depositor's right, title and interest
in and to the Loans.
CERTAIN OTHER LEGAL CONSIDERATIONS
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of state and Federal laws, public policies and principles
of equity. Depending on the provisions of applicable law and the specific facts
and circumstances involved, violations of these laws, policies or principles may
limit the ability of the Servicer to collect all or part of the principal or
interest on the Loans, may entitle the Obligors to a refund of amounts
previously paid, and, in addition, could subject the Servicer or the Transferor
to damages and administrative sanctions. If the Servicer is unable to collect
all or part of the principal or interest on any Loans because of a violation of
the aforementioned laws, public policies or general principles of equity, then
the Trust may be delayed in making, or be unable to make, all distributions owed
to the holders of the Offered Notes to the extent any related losses are not
otherwise covered by amounts available from the credit enhancement provided for
the Offered Notes. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer or the Transferor, such violations may materially
impact (i) the financial ability of the Servicer to continue to act in such
capacity or (ii) the ability of the Transferor to repurchase or replace
Defective Loans, if such violation constitutes a breach of a representation or
warranty under the Home Loan Purchase Agreement. See "Risk Factors-- Certain
Other Legal Considerations Regarding Residential Loans" in the Prospectus. The
Transferor will be required to repurchase or replace any Loan which did not
comply with applicable state and Federal laws and regulations as of the Closing
Date. See "--Limitations on Repurchase or Replacement of Defective Loans by
Transferor" below.
The National Bankruptcy Review Commission (the "Bankruptcy Commission"), an
independent commission established under the Bankruptcy Reform act of 1994 to
study issues and make recommendations relating to the United States Bankruptcy
Code (the "Bankruptcy Code"), recently indicated that it
S-19
<PAGE>
may recommend that debtors in proceedings under Chapter 13 of the Bankruptcy
Code be permitted to treat the portion of any mortgage debt that exceeds the
value of the real property securing such debt as an unsecured claim if such
mortgage is not a first lien mortgage. If such a change in the Bankruptcy Code
were to be enacted, and if such change were to apply to loans originated prior
to enactment, a substantial majority of the Loans would likely be treated as
unsecured debt in a case under Chapter 13 of the Bankruptcy Code. As a
consequence, borrowers who become Chapter 13 debtors would have substantially
less incentive to make arrangements for repayment of their Loans, and the
likelihood that the Trust Fund would recover any amounts in respect of the
related Loans would be remote.
The Bankruptcy Commission is required to submit a report on its findings,
including recommendations for legislation to effect changes to the Bankruptcy
Code, to the President and Congress no later than October 20, 1997. The
Bankruptcy Commission's recommendations will be advisory only; any change in the
Bankruptcy Code must be effected through Congressional action.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR
As a result of the Transferor's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Transferor requires
substantial capital to fund its operations and has operated, and expects to
continue to operate, on a negative operating cash flow basis. Currently, the
Transferor funds substantially all of its operations, including its loan
originations and purchases, from borrowings under the Transferor's lending
arrangements with certain third parties (including an affiliate of the
Underwriter), including warehouse and residual financing facilities. There can
be no assurance that, as the Transferor's existing lending arrangements mature,
the Transferor will have access to the financing necessary for its operations or
that such financing will be available to the Transferor on favorable terms. To
the extent that the Transferor is unable to arrange new or alternative methods
of financing on favorable terms, the Transferor may have to curtail its loan
origination and purchasing activities, which could have a material adverse
effect on the Transferor's financial condition and, in turn, its ability to
service the Loans and to repurchase or replace any Defective Loans.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS BY TRANSFEROR
Pursuant to the Home Loan Purchase Agreement, the Transferor has agreed to
cure in all material respects any breach of the Transferor's representations and
warranties set forth in the Home Loan Purchase Agreement with respect to
Defective Loans. If the Transferor cannot cure such breach within a specified
period of time, the Transferor is required to repurchase such Defective Loans
from the Trust or substitute other loans for such Defective Loans. Although a
significant portion of the Loans will have been acquired from unaffiliated
correspondent lenders, the Transferor will make the representations and
warranties for all such Loans. For a summary description of the Transferor's
representations and warranties, see "Description of the Transfer and Servicing
Agreements-Representations and Warranties" herein.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing any Defective
Loan(s) in the manner described above. If the Transferor repurchases, or is
obligated to repurchase, any defective home loan(s) from any other series of
asset backed securities, the financial ability of the Transferor to repurchase
any Defective Loan(s) from the Trust may be adversely affected. In addition,
other events relating to the Transferor and its home lending can occur that
would adversely affect the financial ability of the Transferor to repurchase or
replace Defective Loans from the Trust, including, without limitation, the sale
or other disposition of all or any significant portion of its assets. If the
Transferor is unable to repurchase or replace a Defective Loan, then the
Servicer, on behalf of the Trust, will utilize customary servicing practices to
recover the maximum amount possible with respect to such Defective Loan and any
resulting loss will be borne by the holders of the Offered Notes to the extent
that such loss is not otherwise covered by amounts available from the credit
enhancement provided for the Offered Notes. See "Empire Funding" and
"Description of Credit Enhancement" herein.
S-20
<PAGE>
THE POOL
GENERAL
The Pool will initially consist of the loans (the "Loans") conveyed to the
Trust on the Closing Date. All of the Loans will be closed-end, fixed-rate home
loans which are not insured or guaranteed by a governmental agency or any other
party and the related proceeds of which were used to finance property
improvements, the acquisition of personal property such as home appliances or
furnishings, debt consolidation, the partial refinancing of residential
properties (which may include cash-out to the borrower) or a combination of
property improvements, debt consolidation and other consumer purposes. The Loans
may be (i) secured (the "Mortgage Loans") by mortgages, deeds of trust and
security deeds on residences (i.e., one- to four-family residences, condominium
units and townhouses, including investment properties) (the "Mortgaged
Properties") that are generally junior (i.e., second or third) in priority to
one or more senior loans on the related Mortgage Properties or (ii) unsecured
(the "Unsecured Loans").
For a description of the underwriting criteria applicable to the Loans, see
"Empire Funding-- Underwriting Criteria" herein. All of the Loans will be sold
by the Transferor to the Depositor, which will then sell the Loans to the Trust
pursuant to the Sale and Servicing Agreement. Pursuant to the Indenture, the
Trust will pledge and assign the Loans to the Indenture Trustee for the benefit
of the holders of the Notes. The Trust will be entitled to all payments of
principal and interest in respect of the Loans received after the Cut-Off Date.
PAYMENTS ON THE LOANS
Interest on each Loan is payable monthly on the outstanding Principal
Balance thereof at a fixed rate per annum (the "Loan Rate"). The Loans are
actuarial loans which provide that interest is charged to the related Obligors,
and payments are due from such Obligors as of a scheduled day each month which
is fixed at the time of origination. Each regular scheduled payment made by the
Obligor is, therefore, treated as containing a predetermined amount of interest
and principal. Scheduled monthly payments made by the Obligors on the Loans
either earlier or later than the scheduled due dates thereof will not affect the
amortization schedule or the relative application of such payments to principal
and interest. Interest accrued on each Loan will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
CHARACTERISTICS OF THE LOANS
The following is a brief description of certain terms of the Loans included
in the Pool as of the date of this Prospectus Supplement. In addition, the
Transferor will be obligated to repurchase or replace certain Loans under
certain circumstances as set forth herein under "Empire Funding--Repurchase or
Substitution of Loans." A schedule of the Loans included in the Pool as of the
Closing Date will be attached to the Sale and Servicing Agreement delivered to
the Indenture Trustee upon delivery of the Offered Notes.
The Loans included in the Pool have the characteristics set forth below and
in the tables beginning on the following page. Unless otherwise indicated, all
percentages and weighted averages are percentages and weighted averages of the
Original Pool Principal Balance.
LOAN STATISTICS
As of the Cut-Off Date, the Loans consisted of 7,096 Loans with an aggregate
Principal Balances totaling $225,371,558 (the "Original Pool Principal
Balance"). The Loans bear interest at fixed Loan Rates which range from 8.99%
per annum to 19.50% per annum and have a weighted average Loan Rate of
approximately 14.07% per annum. The Cut-Off Date Principal Balances of the Loans
range from $409 to $84,783 and average $31,760. As of the Cut-Off Date, the
weighted average remaining term to stated maturity of the Loans was
approximately 238 months and the weighted average number of months that have
elapsed since origination was one month. As of the Cut-Off Date, the weighted
average Combined
S-21
<PAGE>
Loan-to-Value Ratio of the Loans which were Mortgage Loans was approximately
114.89%, with the highest Combined Loan-to-Value Ratio being 143%. All of the
Loans are fully amortizing loans having original stated maturities of not more
than 25 years. No Loan is scheduled to mature later than July 27, 2022.
As of the Cut-Off Date, approximately 98.30% of the Loans (by Original Pool
Principal Balance) were Mortgage Loans secured by Mortgaged Properties located
in 48 states and the District of Columbia. As of the Cut-Off Date, approximately
100% of the Loans (by Original Pool Principal Balance) which were Mortgage Loans
were secured by Mortgaged Properties represented by the related Obligors to be
owner-occupied.
As of the Cut-Off Date, nine of the Loans, representing approximately 0.11%
of the Original Pool Principal Balance were 30 days or more past due. The
weighted average Credit Score for the Loans was 675. See "Empire
Funding--Underwriting Criteria" herein.
The sum of the dollar amounts and percentages in the following tables may
not equal the totals due to rounding.
S-22
<PAGE>
GEOGRAPHIC DISTRIBUTION OF LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
NUMBER DATE PRINCIPAL PRINCIPAL
STATE OF LOANS BALANCE BALANCE
- - - --------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
Alabama.............................................................. 51 $ 1,582,110 0.70%
Alaska............................................................... 78 2,978,500 1.32
Arizona.............................................................. 335 9,491,174 4.21
Arkansas............................................................. 19 632,502 0.28
California........................................................... 2,408 89,917,243 39.90
Colorado............................................................. 209 6,949,320 3.08
Connecticut.......................................................... 16 485,358 0.22
Delaware............................................................. 15 454,766 0.20
District of Columbia................................................. 19 627,070 0.28
Florida.............................................................. 308 8,173,231 3.63
Georgia.............................................................. 268 7,909,698 3.51
Hawaii............................................................... 11 442,855 0.20
Idaho................................................................ 61 2,002,038 0.89
Illinois............................................................. 141 4,292,339 1.90
Indiana.............................................................. 95 2,679,757 1.19
Iowa................................................................. 17 433,420 0.19
Kansas............................................................... 19 448,276 0.20
Kentucky............................................................. 26 460,518 0.20
Louisiana............................................................ 59 1,449,755 0.64
Maine................................................................ 5 196,865 0.09
Maryland............................................................. 448 15,755,998 6.99
Massachusetts........................................................ 7 198,332 0.09
Michigan............................................................. 77 1,740,337 0.77
Minnesota............................................................ 107 3,195,533 1.42
Mississippi.......................................................... 22 424,728 0.19
Missouri............................................................. 162 4,303,035 1.91
Montana.............................................................. 11 335,384 0.15
Nebraska............................................................. 6 48,071 0.02
Nevada............................................................... 161 5,006,739 2.22
New Hampshire........................................................ 2 69,656 0.03
New Jersey........................................................... 25 728,920 0.32
New Mexico........................................................... 41 1,302,114 0.58
New York............................................................. 26 834,860 0.37
North Carolina....................................................... 379 10,773,253 4.78
Ohio................................................................. 69 1,798,173 0.80
Oklahoma............................................................. 94 2,106,709 0.93
Oregon............................................................... 79 2,231,011 0.99
Pennsylvania......................................................... 190 5,374,409 2.38
Rhode Island......................................................... 3 92,191 0.04
South Carolina....................................................... 189 5,495,294 2.44
Tennessee............................................................ 58 1,190,142 0.53
Texas................................................................ 155 1,011,613 0.45
Utah................................................................. 135 4,567,318 2.03
Vermont.............................................................. 1 59,959 0.03
Virginia............................................................. 261 8,704,580 3.86
Washington........................................................... 203 5,581,524 2.48
West Virginia........................................................ 7 203,870 0.09
Wisconsin............................................................ 11 414,904 0.18
Wyoming.............................................................. 7 216,108 0.10
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
S-23
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
RANGE OF CUT-OFF NUMBER DATE PRINCIPAL PRINCIPAL
DATE PRINCIPAL BALANCES OF LOANS BALANCE BALANCE
- - - --------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
$10,000 or less...................................................... 543 $ 3,062,747 1.36%
$10,000.01--$20,000.................................................. 948 15,514,686 6.88
$20,000.01--$30,000.................................................. 1,927 50,103,970 22.23
$30,000.01--$40,000.................................................. 2,230 78,864,078 34.99
$40,000.01--$50,000.................................................. 774 36,177,294 16.05
$50,000.01--$60,000.................................................. 396 22,396,188 9.94
$60,000.01--$70,000.................................................. 186 12,393,977 5.50
$70,000.01--$80,000.................................................. 91 6,773,834 3.01
$80,000.01 or greater................................................ 1 84,783 0.04
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the average Cut-Off Date Principal Balance of the
Loans was $31,760.
LOAN RATES
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
NUMBER DATE PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES OF LOANS BALANCE BALANCE
- - - -------------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
8.501%--9.000%........................................................... 15 $ 482,410 0.21%
9.001%--9.500%........................................................... 1 47,100 0.02
9.501%--10.000%.......................................................... 39 1,469,686 0.65
10.001%--10.500%.......................................................... 17 689,558 0.31
10.501%--11.000%.......................................................... 181 6,535,195 2.90
11.001%--11.500%.......................................................... 65 2,619,097 1.16
11.501%--12.000%.......................................................... 366 12,955,059 5.75
12.001%--12.500%.......................................................... 233 8,213,711 3.64
12.501%--13.000%.......................................................... 1,097 30,398,353 13.49
13.001%--13.500%.......................................................... 552 20,701,210 9.19
13.501%--14.000%.......................................................... 1,245 39,313,005 17.44
14.001%--14.500%.......................................................... 633 21,230,330 9.42
14.501%--15.000%.......................................................... 970 30,920,891 13.72
15.001%--15.500%.......................................................... 412 12,742,616 5.65
15.501%--16.000%.......................................................... 708 20,733,497 9.20
16.001%--16.500%.......................................................... 248 7,603,266 3.37
16.501%--17.000%.......................................................... 233 6,559,835 2.91
17.001%--17.500%.......................................................... 22 657,198 0.29
17.501%--18.000%.......................................................... 50 1,221,780 0.54
18.001%--18.500%.......................................................... 5 178,908 0.08
18.501%--19.000%.......................................................... 3 58,878 0.03
19.001%--19.500%.......................................................... 1 39,972 0.02
----- ---------------- ------
Total................................................................. 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Loan Rate of the Loans was
approximately 14.07% per annum.
S-24
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
NUMBER DATE PRINCIPAL PRINCIPAL
LIEN PRIORITY OF LOANS BALANCE BALANCE
- - - --------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
First Lien........................................................... 32 $ 763,306 0.34%
Second Lien.......................................................... 6,469 220,444,238 97.81
Third Lien........................................................... 13 333,872 0.15
Unsecured............................................................ 582 3,830,142 1.70
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
RANGE OF COMBINED NUMBER DATE PRINCIPAL PRINCIPAL
LOAN-TO-VALUE RATIOS OF LOANS BALANCE BALANCE
- - - --------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
Unsecured............................................................ 582 $ 3,830,142 1.70%
5.01%--10.00%....................................................... 2 13,714 0.01
15.01%--20.00%...................................................... 1 8,745 0.00
20.01%--25.00%...................................................... 1 27,500 0.01
25.01%--30.00%...................................................... 4 114,158 0.05
30.01%--35.00%...................................................... 8 200,687 0.09
35.01%--40.00%...................................................... 6 130,223 0.06
40.01%--45.00%...................................................... 4 109,335 0.05
45.01%--50.00%...................................................... 3 43,955 0.02
50.01%--55.00%...................................................... 1 25,000 0.01
55.01%--60.00%...................................................... 7 162,943 0.07
60.01%--65.00%...................................................... 12 244,769 0.11
65.01%--70.00%...................................................... 18 431,944 0.19
70.01%--75.00%...................................................... 10 212,445 0.09
75.01%--80.00%...................................................... 30 722,557 0.32
80.01%--85.00%...................................................... 39 938,527 0.42
85.01%--90.00%...................................................... 74 1,719,934 0.76
90.01%--95.00%...................................................... 137 3,639,549 1.61
95.01%--100.00%..................................................... 356 9,697,109 4.30
100.01%--105.00%..................................................... 522 15,869,900 7.04
105.01%--110.00%..................................................... 807 25,818,636 11.46
110.01%--115.00%..................................................... 988 32,681,194 14.50
115.01%--120.00%..................................................... 1,294 45,398,917 20.14
120.01%--125.00%..................................................... 2,170 82,491,833 36.60
125.01% or greater................................................... 20 837,842 0.37
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio of
the Loans (excluding the Unsecured Loans) was approximately 114.89%.
S-25
<PAGE>
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
LOAN AGE NUMBER DATE PRINCIPAL PRINCIPAL
(IN MONTHS) OF LOANS BALANCE BALANCE
------------ ----------- ---------------- -------------
<S> <C> <C> <C>
Less than one........................................................ 1,639 $ 51,604,940 22.90%
1--3................................................................. 5,204 165,775,517 73.56
4--6................................................................. 237 7,535,729 3.34
7--9................................................................. 14 432,040 0.19
10 or greater........................................................ 2 23,331 0.01
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average number of months since
origination of the Loans was one month.
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
RANGE OF REMAINING CUT-OFF POOL
TERMS TO MATURITY NUMBER DATE PRINCIPAL PRINCIPAL
(IN MONTHS) OF LOANS BALANCE BALANCE
--------------------- ---------- ---------------- -------------
<S> <C> <C> <C>
0--30............................................................ 19 $ 55,609 0.02%
31--60............................................................ 235 1,589,525 0.71
61--90............................................................ 152 1,184,618 0.53
91--120........................................................... 513 9,269,622 4.11
121--150........................................................... 52 1,089,202 0.48
151--180........................................................... 1,863 57,699,038 25.60
211--240........................................................... 2,099 71,603,607 31.77
271--300........................................................... 2,163 82,880,337 36.78
---------- ---------------- -------------
Total.......................................................... 7,096 $ 225,371,558 100.00%
---------- ---------------- -------------
---------- ---------------- -------------
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Loans was approximately 238 months.
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
ORIGINAL TERM TO NUMBER DATE PRINCIPAL PRINCIPAL
MATURITY (IN MONTHS) OF LOANS BALANCE BALANCE
- - - ---------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
0--30................................................................. 19 $ 55,609 0.02%
31--60................................................................ 234 1,545,397 0.69
61--90................................................................ 153 1,228,746 0.55
91--120............................................................... 512 9,234,690 4.10
121--150.............................................................. 52 1,089,202 0.48
151--180.............................................................. 1,861 57,594,419 25.56
211--240.............................................................. 2,100 71,658,393 31.80
271--300.............................................................. 2,165 82,965,103 36.81
----- ---------------- ------
Total................................................................. 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average original term to maturity of
the Loans was approximately 239 months.
S-26
<PAGE>
CREDIT SCORE
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
CUT-OFF POOL
NUMBER DATE PRINCIPAL PRINCIPAL
RANGE OF CREDIT SCORES OF LOANS BALANCE BALANCE
- - - --------------------------------------------------------------------- ----------- ---------------- -------------
<S> <C> <C> <C>
520 to 540........................................................... 1 $ 29,937 0.01%
540 to 560........................................................... 4 66,086 0.03
560 to 580........................................................... 9 255,182 0.11
580 to 600........................................................... 13 289,525 0.13
600 to 620........................................................... 103 2,888,848 1.28
620 to 640........................................................... 1,031 30,508,354 13.54
640 to 660........................................................... 1,570 49,241,199 21.85
660 to 680........................................................... 1,477 50,297,318 22.32
680 to 700........................................................... 1,162 40,309,493 17.89
700 to 720........................................................... 857 29,056,060 12.89
720 to 740........................................................... 428 12,821,307 5.69
740 to 760........................................................... 231 5,565,774 2.47
760 to 780........................................................... 132 2,971,924 1.32
780 to 800........................................................... 56 909,152 0.40
800 to 820........................................................... 18 144,550 0.06
820 or greater....................................................... 4 16,848 0.01
----- ---------------- ------
Total............................................................ 7,096 $ 225,371,558 100.00%
----- ---------------- ------
----- ---------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average Credit Score of the Loans was
675.
DEBT-TO-INCOME RATIO
<TABLE>
<CAPTION>
AGGREGATE CUT-OFF % OF
RANGE OF DEBT-TO-INCOME NUMBER OF DATE ORIGINAL POOL
RATIOS LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------------------- ----------- --------------------- -----------------
<S> <C> <C> <C>
20.00 and less.............................................. 226 $ 4,561,252 2.02%
20.01 to 25.00.............................................. 417 11,331,669 5.03
25.01 to 30.00.............................................. 864 26,003,364 11.54
30.01 to 35.00.............................................. 1,468 45,666,672 20.26
35.01 to 40.00.............................................. 1,742 56,487,391 25.06
40.01 to 45.00.............................................. 1,966 65,194,275 28.93
45.01 to 50.00.............................................. 404 15,770,276 7.00
Greater than 50............................................. 9 356,658 0.16
----- --------------------- ------
Total................................................... 7,096 $ 225,371,558 100.00%
----- --------------------- ------
----- --------------------- ------
</TABLE>
As of the Cut-Off Date, the weighted average debt-to-income ratio of the
Loans was approximately 36.97%.
S-27
<PAGE>
EMPIRE FUNDING
GENERAL
Empire Funding Corp. ("Empire Funding"), the Transferor and the Servicer
under the Sale and Servicing Agreement, is an Oklahoma corporation that is a
mortgage lender engaged in the business of originating, purchasing, selling and
servicing home loans generally secured by one- to four-family residential
properties, with an emphasis on non-conforming junior lien loans. Empire Funding
was incorporated in Oklahoma in 1987 and currently is licensed as a mortgage
lender or registered, as required, in 37 states.
Empire Funding has its principal offices at 9737 Great Hills Trail, Austin,
Texas 78759 (telephone number (800) 261-4898). It currently has 444 employees
including professionals and support staff.
As of June 30, 1997, Empire Funding was servicing a loan portfolio of
approximately $870 million. This loan portfolio consisted of 60,500 loans with
an average principal balance of approximately $14,824.
Upon written request, Empire Funding will make available its most recent
audited financial statements. Requests should be directed to Empire Funding
Corp., 9737 Great Hills Trail, Austin, Texas 78759 (telephone number (800)
261-4898), Attention: Richard N. Steed, Senior Vice President.
SERVICING PROCEDURES
The following is a general description of the Servicer's servicing policies
and procedures currently employed by the Servicer with respect to its
conventional loan portfolio. The Servicer revises such policies and procedures
from time to time to reflect changing economic and market conditions and to
comply with legal developments.
The Servicer's loan servicing activities include responding to borrower
inquiries, processing and administering loan payments, reporting and remitting
principal and interest to trustees, investors and other entities that own
interests in the loans, collecting delinquent loan payments, conducting
foreclosure proceedings and disposing of foreclosed property and otherwise
administering the loans. The Servicer utilizes a computer-based loan servicing
system. It provides payment processing and cashiering functions, automated
payoff statements, on-line collection, statement and notice mailing along with a
full range of investor reporting requirements.
Collection activity begins once a loan is 10 days delinquent (without regard
to any grace period). The focus of collection activity is understanding the
cause of, and finding a solution for, the delinquency. Collection calls are
generally made every other day until acceptable payment arrangements have been
made. In addition to collection calls, the servicing system generates delinquent
letters at 15 days and at 25 days of delinquency. If no contact with the
borrower has been achieved within 15 days after the first attempted phone call,
or at 25 days of delinquency, a third party property inspection company may be
engaged to visit the borrower's home to complete an exterior inspection of the
property securing the loan, if applicable. The inspection provides specific
details about the property, including whether the property is vacant or
occupied, and a notice is left to call the Servicer's servicing department.
Once the loan becomes 45 to 60 days delinquent, a demand notice is sent to
the borrower, via certified mail with return receipt requested. Collection calls
are generally continued at least every other day and additional delinquency
notices are manually ordered by the Servicer's servicing department. At 90 days
of delinquency, the status of any senior lien is verified, all tax information
is verified and a current credit report is obtained to determine if there have
been any additional liens or judgments filed against the borrower. Finally, at
120 days of delinquency, the loan file is prepared for non-performing review.
All information obtained at 90 days is updated and referred to the Servicer's
Non-Performing Loan Review Committee for determination of appropriate action
which may include negotiating a settlement or new payment plan, pursuing
judgment against the borrower, foreclosure or charge off.
S-28
<PAGE>
Under the Sale and Servicing Agreement, the Servicer may resign from its
duties thereunder only in accordance with the terms thereof. No removal or
resignation will become effective until the Indenture Trustee or a successor
servicer has assumed the Servicer's responsibilities and obligations in
accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement. Notwithstanding anything in the preceding sentence to the contrary,
the Servicer may delegate certain of its obligations to a sub-servicer pursuant
to a sub-servicing agreement. A sub-servicer must meet certain eligibility
requirements, as set forth in the Sale and Servicing Agreement, and each
sub-servicing agreement shall require that the Loans be serviced in a manner
that is consistent with the terms of the Sale and Servicing Agreement. The
Servicer will not be released of its servicing obligations and duties with
respect to any subserviced Loans. As of the Closing Date, the Servicer will not
have subcontracted its servicing obligations and duties with respect to the
Loans.
UNDERWRITING CRITERIA
The majority of the Loans have been underwritten by the Transferor pursuant
to its "Equalizer" program. Generally, the underwriting standards of the
Transferor's "Equalizer" program place a greater emphasis on the
creditworthiness of the borrower than on the underlying collateral in evaluating
the likelihood that a borrower will be able to repay a loan.
UNDERWRITING GUIDELINES FOR "EQUALIZER". The Transferor's "Equalizer"
program is designed for homeowners who may have little or no equity in their
property, but who possess good to excellent credit histories and provable income
and use the proceeds for home improvements and/or debt consolidation. Under the
"Equalizer" program, the Transferor obtains credit information with respect to
each applicant from several sources and generally does not permit the ratio of
total monthly debt obligations to monthly gross income to exceed 45%. Generally,
the applicant will have a Credit Score of 620 or greater. A credit score (the
"Credit Score") is derived based on a methodology developed by Fair, Isaac and
Company, a consulting firm specializing in creating default predictive models
through scoring mechanisms. The Credit Scores, which are obtained from national
credit reporting organizations, are numerical representations of borrowers'
estimated default probabilities, and generally range from a low of 200 to a high
of 800. A borrower with a Credit Score of 700 or higher would be assigned the
highest classification for credit quality by the Transferor. The principal
amount of the "Equalizer" loan originated or purchased by the Transferor
generally does not exceed $75,000. Other than on an exception basis, the loans
originated under the "Equalizer" program will not have a Combined Loan-to-Value
Ratio in excess of 125%. In general, the loan is secured by a first, second or
third lien on the related property or is unsecured. In most instances the
property is improved with an owner-occupied one- or two-family residence.
The Transferor's underwriting standards are designed to provide a program
for all qualified applicants in an amount and for a period of time consistent
with their ability to repay. All the Transferor's underwriting determinations
are made without regard to sex, marital status, race, color, religion, age or
national origin. Each application is evaluated on its individual merits,
applying the stated guidelines to ensure that each application is considered
equitably.
The "Equalizer" program allows for "stated value" (i.e., independent
verification of property values are not required) on loans of $35,000 and less.
Generally, the Transferor bases the loan decision on the creditworthiness of the
borrower, rather than the underlying collateral. However, the Transferor
reserves the right to require an appraisal or other documentation verifying
values in each and every transaction.
For loans in excess of $35,000, property values are generally substantiated
by one of the following: an appraisal dated within 12 months of application, a
FHLMC Form 704 drive-by inspection, a tax bill assessment if the value has been
established within last 12 months, or a HUD-1 statement if dated within six
months of the application. On a case by case basis, the Transferor reserves the
right to accept other forms of documentation.
S-29
<PAGE>
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is required. The
credit report typically contains information reflecting delinquencies,
repossessions, judgments, foreclosures, bankruptcies and similar instances of
adverse credit that can be discovered by a search of public records. An
applicant's recent credit report is used to evaluate the borrower's payment
record and must be current at the time of application. A lack of credit history
payment will not necessarily preclude a loan if the borrower has sufficient
equity in the property.
Generally, the Transferor requires a title report by an approved title
company or legal firm on all property securing loans it originates or purchases.
Title reports indicate the lien position of any related senior mortgage loans.
The applicant is also required to secure hazard and, in certain instances, flood
insurance in an amount sufficient to cover replacement cost or full insurable
value of the mortgaged property (or in the case of flood insurance, the maximum
amount available under the Flood Disaster Protection Act of 1973). The
underwriting guidelines of the Transferor do not require borrowers to obtain
title insurance in connection with a Loan.
Generally, the Transferor has established classifications with respect to
the credit profiles of applicants based on Credit Scores and debt to income
ratios. The criteria currently being used by the Transferor to classify loan
applicants are generally as follows:
<TABLE>
<CAPTION>
MAXIMUM
MINIMUM DEBT-TO-INCOME
LOAN AMOUNT CREDIT SCORE RATIO
- - - -------------------------------------------------------- ------------------- -----------------------
<S> <C> <C>
$70,001--$75,000........................................ 700 45%
$60,001--$70,000........................................ 680 45%
$50,001--$60,000........................................ 660 45%
$40,001--$50,000........................................ 640 45%
$40,000 or less......................................... 620 45%
</TABLE>
The maximum loan amount for self-employed borrowers is $50,000 and the
maximum loan amount for first time homebuyers or borrowers with less than six
months mortgage history is $35,000.
Currently, the Transferor allows the following compensating factors for
exceeding the maximum debt-to-income ratio by a maximum of 5 percentage points:
1) high income with substantial disposable income--if the Credit Score
is equal to or greater than 660, $2,500 in disposable income is required; if
the Credit Score is less than 660, $3,000 in disposable income is required
(disposable income being defined for this purpose as monthly gross income
less monthly debt service); and
2) documented savings pattern.
In addition to Credit Score and debt-to-income ratio parameters, the
Transferor also requires that each loan applicant be a generally acceptable
credit risk as measured by the following:
Existing mortgage loans--Required to be current at time of application
being submitted, with generally a maximum of one 30-day late in the past 12
months.
Existing non-mortgage credit--Minor derogatory items are acceptable. In
some cases, Letters of Explanation ("LOE's") may be required in explaining
derogatory items. Generally, collections and/or charge-offs must be brought
current with satisfactory LOE's. Installment credit histories can show one
30-day delinquency in the last 12 months and two 30-day delinquencies in the
last 24 months, while revolving credit histories can show two 30-days
delinquencies in the last 12 months and three 30-day delinquencies in the
last 24 months. On a case by case basis, the Transferor will allow for
deviation from these parameters if satisfactory LOE's are obtained.
S-30
<PAGE>
In response to changes and developments in the consumer finance area as well
as the refinement of the Transferor's credit evaluation methodology, the
Transferor's underwriting requirements for certain types of loans may change
from time to time resulting sometimes in more stringent and sometimes in less
stringent underwriting requirements. Depending upon the date on which the Loans
were originated or purchased by the Transferor, the Loans included in the Pool
may have been originated or purchased by the Transferor under different
underwriting requirements, and accordingly, certain Loans included in the Pool
may be of a different credit quality and have different loan characteristics
from those of other Loans. Furthermore, to the extent that certain Loans were
originated or purchased by the Transferor in accordance with less stringent
underwriting requirements, such Loans may be more likely to experience higher
rates of delinquencies, defaults and losses than those Loans originated or
purchased in accordance with more stringent underwriting requirements.
REPURCHASE OR SUBSTITUTION OF LOANS
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties which materially and adversely affects the value of a Loan or the
interests of the holders of the Securities therein or as to which a material
document deficiency exists (each, a "Defective Loan") or (ii) on or before the
Determination Date next succeeding the end of such 60 day period, to repurchase
such Defective Loan at a price (the "Purchase Price") equal to the Principal
Balance of such Defective Loan as of the date of repurchase, plus all accrued
and unpaid interest on such Defective Loan to but not including the date of
repurchase computed at the Loan Rate, plus the amount of any unreimbursed
Servicing Advances made by the Servicer with respect to such Defective Loan. In
lieu of repurchasing a Defective Loan, the Transferor may replace such Defective
Loan with one or more Qualified Substitute Loans. If the aggregate outstanding
principal balance of the Qualified Substitute Loan(s) is less than the
outstanding Principal Balance of the Defective Loan(s), the Transferor will also
remit for distribution to the holders of the Notes an amount (a "Substitution
Adjustment") equal to such shortfall which will result in a prepayment of
principal on the Notes for the amount of such shortfall. As used herein, a
"Qualified Substitute Loan" is a loan that (i) has an interest rate which
differs from the Loan Rate for the Defective Loan which it replaces (each, a
"Deleted Loan") by no more than two percentage points in excess of such Loan
Rate, (ii) matures not more than one year later than, and not more than one year
earlier than, the maturity date of the Deleted Loan, (iii) has a principal
balance (after application of all payments received on or prior to the date of
such substitution) equal to or less than the Principal Balance of the Deleted
Loan as of such date, (iv) has a Credit Score not more than 10 points lower than
the Credit Score of the Deleted Loan, (v) has a lien priority no lower than the
Deleted Loan, (vi) complies as of the date of substitution with each
representation and warranty set forth in the Sale and Servicing Agreement with
respect to the Loans and is not more than 29 days delinquent as of the date of
substitution for such Deleted Loan, (vii) has a borrower with a debt-to-income
ratio no higher than the debt-to-income ratio of the Obligor with respect to the
Deleted Loan, and (viii) has a borrower with a comparable credit grade
classification to that of the Obligor with respect to the Deleted Loan.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If the Transferor repurchases, or is obligated to repurchase,
defective loans from any additional series of asset backed securities, the
financial ability of the Transferor to repurchase Defective Loans from the Trust
may be adversely affected. In addition, other events relating to the Transferor
and its mortgage lending and consumer finance operations can occur that would
adversely affect the financial ability of the Transferor to repurchase or
replace Defective Loans from the Trust, including, without limitation, the sale
or other disposition of all or any significant portion of its assets. If the
Transferor is unable to repurchase or replace a Defective Loan, the Servicer, on
behalf of the Trust, will pursue other customary and reasonable efforts, if any,
to recover the maximum amount possible with respect to such Defective Loan. If
the Servicer is unable to collect all amounts due to the Trust with respect
S-31
<PAGE>
to such Defective Loan, the resulting loss will be borne by the holders of the
Offered Notes to the extent that such loss is not otherwise covered by amounts
available from the credit enhancement provided for the Offered Notes. See "Risk
Factors--Adequacy of Credit Enhancement" and "--Limitations on Repurchase or
Replacement of Defective Loans by Transferor" herein.
DELINQUENCY EXPERIENCE
Certain information concerning the delinquency experience on loans
originated or purchased, and serviced, by Empire Funding is set forth below. The
delinquency experience percentages set forth herein are calculated on the basis
of the total loans originated or purchased, and serviced, by Empire Funding as
of the end of the periods indicated. See "Risk Factors--Limited Historical
Delinquency, Loss and Prepayment Information" herein.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MARCH 31, JUNE 30, SEPTEMBER DECEMBER MARCH 31, JUNE 30,
1996 1996 30, 1996 31, 1996 1997 1997
---------- ---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Conventional Servicing Portfolio (1)(2)
Delinquency Period:(3)
30-59 days delinquent.......................... 0.24% 0.09% 0.39% 0.80% 0.55% 0.44%
60-89 days delinquent.......................... 0.00% 0.03% 0.15% 0.20% 0.14% 0.15%
90+ days delinquent............................ 0.00% 0.00% 0.04% 0.24% 0.18% 0.09%
Total.......................................... 0.24% 0.12% 0.58% 1.24% 0.87% 0.67%
Conventional Servicing Portfolio at end of
period......................................... $ 13,277 $ 31,498 $ 68,276 $ 100,369 $ 172,039 $ 408,732
Total Servicing Portfolio (2)(4)(5)
Delinquency Period:(3)
30-59 days delinquent.......................... 4.10% 3.66% 4.05% 4.98% 4.12% 3.05%
60-89 days delinquent.......................... 1.08% 1.23% 1.22% 1.43% 1.21% 1.07%
90+ days delinquent............................ 1.60% 1.66% 1.96% 2.19% 1.86% 1.54%
Total.......................................... 6.79% 6.56% 7.22% 8.60% 7.19% 5.67%
Total Servicing Portfolio at end of period....... $ 379,958 $ 436,937 $ 506,469 $ 562,345 $ 646,450 $ 869,874
</TABLE>
- - - ------------------------
(1) Empire Funding's Conventional Servicing Portfolio does not include FHA Title
I loans.
(2) Totals may not add due to rounding.
(3) The dollar amount of delinquent loans as a percentage of total dollar amount
of loans in the relevant portfolio (including loans owned by Empire Funding)
as of the date indicated.
(4) Total Servicing Portfolio includes Empire Funding's FHA Title I Servicing
Portfolio as well as its Conventional Servicing Portfolio.
(5) Since March 31, 1996 less than 1.00% of loans (by loan principal balance) in
the Total Servicing Portfolio were serviced, but not originated or
purchased, by Empire Funding.
S-32
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
Except as otherwise provided herein, no principal distributions will be made
on any Class of Senior Notes until the Class Principal Balance of each Class of
Senior Notes having a lower numerical designation has been reduced to zero, no
principal distributions will be made on the Mezzanine Notes until all required
principal distributions have been made in respect of the Senior Notes, no
principal distributions will be made on the Class B-1 Notes until all required
principal distributions have been made in respect of the Senior Notes and the
Mezzanine Notes and no principal distributions will be made on the Class B-2
Notes until all required principal distributions have been made in respect of
the Senior Notes, the Mezzanine Notes and the Class B-1 Notes. See "Description
of the Offered Notes--Distributions on the Offered Notes" herein. As the rate of
payment of principal of each Class of Notes depends primarily on the rate of
payment (including prepayments) of the Loans and the availability and amount of
Excess Spread, final payment of any Class of Notes could occur significantly
earlier than their respective Final Scheduled Distribution Dates. Holders of the
Offered Notes will bear the risk that they may not be able to reinvest principal
payments on the Offered Notes at yields at least equal to the yield on their
respective Offered Notes. No prediction can be made as to the rate of
prepayments on the Loans in either stable or changing interest rate
environments. Any reinvestment risk resulting from the rate of prepayment of the
Loans and the distribution of such payments to the holders of the Offered Notes
will be borne entirely by the holders of the Offered Notes.
The effective yield to the holders of any Class of Offered Notes will be
lower than the yield otherwise produced by the applicable Note Interest Rate,
because the distribution of the interest accrued during each Due Period (a
calendar month consisting of thirty days) will not be made until the
Distribution Date occurring in the month following such Due Period. See
"Description of the Offered Notes--Distributions on the Offered Notes" herein.
This delay will result in funds being passed through to the holders of the
Offered Notes approximately 25 days after the end of the monthly accrual period,
during which 25-day period no interest will accrue on such funds.
The rate of principal payments on the Offered Notes, the aggregate amount of
each interest payment on the Offered Notes and the yield to maturity on the
Offered Notes will be directly related to and affected by the rate and timing of
principal reductions on the Loans, the application of Excess Spread to reduce
the Class Principal Balances of the Offered Notes to the extent described herein
under "Description of Credit Enhancement--Overcollateralization," and, under
certain circumstances, the delinquency rate experienced by the Loans. The
principal reductions on such Loans may be in the form of scheduled amortization
payments or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other dispositions. On or after any Distribution Date on which the Pool
Principal Balance declines to 10% or less of the Original Pool Principal
Balance, the Majority Residual Interestholders may effect an early termination
of the Trust, resulting in a redemption of the Notes. See "Description of the
Offered Notes--Optional Termination of the Trust" herein.
The "weighted average life" of an Offered Note refers to the average amount
of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Offered Note is repaid. The weighted average life
of an Offered Note will be influenced by, among other factors, the rate at which
principal reductions occur on the Loans, the extent to which high rates of
delinquencies on the Loans during any Due Period result in interest collections
on the Loans in amounts less than the amount of interest distributable on the
Offered Notes, and the rate at which Excess Spread is distributed to holders of
the Offered Notes as described herein, and the extent to which any reduction of
the Overcollateralization Amount is paid to the holders of the Residual Interest
as described herein. If substantial principal prepayments on the Loans are
received from unscheduled prepayments, liquidations or repurchases, then the
distributions to the holders of the Offered Notes resulting from such
prepayments may significantly shorten the actual average lives of the Offered
Notes. If the Loans experience delinquencies and certain defaults in the payment
of principal, then the holders of the Offered Notes may similarly experience a
S-33
<PAGE>
delay in the receipt of principal distributions attributable to such
delinquencies and defaults which in certain instances may result in longer
actual average lives of the Offered Notes than would otherwise be the case.
However, to the extent that the Principal Balances of Liquidated Home Loans are
included in the principal distributions on the Offered Notes, then the holders
of the Offered Notes will experience an acceleration in the receipt of principal
distributions which in certain instances may result in shorter actual average
lives of the Offered Notes than would otherwise be the case. Interest shortfalls
on the Loans due to principal prepayments in full and curtailments and any
resulting shortfalls in amounts distributable on the Offered Notes will be
covered only to the extent of amounts available from the credit enhancement
provided for the Offered Notes as described herein. See "Risk Factors--Adequacy
of Credit Enhancement" herein.
The rate and timing of principal reductions on the Loans will be influenced
by a variety of economic, geographic, social and other factors. These factors
may include changes in Obligors' housing needs, job transfers, unemployment,
Obligors' net equity, if any, in the Mortgaged Properties, servicing decisions,
homeowner mobility, the existence and enforceability of "due-on-sale" clauses,
the existence and enforceability of prepayment penalties, seasoning of Loans,
market interest rates for similar types of loans and the availability of funds
for such loans. Each of the Loans may be assumed, with the Transferor's consent,
upon the sale of the Mortgaged Property. Certain of the Loans contain prepayment
penalty provisions which generally obligate the related Obligor to pay a penalty
in connection with a prepayment of the Obligor's Loan. The Servicer, in its
discretion, may elect to enforce or abstain from enforcing any prepayment
penalty. The Servicer has no obligation to enforce prepayment penalties and will
exercise its rights to enforce them to the extent it deems appropriate. The
Servicer is entitled to retain all prepayment penalties to the extent it
collects the penalties from Obligors. Any enforcement by the Servicer of the
prepayment penalties contained in the Loans may have an effect on the decisions
of Obligors to prepay their Loans and may affect the weighted average lives of
the Notes.
Generally, the rate of prepayment on a pool of fixed-rate loans is affected
by prevailing market interest rates for similar types of loans of a comparable
term and risk level. If prevailing interest rates were to fall significantly
below the respective Loan Rates on the Loans, the rate of prepayment (and
refinancing) would be expected to increase. Conversely, if prevailing interest
rates were to rise significantly above the respective Loan Rates on the Loans,
the rate of prepayment on the Loans would be expected to decrease. In addition,
any future limitations on the rights of borrowers to deduct interest payments on
mortgage loans for Federal income tax purposes may result in a higher rate of
prepayment on the Loans. Neither the Transferor, the Depositor, nor the
Underwriter make any representations as to the particular factors that will
affect the prepayment of the Loans, as to the relative importance of such
factors, or as to the percentage of the Principal Balances of the Loans that
will be paid as of any date.
Distributions of principal to holders of the Offered Notes at a faster rate
than anticipated will increase the yields on Offered Notes purchased at
discounts but will decrease the yields on Offered Notes purchased at premiums,
which distributions of principal may be attributable to scheduled payments and
prepayments of principal on the Loans and to the application of Excess Spread.
The effect on an investor's yield due to distributions of principal to the
holders of the Offered Notes (including, without limitation, prepayments on the
Loans) occurring at a rate that is faster (or slower) than the rate anticipated
by the investor during any period following the issuance of the Offered Notes
will not be entirely offset by a subsequent like reduction (or increase) in the
rate of such distributions of principal during any subsequent period.
The rate of delinquencies and defaults on the Loans, and the recoveries, if
any, on defaulted Loans and foreclosed properties, will also affect the rate and
timing of principal payments on the Loans and, accordingly, the weighted average
lives of the Offered Notes, and could cause a delay in the payment of principal
or a slower rate of principal amortization to the holders of Offered Notes.
Certain factors may influence such delinquencies and defaults, including
origination and underwriting standards and Combined Loan-to-Value Ratios. In
general, defaults on home loans are expected to occur with greater frequency in
S-34
<PAGE>
their early years, although few data are available with respect to the rate of
default on home loans similar to the Loans. In general, the rate of default on
junior lien loans with high Combined Loan-to-Value Ratios may be higher than
that of junior lien home loans with lower Combined Loan-to-Value Ratios, or
first lien loans, secured by comparable properties. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located or the related Obligors are residing.
See "Risk Factors--Geographic Concentration" and "The Pool" herein. The risk of
delinquencies and loss is greater and voluntary principal 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.
Because principal distributions generally are paid to holders of the Senior
Notes and Mezzanine Notes before the Class B-1 Notes, holders of the Class B-1
Notes bear a greater risk of losses from delinquencies and defaults on the Loans
than holders of the Classes of Notes having earlier priorities for payment of
principal. See "Description of Credit Enhancement--Subordination and Allocation
of Losses" herein.
Although certain data have been published with respect to the historical
prepayment experience of certain residential mortgage loans, such mortgage loans
may differ in material respects from the Loans and such data may not be
reflective of conditions applicable to the Loans. No prepayment history is
generally available with respect to the Loans or similar types of loans, and
there can be no assurance that the Loans will achieve or fail to achieve any
particular rate of principal prepayment. Several factors suggest that the
prepayment experience of the Pool may be significantly different from that of a
pool of conventional first lien, single family mortgage loans with equivalent
interest rates and maturities. One such factor is that the Principal Balance of
the average Loan is substantially smaller than that of the average conventional
first lien mortgage loan. A smaller principal balance may be easier for a
borrower to prepay than a larger balance and, therefore, a higher prepayment
rate may result for the Pool than for a pool of first lien mortgage loans,
irrespective of the relative average interest rates and the general interest
rate environment. In addition, in order to refinance a first lien mortgage loan,
the borrower must generally repay any junior liens. However, a small principal
balance may make the refinancing of a loan at a lower interest rate less
attractive to the borrower as the perceived impact to the borrower of such lower
interest rate on the size of the monthly payment may not be significant. Other
factors that might be expected to affect the prepayment rate of the Pool include
general economic conditions, the amounts of and interest rates on the related
senior mortgage loans, and the tendency of borrowers to use first lien mortgage
loans as long-term financing for home purchase and junior liens as shorter-term
financing for a variety of purposes, which may include the direct or indirect
financing of home improvement, education expenses, debt consolidation, purchases
of consumer durables such as automobiles, appliances and furnishings and other
consumer purposes. Furthermore, because at origination a substantial majority of
the Loans had Combined Loan-to-Value Ratios that exceeded 100% or were Unsecured
Loans, the related Obligors will generally have significantly less opportunity
to refinance the indebtedness and, therefore, a lower prepayment rate may be
experienced by the Pool than by a pool of first or junior lien mortgage loans
that have Combined Loan-to-Value Ratios less than 100%. Given these
characteristics, the Loans may experience a higher or lower rate of prepayment
than first lien mortgage loans.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Notes relative to the principal
amortization of the Loans. If on any Distribution Date, the
Overcollateralization Target Amount exceeds the Overcollateralization Amount,
Excess Spread, if any, will be distributed to the holders of the Classes of
Offered Notes in the order and amounts specified herein under "Description of
the Offered Notes--Priority of Distributions." If the Overcollateralization
Amount equals the Overcollateralization Target Amount for such Distribution
Date, Excess Spread otherwise distributable to the holders of the Offered Notes
as described above will instead be distributed in respect
S-35
<PAGE>
of Loss Reimbursement Deficiencies, if any, and then to the holders of the
Residual Interest Certificates. On the Stepdown Date and on each Distribution
Date thereafter as to which the Overcollateralization. Amount is or, after
taking into account all other distributions to be made on such Distribution
Date, would be at least equal to the Overcollateralization Target Amount,
amounts otherwise distributable as principal to the holders of the Offered Notes
on such Distribution Date in reduction of their Class Principal Balances may
instead be distributed in respect of the applicable Classes in payment of their
respective Loss Reimbursement Deficiencies and then to the holders of the
Residual Interest Certificates, thereby reducing the rate of, and under certain
circumstances delaying, the principal amortization of the Offered Notes, until
the Overcollateralization Amount is reduced to the Overcollateralization Target
Amount. In particular, high rates of delinquencies on the Loans during any Due
Period will cause the Excess Spread available on the related Distribution Date
to be reduced. Such an occurrence may cause the Class Principal Balances of the
Offered Notes to decrease at a slower rate relative to the Pool Principal
Balance, resulting in a possible reduction of the Overcollateralization Amount
and, in some circumstances, an Allocable Loss Amount. If the actual
distributions of any such amounts to the holders of the Residual Interest
Certificates occur later than anticipated by an investor who purchases an
Offered Note at a premium, the actual yield to such investor may be lower than
such investor's anticipated yield. The amount payable to the holders of the
Residual Interest Certificates that would otherwise be applied in reduction of
the Overcollateralization Amount or in payment of Loss Reimbursement
Deficiencies on any Distribution Date will be affected by the
Overcollateralization Target Amount as well as by the actual default and
delinquency experience of the Pool and the principal amortization of the Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered Notes
will be affected by the rate and timing of principal payments (including
prepayments) in relation to the prevailing interest rates at the time of receipt
of such principal payments. For example, during periods of falling interest
rates, holders of the Offered Notes may receive an increased amount of principal
payments from the Loans at a time when such holders may be unable to reinvest
such payments in investments having a yield and rating comparable to the Offered
Notes. Conversely, during periods of rising interest rates, holders of the
Offered Notes may receive a decreased amount of principal prepayments from the
Loans at a time when such holders may have an opportunity to reinvest such
payments in investments having a higher yield than, and a comparable rating to,
the Offered Notes.
FINAL SCHEDULED DISTRIBUTION DATES
To the extent not previously paid, the Class Principal Balance of each Class
of Notes will be payable in full on the Final Scheduled Distribution Date for
each Class of Notes set forth in the "Summary" herein. The actual maturity of
any Class of Notes may be substantially earlier than the Final Scheduled
Distribution Date set forth herein under "Summary."
S-36
<PAGE>
WEIGHTED AVERAGE LIVES OF THE OFFERED NOTES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Offered Notes
under certain stated assumptions and is not a prediction of the prepayment rate
that may actually be experienced by the Loans. Weighted average life refers to
the average amount of time that will elapse from the date of delivery of a
security until each dollar of principal of such security will be repaid to the
investor. The weighted average lives of the Offered Notes will be influenced by
the rate at which principal of the Loans is paid, which may be in the form of
scheduled amortization or prepayments (for this purpose, the term "prepayment"
includes reductions of principal, including, without limitation, those resulting
from unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions and substitutions
and repurchases by or on behalf of the Transferor), the rate at which Excess
Spread is distributed to holders of the Offered Notes as described herein, the
delinquency rate of the Loans from time to time.
Prepayments on loans such as the Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the "Prepayment Assumption"), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ("CPR") of 3.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate 1.0% (expressed as a percentage per
annum) in each month thereafter until the twelfth month; beginning in the
twelfth month and in each month thereafter during the life of the loans, a CPR
of 14.0% per annum each month is assumed. As used in the table below, a 0%
Prepayment Assumption assumes a prepayment rate equal to 0% of the Prepayment
Assumption (i.e., no prepayments). Correspondingly, a 75% Prepayment Assumption
assumes a prepayment rate equal to 75% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be an historical
description of prepayment experience or a prediction of the anticipated rate of
prepayment of any pool of loans, including the Loans. Neither the Transferor,
the Depositor nor the Underwriter make any representations about the
appropriateness of the Prepayment Assumption or the CPR.
MODELING ASSUMPTIONS. For purposes of preparing the tables below, the
following assumptions (the "Modeling Assumptions") have been made:
(i) all scheduled principal payments on the Loans are timely received on
the first day of a Due Period, which will begin on the first day of each
month and end on the thirtieth day of the month, with the first Due Period
commencing on August 1, 1997, no delinquencies or losses occur on the Loans
and all Loans have a first payment date that occurs thirty (30) days after
the origination thereof;
(ii) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (prior to giving effect to prepayments), the
Loan Rate and the remaining term to stated maturity such that the Loans will
fully amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of the
Loans have been made through the Cut-Off Date;
(iv) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the Offered
Notes occurs (except with respect to the calculation of the "Weighted
Average Life-to-Call (Years)" figures in the following tables) and no
substitutions or repurchases of the Loans occur;
(v) all prepayments in respect of the Loans include 30 days' accrued
interest thereon;
(vi) the Closing Date for the Offered Notes is August 22, 1997;
(vii) each year will consist of twelve 30-day months;
S-37
<PAGE>
(viii) cash distributions are received by the holders of the Offered Notes
on the 25th day of each month, commencing in September 1997;
(ix) the Overcollateralization Target Amount will be as defined herein;
(x) the Note Interest Rate for each Class of Notes is as set forth on
the cover page hereof; provided, however, that interest accrues on the Class
A-7 Notes for the period commencing on the first day of the month in which
the Clean-up Call Date occurs is 8.12%;
(xi) the additional fees deducted from the interest collections in
respect of the Loans include the Servicing Fee and 0.01% on the aggregate
Class Principal Balances of the Notes in respect of all other fees;
(xii) no reinvestment income from any Account (defined below) is earned
and available for distribution; and
(xiii) the Pool consists of Loans having the following characteristics:
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
CUT-OFF DATE
PRINCIPAL ORIGINAL TERM TO REMAINING TERM TO
SUB-POOL BALANCE LOAN RATE MATURITY (MONTHS) MATURITY (MONTHS)
- - - --------- ---------------- ----------- ------------------- -------------------
<S> <C> <C> <C> <C>
1 $ 13,576,062 13.9925% 162 162
2 23,282,646 14.1248% 167 166
3 33,889,355 13.9585% 169 167
4 16,693,763 14.3830% 240 240
5 25,892,430 14.2250% 240 239
6 29,072,200 14.1118% 239 237
7 21,335,116 14.0442% 300 300
8 32,136,767 14.0181% 300 299
9 29,493,219 13.9251% 299 297
----------------
$ 225,371,558
----------------
----------------
</TABLE>
The following tables indicate at the specified percentages of the Prepayment
Assumption the corresponding weighted average lives of each Class of Notes.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 24% 0% 0% 0% 0%
August 1999............................................................. 5% 0% 0% 0% 0%
August 2000............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 0.76 0.42 0.38 0.35 0.32
Weighted Average Life-to-Call (Years)(2)................................ 0.76 0.42 0.38 0.35 0.32
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 0%
August 1999............................................................. 0%
August 2000............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 0.30
Weighted Average Life-to-Call (Years)(2)................................ 0.30
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-38
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-2 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 78% 60% 43% 25%
August 1999............................................................. 100% 19% 0% 0% 0%
August 2000............................................................. 90% 0% 0% 0% 0%
August 2001............................................................. 75% 0% 0% 0% 0%
August 2002............................................................. 58% 0% 0% 0% 0%
August 2003............................................................. 39% 0% 0% 0% 0%
August 2004............................................................. 16% 0% 0% 0% 0%
August 2005............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 5.32 1.53 1.18 1.00 0.88
Weighted Average Life-to-Call (Years)(2)................................ 5.32 1.53 1.18 1.00 0.88
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 7%
August 1999............................................................. 0%
August 2000............................................................. 0%
August 2001............................................................. 0%
August 2002............................................................. 0%
August 2003............................................................. 0%
August 2004............................................................. 0%
August 2005............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 0.79
Weighted Average Life-to-Call (Years)(2)................................ 0.79
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 81% 45% 10%
August 2000............................................................. 100% 66% 13% 0% 0%
August 2001............................................................. 100% 17% 0% 0% 0%
August 2002............................................................. 100% 0% 0% 0% 0%
August 2003............................................................. 100% 0% 0% 0% 0%
August 2004............................................................. 100% 0% 0% 0% 0%
August 2005............................................................. 91% 0% 0% 0% 0%
August 2006............................................................. 64% 0% 0% 0% 0%
August 2007............................................................. 32% 0% 0% 0% 0%
August 2008............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 9.44 3.38 2.50 2.00 1.68
Weighted Average Life-to-Call (Years)(2)................................ 9.44 3.38 2.50 2.00 1.68
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 0%
August 2000............................................................. 0%
August 2001............................................................. 0%
August 2002............................................................. 0%
August 2003............................................................. 0%
August 2004............................................................. 0%
August 2005............................................................. 0%
August 2006............................................................. 0%
August 2007............................................................. 0%
August 2008............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 1.46
Weighted Average Life-to-Call (Years)(2)................................ 1.46
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
S-39
<PAGE>
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-4 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 43% 0%
August 2001............................................................. 100% 100% 26% 0% 0%
August 2002............................................................. 100% 56% 0% 0% 0%
August 2003............................................................. 100% 0% 0% 0% 0%
August 2004............................................................. 100% 0% 0% 0% 0%
August 2005............................................................. 100% 0% 0% 0% 0%
August 2006............................................................. 100% 0% 0% 0% 0%
August 2007............................................................. 100% 0% 0% 0% 0%
August 2008............................................................. 94% 0% 0% 0% 0%
August 2009............................................................. 29% 0% 0% 0% 0%
August 2010............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 11.73 5.14 3.79 3.00 2.48
Weighted Average Life-to-Call (Years)(2)................................ 11.73 5.14 3.79 3.00 2.48
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 63%
August 2000............................................................. 0%
August 2001............................................................. 0%
August 2002............................................................. 0%
August 2003............................................................. 0%
August 2004............................................................. 0%
August 2005............................................................. 0%
August 2006............................................................. 0%
August 2007............................................................. 0%
August 2008............................................................. 0%
August 2009............................................................. 0%
August 2010............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 2.13
Weighted Average Life-to-Call (Years)(2)................................ 2.13
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-40
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-5 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 76%
August 2001............................................................. 100% 100% 100% 44% 0%
August 2002............................................................. 100% 100% 49% 0% 0%
August 2003............................................................. 100% 90% 1% 0% 0%
August 2004............................................................. 100% 35% 0% 0% 0%
August 2005............................................................. 100% 0% 0% 0% 0%
August 2006............................................................. 100% 0% 0% 0% 0%
August 2007............................................................. 100% 0% 0% 0% 0%
August 2008............................................................. 100% 0% 0% 0% 0%
August 2009............................................................. 100% 0% 0% 0% 0%
August 2010............................................................. 61% 0% 0% 0% 0%
August 2011............................................................. 5% 0% 0% 0% 0%
August 2012............................................................. 0% 0% 0% 0% 0%
August 2013............................................................. 0% 0% 0% 0% 0%
August 2014............................................................. 0% 0% 0% 0% 0%
August 2015............................................................. 0% 0% 0% 0% 0%
August 2016............................................................. 0% 0% 0% 0% 0%
August 2017............................................................. 0% 0% 0% 0% 0%
August 2018............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 13.23 6.79 5.06 4.00 3.30
Weighted Average Life-to-Call (Years)(2)................................ 13.23 6.79 5.06 4.00 3.30
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 18%
August 2001............................................................. 0%
August 2002............................................................. 0%
August 2003............................................................. 0%
August 2004............................................................. 0%
August 2005............................................................. 0%
August 2006............................................................. 0%
August 2007............................................................. 0%
August 2008............................................................. 0%
August 2009............................................................. 0%
August 2010............................................................. 0%
August 2011............................................................. 0%
August 2012............................................................. 0%
August 2013............................................................. 0%
August 2014............................................................. 0%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 2.80
Weighted Average Life-to-Call (Years)(2)................................ 2.80
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-41
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-6 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 100%
August 2001............................................................. 100% 100% 100% 100% 97%
August 2002............................................................. 100% 100% 100% 93% 66%
August 2003............................................................. 100% 100% 100% 68% 40%
August 2004............................................................. 100% 100% 79% 46% 20%
August 2005............................................................. 100% 100% 59% 27% 3%
August 2006............................................................. 100% 82% 41% 11% 0%
August 2007............................................................. 100% 64% 25% 0% 0%
August 2008............................................................. 100% 47% 10% 0% 0%
August 2009............................................................. 100% 30% 0% 0% 0%
August 2010............................................................. 100% 14% 0% 0% 0%
August 2011............................................................. 100% 0% 0% 0% 0%
August 2012............................................................. 94% 0% 0% 0% 0%
August 2013............................................................. 80% 0% 0% 0% 0%
August 2014............................................................. 64% 0% 0% 0% 0%
August 2015............................................................. 45% 0% 0% 0% 0%
August 2016............................................................. 24% 0% 0% 0% 0%
August 2017............................................................. 2% 0% 0% 0% 0%
August 2018............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 17.65 10.91 8.66 7.00 5.79
Weighted Average Life-to-Call (Years)(2)................................ 17.65 10.91 8.66 7.00 5.79
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 100%
August 2001............................................................. 74%
August 2002............................................................. 43%
August 2003............................................................. 18%
August 2004............................................................. 0%
August 2005............................................................. 0%
August 2006............................................................. 0%
August 2007............................................................. 0%
August 2008............................................................. 0%
August 2009............................................................. 0%
August 2010............................................................. 0%
August 2011............................................................. 0%
August 2012............................................................. 0%
August 2013............................................................. 0%
August 2014............................................................. 0%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 4.91
Weighted Average Life-to-Call (Years)(2)................................ 4.91
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-42
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-7 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 100%
August 2001............................................................. 100% 100% 100% 100% 100%
August 2002............................................................. 100% 100% 100% 100% 100%
August 2003............................................................. 100% 100% 100% 100% 100%
August 2004............................................................. 100% 100% 100% 100% 100%
August 2005............................................................. 100% 100% 100% 100% 100%
August 2006............................................................. 100% 100% 100% 100% 82%
August 2007............................................................. 100% 100% 100% 95% 63%
August 2008............................................................. 100% 100% 100% 76% 49%
August 2009............................................................. 100% 100% 95% 59% 37%
August 2010............................................................. 100% 100% 75% 45% 27%
August 2011............................................................. 100% 100% 59% 34% 19%
August 2012............................................................. 100% 86% 49% 27% 15%
August 2013............................................................. 100% 73% 40% 21% 11%
August 2014............................................................. 100% 60% 32% 16% 8%
August 2015............................................................. 100% 48% 24% 12% 6%
August 2016............................................................. 100% 36% 18% 8% 3%
August 2017............................................................. 100% 25% 12% 5% 0%
August 2018............................................................. 88% 20% 9% 4% 0%
August 2019............................................................. 69% 14% 6% 0% 0%
August 2020............................................................. 48% 9% 4% 0% 0%
August 2021............................................................. 24% 4% 0% 0% 0%
August 2022............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 22.85 18.28 15.77 13.60 11.75
Weighted Average Life-to-Call (Years)(2)................................ 22.23 16.66 13.77 11.74 10.02
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 100%
August 2001............................................................. 100%
August 2002............................................................. 100%
August 2003............................................................. 100%
August 2004............................................................. 98%
August 2005............................................................. 75%
August 2006............................................................. 56%
August 2007............................................................. 42%
August 2008............................................................. 31%
August 2009............................................................. 22%
August 2010............................................................. 16%
August 2011............................................................. 11%
August 2012............................................................. 8%
August 2013............................................................. 6%
August 2014............................................................. 4%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
August 2019............................................................. 0%
August 2020............................................................. 0%
August 2021............................................................. 0%
August 2022............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 10.21
Weighted Average Life-to-Call (Years)(2)................................ 8.58
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-43
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-1 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 100%
August 2001............................................................. 100% 100% 100% 100% 92%
August 2002............................................................. 100% 100% 100% 90% 74%
August 2003............................................................. 100% 100% 95% 75% 60%
August 2004............................................................. 100% 100% 82% 63% 48%
August 2005............................................................. 100% 94% 70% 52% 38%
August 2006............................................................. 100% 83% 60% 42% 30%
August 2007............................................................. 100% 73% 50% 34% 23%
August 2008............................................................. 100% 63% 42% 27% 18%
August 2009............................................................. 100% 54% 34% 22% 13%
August 2010............................................................. 100% 44% 27% 16% 10%
August 2011............................................................. 97% 36% 21% 12% 7%
August 2012............................................................. 90% 31% 18% 10% 5%
August 2013............................................................. 82% 26% 14% 8% 4%
August 2014............................................................. 73% 22% 12% 6% 3%
August 2015............................................................. 63% 17% 9% 4% 1%
August 2016............................................................. 50% 13% 6% 3% 0%
August 2017............................................................. 37% 9% 4% 1% 0%
August 2018............................................................. 32% 7% 3% 0% 0%
August 2019............................................................. 25% 5% 2% 0% 0%
August 2020............................................................. 17% 3% 0% 0% 0%
August 2021............................................................. 9% 0% 0% 0% 0%
August 2022............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 19.32 13.39 11.06 9.23 7.82
Weighted Average Life-to-Call (Years)(2)................................ 19.10 12.80 10.35 8.57 7.21
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 100%
August 2001............................................................. 79%
August 2002............................................................. 61%
August 2003............................................................. 47%
August 2004............................................................. 36%
August 2005............................................................. 27%
August 2006............................................................. 20%
August 2007............................................................. 15%
August 2008............................................................. 11%
August 2009............................................................. 8%
August 2010............................................................. 6%
August 2011............................................................. 4%
August 2012............................................................. 3%
August 2013............................................................. 1%
August 2014............................................................. 0%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
August 2019............................................................. 0%
August 2020............................................................. 0%
August 2021............................................................. 0%
August 2022............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 6.71
Weighted Average Life-to-Call (Years)(2)................................ 6.14
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-44
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-2 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 100%
August 2001............................................................. 100% 100% 100% 100% 92%
August 2002............................................................. 100% 100% 100% 90% 74%
August 2003............................................................. 100% 100% 95% 75% 60%
August 2004............................................................. 100% 100% 82% 63% 48%
August 2005............................................................. 100% 94% 70% 52% 38%
August 2006............................................................. 100% 83% 60% 42% 30%
August 2007............................................................. 100% 73% 50% 34% 23%
August 2008............................................................. 100% 63% 42% 27% 18%
August 2009............................................................. 100% 54% 34% 22% 13%
August 2010............................................................. 100% 44% 27% 16% 10%
August 2011............................................................. 97% 36% 21% 12% 7%
August 2012............................................................. 90% 31% 18% 10% 5%
August 2013............................................................. 82% 26% 14% 8% 4%
August 2014............................................................. 73% 22% 12% 6% 1%
August 2015............................................................. 63% 17% 9% 4% 0%
August 2016............................................................. 50% 13% 6% 1% 0%
August 2017............................................................. 37% 9% 4% 0% 0%
August 2018............................................................. 32% 7% 2% 0% 0%
August 2019............................................................. 25% 5% 0% 0% 0%
August 2020............................................................. 17% 2% 0% 0% 0%
August 2021............................................................. 9% 0% 0% 0% 0%
August 2022............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 19.32 13.37 11.02 9.20 7.78
Weighted Average Life-to-Call (Years)(2)................................ 19.10 12.80 10.35 8.57 7.21
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 100%
August 2001............................................................. 79%
August 2002............................................................. 61%
August 2003............................................................. 47%
August 2004............................................................. 36%
August 2005............................................................. 27%
August 2006............................................................. 20%
August 2007............................................................. 15%
August 2008............................................................. 11%
August 2009............................................................. 8%
August 2010............................................................. 6%
August 2011............................................................. 4%
August 2012............................................................. 1%
August 2013............................................................. 0%
August 2014............................................................. 0%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
August 2019............................................................. 0%
August 2020............................................................. 0%
August 2021............................................................. 0%
August 2022............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 6.68
Weighted Average Life-to-Call (Years)(2)................................ 6.14
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
S-45
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS B-1 NOTES
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DATE 0% 50% 75% 100% 125%
- - - ------------------------------------------------------------------------ --- --- --- ----- -----
Initial Percent......................................................... 100% 100% 100% 100% 100%
August 1998............................................................. 100% 100% 100% 100% 100%
August 1999............................................................. 100% 100% 100% 100% 100%
August 2000............................................................. 100% 100% 100% 100% 100%
August 2001............................................................. 100% 100% 100% 100% 92%
August 2002............................................................. 100% 100% 100% 90% 74%
August 2003............................................................. 100% 100% 95% 75% 60%
August 2004............................................................. 100% 100% 82% 63% 48%
August 2005............................................................. 100% 94% 70% 52% 38%
August 2006............................................................. 100% 83% 60% 42% 30%
August 2007............................................................. 100% 73% 50% 34% 23%
August 2008............................................................. 100% 63% 42% 27% 18%
August 2009............................................................. 100% 54% 34% 22% 13%
August 2010............................................................. 100% 44% 27% 16% 10%
August 2011............................................................. 97% 36% 21% 12% 7%
August 2012............................................................. 90% 31% 18% 10% 3%
August 2013............................................................. 82% 26% 14% 8% 0%
August 2014............................................................. 73% 22% 12% 5% 0%
August 2015............................................................. 63% 17% 9% 1% 0%
August 2016............................................................. 50% 13% 5% 0% 0%
August 2017............................................................. 37% 9% 1% 0% 0%
August 2018............................................................. 32% 7% 0% 0% 0%
August 2019............................................................. 25% 3% 0% 0% 0%
August 2020............................................................. 17% 0% 0% 0% 0%
August 2021............................................................. 9% 0% 0% 0% 0%
August 2022............................................................. 0% 0% 0% 0% 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 19.31 13.32 10.96 9.14 7.71
Weighted Average Life-to-Call (Years)(2)................................ 19.10 12.80 10.35 8.57 7.21
<CAPTION>
<S> <C>
DATE 150%
- - - ------------------------------------------------------------------------ -----
Initial Percent......................................................... 100%
August 1998............................................................. 100%
August 1999............................................................. 100%
August 2000............................................................. 100%
August 2001............................................................. 79%
August 2002............................................................. 61%
August 2003............................................................. 47%
August 2004............................................................. 36%
August 2005............................................................. 27%
August 2006............................................................. 20%
August 2007............................................................. 15%
August 2008............................................................. 11%
August 2009............................................................. 8%
August 2010............................................................. 4%
August 2011............................................................. 0%
August 2012............................................................. 0%
August 2013............................................................. 0%
August 2014............................................................. 0%
August 2015............................................................. 0%
August 2016............................................................. 0%
August 2017............................................................. 0%
August 2018............................................................. 0%
August 2019............................................................. 0%
August 2020............................................................. 0%
August 2021............................................................. 0%
August 2022............................................................. 0%
Weighted Average Life-to-Maturity (Years)(2)............................ 6.62
Weighted Average Life-to-Call (Years)(2)................................ 6.14
</TABLE>
- - - ------------------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each distribution of principal thereof by the number of years from
the date of issuance to the related Distribution Date, (b) summing the
results and (c) dividing the sum by the aggregate distributions of principal
referred to in clause (a) and rounding to one decimal place.
These tables have been prepared based on the Modeling Assumptions (including
the assumptions regarding the characteristics and performance of the Loans which
may differ from the actual characteristics and performance thereof) and should
be read in conjunction therewith.
The paydown scenarios for the Offered Notes set forth in the foregoing
tables are subject to significant uncertainties and contingencies (including
those discussed above under "Prepayment and Yield Considerations"). As a result,
there can be no assurance that any of the foregoing paydown scenarios and the
Modeling Assumptions on which they were made will prove to be accurate or that
the actual weighted average lives of the Offered Notes will not vary from those
set forth in the foregoing tables, which variations may be shorter or longer,
and which variations may be greater with respect to later years. Furthermore, it
is unlikely that the Loans will prepay at a constant rate or that all of the
Loans will prepay
S-46
<PAGE>
at the same rate. Moreover, the Loans actually included in the Pool, the payment
experience of such Loans and certain other factors affecting the distributions
on the Offered Notes will not conform to the Modeling Assumptions made in
preparing the above tables. In fact, the characteristics and payment experience
of the Loans will differ in many respects from such Modeling Assumptions. See
"The Pool" herein. To the extent that the Loans actually included in the Pool
have characteristics and a payment experience that differ from those assumed in
preparing the foregoing tables, the Offered Notes are likely to have weighted
average lives that are shorter or longer than those set forth in the foregoing
tables. See "Risk Factors--Yield, Prepayment and Maturity Considerations"
herein.
In light of the uncertainties inherent in the foregoing paydown scenarios,
the inclusion of the weighted average lives of the Offered Notes in the
foregoing tables should not be regarded as a representation by the Transferor,
the Depositor, the Underwriter or any other person that any of the foregoing
paydown scenarios will be experienced.
S-47
<PAGE>
THE TRUST
GENERAL
Empire Funding Home Loan Owner Trust 1997-3 (the "Trust"), is a business
trust to be formed under the laws of the State of Delaware pursuant to the Trust
Agreement for the transactions described in this Prospectus Supplement. After
its formation, the Trust will not engage in any activity other than (i)
acquiring, holding and managing the Loans and the other assets of the Trust and
proceeds therefrom, (ii) issuing the Notes and the Residual Interest
Certificates, (iii) making payments on the Notes and the Residual Interest
Certificates and (iv) engaging in other activities that are necessary, suitable
or convenient to accomplish the foregoing or are incidental thereto or in
connection therewith.
The Residual Interest Certificates represent the residual interest in the
assets of the Trust. The Trust will initially be capitalized with equity equal
to the Residual Interest. The Residual Interest Certificates, together with the
Notes, were delivered by the Trust to the Depositor as consideration for the
Loans pursuant to the Sale and Servicing Agreement.
On the Closing Date, the Trust will purchase from the Depositor Loans having
an aggregate principal balance as of the Cut-Off Date of approximately
$225,371,558 (the "Original Pool Principal Balance") pursuant to a Sale and
Servicing Agreement dated as of August 1, 1997 (the "Sale And Servicing
Agreement"), among the Trust, the Depositor, the Transferor, the Servicer, the
Co-Owner Trustee and the Indenture Trustee.
The assets of the Trust will consist primarily of the Pool of Loans, which
are either secured by Mortgages (the "Mortgage Loans") or unsecured (the
"Unsecured Loans"). See "The Pool" herein. The assets of the Trust also will
include (i) payments of principal and interest in respect of the Loans received
after the Cut-Off Date; (ii) amounts on deposit in the Collection Account, Note
Distribution Account and Certificate Distribution Account; (iii) an assignment
of the Depositor's rights under a Home Loan Purchase Agreement dated as of
August 1, 1997 between the Transferor and the Depositor (the "Home Loan Purchase
Agreement"); and (iv) certain other ancillary or incidental funds, rights and
properties related to the foregoing.
The Trust will include the unpaid Principal Balance of each Loan as of its
applicable Cut-Off Date (the "Cut-Off Date Principal Balance"). The "Principal
Balance" of a Loan on any day is equal to its Cut-Off Date Principal Balance
minus all principal reductions credited against the Principal Balance of such
Loan since the Cut-Off Date, including any principal losses recorded by the
Servicer on account of a modification of such Loan; provided however, that any
Liquidated Home Loan will have a Principal Balance of zero. With respect to any
date, the "Pool Principal Balance" will be equal to the aggregate Principal
Balances of all Loans as of such date.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement and will be compensated for such services as described under
"Description of the Transfer and Servicing Agreements--Servicing" herein.
The Trust's principal offices are located in Wilmington, Delaware, in care
of Wilmington Trust Company, as Owner Trustee, at the address set forth below
under "--The Owner Trustee and Co-Owner Trustee."
THE OWNER TRUSTEE AND CO-OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Trust
Agreement. Wilmington Trust Company is a Delaware banking corporation and its
principal offices are located at Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890-0001.
Certain functions of the Owner Trustee under the Trust Agreement and the
Sale and Servicing Agreement will be performed by U.S. Bank National
Association, f/k/a First Bank National Association, in
S-48
<PAGE>
its capacity as Co-Owner Trustee under the Trust Agreement and the Sale and
Servicing Agreement, including maintaining the Certificate Distribution Account
and making distributions therefrom.
DESCRIPTION OF THE OFFERED NOTES
GENERAL
The Trust will issue eleven Classes of Home Loan Asset Backed Notes
(collectively, the "Notes") pursuant to an Indenture to be dated as of August 1,
1997 (the "Indenture"), between the Trust and the Indenture Trustee. The Notes
listed on the cover hereof (the "Offered Notes") have the designations and
aggregate initial principal amounts specified on the cover hereof. The Notes
will include $5,634,289 aggregate initial principal amount of Class B-2 Notes
(the "Class B-2 Notes"). The Trust will also issue certificates (the "Residual
Interest Certificates") evidencing the residual interest in the Trust (the
"Residual Interest") pursuant to the terms of a Trust Agreement dated as of
August 1, 1997 (the "Trust Agreement"), among the Transferor, the Depositor, the
Owner Trustee and the Co-Owner Trustee. The Notes will be secured by the assets
of the Trust pursuant to the Indenture. The Class B-2 Notes and the Residual
Interest Certificates are not being offered hereby.
On the 25th day of each month or, if such day is not a Business Day, the
first Business Day immediately following, commencing in September 1997 (each
such date, a "Distribution Date"), the Indenture Trustee or its designee will
distribute to the persons in whose names the Notes are registered on the last
Business Day of the month immediately preceding the month of the related
Distribution Date (each such date, a "Record Date"), the portion of the
aggregate distribution to be made to each holder of a Note as described below.
Prior to any termination of the book-entry provisions, distributions on the
Offered Notes will be made to Beneficial Owners only through DTC and DTC
Participants. See "Description of the Securities--Book-Entry Registration of
Securities" in the Prospectus.
Beneficial ownership interests in each Class of Offered Notes will be held
in minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof; provided, however, that one Offered Note of each Class may be issued in
such denomination as may be necessary to represent the remainder of the
aggregate amount of Notes of such Class.
DISTRIBUTIONS ON THE OFFERED NOTES
For the definitions of certain of the defined terms used in the following
subsections, See "--Related Definitions" below.
AVAILABLE COLLECTION AMOUNT. Distributions on the Offered Notes on each
Distribution Date will be made from the Available Collection Amount. The
Servicer will calculate the Available Collection Amount on the fourteenth
calendar day of each month or, if such day is not a Business Day, then the
immediately preceding Business Day (each such day, a "Determination Date"). With
respect to each Distribution Date, the "Available Collection Amount" is the sum
of (i) all amounts received on the Loans or required to be paid by the Servicer
or the Transferor during the related Due Period (exclusive of amounts not
required to be deposited by the Servicer in the Collection Account and amounts
permitted to be withdrawn by the Indenture Trustee from the Collection Account)
as reduced by any portion thereof that may not be withdrawn therefrom pursuant
to an order of a United States bankruptcy court of competent jurisdiction
imposing a stay pursuant to Section 362 of the United States Bankruptcy Code;
(ii) any and all income or gain from investments in the Collection Account, the
Note Distribution Account and the Certificate Distribution Account; (iii) the
Purchase Price paid for any Loans required to be repurchased and the
Substitution Adjustment to be deposited in the Collection Account in connection
with any substitution, in each case prior to the related Determination Date; and
(iv) upon the exercise of an optional termination of the Trust by the Majority
Residual Interestholders, the Termination Price.
S-49
<PAGE>
DISTRIBUTIONS OF INTEREST. Interest on the Class Principal Balance of each
Class of Notes will accrue thereon at their respective Note Interest Rates per
annum, and will be payable to the holders of the Notes monthly on each
Distribution Date, commencing in September 1997; provided, however, that
interest on the Class A-7 Notes will accrue at 8.12% per annum commencing on the
first day of the month in which the Clean-up Call Date occurs. Interest on each
Class of Notes will be calculated on the basis of a 360-day year of twelve
30-day months.
Interest distributions on the Notes will be made from the "Available
Distribution Amount", which is the Available Collection Amount remaining after
the payment of the Trust Fees and Expenses. Interest payments will be made,
FIRST, to the Classes of Senior Notes PRO RATA, SECOND, to the Classes of
Mezzanine Notes sequentially, and, THIRD, to the Class B Notes sequentially.
Under certain circumstances, the amount available for interest payments could be
less than the amount of interest payable on all Classes of Notes on any
Distribution Date. In such event, each Note of the affected Class will receive
its ratable share (based upon the aggregate amount of interest due to such
Class) of the remaining amount available to be distributed as interest after the
payment of all interest due on each Class having a higher interest payment
priority. In addition, any such interest deficiency will be carried forward as a
Noteholders' Interest Carry-Forward Amount, and will be distributed to holders
of each such Class of Notes on subsequent Distribution Dates to the extent that
sufficient funds are available. Any such interest deficiency could occur, for
example, if delinquencies or losses realized on the Loans were exceptionally
high or were concentrated in a particular month. No interest will accrue on any
Noteholders' Interest Carry-Forward Amount.
DISTRIBUTIONS OF PRINCIPAL. Principal distributions will be made to the
holders of the Notes on each Distribution Date in an amount generally equal to
(i) the Regular Principal Distribution Amount plus (ii) to the extent of the
Overcollateralization Deficiency Amount, any Excess Spread for such Distribution
Date less (iii) the excess, if any, of the Overcollateralization Amount over the
Overcollateralization Target Amount. The aggregate distributions of principal to
each Class of Notes will not exceed the Original Class Principal Balances
thereof.
PRIORITY OF DISTRIBUTIONS
A. On each Distribution Date, the Regular Distribution Amount will be
distributed in the following order of priority:
(i) to the holders of the Senior Notes, pro rata, the applicable portion
of the Noteholders' Interest Distribution Amount required to be distributed
in respect of the Senior Notes;
(ii) sequentially, to the holders of the Class M-1 and Class M-2 Notes,
in that order, the applicable portion of the Noteholders' Interest
Distribution Amount required to be distributed in respect of the Mezzanine
Notes;
(iii) sequentially, to the holders of the Class B-1 and Class B-2 Notes,
in that order, the applicable portion of the Noteholders' Interest
Distribution Amount required to be distributed in respect of the Class B
Notes;
(iv) sequentially, to pay principal to the holders of the Class A-1,
Class A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Notes,
in that order, until the respective Class Principal Balances thereof are
reduced to zero, the amount necessary to reduce the aggregate Class
Principal Balance of such Senior Notes to the Senior Optimal Principal
Balance for such Distribution Date; PROVIDED, HOWEVER, that on each
Distribution Date occurring on or after any reduction of the Class Principal
Balances of the Class M-1 Notes, Class M-2 Notes, Class B-1 Notes and Class
B-2 Notes to zero through the application of Allocable Loss Amounts,
distributions shall be made among the remaining Senior Notes pro rata and
not sequentially;
S-50
<PAGE>
(v) sequentially, to the holders of the Class M-1 and the Class M-2
Notes, in that order, until the Class Principal Balances thereof are reduced
to the Class M-1 Optimal Principal Balance and the Class M-2 Optimal
Principal Balance, respectively, for such Distribution Date;
(vi) sequentially, to the holders of the Class B-1 and Class B-2 Notes,
in that order, until the Class Principal Balances thereof are reduced to the
Class B-1 Optimal Principal Balance and the Class B-2 Optimal Principal
Balance, respectively, for such Distribution Date;
(vii) sequentially, to the Class M-1 Notes, Class M-2 Notes, Class B-1
Notes and the Class B-2 Notes, in that order, until their respective Loss
Reimbursement Deficiencies, if any, have been paid in full; and
(viii) any remaining amount to the holders of the Residual Interest
Certificates.
B. On each Distribution Date, the Excess Spread, if any, will be distributed
in the following order of priority (in each case after giving effect to all
payments specified in paragraph A. above):
(i) in an amount equal to the Overcollateralization Deficiency Amount,
if any, as follows:
(A) sequentially, as principal to the holders of the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5, Class A-6 and Class A-7 Notes, in
that order, until the respective Class Principal Balances thereof are
reduced to zero, the amount necessary to reduce the aggregate Class
Principal Balance of such Senior Notes to the Senior Optimal Principal
Balance for such Distribution Date;
(B) sequentially, as principal to the holders of the Class M-1 and
Class M-2 Notes, in that order, until the Class Principal Balances
thereof are reduced to the Class M-1 Optimal Principal Balance and the
Class M-2 Optimal Principal Balance, respectively, for such Distribution
Date; and
(C) sequentially, as principal to the holders of the Class B-1 and
Class B-2 Notes, in that order, until the Class Principal Balances
thereof are reduced to the Class B-1 Optimal Principal Balance and the
Class B-2 Optimal Principal Balance, respectively, for such Distribution
Date;
(ii) sequentially, to the Class M-1 Notes, the Class M-2 Notes, the
Class B-1 and the Class B-2 Notes, in that order, until their respective
Loss Reimbursement Deficiencies, if any, have been paid in full; and
(iii) any remaining amount to the holders of the Residual Interest
Certificates.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
BUSINESS DAY: Any day other than (i) a Saturday or a Sunday or (ii) a day
on which banking institutions in The City of New York or in the city in which
the corporate trust office of the Indenture Trustee is located or in the city in
which the Servicer's servicing operations are primarily located and are
authorized or obligated by law or executive order to be closed.
CLASS PRINCIPAL BALANCE: With respect to each Class and as of any date of
determination, the Original Class Principal Balance of such Class reduced by the
sum of (i) all amounts previously distributed in respect of principal of such
Class on all previous Distribution Dates and (ii) with respect to the Mezzanine
Notes and the Class B Notes, all Allocable Loss Amounts applied in reduction of
principal of such Classes on all previous Distribution Dates.
CLASS B-1 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related
S-51
<PAGE>
Determination Date minus the sum of (i) the aggregate Class Principal Balance of
the Senior Notes and the Mezzanine Notes (after taking into account any
distributions made on such Distribution Date in reduction of the Class Principal
Balances of the Senior Notes and the Mezzanine Notes) and (ii) the greater of
(x) 5.0% of the Pool Principal Balance as of the related Determination Date plus
the Overcollateralization Target Amount (calculated without giving effect to the
proviso in the definition thereof) for such Distribution Date and (y) 0.50% of
the Original Pool Principal Balance.
CLASS B-2 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Senior Notes, the
Mezzanine Notes and the Class B-1 Notes (after taking into account any
distributions made on such Distribution Date in reduction of the Class Principal
Balances of the Senior Notes, the Mezzanine Notes and the Class B-1 Notes) and
(ii) the Overcollateralization Target Amount for such Distribution Date.
CLASS M-1 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account distributions made on such Distribution Date in reduction of
the Class Principal Balances of the Classes of Senior Notes) and (ii) the
greater of (x) 29.5% of the Pool Principal Balance as of the related
Determination Date plus the Overcollateralization Target Amount (calculated
without giving effect to the proviso in the definition thereof) for such
Distribution Date and (y) 0.50% of the Original Pool Principal Balance.
CLASS M-2 OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; and with respect to any other Distribution
Date, the Pool Principal Balance as of the related Determination Date minus the
sum of (i) the aggregate Class Principal Balance of the Senior Notes (after
taking into account any distributions made on such Distribution Date in
reduction of the Class Principal Balances of the Classes of Senior Notes) plus
the Class Principal Balance of the Class M-1 Notes (after taking into account
any distributions made on such Distribution Date in reduction of the Class
Principal Balance of the Class M-1 Notes made prior to such determination) and
(ii) the greater of (x) 17.0% of the Pool Principal Balance as of the related
Determination Date plus the Overcollateralization Target Amount (without giving
effect to the proviso in the definition thereof) for such Distribution Date and
(y) 0.50% of the Original Pool Principal Balance.
EXCESS SPREAD: With respect to any Distribution Date, the positive excess,
if any, of (a) the Available Distribution Amount over (b) the Regular
Distribution Amount.
INSURANCE PROCEEDS: With respect to any Distribution Date, the proceeds
paid to the Indenture Trustee or the Servicer by any insurer pursuant to any
insurance policy covering a Loan, Mortgaged Property or REO Property or any
other insurance policy that relates to a Loan, net of any expenses which are
incurred by the Indenture Trustee or the Servicer in connection with the
collection of such proceeds and not otherwise reimbursed to the Indenture
Trustee or the Servicer, but excluding the proceeds of any insurance policy that
are to be applied to the restoration or repair of the Mortgaged Property or
released to the Obligor in accordance with accepted loan servicing procedures.
LIQUIDATED HOME LOAN: Any Loan in respect of which a monthly payment is in
excess of 30 days and as to which the Servicer has determined that all
recoverable liquidation and insurance proceeds have been received, which will be
deemed to occur upon the earliest of: (a) the liquidation of the related
Mortgaged Property acquired through foreclosure or similar proceedings, (b) the
Servicer's determination in accordance with customary accepted servicing
practices that no further amounts are collectible on the Loan and any related
Mortgaged Property or (c) any portion of a scheduled monthly payment of
principal and interest is in excess of 180 days past due.
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LOSS REIMBURSEMENT DEFICIENCY: As of any date of determination and as to
the Class M-1 Notes, Class M-2 Notes, Class B-1 Notes or the Class B-2 Notes,
the amount of Allocable Loss Amounts applied to the reduction of the Class
Principal Balance of such Class plus, interest accrued on the unreimbursed
portion thereof at the applicable Note Interest Rates through the end of the Due
Period immediately preceding the date of payment.
NET DELINQUENCY CALCULATION AMOUNT: With respect to any Distribution Date,
the excess, if any, of (x) the product of 1.70 and the Six-Month Rolling
Delinquency Average over (y) the aggregate of the amounts of Excess Spread for
the three preceding Distribution Dates.
NET LIQUIDATION PROCEEDS: With respect to any Distribution Date, any cash
amounts received from Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of Mortgaged Properties or otherwise (other than
Insurance Proceeds and Released Mortgaged Property Proceeds), and any other cash
amounts received in connection with the management of the Mortgaged Properties
from defaulted Loans, in each case, net of any reimbursements to the Servicer
made from such amounts for any unreimbursed Servicing Compensation and Servicing
Advances made and any other fees and expenses paid in connection with the
foreclosure, conservation and liquidation of the related Liquidated Home Loans
or Foreclosure Properties.
NOTEHOLDERS' INTEREST CARRY-FORWARD AMOUNT: With respect to any
Distribution Date, the excess, if any, of the Noteholders' Monthly Interest
Distribution Amount for the preceding Distribution Date plus any outstanding
Noteholders' Interest Carry-Forward Amount on such preceding Distribution Date,
over the amount in respect of interest that is actually deposited in the Note
Distribution Account on such preceding Distribution Date.
NOTEHOLDERS' INTEREST DISTRIBUTION AMOUNT: With respect to any Distribution
Date, the sum of the Noteholders' Monthly Interest Distribution Amount and the
Noteholders' Interest Carry-Forward Amount.
NOTEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT: With respect to any
Distribution Date, interest accrued for the related Due Period on each Class of
Notes at the respective Note Interest Rate for such Class on the Class Principal
Balance thereof on the immediately preceding Distribution Date (or, in the case
of the first Distribution Date, on the Closing Date), after giving effect to all
payments of principal to the holders of such Class of Notes on or prior to such
preceding Distribution Date.
OVERCOLLATERALIZATION AMOUNT: With respect to any Distribution Date, the
amount equal to the excess of (a) the Pool Principal Balance as of the end of
the preceding Due Period, over (b) the aggregate of the Class Principal Balances
of the Notes (after giving effect to distributions on the Notes on such
Distribution Date).
OVERCOLLATERALIZATION DEFICIENCY AMOUNT: With respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount.
OVERCOLLATERALIZATION TARGET AMOUNT: (A) With respect to any Distribution
Date occurring prior to the Stepdown Date, an amount equal to the greater of (x)
4.5% of the Original Pool Principal Balance and (y) the Net Delinquency
Calculation Amount; and (B) with respect to any other Distribution Date, an
amount equal to the greater of (x) 9% of the Pool Principal Balance as of the
end of the related Due Period and (y) the Net Delinquency Calculation Amount;
provided, however, that the Overcollateralization Target Amount will in no event
be less than 0.50% of the Original Pool Principal Balance or greater than the
sum of the aggregate Class Principal Balances of all Classes of Notes.
REGULAR DISTRIBUTION AMOUNT: With respect to any Distribution Date, the
lesser of (a) the Available Distribution Amount and (b) the sum of (i) the
Noteholders' Interest Distribution Amount and (ii) the Regular Principal
Distribution Amount.
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REGULAR PRINCIPAL DISTRIBUTION AMOUNT: On each Distribution Date, an amount
(but not in excess of the aggregate of the Class Principal Balances of the Notes
immediately prior to such Distribution Date) equal to the sum of (i) each
scheduled payment of principal collected by the Servicer in the related Due
Period, (ii) all full and partial principal prepayments applied by the Servicer
during such related Due Period, (iii) the principal portion of all Net
Liquidation Proceeds, Insurance Proceeds and Released Mortgaged Property
Proceeds received during the related Due Period, (iv) that portion of the
Purchase Price of any repurchased Loan which represents principal received prior
to the related Determination Date, (v) the principal portion of any Substitution
Adjustments required to be deposited in the Collection Account as of the related
Determination Date and (vi) on the Distribution Date on which the Trust is to be
terminated pursuant to the Sale and Servicing Agreement, the Termination Price
(net of any accrued and unpaid interest, due and unpaid Trust Fees and Expenses
and unreimbursed Servicing Advances).
RELEASED MORTGAGED PROPERTY PROCEEDS: With respect to any Mortgage Loan,
the proceeds received by the Servicer in connection with (i) a taking of an
entire Mortgaged Property by exercise of the power of eminent domain or
condemnation or (ii) any release of part of the Mortgaged Property from the lien
of the related Mortgage, whether by partial condemnation, sale or otherwise,
which proceeds are not released to the Obligor in accordance with applicable
law, accepted mortgage servicing procedures and the Sale and Servicing
Agreement.
SENIOR OPTIMAL PRINCIPAL BALANCE: With respect to any Distribution Date
prior to the Stepdown Date, zero; with respect to any other Distribution Date,
an amount equal to the Pool Principal Balance as of the related Determination
Date minus the greater of (a) 59.5% of the Pool Principal Balance as of the
related Determination Date plus the Overcollateralization Target Amount (without
giving effect to the proviso in the definition thereof) for such Distribution
Date and (b) 0.50% of the Original Pool Principal Balance.
SIX-MONTH ROLLING DELINQUENCY AVERAGE: With respect to any Distribution
Date, the average of the applicable 60-Day Delinquency Amounts for each of the
six immediately preceding Due Periods, where the 60-Day Delinquency Amount for
any Due Period is the aggregate of the Principal Balances of all Loans that are
60 or more days delinquent, in foreclosure or REO Property as of the end of such
Due Period.
STEPDOWN DATE: The first Distribution Date occurring after August 2000 as
to which:
(1) the Pool Principal Balance has been reduced to 50% of the Original
Pool Principal Balance;
(2) the Net Delinquency Calculation Amount is less than 4.5% of the
Original Pool Principal Balance; and
(3) the aggregate Class Principal Balance of the Senior Notes (after
giving effect to distributions of principal on such Distribution Date) will
be able to be reduced on such Distribution Date (such determination to be
made by the Indenture Trustee prior to giving effect to any distributions on
such Distribution Date) to the excess of (i) the Pool Principal Balance as
of the preceding Determination Date over (ii) the greater of (a) the sum of
(1) 59.5% of the Pool Principal Balance as of the preceding Determination
Date and (2) the Overcollateralization Target Amount for such Distribution
Date (such Overcollateralization Target Amount calculated without giving
effect to the proviso in the definition thereof and calculated pursuant only
to clause (B) in the definition thereof) and (b) 0.50% of the Original Pool
Principal Balance.
APPLICATION OF ALLOCABLE LOSS AMOUNTS
Following any reduction of the Overcollateralization Amount to zero, any
Allocable Loss Amounts will be applied, sequentially, in reduction of the Class
Principal Balances of the Class B-2, the Class B-1 Notes, the Class M-2 Notes
and the Class M-1 Notes, in that order, until their respective Class Principal
Balances have been reduced to zero. The Class Principal Balances of the Senior
Notes will not be reduced by any application of Allocable Loss Amounts. The
reduction of the Class Principal Balance of any
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applicable Class of Offered Notes by the application of Allocable Loss Amounts
entitles such Class to reimbursement in an amount equal to the Loss
Reimbursement Deficiency. Each such Class of Notes will be entitled to receive
its Loss Reimbursement Deficiency, or any portion thereof, in accordance with
the payment priorities specified herein. Payment in respect of Loss
Reimbursement Deficiencies will not reduce the Class Principal Balance of the
related Class or Classes. The Loss Reimbursement Deficiency with respect to any
Class will remain outstanding until the earlier of (x) the payment in full of
such amount to the holders of such Class and (y) the occurrence of the
applicable Final Scheduled Distribution Date (although there is no requirement
that such amounts be paid on such date).
OPTIONAL TERMINATION OF THE TRUST
The holders of an aggregate percentage interest in the Residual Interest
Certificates in excess of 50% (the "Majority Residual Interestholders") may, at
their option, effect an early termination of the Trust on or after any
Distribution Date on which the Pool Principal Balance declines to 10% or less of
the Original Pool Principal Balance, by purchasing such Loans for a price equal
to or greater than the Termination Price. The "Termination Price" shall be an
amount equal to the greater of (a) sum of (i) the then outstanding Class
Principal Balances of the Classes of Notes plus all accrued and unpaid interest
thereon, (ii) any Trust Fees and Expenses due and unpaid on such date and (iii)
any unreimbursed Servicing Advances including such Servicing Advances deemed to
be nonrecoverable and (b) the sum of (i) the Principal Balance of each Loan
included in the Trust as of the last day of the month immediately preceding such
Distribution Date; (ii) all unpaid interest accrued on the Principal Balance of
each such Loan at the related interest rate, net of the Servicing Fee, to such
date; and (iii) the aggregate fair market value of each foreclosure property
included in the Trust on such date, as determined by an independent appraiser
acceptable to the Indenture Trustee as of a date not more than 30 days prior to
such date. The proceeds from such sale will be distributed (i) first, to the
outstanding Trust Fees and Expenses, (ii) second, to the Servicer for
unreimbursed Servicing Advances including such Servicing Advances deemed to be
nonrecoverable, (iii) third, to the holders of Notes in an amount equal to the
then outstanding Class Principal Balance of the Notes plus all accrued and
unpaid interest thereon and (iv) fourth, to the holders of the Residual
Interest, in an amount equal to the amount of proceeds remaining, if any, after
the distributions specified in clauses (i) through (iii) above.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Notes will be provided by (i)
the subordination of the right of the Residual Interest and certain Classes of
Notes to receive distributions with respect to interest and principal as
described below under "--Subordination and Allocation of Losses" and (ii) the
overcollateralization feature described below under "--Overcollateralization."
SUBORDINATION AND ALLOCATION OF LOSSES
Distributions of interest on the Notes will be made first to the Senior
Notes, second to the Class M-1 Notes, third to the Class M-2 Notes, fourth to
the Class B-1 Notes and then to the Class B-2 Notes, such that no interest will
be paid on the Mezzanine Notes until all required interest payments have been
made on the Senior Notes and no interest will be paid on the Class B Notes until
all required interest payments have been made on the Senior Notes and the
Mezzanine Notes. In addition, distributions of principal of the Notes generally
will be made sequentially, such that no Class of Notes will receive any
distributions of principal until the Class Principal Balances of all Classes of
Notes having lower numerical designations have received all required
distributions of principal. In addition, all Allocable Loss Amounts applied in
reduction of the Class Principal Balances of the Mezzanine Notes and Class B
Notes will be applied first to the Class B-2 Notes, second to the Class B-1
Notes, third to the Class M-2 Notes and then to the Class M-1 Notes, until their
respective Class Principal Balances have been reduced to zero. Allocable Loss
Amounts will not be applied to any Class of Senior Notes. The rights of the
holders of the Residual Interest and the Class B-2 Notes to receive any
distributions on any Distribution Date generally will be subordinated to the
rights of the holders of the Offered Notes. The subordination described above is
intended to enhance the likelihood of the regular receipt of interest and
principal due to the holders of the Classes of Notes and to afford such holders
protection against losses on the Loans, with the greatest amount of such
enhancement and protection being provided to the Classes of Senior Notes, a
lesser amount of such enhancement and protection being provided to the Mezzanine
Notes and, in particular, the Class M-2 Notes, and the least amount of such
enhancement and protection being provided to the Class B Notes, and in
particular, the Class B-2 Notes. See "Risk Factors--Adequacy of Credit
Enhancement" herein.
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On each Distribution Date, the "Allocable Loss Amount" will be equal to the
excess, if any, of (a) the aggregate of the Class Principal Balances of all
Classes of Notes (after giving effect to all distributions on such Distribution
Date) over (b) the Pool Principal Balance as of the end of the preceding Due
Period.
OVERCOLLATERALIZATION
As of any date of determination, the "Overcollateralization Amount" will
equal the excess of the Pool Principal Balance as of the end of the previous Due
Period over the aggregate of the Class Principal Balances of all Classes of
Notes (after giving effect to all distributions on the Notes on such
Distribution Date). On the Closing Date, the Overcollateralization Amount will
be equal to zero. A limited acceleration of the principal amortization of the
Notes relative to the principal amortization of the Loans has been designed to
increase the Overcollateralization Amount over time by making additional
distributions of principal to the holders of the Notes from the distribution of
Excess Spread until the Overcollateralization Amount is at least equal to the
Overcollateralization Target Amount. The "Overcollateralization Target Amount"
for any Distribution Date occurring prior to the Stepdown Date will be equal to
the greater of (x) 4.5% of the Original Pool Principal Balance and (y) the Net
Delinquency Calculation Amount; with respect to any other Distribution Date, the
Overcollateralization Target Amount will be equal to the greater of (x) 9% of
the Pool Principal Balance as of the end of the related Due Period and (y) the
Net Delinquency Calculation Amount; provided, however, that the
Overcollateralization Target Amount will in no event be less than 0.50% of the
Original Pool Principal Balance or greater than the sum of the aggregate Class
Principal Balances of all Classes of Notes.
If on any Distribution Date there exists an Overcollateralization Deficiency
Amount (as defined herein), distributions of Excess Spread, if any, will be made
as an additional distribution of principal to the holders of the Notes, to be
allocated among the Classes of Notes in the order of priority set forth under
"Description of the Offered Notes--Priority of Distributions" herein. Such
distributions of Excess Spread are intended to accelerate the amortization of
the Class Principal Balances of all Classes of Notes relative to the
amortization of the Loans, thereby increasing the Overcollateralization Amount.
The relative percentage of the aggregate of the Class Principal Balances of the
Notes to the Pool Principal Balance will decrease as a result of the application
of Excess Spread to reduce the Class Principal Balances of the Notes.
On any Distribution Date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may be
distributed to the holders of the Residual Interest rather than being
distributed as principal to the holders of the Notes, thereby ceasing the
acceleration of principal amortization of the Notes in relation to the principal
amortization of the Pool until such time as the Overcollateralization Deficiency
Amount is greater than zero (i.e., due to a reduction in the
Overcollateralization Amount as a result of Net Loan Losses or delinquencies or
due to an increase in the Overcollateralization Target Amount as a result of the
failure to satisfy certain delinquency criteria).
While the application of Excess Spread in the manner specified above has
been designed to produce and maintain a given level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. In particular, a high rate of delinquencies on the
Loans during any Due Period could cause the amount of interest received on the
Loans during such Due Period to be less than the amount of interest
distributable on the Notes on the related Distribution Date. In such a case, the
Class Principal Balances of the Notes could decrease at a slower rate relative
to the Pool Principal Balance, resulting in a possible reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. See "Risk Factors--Adequacy of Credit Enhancement" herein.
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DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement and the Trust Agreement
(collectively, the "Transfer And Servicing Agreements"). Copies of the Transfer
and Servicing Agreements will be filed with the Commission following the
issuance of the Offered Notes. The summary does not purport to be complete and
is subject to, and qualified in its entirety by reference to, all the provisions
of the Transfer and Servicing Agreements. The following summary supplements, and
to the extent inconsistent therewith replaces, the description of the general
terms and provisions of the Transfer and Servicing Agreements set forth under
the heading "Description of the Securities" in the Prospectus, to which
description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the Closing Date, all of the Transferor's right, title and interest in
and to the Loans will be sold, conveyed, transferred and assigned from the
Transferor to the Depositor and then from the Depositor to the Trust. The Trust,
concurrently with the sale, conveyance, transfer and assignment of the Loans,
will cause the Notes to be delivered to the Depositor in exchange for the Loans.
The Trust will pledge and assign the Loans to the Indenture Trustee in exchange
for the Notes. Each Loan will be identified in a schedule appearing as an
exhibit to the Sale and Servicing Agreement delivered to the Indenture Trustee
(the "Loan Schedule").
In addition, the Transferor will, as to each Loan, deliver or cause to be
delivered, to the Custodian, the related Note endorsed in blank or to the order
of the Indenture Trustee without recourse, any assumption and modification
agreements and the Mortgage, if any, with evidence of recording indicated
thereon (except for any Mortgage not returned from the public recording office),
an assignment of the Mortgage, if any, in the name of the Indenture Trustee in
recordable form, and any intervening assignments of the Mortgage (collectively,
as to each Loan, the "Indenture Trustee's Loan File"). The Transferor will
deliver to the Custodian after recordation the assignments of the Mortgages in
the name of the Indenture Trustee. In the event that, with respect to any
Mortgage Loan, the Transferor cannot deliver the Mortgage or any assignment of
Mortgage with evidence of recording thereon concurrently with the conveyance
thereof under the Sale and Servicing Agreement because it has or they have not
yet been returned by the public recording office, the Transferor will deliver or
cause to be delivered to the Custodian a certified true photocopy of such
Mortgage or assignment of Mortgage. The Transferor will deliver or cause to be
delivered to the Custodian any such Mortgage or assignment of Mortgage with
evidence of recording indicated thereon upon receipt thereof from the public
recording office. The Custodian will agree, for the benefit of the holders of
the Notes, to review (or cause to be reviewed) each Indenture Trustee's Loan
File within 45 days after the conveyance of the related Loan to the Trust to
ascertain that all required documents have been executed and received. Subject
to certain cure provisions set forth in the Transfer and Servicing Agreements,
the Transferor will be required to repurchase or replace Loans as to which a
material document deficiency exists.
REPRESENTATIONS AND WARRANTIES
In the Sale and Servicing Agreement, the Transferor will represent and
warrant to the Indenture Trustee, among other things, that: (i) the information
with respect to each Loan set forth in the Loan Schedule is true and correct in
all material respects; (ii) upon the sale to the Depositor of each Loan, the
Depositor will have good and indefeasible legal title to each Loan, the related
note and any related mortgage, free of all liens, pledges, charges, mortgages,
encumbrances or rights of others; (iii) as of the Cut-Off Date, none of the
Loans was 30 or more days past due; and (iv) at origination, each Loan complied
in all material respects with applicable state and federal laws.
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TRUST FEES AND EXPENSES
As compensation for its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under "-- Servicing"
below. As compensation for their services pursuant to the applicable Transfer
and Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the
Custodian is entitled to the Custodian Fee.
SERVICING
In consideration for the performance of the daily loan servicing functions
for the Loans, the Servicer is entitled to receive a monthly servicing fee (the
"Servicing Fee") as to each Loan in the amount equal to one-twelfth of the
product of 0.75% (the "Servicing Fee Rate") and the Principal Balance of such
Loan as of the first day of the immediately preceding Due Period (or as of the
Cut Off-Date, with respect to the first Due Period). The Servicer will pay the
fees of any Subservicer out of the amounts it receives as the Servicing Fee. In
addition to the Servicing Fee, the Servicer is entitled to retain additional
servicing compensation in the form of assumption, modification and other
administrative fees, insufficient funds charges, late payment charges,
prepayment penalties, and any other servicing-related penalties and fees (such
additional compensation and the Servicing Fee, collectively, the "Servicing
Compensation").
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. However, the Servicer will make
reasonable and customary expense advances with respect to the Loans (each, a
"Servicing Advance") in accordance with its servicing obligations under the Sale
and Servicing Agreement and will be entitled to receive reimbursement for such
Servicing Advances. For example, such Servicing Advances with respect to a Loan
may include costs and expenses advanced for the preservation, restoration and
protection of the related Mortgaged Property, including advances to pay
delinquent real estate taxes and assessments. Any Servicing Advances previously
made and determined by the Servicer in accordance with accepted servicing
practices to be nonrecoverable will be reimbursable from amounts in the
Collection Account prior to distributions to holders of the Offered Notes.
COLLECTION ACCOUNT, NOTE DISTRIBUTION ACCOUNT AND CERTIFICATE DISTRIBUTION
ACCOUNT
The Servicer is required to use its best efforts to deposit in an Eligible
Account (as defined in the Sale and Servicing Agreement) (the "Collection
Account"), within two Business Days after receipt, all payments on the related
Loans received after the Cut-Off Date on account of principal and interest, all
Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or substitution
of any Loan, interest and gains on funds held in the Collection Account, Note
Distribution Account and Certificate Distribution Account and any amount
required to be deposited in the Collection Account in connection with the
termination of the Offered Notes. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the Loans on or before the Cut-Off Date. Withdrawals will
be made from the Collection Account only for the purposes specified in the Sale
and Servicing Agreement. The Collection Account may be maintained at any
depository institution which satisfies the requirements set forth in the
definition of Eligible Account in the Sale and Servicing Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account for distribution to the
holders of Notes will be deposited and from which all distributions to the
holders of Notes will be made (the "Note Distribution Account"). The Servicer
will also establish and maintain with the Indenture Trustee an account in the
name of the Owner Trustee on behalf of the holders of the Residual Interest
Certificates, into which amounts released from the Collection Account for
distribution to the Residual Interest Certificates will be deposited and from
which all distributions to the
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Residual Interest Certificates will be made (the "Certificate Distribution
Account" and, together with the Note Distribution Account, the "Distribution
Accounts").
On the second Business Day prior to each Distribution Date, the Indenture
Trustee will deposit into the Distribution Accounts the applicable portions of
the Available Collection Amount by making the appropriate withdrawals from the
Collection Account. On each Distribution Date, the Indenture Trustee will make
withdrawals from the Distribution Accounts for application of the amounts
specified under "Description of the Offered Notes--Distributions on the Offered
Notes" above.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing, amounts
on deposit in the Distribution Accounts and the Collection Account
(collectively, the "Accounts") will be invested by the Indenture Trustee, as
directed by the Transferor, in one or more Permitted Investments (as defined in
the Sale and Servicing Agreement) bearing interest or sold at a discount. No
such investment in any Account will mature later than the Business Day
immediately preceding the next Distribution Date. All income or other gain from
investments in any Account will be deposited in such Account, immediately on
receipt and shall comprise a portion of the Available Collection Amount.
COLLECTION AND OTHER SERVICING PROCEDURES FOR LOANS
The Servicer has agreed to manage, service, administer and make collections
on the Loans and perform the other actions required by the Servicer under the
Sale and Servicing Agreement. In performing such obligations, the Servicer is
required to act in good faith in a commercially reasonable manner and in
accordance with the terms of the Sale and Servicing Agreement. The Servicer has
full power and authority, subject only to the specific requirements and
prohibitions of the Sale and Servicing Agreement and the respective Loans, to do
any and all things in connection with such servicing and administration which
are consistent with the manner in which it services similar types of loans owned
by the Servicer or any of its affiliates or serviced by the Servicer for others
and which are consistent with the ordinary practices of prudent mortgage lending
institutions.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace
period, the Servicer must take such action as it shall deem to be in the best
interest of the Trust.
The Servicer may modify any provision of any Loan if, in the Servicer's good
faith judgment, such modification would minimize the loss that might otherwise
be experienced with respect to such Loan, only in the event of a payment default
with respect to such Loan or in the event that a payment default with respect to
such Loan is reasonably foreseeable by the Servicer.
INSURANCE
The Servicer shall cause to be maintained such fire and hazard insurance
covering any Mortgaged Property acquired by the Trust in foreclosure as the
Servicer shall deem reasonable.
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REALIZATION UPON DEFAULTED MORTGAGE LOANS
With respect to any Mortgage Loan in default, the Servicer may, among other
things, accept short pay-offs, short sales, enter into assumptions and
modifications, pursue collection litigation or alternative court proceedings to
foreclosure actions, institute foreclosure proceedings, exercise any power of
sale to the extent permitted by law, obtain a deed in lieu of foreclosure, or
otherwise acquire possession of or title to any Mortgaged Property, by operation
of law or otherwise; provided, however, that in the Servicer's reasonable
judgment such action will be likely to result in a positive economic benefit to
the Trust by creating Net Liquidation Proceeds (after reimbursement of all
amounts owed with respect to such Mortgage Loan to the Servicer); and provided,
further, that the Servicer will have obtained, prior to taking title to any
Mortgaged Property, an environmental review of the Mortgaged Property from a
company having appropriate experience, the scope of which is limited to the
review of public records and documents for information regarding whether such
Mortgaged Property has on it, has under it or is near, hazardous or toxic
material or waste. If such review reveals that the Mortgaged Property has on it,
has under it or is near hazardous or toxic material or waste or reveals any
other environmental problem, the Servicer shall provide a copy of the related
report to the Indenture Trustee and title shall be taken to such Mortgaged
Property only after the Servicer provides to the Indenture Trustee a
certification that, based on an analysis of all available information at the
time, it is the best judgment of the Servicer that such foreclosure shall
increase Net Liquidation Proceeds to the Indenture Trustee.
In connection with any such foreclosure proceeding, power of sale, deed in
lieu of foreclosure or other acquisition of a Mortgaged Property and any sale or
liquidation of the Loan or related Mortgaged Property, the Servicer shall comply
with the requirements of the Sale and Servicing Agreement, shall follow such
practices and procedures as are consistent with the Servicer's procedure for
foreclosure and operation of foreclosed property with respect to similar loans
held in the Servicer's portfolio for its own account or, if there are no such
loans, such loans serviced by the Servicer for others, giving due consideration
to accepted servicing practices of prudent lending institutions.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides that the Servicer deliver to the
Indenture Trustee, the Depositor and the Rating Agencies an annual statement
signed by an officer of the Servicer to the effect that the Servicer has
fulfilled its obligations under the Sale and Servicing Agreement throughout the
preceding year, except as specified in such statement.
Each year (within 90 days following the end of the Servicer's fiscal year),
beginning in 1998, the Servicer will furnish to the Indenture Trustee a report
prepared by a firm of nationally recognized independent public accountants
(which may also render other services to the Servicer) to the effect that such
firm has examined certain documents and the records relating to servicing of the
Loans as specified in the Sale and Servicing Agreement and such firm's
conclusion that the Servicer is in compliance with respect thereto.
The Servicer's fiscal year is the calendar year.
CERTAIN MATTERS REGARDING THE SERVICER
The Sale and Servicing Agreement provides that the Servicer may not resign
from its obligations and duties thereunder except (i) with the consent of the
Indenture Trustee or (ii) upon determination that the performance of its duties
under the Sale and Servicing Agreement are no longer permissible under
applicable law. Any such determination permitting the resignation of the
Servicer pursuant to clause (ii) of the immediately preceding sentence shall be
evidenced by an opinion of counsel to such effect delivered and acceptable to
the Indenture Trustee. No resignation of the Servicer shall become effective
until the Indenture Trustee or a successor servicer shall have assumed the
Servicer's servicing responsibilities and obligations.
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The Servicer has agreed not to merge or consolidate with any other company
or permit any other company to become the successor to the Servicer's business
unless, after the merger or consolidation, the successor or surviving entity (i)
shall be an Eligible Servicer (as defined in the Sale and Servicing Agreement)
and (ii) shall be capable of fulfilling the duties of the Servicer contained in
the Sale and Servicing Agreement. Any company into which the Servicer may be
merged or consolidated shall be the successor to the Servicer under the Sale and
Servicing Agreement without the execution or filing of any paper or any further
act.
The Sale and Servicing Agreement provides that neither the Servicer nor any
of its directors, officers, employees or agents shall have any liability to the
Trust or to the Security Owners for any action taken, or for refraining from
taking any action, in good faith pursuant to the Sale and Servicing Agreement or
for errors in judgment, unless liability would otherwise be imposed by reason of
willful misfeasance, bad faith, negligence or reckless disregard in performing
or failing to perform the Servicer's duties.
EVENTS OF DEFAULT
"Events Of Default" will consist of, among other things: (i) any failure of
the Servicer to deposit in the Collection Account any amount required to be
deposited under the Sale and Servicing Agreement, which failure continues
unremedied for two Business Days; (ii) any failure by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Sale and Servicing Agreement, which failure continues
unremedied for 30 Business Days after notice; or (iii) certain events of
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceedings relating to the Servicer and certain actions by the Servicer
indicating insolvency, reorganization or inability to pay its obligations (an
"Insolvency Event") or the Servicer shall dissolve or liquidate, in whole or
part, in any material respect.
If an Event of Default shall occur and be continuing, the Indenture Trustee,
the Co-Owner Trustee or the holders of Notes evidencing not less than 50% of the
voting interests of the Notes, by notice given in writing to the Servicer (and
to the Indenture Trustee, if given by such holders of Notes) may terminate all
of the rights and obligations of the Servicer under the Sale and Servicing
Agreement. On or after the receipt by the Servicer of such written notice, and
the appointment of and acceptance of appointment by a successor Servicer, all
authority, power, obligations and responsibilities of the Servicer under the
Sale and Servicing Agreement shall become obligations and responsibilities of
the successor Servicer. After the Servicer receives a notice of termination or
upon the resignation of the Servicer, the Indenture Trustee shall be the
successor in all respects to the Servicer in its capacity as servicer under the
Sale and Servicing Agreement.
Any successor Servicer shall be entitled to such compensation (whether
payable out of the Collection Account or otherwise) as the Servicer would have
been entitled to under the Sale and Servicing Agreement if the Servicer had not
resigned or been terminated thereunder. In addition, any successor Servicer
shall be entitled to reasonable transition expenses incurred in acting as
successor Servicer.
THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee, the Co-Owner Trustee, the Indenture Trustee and any of
their respective affiliates may hold Offered Notes in their own names or as
pledgees.
For the purpose of meeting the legal requirements of certain jurisdictions,
the Servicer, the Owner Trustee and the Indenture Trustee acting jointly (or in
some instances, the Owner Trustee or the Indenture Trustee acting alone) will
have the power to appoint co-trustees or separate trustees of all or any part of
the Trust. In the event of such an appointment, all rights, powers, duties and
obligations conferred or imposed upon the Owner Trustee by the Sale and
Servicing Agreement and the Trust Agreement and upon the Indenture Trustee by
the Sale and Servicing Agreement and the Indenture will be conferred or
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imposed jointly upon the Owner Trustee and the Indenture Trustee, respectively,
and in each such case such separate trustee or co-trustee, or, in any
jurisdiction in which the Owner Trustee or Indenture Trustee will be incompetent
or unqualified to perform certain acts, singly upon such separate trustee or
co-trustee which will exercise and perform such rights, powers, duties and
obligations solely at the direction of the Owner Trustee or the Indenture
Trustee, respectively.
The Owner Trustee and the Co-Owner Trustee may resign at any time, in which
event the Administrator will be obligated to appoint a successor thereto. The
Administrator may remove the Owner Trustee or the Co-Owner Trustee if any of
them ceases to be eligible to continue as such under the Trust Agreement, or
becomes legally unable to act or becomes insolvent. In such circumstances, the
Administrator will be obligated to appoint a successor Owner Trustee or a
successor Co-Owner Trustee, as applicable. Any resignation or removal of the
Owner Trustee or the Co-Owner Trustee and appointment of a successor thereto
will not become effective until acceptance of the appointment by such successor.
The Indenture Trustee may resign at any time, in which event Empire Funding
will be obligated to appoint a successor thereto. The holders of a majority in
outstanding amount of the Notes may remove the Indenture Trustee and may appoint
a successor thereto. Empire Funding will be obligated to remove the Indenture
Trustee if the Indenture Trustee ceases to be eligible to continue as such under
the Indenture, or becomes legally unable to act or becomes insolvent. In such
circumstances, Empire Funding will be obligated to appoint a successor Indenture
Trustee. Any resignation or removal of the Indenture Trustee and appointment of
a successor thereto will not become effective until acceptance of the
appointment by such successor.
The Trust Agreement and Indenture will provide that the Owner Trustee, the
Co- Owner Trustee and Indenture Trustee will be entitled to indemnification by
the Transferor, and will be held harmless against, any loss, liability or
expense incurred by the Owner Trustee, the Co-Owner Trustee or Indenture Trustee
not resulting from its own willful misfeasance, bad faith or negligence (other
than by reason of a breach of any of its representations or warranties to be set
forth in the Trust Agreement or Indenture, as the case may be).
DUTIES OF THE OWNER TRUSTEE, THE CO-OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee and the Co-Owner Trustee will make no representations as
to the validity or sufficiency of the Trust Agreement, the Securities (other
than the execution and authentication thereof) or of any Loans or related
documents, and will not be accountable for the use or application by the
Depositor or the Servicer of any funds paid to the Depositor or the Servicer in
respect of the Notes or the Loans, or the investment of any monies by the
Servicer before such monies are deposited into the Accounts. So long as no Event
of Default will have occurred and be continuing, the Owner Trustee and the
Co-Owner Trustee will be required to perform only those duties specifically
required of them under the Trust Agreement. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the Owner Trustee and the Co-Owner Trustee under the
Trust Agreement, in which case they will only be required to examine such
certificates, reports or other instruments to determine whether they conform to
the requirements of the Trust Agreement. The Owner Trustee and the Co-Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Trust Agreement or the Sale and Servicing Agreement
which failure constitutes an Event of Default, unless the Owner Trustee or the
Co-Owner Trustee obtains such actual knowledge of such failure as specified in
the Trust Agreement.
The Owner Trustee and the Co-Owner Trustee will be under no obligation to
exercise any of the rights or powers vested in them by the Trust 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 Residual Interest Certificates, unless such
holders have offered to the Owner Trustee and the Co-Owner Trustee reasonable
security or indemnity against the costs,
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expenses and liabilities that may be incurred therein or thereby. Subject to the
rights or consent of the holders of Notes and the Indenture Trustee, no holder
of a Residual Interest will have any right under the Trust Agreement to
institute any proceeding with respect to the Trust Agreement, unless such holder
previously has given to the Owner Trustee and the Co-Owner Trustee written
notice of the occurrence of an Event of Default and the Event of Default arises
from the Servicer's failure to remit payments when due.
The Indenture Trustee will make no representations as to the validity or
sufficiency of the Indenture, the Securities (other than the execution and
authentication thereof) or of any Loans or related documents, and will not be
accountable for the use or application by the Depositor or the Servicer of any
funds paid to the Depositor or the Servicer in respect of the Notes or the
Loans, or the investment of any monies by the Servicer before such monies are
deposited into the Accounts. So long as no Event of Default under the Indenture
will have occurred and be continuing, the Indenture Trustee will be required to
perform only those duties specifically required of it under the Indenture.
Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
Indenture Trustee under the Indenture, in which case it will only be required to
examine them to determine whether they conform to the requirements of the
Indenture. The Indenture Trustee will not be charged with knowledge of a failure
by the Servicer to perform its duties under the Trust Agreement, the Sale and
Servicing Agreement or the Administration Agreement which failure constitutes an
Event of Default under the Indenture, unless the Indenture Trustee obtains such
actual knowledge of such failure as specified in the Indenture.
The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture 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 Notes, unless such holders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No holder of Notes will have any right
under the Indenture to institute any proceeding with respect to the Indenture,
unless such holder will previously have given to the Indenture Trustee written
notice of the occurrence of an Event of Default and (i) the Event of Default
arises from the Servicer's failure to remit payments when due or (ii) holders of
Notes evidencing not less than 25% of the voting interests of the Notes, have
made written request upon the Indenture Trustee to institute such proceeding in
its own name as the Indenture Trustee thereunder and have offered to the
Indenture Trustee reasonable indemnity and the Indenture Trustee has for 30 days
neglected or refused to institute any such proceedings.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary of certain United States federal income tax
considerations relevant to the beneficial owner of an Offered Note that holds
the Offered Note as a capital asset and, unless otherwise indicated below, is a
United States person (as defined in the Prospectus). This summary does not
address special tax rules which may apply to certain types of investors, and
investors that hold Offered Notes as part of an integrated investment. This
summary supplements the discussion contained in the Prospectus under the heading
"Certain Federal Income Tax Consequences," and supersedes that discussion to the
extent that it is inconsistent therewith.
CLASSIFICATION OF INVESTMENT ARRANGEMENT
In the opinion of Cadwalader, Wickersham & Taft, special counsel to the
Depositor, the Trust will not be treated as an association or a publicly traded
partnership taxable as a corporation for federal income tax purposes, but rather
will be ignored and treated as a mere security device when there is a single
beneficial owner of the Trust, or will be treated as a domestic partnership when
there are two or more beneficial owners of the Trust.
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TAXATION OF HOLDERS
CHARACTERIZATION OF THE OFFERED NOTES. There are no regulations, published
rulings or judicial decisions addressing the characterization for federal income
tax purposes of securities with terms that are substantially the same as those
of the Offered Notes. However, in the opinion of Cadwalader, Wickersham & Taft,
special counsel to the Depositor, the Offered Notes will be treated as
indebtedness for federal income tax purposes and not as an ownership interest in
the Loans or an equity interest in the Trust.
INTEREST AND ORIGINAL ISSUE DISCOUNT. Interest on the Offered Notes will be
treated as income to beneficial owners as such amounts are paid or accrue in
accordance with the holder's method of accounting. It is anticipated that the
Offered Notes will not be issued with original issue discount for federal income
tax purposes. Any premium or DE MINIMIS original issue discount with respect to
the Offered Notes will be determined in the same manner as described under
"Certain Federal Income Tax Consequences--REMICs--Taxation of Classes of REMIC
Regular Certificates--Premium" and "-- Original Issue Discount" in the
Prospectus. The prepayment assumption that will be used for determining if
original issue discount is DE MINIMIS or for amortizing premium for federal
income tax purposes is 100% of the Prepayment Assumption.
SALE, EXCHANGE, RETIREMENT OR OTHER DISPOSITION. Upon the sale, exchange,
retirement or other disposition of an Offered Note, a beneficial owner generally
will recognize capital gain or loss equal to the difference, if any, between the
amount realized (adjusted for accrued stated interest) on the sale or other
disposition and the owner's Offered Note. Under recently enacted legislation,
any such capital gain of an individual investor would be subject to a lower
maximum rate if the beneficial owner's holding period is more than eighteen
months than if such holding period is more than one year but less than eighteen
months.
TAXATION OF CERTAIN FOREIGN INVESTORS. Interest, including original issue
discount, distributable to beneficial owners of Offered Notes who are
nonresident aliens, foreign corporations, or other Non-U.S. Persons (I.E., any
person who is not a "U.S. Person," as defined below), will be considered
"portfolio interest" and, therefore, generally will not be subject to 30% United
States withholding tax, provided that such Non-U.S. Person (i) is not a
"10-percent shareholder" within the meaning of Code Section 871(h)(3)(B) or a
controlled foreign corporation described in Code Section 881(c)(3)(C) with
respect to the Depositor or the Trust and (ii) provides the Trustee, or the
person who would otherwise be required to withhold tax from such distributions
under Code Section 1441 or 1442, with an appropriate statement, signed under
penalties of perjury, identifying the beneficial owner and stating, among other
things, that the beneficial owner of the Offered Note is a Non-U.S. Person. If
such statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the Offered Note is effectively connected
with the conduct of a trade or business within the United States by such
Non-U.S. Person. In the latter case, such Non-U.S. Person will be subject to
United States federal income tax at regular rates. Investors who are Non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning an Offered Certificate. The term "U.S. Person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, an estate that is subject to U.S. federal
income tax regardless of the source of its income, 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 fiduciaries have the
authority to control all substantial decisions of the trust.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Distributions made on the Offered Notes and proceeds from the sale of
Offered Notes to or through certain brokers may be subject to a "back-up"
withholding tax of 31% of "reportable payments" (including interest accruals,
original issue discount, and, under certain circumstances, distributions in
respect of
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principal amount) unless, in general, the beneficial owner complies with certain
procedures or is an exempt recipient. Any amounts so withheld from distributions
on the Offered Notes would be refunded by the Internal Revenue Service or
allowed as a credit against the beneficial owner's federal income tax.
Reports will be made to the Internal Revenue Service and to beneficial
owners that are not excepted from the reporting requirements.
See "Certain Federal Income Tax Consequences--Notes" in the Prospectus.
ERISA CONSIDERATIONS
GENERAL
Title I of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") and section 4975 of the Internal Revenue Code of 1986, as amended (the
"Code"), impose certain restrictions on employee benefit plans and other
retirement plans or arrangements subject thereto ("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 Offered Notes 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. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Offered Notes
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Offered Notes.
See "ERISA Considerations" in the Prospectus. Investments by Plans are also
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 (including loans) 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.
PLAN ASSET REGULATION
The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan for purposes
of ERISA and the prohibited transaction provisions of the Code (the "Plan Asset
Regulation"). The Plan Asset Regulation describes the circumstances under which
the assets of an entity in which a Plan invests will be considered to be "plan
assets" such that any person who exercises control over such assets would be
subject to ERISA's fiduciary standards. Under the Plan Asset Regulation,
generally when a Plan invests in another entity, the Plan's assets do not
include, solely by reason of such investment, any of the underlying assets of
the entity. However, the Plan Asset Regulation provides that, if a Plan acquires
an "equity interest" in an entity, the assets of the entity will be treated as
assets of the Plan investor unless certain exceptions not applicable here apply.
Under the Plan Asset Regulation, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no
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"substantial equity features." If the Offered Notes are not treated as equity
interests in the Trust for purposes of the Plan Asset Regulation, a Plan's
investment in such Offered Notes would not cause the assets of the Trust to be
deemed Plan assets. However, the Depositor, the Servicer, the Indenture Trustee,
and the Owner Trustee may be the sponsor of or investment advisor with respect
to one or more Plans. Because such parties may receive certain benefits in
connection with the sale of Offered Notes, the purchase of Offered Notes using
Plan assets over which any such parties has investment authority might be deemed
to be a violation of the prohibited transaction rules of ERISA and the Code for
which no exemption may be available. Accordingly, Offered Notes may not be
purchased using the assets of any Plan if the Depositor, the Servicer, the
Indenture Trustee, or the Owner Trustee has investment authority with respect to
such assets.
In addition, certain affiliates of the Depositor might be considered or
might become Parties in Interest with respect to a Plan. Also, any holder of
Residual Interest Certificates, because of its activities or the activities of
its respective affiliates, may be deemed to be a Party in Interest with respect
to certain Plans, including but not limited to Plans sponsored by such holder.
In either case, the acquisition or holding of Offered Notes by or on behalf of
such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more exemptions such as Prohibited Transaction Class Exemption ("PTCE")
84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager", PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts, PTCE-91-38,
which exempts certain transactions involving bank collective investment funds,
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts, or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house asset managers". Each purchaser or
transferee of a Note that is a Plan or is investing assets of a Plan shall be
deemed to have represented that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
If the Offered Notes are deemed to be equity interests in the Trust, the
Trust could be considered to hold Plan assets by reason of a Plan's investment
in the Offered Notes. In such an event, the Servicer and other persons
exercising management or discretionary control over the assets of the Trust may
be deemed to be fiduciaries with respect to investing Plans and thus subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of section 406 of ERISA, and section 4975 of
the Code with respect to transactions involving the Trust's assets. There can be
no assurance that any statutory or administrative exemption will apply to all
prohibited transactions that might arise in connection with the purchase or
holding of an equity interest in the Trust by a Plan.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any Offered Notes 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 and the availability of any prohibited transaction
exemptions. The sale of Offered Notes to a Plan is in no respect a
representation by the Depositor or the Underwriter that this investment meets
all relevant requirements with respect to investments by Plans generally or any
particular Plan or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT MATTERS
The Offered Notes will NOT constitute "mortgage related securities" under
SMMEA because substantially all of the Loans are either unsecured or secured by
liens on real estate that are not first liens.
No representation is made as to the proper characterization of the Offered
Notes for legal investment purposes, financial institution regulatory purposes,
or other purposes, or as to the ability of particular
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investors to purchase the Offered Notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
Offered Notes. 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 own
legal advisors in determining whether and to what extent the Offered Notes
constitute a legal investment or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The Transferor intends to use the net proceeds to be received from the sale
of the Offered Notes to pay off certain indebtedness incurred in connection with
the acquisition of the Loans and to pay other expenses associated with the
pooling of the Loans and the issuance of the Notes. An affiliate of the
Underwriter provides warehouse financing to the Transferor and will indirectly
receive a material portion of the net proceeds from the sale of the Notes in
connection with a repayment under such warehouse financing.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the Underwriting Agreement
between the Depositor and PaineWebber Incorporated (the "Underwriter") (an
affiliate of the Depositor), the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, the
Offered Notes. Distribution of the Offered Notes will be made by the Underwriter
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. In connection with the sale of the Offered
Notes, the Underwriter may be deemed to have received compensation from the
Depositor in the form of underwriting discounts.
There is currently no secondary market for the Offered Notes. There can be
no assurance that a secondary market for the Offered Notes will develop or, if
it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriter against, or make
contributions to the Underwriter with respect to, certain liabilities, including
liabilities under the Securities Act of 1933, as amended.
In addition to the purchase of the Offered Notes pursuant to the
Underwriting Agreement, the Underwriter and certain of its affiliates have
certain financing relationships with the Transferor. An affiliate of the
Underwriter provides warehouse financing to the Transferor for its mortgage
loans, including certain of the Loans and will indirectly receive a material
portion of the net proceeds from the sale of the Notes in connection with a
repayment under such warehouse financing. In addition, an affiliate of the
Underwriter may provide other term financing arrangements to the Transferor for
the Residual Interest retained by it.
LEGAL MATTERS
The validity of the Offered Notes and certain federal income tax matters
will be passed upon for the Depositor and for the Underwriter by Cadwalader,
Wickersham & Taft, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Notes that each of the
Class A-1 Notes, Class A-2 Notes, Class A-3 Notes, Class A-4 Notes, Class A-5
Notes, Class A-6 and Class A-7 Notes be rated "AAA" by Standard & Poor's and
DCR, the Class M-1 Notes be rated "AA" and the Class M-2 Notes be rated "A" and
the Class B-1 Notes be rated "BBB" by Standard & Poor's and DCR.
The ratings on the Offered Notes address the likelihood of the receipt by
the holders of the Offered Notes of all distributions on the Loans to which they
are entitled. The ratings on the Offered Notes also
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address the structural, legal and issuer-related aspects of the Offered Notes,
including the nature of the Loans. In general, the ratings on the Offered Notes
address credit risk and not prepayment risk. The ratings on the Offered Notes do
not represent any assessment of the likelihood that principal prepayments of the
Loans will be made by borrowers or the degree to which the rate of such
prepayments might differ from that originally anticipated. As a result, the
initial ratings assigned to the Offered Notes do not address the possibility
that holders of the Offered Notes might suffer a lower than anticipated yield in
the event of principal payments on the Offered Notes resulting from rapid
prepayments of the Loans or the application of Excess Spread as described
herein, or in the event that the Trust is terminated prior to the Final
Scheduled Distribution Date of the Classes of Notes.
The Depositor has not solicited ratings on the Offered Notes with any rating
agency other than the Rating Agencies. However, there can be no assurance as to
whether any other rating agency will rate the Offered Notes or, if it does, what
rating would be assigned by any such other rating agency. Any rating on the
Offered Notes by another rating agency, if assigned at all, may be lower than
the ratings assigned to the Offered Notes by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Notes by the Rating Agencies are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to such Offered Notes.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
------------------
<S> <C>
Accounts...................................................................................... S-59
Administration Agreement...................................................................... S-4
Administrator................................................................................. S-4
Allocable Loss Amount......................................................................... S-11, S-56
Available Collection Amount................................................................... S-49
Available Distribution Amount................................................................. S-50
Bankruptcy Code............................................................................... S-19
Bankruptcy Commission......................................................................... S-19
Business Day.................................................................................. S-51
Certificate Distribution Account.............................................................. S-59
Class......................................................................................... S-1
Class B Notes................................................................................. S-5
Class B-2 Notes............................................................................... S-49
Class B-1 Optimal Principal Balance........................................................... S-51
Class B-2 Optimal Principal Balance........................................................... S-52
Class M-1 Optimal Principal Balance........................................................... S-52
Class M-2 Optimal Principal Balance........................................................... S-52
Class Principal Balance....................................................................... S-51
Clean-up Call Date............................................................................ S-12
Closing Date.................................................................................. S-1
Code.......................................................................................... S-65
Collection Account............................................................................ S-58
Combined Loan-To-Value Ratio.................................................................. S-9
Commission.................................................................................... S-3
Co-Owner Trustee.............................................................................. S-1, S-4
CPR........................................................................................... S-37
Credit Score.................................................................................. S-29
Custodian..................................................................................... S-4
Custodian Fee................................................................................. S-11
Cut-Off Date Principal Balance................................................................ S-8, S-48
DCR........................................................................................... S-13
Defective Loan................................................................................ S-9, S-31
Deleted Loan.................................................................................. S-31
Depositor..................................................................................... S-1, S-4
Depository.................................................................................... S-1
Determination Date............................................................................ S-5, S-49
Distribution Accounts......................................................................... S-59
Distribution Date............................................................................. S-2, S-5, S-49
DOL........................................................................................... S-65
DTC........................................................................................... S-7
Due Period.................................................................................... S-5
Empire Funding................................................................................ S-1, S-4, S-28
ERISA......................................................................................... S-65
Events Of Default............................................................................. S-61
Excess Spread................................................................................. S-52
FHLMC......................................................................................... S-16
Final Scheduled Distribution Date............................................................. S-7
</TABLE>
S-69
<PAGE>
<TABLE>
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<S> <C>
FNMA.......................................................................................... S-16
Home Loan Purchase Agreement.................................................................. S-4, S-48
Indenture..................................................................................... S-1, S-4, S-49
Indenture Trustee............................................................................. S-1, S-4
Indenture Trustee's Loan File................................................................. S-57
Indenture Trustee Fee......................................................................... S-11
Insolvency Event.............................................................................. S-61
Insurance Proceeds............................................................................ S-52
Issuer........................................................................................ S-4
Liquidated Home Loan.......................................................................... S-52
Loan Rate..................................................................................... S-21
Loan Schedule................................................................................. S-57
Loans......................................................................................... S-1, S-7, S-21
LOE's......................................................................................... S-30
Loss Reimbursement Deficiency................................................................. S-11, S-53
Majority Residual Interestholders............................................................. S-11, S-55
Mezzanine Notes............................................................................... S-2, S-5
Modeling Assumptions.......................................................................... S-37
Mortgage Loans................................................................................ S-8, S-21, S-48
Mortgaged Properties.......................................................................... S-8, S-21
Mortgages..................................................................................... S-1, S-8
Net Delinquency Calculation Amount............................................................ S-53
Net Liquidation Proceeds...................................................................... S-53
Note Distribution Account..................................................................... S-58
Note Interest Rate............................................................................ S-5
Noteholders' Interest Carry-Forward Amount.................................................... S-53
Noteholders' Interest Distribution Amount..................................................... S-53
Noteholders' Monthly Interest Distribution Amount............................................. S-53
Notes......................................................................................... S-1, S-49
Obligors...................................................................................... S-14
Offered Notes................................................................................. S-1, S-49
Original Class Principal Balance.............................................................. S-5
Original Pool Principal Balance............................................................... S-7, S-21, S-48
Overcollateralization Amount.................................................................. S-10, S-53, S-56
Overcollateralization Deficiency Amount....................................................... S-53
Overcollateralization Target Amount........................................................... S-10, S-53, S-56
Owner Trustee................................................................................. S-1, S-4
Owner Trustee Fee............................................................................. S-11
Parties in Interest........................................................................... S-65
Plan Asset Regulation......................................................................... S-65
Plans......................................................................................... S-65
Pool.......................................................................................... S-1, S-8
Pool Principal Balance........................................................................ S-8, S-48
Prepayment Assumption......................................................................... S-37
Principal Balance............................................................................. S-8, S-48
Prospectus.................................................................................... S-2
PTCE.......................................................................................... S-66
Purchase Price................................................................................ S-31
Qualified Substitute Loan..................................................................... S-9, S-31
Rating Agencies............................................................................... S-13
</TABLE>
S-70
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
Record Date................................................................................... S-5, S-49
Regular Distribution Amount................................................................... S-53
Regular Principal Distribution Amount......................................................... S-54
Released Mortgaged Property Proceeds.......................................................... S-54
Residual Interest............................................................................. S-49
Residual Interest Certificates................................................................ S-1, S-5, S-49
Sale and Servicing Agreement.................................................................. S-4, S-48
Securities.................................................................................... S-1
Security Owners............................................................................... S-7
Senior Notes.................................................................................. S-2, S-5
Senior Optimal Principal Balance.............................................................. S-54
Servicer...................................................................................... S-4
Servicing Advance............................................................................. S-58
Servicing Compensation........................................................................ S-11, S-12, S-58
Servicing Fee................................................................................. S-12, S-58
Servicing Fee Rate............................................................................ S-58
Six-Month Rolling Delinquency Average......................................................... S-54
SMMEA......................................................................................... S-13
Standard & Poor's............................................................................. S-13
Stepdown Date................................................................................. S-54
Subservicer................................................................................... S-12
Substitution Adjustment....................................................................... S-31
Termination Price............................................................................. S-55
Transfer And Servicing Agreements............................................................. S-57
Transferor.................................................................................... S-4
Trust......................................................................................... S-1, S-4, S-48
Trust Agreement............................................................................... S-1, S-4, S-49
Trust Fees And Expenses....................................................................... S-11
Underwriter................................................................................... S-1, S-67
Unsecured Loans............................................................................... S-8, S-21, S-48
U.S. Person................................................................................... S-64
</TABLE>
S-71
<PAGE>
PROSPECTUS
AUGUST 19, 1997
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
Principal and interest with respect to Securities will be payable monthly,
quarterly, semiannually or at such other intervals on the dates specified in the
related Prospectus Supplement.
The mortgage pass-through certificates ("Certificates") or mortgaged-backed
notes ("Notes") offered hereby (together, "Securities") and by Supplements to
this Prospectus will be offered from time to time in one or more series (each, a
"Series"). Each Series of Securities will represent in the aggregate the entire
beneficial ownership interest in a Trust Fund consisting primarily of a
segregated pool of various types of single-family and multifamily residential
mortgage loans, home improvement contracts, cooperative apartment loans or
manufactured housing conditional sales contracts and installment loan agreements
(collectively, the "Residential Loans"), or beneficial interests therein (which
may include Mortgage Securities as defined herein), pass-through or
participation certificates issued or guaranteed by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC") (any such
certificates, "Agency Securities"). Information regarding a Series of Securities
and the composition of the related Trust Fund will be furnished at the time of
offering in a Prospectus Supplement.
Each Series of Securities will include one or more classes. Each class of
Securities of any Series will represent the right, which right may be senior to
the rights of one or more of the other classes of the Certificates, to receive a
specified portion of payments of principal and interest on the Residential Loans
or Agency Securities in the related Trust Fund in the manner described herein
and in the related Prospectus Supplement. A Series may include one or more
classes of Securities entitled to principal distributions, with
disproportionate, nominal or no interest distributions, or to interest
distributions, with disproportionate, nominal or no principal distributions. See
"Description of the Certificates". A Series may include two or more classes of
Securities which differ as to the timing, sequential order or amount of
distributions of principal or interest or both. If so specified in the related
Prospectus Supplement, the Trust Fund for a Series of Securities may include
insurance policies, surety bonds, guarantees, letters of credit, reserve funds,
cash accounts, reinvestment income or other types of credit support, or any
combination thereof. See "Description of Credit Support".
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
SECURITIES, SEE THE INFORMATION UNDER "RISK FACTORS" ON PAGE 16.
The only obligations of the Depositor with respect to a Series of Securities
will be pursuant to its representations and warranties as described herein. The
Master Servicer with respect to a Series of Securities evidencing interests in a
Trust Fund including Residential Loans will be named in the related Prospectus
Supplement. The principal obligations of a Master Servicer will be limited to
its contractual servicing obligations, and, to the extent described in the
related Prospectus Supplement, its obligation to make certain cash advances in
the event of payment delinquencies on the Residential Loans.
Each Trust Fund will be held in trust for the benefit of the holders of the
related Series of Securities as more fully described herein. With respect to
each series of Certificates, if specified in the related Prospectus Supplement,
one or more elections may be made to treat the related Trust Fund as a "real
estate mortgage investment conduit" ("REMIC") for federal income tax purposes.
See "Certain Federal Income Tax Consequences".
PAINEWEBBER INCORPORATED
<PAGE>
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR, EXCEPT AS SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT, ANY UNDERLYING RESIDENTIAL LOAN (OTHER THAN
RESIDENTIAL LOANS IDENTIFIED AS FHA LOANS OR VA LOANS IN THE RELATED PROSPECTUS
SUPPLEMENT) OR ANY MORTGAGE SECURITY, WILL BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY. ALTHOUGH PAYMENT OF PRINCIPAL AND
INTEREST ON AGENCY SECURITIES WILL BE GUARANTEED AS DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT BY GNMA, FNMA OR FHLMC, THE CERTIFICATES OF ANY
SERIES EVIDENCING INTERESTS IN A TRUST FUND INCLUDING SUCH AGENCY SECURITIES
WILL NOT BE SO GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Securities may be offered through one or more different methods,
including offerings through underwriters, as more fully described under "Plans
of Distribution" and in the related Prospectus Supplement. The Depositor may
retain or hold for sale, from time to time, one or more classes of a Series of
Securities.
The Depositor does not intend to list any of the Securities on any
securities exchange and has not made any other arrangement for secondary trading
of the Securities. With respect to each Series, all of the Securities of each
class offered hereby will be rated in one of the four highest rating categories
by one or more nationally recognized statistical rating organizations. There
will have been no public market for any Series of Securities prior to the
offering thereof. No assurance can be given that such a market will develop as a
result of such an offering.
The Securities are offered when, as and if delivered to and accepted by the
underwriters subject to prior sale, withdrawal or modification of the offer
without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON. THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY AND THEREBY NOR AN OFFER OF
THE SECURITIES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH
OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT INFORMATION THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATE.
2
<PAGE>
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the Securities
Exchange Act of 1934 and in accordance therewith files reports and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports and other information filed by the Depositor can be inspected and copied
at the public reference facilities maintained by the Commission at its Public
Reference Section, 450 Fifth Street, N.W., Washington, D.C. 20549, and its
Regional Offices located as follows: Chicago Regional Office, Suite 1400,
Northwestern Atrium Center, 500 West Madison Street, Chicago, Illinois 60661;
New York Regional Office, Seven World Trade Center, New York, New York 10048.
Copies of such material can also be obtained from the Public Reference Section
of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Depositor does not intend to send any financial reports to
Securityholders. The Commission also maintains a site on the World Wide Web at
"http://www.sec.gov" at which users can view and download copies of reports,
proxy and information statements and other information filed electronically
through the Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system.
The Depositor has filed the Registration Statement, including all exhibits
thereto, through the EDGAR system and therefore such materials should be
available by logging onto the Commission's Web site. The Commission maintains
computer terminals providing access to the EDGAR system at each of the offices
referred to above.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of FHLMC's Offering Circular, Information
Statement or any supplement and, accordingly, makes no representation as to the
accuracy or completeness of the information set forth therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752-6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee (as specified in the related Prospectus
Supplement) will furnish to all registered holders of Securities of the related
Series monthly, quarterly, semi-annually or at such other intervals specified in
the related Prospectus Supplement, reports and annual statements containing
information with respect to each Trust Fund described herein and in the related
Prospectus Supplement. See "Description of the Securities--Statements to
Securityholders".
3
<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each Series of Securities offered hereby, there are
incorporated herein and in the related Prospectus Supplement by reference all
documents and reports filed or caused to be filed by the Depositor pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, prior
to the termination of the offering of the related Series of Securities, that
relate specifically to such related Series of Securities. The Depositor will
provide or cause to be provided without charge to each person to whom this
Prospectus and a related Prospectus Supplement is delivered in connection with
the offering of one or more classes of such Series of Securities, upon written
or oral request of such person, a copy of any or all such reports incorporated
herein by reference, in each case to the extent such reports relate to one or
more of such classes of such Series of Securities, other than the exhibits to
such documents, unless such exhibits are specifically incorporated by reference
in such documents. Requests should be directed in writing to PaineWebber
Mortgage Acceptance Corporation IV, 1285 Avenue of the Americas, New York, New
York 10019 or by telephone at (212) 713-2000.
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Current Report on Form 8-K relating to the
Securities of each Series to be offered hereunder will, among other things, set
forth with respect to such Securities, as appropriate: (i) a description of the
class or classes of Securities and the Security Interest Rate or method of
determining the rate or the amount of interest, if any, to be paid 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 Trust Fund Assets included
therein and, if applicable, the insurance policies, surety bonds, guarantees,
letters of credit, reserve funds, cash accounts, reinvestment income or other
instruments or agreements included in the Trust Fund or otherwise, and the
amount and source of any reserve account or cash account; (iv) the
circumstances, if any, under which the Trust Fund may be subject to early
termination; (v) the method used to calculate the amount of principal to be
distributed with respect to each class of Securities; (vi) the order of
application of distributions to each of the classes within such Series, whether
sequential, pro rata, or otherwise; (vii) additional information with respect to
the method of distribution of such Securities; (viii) whether one or more REMIC
elections will be made and designation of the regular interests and residual
interests; (ix) the aggregate original percentage ownership interest in the
Trust Fund to be evidenced by each class of Securities; (x) information as to
the Trustee; (xi) 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 (xii) information as to the Master Servicer.
UNTIL 90 DAYS AFTER THE DATE OF EACH PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE 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 SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITERS OF THE SECURITIES COVERED BY SUCH PROSPECTUS
SUPPLEMENT AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
4
<PAGE>
SUMMARY OF TERMS
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 in each Prospectus Supplement with respect to the Series
offered thereby and the terms and provisions of the related Pooling and
Servicing Agreement (the "Pooling and Servicing Agreement") or Trust Agreement
(the "Trust Agreement"; each Pooling and Servicing Agreement or Trust Agreement,
an "Agreement") to be prepared and delivered in connection with the offering of
such Series. Unless otherwise specified, capitalized terms used and not defined
in this Summary of Terms have the meanings ascribed to them in this Prospectus
and in the related Prospectus Supplement.
<TABLE>
<S> <C>
Securities Offered........................... Mortgage pass-through certificates
("Certificates") or mortgage-backed notes
("Notes", and together with the Certificates,
the "Securities").
Depositor.................................... PaineWebber Mortgage Acceptance Corporation
IV (the "Depositor"), a Delaware corporation,
is a wholly-owned limited purpose finance
subsidiary of PaineWebber Group Inc. The
Depositor's principal offices are located at
1285 Avenue of the Americas, New York, New
York 10019 and its telephone number is (212)
713-2000. See "The Depositor".
Master Servicer.............................. The entity or entities named as Master
Servicer (the "Master Servicer") for each
Series of Securities evidencing interests in
a Trust Fund including Residential Loans as
specified in the related Prospectus
Supplement. See "Description of the
Securities--Certain Matters Regarding the
Master Servicer, the Depositor and the
Trustee".
Trustees..................................... The trustee or indenture trustee (the
"Trustee") for each Series of Securities will
be named in the related Prospectus
Supplement. The owner trustee (the "Owner
Trustee") for each Series of Notes will be
named in the Prospectus Supplement. See
"Description of the Securities--Certain
Matters Regarding the Master Servicer, the
Depositor and The Trustee".
Issuer of Notes.............................. With respect to each series of Notes, the
issuer (the "Issuer") will be the Depositor
or an owner trust established by it for the
purpose of issuing such series of Notes. Each
such owner trust will be created pursuant to
a trust agreement (the "Owner Trust
Agreement") between the Depositor, acting as
depositor, and the Owner Trustee. Each series
of Notes will represent indebtedness of the
Issuer and will be issued pursuant to an
indenture between the Issuer and the Trustee
(the "Indenture") whereby the Issuer will
pledge the Trust Fund to secure the Notes
under the lien of the Indenture. As to each
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
series of Notes where the Issuer is an owner
trust, the ownership of the Trust Fund will
be evidenced by certificates (the "Equity
Certificates") issued under the Owner Trust
Agreement, which, unless otherwise specified
in the Prospectus Supplement, are not offered
hereby. The Notes will represent nonrecourse
obligations solely of the Issuer, and the
proceeds of the Trust Fund will be the sole
source of payments on the Notes, except as
described herein under "Description of Credit
Support" and in the related Prospectus
Supplement.
Description of Securities.................... Each Series of Securities will include one or
more classes. Each Series of Securities
(including any class or classes of Securities
of such Series not offered hereby) will
represent either (i) with respect to each
series of Certificates, in the aggregate the
entire beneficial ownership interest in, or
(ii) with respect to each series of Notes,
indebtedness of, a segregated pool of
Residential Loans or Agency Securities, or
beneficial interests therein (which may
include Mortgage Securities as defined
herein) (each, a "Trust Fund Asset"), and
certain other assets described below
(together, all such Trust Fund Assets and
other assets with respect to a Series of
Securities shall constitute a "Trust Fund").
Unless otherwise specified in the related
Prospectus Supplement, each class of
Securities will have a stated principal
amount (a "Security Principal Balance") and
will be entitled to distributions of interest
thereon based on a specified interest rate
(the "Security Interest Rate"). The Security
Interest Rate may vary for each class of
Securities and may be fixed, variable or
adjustable. The related Prospectus Supplement
will specify the Security Interest Rate for
each Series of Securities or each class
thereof, or the method for determining the
Security Interest Rate.
If so provided in the related Prospectus
Supplement, a Series of Securities evidencing
interests in a Trust Fund including
Residential Loans may include one or more
classes of Securities (collectively, the
"Senior Securities") which are senior to one
or more classes of Securities (collectively,
the "Subordinate Securities") in respect of
certain distributions of principal and
interest and allocations of losses on the
Residential Loans to the extent and in the
manner provided in the related Prospectus
Supplement. Credit enhancement may also be
provided with respect to any Series by means
of various insurance policies,
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
surety bonds, guarantees, letters of credit,
reserve funds, cash accounts, reinvestment
income or other types of credit support, or
any combination of the foregoing, as
described herein and in the related
Prospectus Supplement. See "Description of
Credit Support".
A Series may include one or more classes of
Securities that (i) may be entitled to
principal distributions, with
disproportionate, nominal or no interest
distributions, (ii) may be entitled to
interest distributions, with
disproportionate, nominal or no principal
distributions ("Strip Securities"), (iii) may
be entitled to receive distributions only of
prepayments of principal throughout the lives
of the Securities or during specified
periods, (iv) may be subordinated in the
right to receive distributions of scheduled
payments of principal, prepayments of
principal, interest or any combination
thereof to one or more other classes of
Securities of such Series throughout the
lives of the Securities or during specified
periods, (v) may be entitled to receive such
distributions only after the occurrence of
events specified in the related Prospectus
Supplement, (vi) may be entitled to receive
distributions in accordance with a schedule
or formula or on the basis of collections
from designated portions of the assets in the
related Trust Fund, (vii) as to Securities
entitled to distributions allocable to
interest, may be entitled to receive interest
at a fixed rate or a rate that is subject to
change from time to time, and (viii) as to
Securities entitled to distributions
allocable to interest, may be entitled to
distributions allocable to interest only
after the occurrence of events specified in
the related Prospectus Supplement and may
accrue interest until such events occur, in
each case as specified in the related
Prospectus Supplement. The timing and amounts
of such distributions may vary among classes,
over time, or otherwise as specified in the
related Prospectus Supplement. In addition, a
Series may include two or more classes of
Securities which differ as to timing,
sequential order or amount of distributions
of principal or interest, or both, or which
may include one or more classes of Securities
("Accrual Securities"), as to which accrued
interest will not be distributed but rather
will be added to the Security Principal
Balance thereof on each Distribution Date, as
hereinafter defined, in the manner described
in the related Prospectus Supplement.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
As to each Series relating only to
Certificates, 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" or "REMIC" as
defined in the Internal Revenue Code of 1986
(the "Code"). If any such election is made as
to any Series, one of the classes of
Certificates comprising such Series will be
designated as evidencing all "residual
interests" in the related REMIC as defined in
the Code. See "Description of the
Securities".
The Securities will not represent an interest
in or obligation of the Depositor or any
affiliate thereof except as set forth herein,
nor will the Securities, any Residential
Loans (other than Residential Loans
identified as FHA Loans or VA Loans in the
related Prospectus Supplement) or Mortgage
Securities be insured or guaranteed by any
governmental agency or instrumentality.
Although payment of principal and interest on
Agency Securities will be guaranteed as
described herein and in the related
Prospectus Supplement by GNMA, FNMA or FHLMC,
the Securities of any Series including such
Agency Securities will not be so guaranteed.
Interest..................................... Interest on each class of Securities other
than certain classes of Strip Securities or
Accrual Securities (prior to the time when
accrued interest becomes payable thereon) of
each Series will accrue at the applicable
Security Interest Rate on the outstanding
Security Principal Balances thereof and will
be distributed to Securityholders as provided
in the related Prospectus Supplement (each of
the specified dates on which distributions
are to be made, a "Distribution Date").
Distributions with respect to interest on
Strip Securities with no or, in certain
cases, a nominal Security Principal Balance
will be made on each Distribution Date on the
basis of a notional amount as described
herein and in the related Prospectus
Supplement. Interest that has accrued but is
not yet payable on any Accrual Securities
will be added to the Security Principal
Balance thereof on each Distribution Date.
Distributions of interest with respect to one
or more classes of Securities (or accruals
thereof in the case of Accrual Securities)
may be reduced to the extent of certain
delinquencies or other contingencies
described herein and in the related
Prospectus Supplement. See "Yield
Considerations", "Maturity and Prepayment
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Considerations" and "Description of the
Securities".
Principal.................................... The Securities of each Series (other than
certain Strip Securities) initially will have
an aggregate Security Principal Balance equal
to either (i) unless the related Prospectus
Supplement provides otherwise, the
outstanding principal balance of the Trust
Fund Assets included in the related Trust
Fund, as of 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, or, (ii) if so specified in the
related Prospectus Supplement with respect to
a Series having more than one class of
Securities, the total of the Cash Flow Values
(as defined herein) of the Residential Loans
as of such date. The Security Principal
Balance of a Security represents the maximum
dollar amount (exclusive of interest thereon)
which the holder thereof is entitled to
receive in respect of principal from future
cash flow on the assets in the related Trust
Fund. The initial Security Principal Balance
of each class of Securities will be set forth
on the cover of the related Prospectus
Supplement. Except as otherwise specified in
the related Prospectus Supplement,
distributions in respect of principal on the
Securities of each Series will be payable on
each Distribution Date to the class or
classes of Securities entitled thereto until
the Security Principal Balance of such class
has been reduced to zero, on a pro rata basis
among all of the Securities of such class, in
proportion to their respective outstanding
Security Principal Balances, or in the
priority and manner otherwise specified in
the related Prospectus Supplement. Strip
Securities not having a Security Principal
Balance will not receive distributions in
respect of principal. See "The Trust Funds",
"Maturity and Prepayment Considerations" and
"Description of the Securities".
The Trust Funds.............................. Each Trust Fund will consist of a segregated
pool of Residential Loans or Agency
Securities and certain other assets as
described herein and in the related
Prospectus Supplement. Unless otherwise
specified in the related Prospectus
Supplement, all Trust Fund Assets will be
purchased by the Depositor, either directly
or through an affiliate, from unaffiliated
sellers and will be deposited into the
related Trust Fund as of the first day of the
month
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in which the Securities evidencing interests
therein are initially issued. In addition, if
the related Prospectus Supplement so
provides, the related Trust Fund Assets will
include funds on deposit in an account (a
"Pre-Funding Account") which will be used to
purchase additional Residential Loans during
the period specified in the related
Prospectus Supplement. See "Description of
the Securities, Pre-Funding Accounts".
A. Residential Loans......................... The Residential Loans will consist of (i)
mortgage loans (the "Mortgage Loans") secured
by first or junior liens on one- to
four-family residential properties (each, a
"Mortgaged Property," collectively,
"Mortgaged Properties") or mortgage loans
(the "Multifamily Loans") secured by first or
junior liens on multifamily residential
properties consisting of five or more
dwelling units (also, "Mortgaged
Properties"), (ii) home improvement
installment sales contracts and installment
loan agreements (the "Home Improvement
Contracts") which may be unsecured or secured
by a lien on the related Mortgaged Property
or a Manufactured Home, which lien may be
subordinated to one or more senior liens on
the related Mortgaged Property, as described
in the related Prospectus Supplement, (iii)
one- to four-family first or junior lien
closed end home equity loans for property
improvement, debt consolidation or home
equity purposes (the "Home Equity Loans"),
(iv) cooperative loans (the "Cooperative
Loans") secured primarily by shares in a
private cooperative housing corporation (a
"Cooperative") which with the related
proprietary lease or occupancy agreement give
the owner thereof the right to occupy a
particular dwelling unit in the Cooperative
or (v) manufactured housing conditional sales
contracts and installment loan agreements
(the "Manufactured Housing Contracts"), which
may be secured by either liens on (a) new or
used Manufactured Homes (as defined herein)
or (b) the real property and any improvements
thereon (the "Mortgaged Property," which may
include the related Manufactured Home if
deemed to be part of the real property under
applicable state law) relating to a
Manufactured Housing Contract as well as in
certain cases a lien on a new or used
Manufactured Home which is not deemed to be a
part of the related real property under
applicable state law (such Manufactured
Housing Contracts that are secured by
Mortgaged Property are
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referred to herein as "Land Contracts"). The
Mortgaged Properties, Cooperative shares
(together with the right to occupy a
particular dwelling unit evidenced thereby)
and Manufactured Homes (collectively, the
"Residential Properties") may be located in
any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico.
Unless otherwise specified in the related
Prospectus Supplement, each Trust Fund will
contain only one of the following types of
residential loans: (1) fully amortizing loans
with a fixed rate of interest (such rate, an
"Interest Rate") and level monthly payments
to maturity; (2) fully amortizing loans with
a fixed Interest Rate providing for level
monthly payments, or for payments of interest
only during the early years of the term,
followed by monthly payments of principal and
interest that increase annually at a
predetermined rate until the loan is repaid
or for a specified number of years, after
which level monthly payments resume; (3)
fully amortizing loans with a fixed Interest
Rate providing for monthly payments during
the early years of the term that are
calculated on the basis of an interest rate
below the Interest Rate, followed by monthly
payments of principal and interest that
increase annually by a predetermined
percentage over the monthly payments payable
in the previous year until the loan is repaid
or for a specified number of years, followed
by level monthly payments; (4) fixed Interest
Rate loans providing for level payments of
principal and interest on the basis of an
assumed amortization schedule and a balloon
payment of principal at the end of a
specified term; (5) fully amortizing loans
with an Interest Rate adjusted periodically
(with corresponding adjustments in the amount
of monthly payments) to equal the sum (which
may be rounded) of a fixed margin and an
index as described in the related Prospectus
Supplement, which may provide for an
election, at the mortgagor's option during a
specified period after origination of the
loan, to convert the adjustable Interest Rate
to a fixed Interest Rate, as described in the
related Prospectus Supplement; (6) fully
amortizing loans with an adjustable Interest
Rate providing for monthly payments less than
the amount of interest accruing on such loan
and for such amount of interest accrued but
not paid currently to be added to the
principal balance of such loan; (7)
adjustable Interest Rate loans providing for
an election at the mortgagor's option,
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in the event of an adjustment to the Interest
Rate resulting in an Interest Rate in excess
of the Interest Rate at origination of the
loan, to extend the term to maturity for such
period as will result in level monthly
payments to maturity; or (8) such other types
of Residential Loans as may be described in
the related Prospectus Supplement.
If specified in the related Prospectus
Supplement, the Residential Loans will be
covered by standard hazard insurance policies
with extended coverage insuring against
losses due to fire and various other causes.
If specified in the related Prospectus
Supplement, the Residential Loans will be
covered by flood insurance policies if the
related Residential Property is located in a
federally designated flood area and if such
insurance is available. If specified in the
related Prospectus Supplement, the
Residential Loans will be covered by primary
credit insurance policies or will be insured
by the Federal Housing Administration (the
"FHA") or partially guaranteed by the
Veterans Administration (the "VA"). See
"Description of Primary Insurance Coverage".
B. Agency Securities......................... The Agency Securities will consist of any
combination of "fully modified pass-through"
mortgage-backed certificates ("GNMA
Certificates") guaranteed by the Government
National Mortgage Association ("GNMA"),
guaranteed mortgage pass-through securities
("FNMA Certificates") issued by the Federal
National Mortgage Association ("FNMA") and
mortgage participation certificates ("FHLMC
Certificates") issued by the Federal Home
Loan Mortgage Corporation ("FHLMC").
C. Mortgage Securities....................... If specified in the related Prospectus
Supplement, a Trust Fund may include
previously issued asset-backed certificates,
collateralized mortgage obligations or
participation certificates (each, and
collectively, "Mortgage Securities")
evidencing interests in, or collateralized
by, Residential Loans or Agency Securities as
defined herein.
D. Trust Account............................. Each Trust Fund will include one or more
accounts (collectively, the "Trust Account")
established and maintained on behalf of the
Securityholders into which the Master
Servicer or the Trustee will, to the extent
described herein and in the related
Prospectus Supplement, deposit all payments
and collections received or advanced with
respect to the related Trust Fund Assets. A
Trust Account may be
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maintained as an interest bearing or a
non-interest bearing account, or funds held
therein may be invested in certain short-term
high-quality obligations. See "Description of
the Securities-- Deposits to the Trust
Account".
E. Credit Support............................ If so specified in the Prospectus Supplement,
one or more classes of Securities within any
Series evidencing interests in a Trust Fund
that includes Residential Loans may be
covered by any combination of a surety bond,
a guarantee, letter of credit, an insurance
policy, a bankruptcy bond, a reserve fund, a
cash account, reinvestment income,
subordination of one or more classes of
Securities in a Series (or, with respect to
any Series of Notes, the related Equity
Certificates) to the extent provided in the
related Prospectus Supplement, cross-support
between Securities evidencing beneficial
ownership in different asset groups within
the same Trust Fund or another type of credit
support to provide partial or full coverage
for certain defaults and losses relating to
the Residential Loans. The amount and types
of coverage, the identification of the entity
providing the coverage (if applicable), the
terms of any subordination and related
information with respect to each type of
credit support, if any, will be set forth in
the related Prospectus Supplement for a
Series of Securities. If specified in the
related Prospectus Supplement, the coverage
provided by one or more forms of credit
support may apply concurrently to two or more
separate Trust Funds. If applicable, the
related Prospectus Supplement will identify
the Trust Funds to which such credit support
relates and the manner of determining the
amount of the coverage provided thereby and
the application of such coverage to the
identified Trust Funds. See "Description of
Credit Support" and "Description of the
Securities--Subordination".
Servicing and Advances....................... The Master Servicer, directly or through sub-
servicers, will service and administer the
Residential Loans included in a Trust Fund
and, unless the related Prospectus Supplement
provides otherwise, in connection therewith
(and pursuant to the terms of the related
Mortgage Securities, if applicable) will be
obligated to make certain cash advances with
respect to delinquent scheduled payments on
the Residential Loans or will be obligated to
make such cash advances only to the extent
that the Master Servicer determines that such
advances will be recoverable (any such
advance, an "Advance").
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Advances made by the Master Servicer will be
reimbursable to the extent described herein
and in the related Prospectus Supplement. The
Prospectus Supplement with respect to any
Series may provide that the Master Servicer
will obtain a cash advance surety bond, or
maintain a cash advance reserve fund, to
cover any obligation of the Master Servicer
to make advances. The obligor on any such
surety bond will be named, and the terms
applicable to any such cash advance reserve
fund will be described in the related
Prospectus Supplement. See "Description of
the Securities--Advances".
Optional Termination......................... If so specified in the related Prospectus
Supplement, a Series of Securities may be
subject to optional early termination
("Optional Termination") through the
repurchase of the assets in the related Trust
Fund by the party entitled to effect such
termination, under the circumstances and in
the manner set forth herein under
"Description of the Securities--Termination"
herein and in the related Prospectus
Supplement.
Certain Federal Income Tax Consequences...... The Certificates of each Series offered
hereby will constitute either (i) interests
("Grantor Trust Certificates") in a Trust
Fund treated as a grantor trust under
applicable provisions of the Code, or (ii)
"regular interests" ("REMIC Regular
Certificates") or "residual interests"
("REMIC Residual Certificates") in a Trust
Fund treated as a REMIC under Sections 860A
through 860G of the Code. Notes will
represent indebtedness of the related Trust
Fund.
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 and annuities, Keogh plans and bank
collective investment funds and insurance
company general 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 counsel whether the purchase, sale or
holding of Securities could give rise to a
transaction that is prohibited or is not
otherwise permissible either under ERISA or
Section 4975 of the Code. Plan investors are
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advised to consult their counsel and to
review "ERISA Considerations" herein and in
the related Prospectus Supplement.
Legal Investment............................. The Prospectus Supplement for each Series of
Securities will specify which, if any, of the
Securities offered thereby constitute at the
date of issuance "mortgage related
securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984
("SMMEA"). Institutions whose investment
activities are subject to review by federal
or state authorities should consult with
their counsel or the applicable authorities
to determine whether and to what extent a
class of Securities constitutes a legal
investment for them. See "Legal Investment".
Use of Proceeds.............................. The Depositor will use the net proceeds from
the sale of each Series for one or more of
the following purposes: (i) to purchase the
related Trust Fund Assets, (ii) to repay
indebtedness which has been incurred to
obtain funds to acquire such Trust Fund
Assets, (iii) to establish any Reserve Funds
described in the related Prospectus
Supplement and (iv) to pay costs of
structuring, guaranteeing and issuing such
Securities. If so specified in the related
Prospectus Supplement, the purchase of the
Trust Fund Assets for a Series may be
effected by an exchange of Securities with
the Depositor of such Trust Fund Assets. See
"Use of Proceeds."
Ratings...................................... Unless otherwise specified in the related
Prospectus Supplement, it will be a
requirement for issuance of any Series that
the Securities offered by this Prospectus and
such Prospectus Supplement be rated by at
least one Rating Agency in one of its four
highest applicable rating categories. The
rating or ratings applicable to Securities of
each Series offered hereby and by the related
Prospectus Supplement will be as set forth in
the related Prospectus Supplement. A
securities rating should be evaluated
independently of similar ratings on different
types of securities. A security rating does
not address the effect that the rate of
prepayments on Residential Loans comprising
or underlying the Trust Fund Assets may have
on the yield to investors in the Securities.
See "Risk Factors."
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities offered hereby and by the related
Prospectus Supplement.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Securities of any
Series will develop or, if it does develop, that it will provide holders with
liquidity of investment or will continue while Securities of such Series remain
outstanding. The market value of Securities of each Series will fluctuate with
changes in prevailing rates of interest. Consequently, sale of the Securities by
a holder in any secondary market that may develop may be at a discount from par
value or from its purchase price. Holders of Securities have no optional
redemption rights. Unless otherwise provided in the related Prospectus
Supplement, PaineWebber expects to make a secondary market in the Securities
offered hereby, but is not obligated to do so.
LIMITED ASSETS
The Depositor does not have, nor is it expected to have, any significant
assets. Unless otherwise specified in the related Prospectus Supplement, the
Securities of a Series will be payable solely from the Trust Fund for such
Securities and will not have any claim against or security interest in the Trust
Fund for any other Series. There will be no recourse to the Depositor or any
other person for any failure to receive distributions on the Securities.
Furthermore, at the times set forth in the related Prospectus Supplement,
certain Trust Fund Assets and/or any balance remaining in the Trust Account
immediately after making all payments due on the Securities of such Series,
after making adequate provision for future payments on certain classes of
Securities and after making any other payments specified in the related
Prospectus Supplement, may be promptly released or remitted to the Depositor,
the Master Servicer, any credit enhancement provider or any other person
entitled thereto and will no longer be available for making payments to
Securityholders. Consequently, holders of Securities of each Series must rely
solely upon payments with respect to the Trust Fund Assets and the other assets
constituting the Trust Fund for a Series of Securities, including, if
applicable, any amounts available pursuant to any credit enhancement for such
Series, for the payment of principal of and interest on the Securities of such
Series.
The Securities will not represent an interest in or obligation of the
Depositor, the Master Servicer or any of their respective affiliates. The only
obligations, if any, of the Depositor with respect to the Trust Fund Assets and
the other assets constituting the Trust Fund for a Series of Securities, or the
Securities of any Series will be pursuant to certain representations and
warranties. The Depositor does not have, and is not expected in the future to
have, any significant assets with which to meet any obligation to repurchase
Trust Fund Assets with respect to which there has been a breach of any
representation or warranty. If, for example, the Depositor were required to
repurchase a Residential Loan, its only sources of funds to make such repurchase
would be from funds obtained (i) from the enforcement of a corresponding
obligation, if any, on the part of the seller or originator of such Residential
Loan, or (ii) from a reserve account or similar credit enhancement established
to provide funds for such repurchases. The Master Servicer's servicing
obligations under the related Agreement may include its limited obligation to
make certain advances in the event of delinquencies on the Residential Loans,
but only to the extent deemed recoverable. To the extent described in the
related Prospectus Supplement, the Depositor, Master Servicer or Trustee will be
obligated under certain limited circumstances to purchase or act as a
remarketing agent with respect to a convertible Residential Loan upon the
conversion of the interest rate thereon to a fixed rate.
CREDIT ENHANCEMENT
Although credit enhancement is intended to reduce the risk of delinquent
payments or losses to holders of Securities entitled to the benefit thereof, the
amount of such credit enhancement will be limited,
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as set forth in the related Prospectus Supplement, and may decline and could be
depleted under certain circumstances prior to the payment in full of the related
Series of Securities, and as a result Securityholders may suffer losses.
Moreover, such credit enhancement may not cover all potential losses or risks.
For example, credit enhancement may or may not cover, or may cover only in part,
fraud or negligence by a loan originator or other parties. See "Description of
Credit Support".
PREPAYMENT AND YIELD CONSIDERATIONS
The timing of principal payments of the Securities of a Series will be
affected by a number of factors, including the following: (i) the extent of
prepayments of the Residential Loans and, in the case of Agency Securities, the
underlying loans related thereto, comprising the Trust Fund, which prepayments
may be influenced by a variety of factors, (ii) the manner of allocating
principal and/or payment among the classes of Securities of a Series as
specified in the related Prospectus Supplement, (iii) the exercise by the party
entitled thereto of any right of optional termination and (iv) the rate and
timing of payment defaults and losses incurred with respect to the Trust Fund
Assets. Prepayments of principal may also result from repurchases of Trust Fund
Assets due to material breaches of the Unaffiliated Seller's (as defined
herein), originator's, Depositor's or Master Servicer's representations and
warranties, as applicable. The yield to maturity experienced by a holder of
Securities may be affected by the rate of prepayment of the Residential Loans
comprising or underlying the Trust Fund Assets. See "Yield Considerations" and
"Maturity and Prepayment Considerations".
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues over a period ending two or
more days prior to a Distribution Date, the effective yield to Securityholders
will be reduced from the yield that would otherwise be obtainable if interest
payable on the Certificates were to accrue through the day immediately preceding
each Distribution Date, and the effective yield (at par) to Securityholders will
be less than the indicated coupon rate. See "Description of the
Securities--Distributions" and "--Principal Interest on the Securities".
BALLOON PAYMENTS
Certain of the Residential Loans as of the Cut-off Date may not be fully
amortizing over their terms to maturity and, thus, will require principal
payments (i.e., balloon payments) at their stated maturity. Residential Loans
with balloon payments involve a greater degree of risk because the ability of a
borrower to make a balloon payment typically will depend upon its ability either
to timely refinance the loan or to timely sell the related Residential Property.
The ability of a borrower to accomplish either of these goals will be affected
by a number of factors, including the level of available mortgage rates at the
time of sale or refinancing, the borrower's equity in the related Residential
Property, the financial condition of the borrower and tax laws.
NATURE OF MORTGAGES
There are several factors that could adversely affect the value of the
Residential Properties such that the outstanding balance of the related
Residential Loans, together with any senior financing on the Residential
Properties, if applicable, would equal or exceed the value of the Residential
Properties. Among the factors that could adversely affect the value of the
Residential Properties are an overall decline in the residential real estate
market in the areas in which the Residential Properties are located or a decline
in the general condition of the Residential Properties as a result of failure of
borrowers to adequately maintain the Residential Properties or of natural
disasters that are not necessarily covered by insurance, such as earthquakes and
floods. In the case of Home Improvement Contracts or other Residential Loans
that are secured by junior liens, such decline could extinguish the value of the
interest of a junior mortgagee in the Residential Property before having any
effect on the interest of the related senior mortgagee. If such a decline
occurs, the actual rates of delinquencies, foreclosures and losses on all
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Residential Loans could be higher than those currently experienced in the
mortgage lending industry in general.
Even assuming that the Residential Properties provide adequate security for
the Residential Loans, substantial delays could be encountered with the
liquidation of defaulted Residential Loans and corresponding delays in the
receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Residential Property securing a Residential Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a
Residential Property. In the event of a default by a borrower, these
restrictions, among other things, may impede the ability of the Master Servicer
to foreclose on or sell the Residential Property or to obtain liquidation
proceeds sufficient to repay all amounts due on the related Residential Loan. In
addition, the Master Servicer will be entitled to deduct from related
liquidation proceeds all expenses reasonably incurred in attempting to recover
amounts due on defaulted Residential Loans and not yet reimbursed, including
payments to senior lienholders, legal fees and costs of legal action, real
estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balances of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. Since the mortgages
and deeds of trust securing certain Mortgage Loans, Multifamily Loans and Home
Improvement Contracts will be primarily junior liens subordinate to the rights
of the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from the liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of such junior lien only to the
extent that the claims of the senior mortgagees have been satisfied in full,
including any related foreclosure costs. In addition, a junior mortgagee may not
foreclose on the property securing a junior mortgage unless it forecloses
subject to any senior mortgage, in which case it must either pay the entire
amount due on any senior mortgage to the related senior mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on any such
senior mortgage in the event the mortgagor is in default thereunder. The Trust
Fund will not have any source of funds to satisfy any senior mortgages or make
payments due to any senior mortgagees, although the Master Servicer or
Sub-Servicer may, at its option, advance such amounts to the extent deemed
recoverable and prudent. In the event that such proceeds from a foreclosure or
similar sale of the related Mortgaged Property are insufficient to satisfy all
senior liens and the Mortgage Loan, Multifamily Loan or Home Improvement
Contract in the aggregate, the Trust Fund, as the holder of the junior lien,
and, accordingly, holders of one or more classes of the Securities, to the
extent not covered by credit enhancement, are likely to (i) incur losses in
jurisdictions in which a deficiency judgment against the borrower is not
available, and (ii) incur losses if any deficiency judgment obtained is not
realized upon. In addition, the rate of default of junior mortgage loans,
multifamily loans and home improvement contracts may be greater than that of
mortgage loans secured by first liens on comparable properties.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Residential Loans. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the Residential Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Residential Loans, may entitle the
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borrower to a refund of amounts previously paid and, in addition, could subject
the Master Servicer to damages and administrative sanctions. See "Certain Legal
Aspects of Residential Loans".
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to certain
environmental risks. Under the laws of certain states, contamination of a
property may give rise to a lien on the property to assure the costs of cleanup.
In several states, such a lien has priority over the lien of an existing
mortgage against such property. In addition, under the laws of some states and
under the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("CERCLA"), a lender may be liable, as an "owner" or
"operator", for costs of addressing releases or threatened releases of hazardous
substances that require remedy on a property, if agents or employees of the
lender have become sufficiently involved in the operations of the borrower,
regardless of whether the environmental damage or threat was caused by a prior
owner. A lender also risks such liability on foreclosure of the related
property. See "Risk Factors-- Environmental Risks" and "Certain Legal Aspects of
Residential Loans--Environmental Legislation".
CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING RESIDENTIAL LOANS
The Residential Loans may also be subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding the
terms of the Residential Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public assistance
or the exercise of any right under the Consumer Credit Protection Act, in
the extension of credit;
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience; and
(iv) for Residential Loans that were originated or closed after November
7, 1989, the Home Equity Loan Consumer Protection Act of 1988, which
requires additional disclosures, limits changes that may be made to the loan
documents without the borrower's consent and restricts a lender's ability to
declare a default or to suspend or reduce a borrower's credit limit to
certain enumerated events.
THE RIEGLE ACT. Certain mortgage loans are subject to the Riegle Community
Development and Regulatory Improvement Act of 1994 (the "Riegle Act") which
incorporates the Home Ownership and Equity Protection Act of 1994. These
provisions impose additional disclosure and other requirements on creditors with
respect to non-purchase money mortgage loans with high interest rates or high
up-front fees and charges. The provisions of the Riegle Act apply on a mandatory
basis to all mortgage loans originated on or after October 1, 1995. These
provisions can impose specific statutory liabilities upon creditors who fail to
comply with their provisions and may affect the enforceability of the related
loans. In addition, any assignee of the creditor would generally be subject to
all claims and defenses that the consumer could assert against the creditor,
including, without limitation, the right to rescind the mortgage loan.
The Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
"Holder in Due Course Rules"), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
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Violations of certain provisions of these federal laws may limit the ability
of the Master Servicer to collect all or part of the principal of or interest on
the Residential Loans and in addition could subject the Trust Fund to damages
and administrative enforcement. See "Certain Legal Aspects of Residential
Loans".
RATING OF THE SECURITIES
Unless otherwise specified in the related Prospectus Supplement, it will be
a condition to the issuance of a class of Securities that they be rated in one
of the four highest rating categories by the Rating Agency identified in the
related Prospectus Supplement. Any such rating would be based on among other
things, the adequacy of the value of the Trust Fund Assets and any credit
enhancement with respect to such class and such Rating Agency's assessment
solely of the likelihood that holders of a class of Securities 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 on the related Residential Loans will be made, the degree to which
such prepayments might differ from that originally anticipated or the likelihood
of early optional termination of the Series of Securities. Such rating shall not
be deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. 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.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn, among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a class of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of similar loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of similar loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Residential Loans. No assurance can be given that the values of any
Residential Properties have remained or will remain at their levels on the
respective dates of origination of the related Residential Loans. If the
residential real estate markets should experience an overall decline in property
values such that the outstanding principal balances of the Residential Loans in
a particular Trust Fund and any secondary financing on the related Residential
Properties become equal to or greater than the value of the Residential
Properties, the rate of delinquencies, foreclosures and losses could be higher
than those now generally experienced in the mortgage lending industry. In
addition, adverse economic conditions (which may or may not affect real property
values) may affect the timely payment by mortgagors of scheduled payments of
principal and interest on the Residential Loans and, accordingly, the rates of
delinquencies, foreclosures and losses with respect to any Trust Fund. To the
extent that such losses are not covered by credit enhancement, such losses will
be borne, at least in part, by the holders of one or more classes of the
Securities of the related Series. See "Rating".
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BOOK-ENTRY REGISTRATION
If issued in book-entry form, such registration may reduce the liquidity of
the Securities in the secondary trading market since investors may be unwilling
to purchase Securities for which they cannot obtain physical certificates. Since
transactions in Certificates can be effected only through the Depository Trust
Company ("DTC"), participating organizations ("Participants"), Financial
Intermediaries and certain banks, the ability of a Certificateholder to pledge a
Certificate to persons or entities that do not participate in the DTC system, or
otherwise to take action in respect of such Securities, may be limited due to
lack of a physical certificate representing the Securities.
In addition, Securityholders may experience some delay in their receipt of
distributions of interest and principal on the Certificates since distributions
are required to be forwarded by the Trustee to DTC and DTC will then be required
to credit such distributions to the accounts of Participants which thereafter
will be required to credit them to the accounts of Securityholders either
directly or indirectly through Financial Intermediaries. See "Description of the
Securities--Book-Entry Registration of Securities" herein.
CERTAIN HOME IMPROVEMENT CONTRACTS
CONTRACTS UNSECURED. The obligations of a borrower under an unsecured Home
Improvement Contract will not be secured by an interest in the related real
estate or otherwise, and the related Trust Fund, as the owner of such unsecured
Home Improvement Contract, will be a general unsecured creditor as to such
obligations. As a consequence, in the event of a default under an unsecured Home
Improvement Contract, the related Trust Fund will have recourse only against the
obligor's (the "Obligor") assets generally, along with all other general
unsecured creditors of the Obligor. In a bankruptcy or insolvency proceeding
relating to an Obligor on an unsecured Home Improvement Contract, the
obligations of the Obligor under such unsecured Home Improvement Contract may be
discharged in their entirety, notwithstanding the fact that the portion of such
Obligor's assets made available to the related Trust Fund as a general unsecured
creditor to pay amounts due and owing thereunder are sufficient to pay such
amounts in whole or part. An Obligor on an unsecured Home Improvement Contract
may not demonstrate the same degree of concern over performance of the Obligor's
obligations under such unsecured Home Improvement Contract as if such
obligations were secured by the real estate owned by such Obligor.
MORTGAGE LOANS UNDERWRITTEN AS NON-CONFORMING CREDITS MAY EXPERIENCE RELATIVELY
HIGHER LOSSES
If so specified in the related Prospectus Supplement, the single family
Mortgage Loans assigned and transferred to the related Trust Fund may include
Mortgage Loans underwritten in accordance with the underwriting standards for
"non-conforming credits," which include borrowers whose creditworthiness and
repayment ability do not satisfy FNMA or FHLMC underwriting guidelines. A
Mortgage Loan made to a "non-conforming credit" means a residential loan that is
ineligible for purchase by FNMA or FHLMC due to borrower credit characteristics,
property characteristics, loan documentation guidelines or other characteristics
that do not meet FNMA or FHLMC underwriting guidelines, including a loan made to
a borrower whose creditworthiness and repayment ability do not satisfy such FNMA
or FHLMC underwriting guidelines and a borrower who may have a record of major
derogatory credit items such as default on a prior residential loan, credit
write-offs, outstanding judgments or prior bankruptcies. Because the borrowers
on such Mortgage Loans are less creditworthy than borrowers who meet FNMA or
FHLMC underwriting guidelines, delinquencies and foreclosures can be expected to
be more prevalent with respect to such Mortgage Loans than with respect to
residential loans originated in accordance with FNMA or FHLMC underwriting
guidelines. As a result, changes in the values of the Mortgaged Properties may
have a greater effect on the loss experience of such Mortgage Loans than on
residential loans originated in accordance with FNMA or FHLMC underwriting
guidelines. If the values of the Mortgaged Properties decline after the dates of
origination of such Mortgage Loans, the rate of losses on such Mortgage Loans
may increase and such increase may be substantial. See "Residential Loan Program
- - - -- Underwriting Standards".
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TRUST FUND ASSETS MAY INCLUDE DELINQUENT, SUB-PERFORMING AND NON-PERFORMING
RESIDENTIAL LOANS
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. Credit enhancement provided with respect to a
particular Series of Certificates may not cover all losses related to such
delinquent, sub-performing or non-performing Residential Loans. Prospective
investors should consider the risk that the inclusion of such Residential Loans
in the Trust Fund for a Series may cause the rate of defaults and prepayments on
the Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Securities of such Series. See "The Trust Funds -- Residential Loans".
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date the
Depositor will deposit an amount (the "Pre-Funded Amount") specified in such
Prospectus Supplement into the Pre-Funding Account. The Pre-Funded Amount will
be used to purchase Residential Loans ("Subsequent Loans") within a period
commencing from the Closing Date and ending on a date not more than three months
after the Closing Date (such period, the "Funding Period") from the Depositor
(which, in turn, will acquire such Subsequent Loans from the seller or sellers
specified in the related Prospectus Supplement). To the extent that the entire
Pre-Funded Amount has not been applied to the purchase of Subsequent Loans by
the end of the related Funding Period, any amounts remaining in the Pre-Funding
Account will be distributed as a prepayment of principal to Securityholders on
the Distribution Date immediately following the end of the Funding Period, in
the amounts and pursuant to the priorities set forth in the related Prospectus
Supplement.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or any
other assets of a Trust Fund will at any time be equal to or greater than the
principal amount of the Securities of the related Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the Agreement
for a Series and a sale of the assets in the Trust Fund or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Master
Servicer, the credit enhancer, if any, and any other service provider specified
in the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to
Securityholders. Upon any such sale, the proceeds thereof may be insufficient to
pay in full the principal of and interest on the Securities of such Series.
THE TRUST FUNDS
Each Trust Fund Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or through affiliates,
from sellers not affiliated with the Depositor (any such sellers of Residential
Loans, hereinafter "Unaffiliated Sellers"), or, if provided in the related
Prospectus Supplement, from sellers affiliated with the Depositor.
RESIDENTIAL LOANS
The Residential Loans will consist of mortgage loans (the "Mortgage Loans")
secured by first or junior liens on one- to four-family residential properties
(each, a "Mortgaged Property," collectively, "Mortgaged Properties") (which may
include Mortgage Securities) or mortgage loans (the "Multifamily Loans") secured
by first or junior liens on multifamily residential properties consisting of
five or more dwelling units (also, "Mortgaged Properties"), home improvement
installment sales contracts and installment loan agreements (the "Home
Improvement Contracts") which may be unsecured or secured by a lien on the
related Mortgaged Property or a Manufactured Home, which lien may be
subordinated to one or
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more senior liens on the related Mortgaged Property, cooperative loans (the
"Cooperative Loans") secured primarily by shares in the related private
cooperative housing corporation (a "Cooperative") that, with the related
proprietary lease or occupancy agreement, give the owner thereof the right to
occupy a particular dwelling unit (each, a "Cooperative Unit") in the
Cooperative or manufactured housing conditional sales contracts and installment
loan agreements (the "Manufactured Housing Contracts"), which may be secured by
either liens on (a) new or used Manufactured Homes or (b) the real property and
any improvements thereon (the "Mortgaged Property," which may include the
related Manufactured Home if deemed to be part of the real property under
applicable state law) relating to a Manufactured Housing Contract as well as in
certain cases a lien on a new or used Manufactured Home which is not deemed to
be a part of the related real property under applicable state law (such
Manufactured Housing Contracts that are secured by Mortgaged Property are
referred to herein as "Land Contracts"). The Mortgaged Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the "Residential
Properties") may be located in any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico. Unless otherwise provided in the
related Prospectus Supplement, each Trust Fund will contain (and any
participation interest in any of the foregoing will relate to) only one of the
following types of Residential Loans:
(1) Fully amortizing loans with a fixed rate of interest (such rate, an
"Interest Rate") and level monthly payments to maturity;
(2) Fully amortizing loans with a fixed Interest Rate providing for level
monthly payments, or for payments of interest only during the early years of the
term, followed by monthly payments of principal and interest that increase
annually at a predetermined rate until the loan is repaid or for a specified
number of years, after which level monthly payments resume;
(3) Fully amortizing loans with a fixed Interest Rate providing for monthly
payments during the early years of the term that are calculated on the basis of
an interest rate below the Interest Rate, followed by monthly payments of
principal and interest that increase annually by a predetermined percentage over
the monthly payments payable in the previous year until the loan is repaid or
for a specified number of years, followed by level monthly payments;
(4) Fixed Interest Rate loans providing for level payments of principal and
interest on the basis of an assumed amortization schedule and a balloon payment
of principal at the end of a specified term;
(5) Fully amortizing loans with an Interest Rate adjusted periodically ("ARM
Loans") (with corresponding adjustments in the amount of monthly payments), to
equal the sum (which may be rounded) of a fixed margin and an index as described
in the related Prospectus Supplement, which may provide for an election, at the
mortgagor's option during a specified period after origination of the loan, to
convert the adjustable Interest Rate to a fixed Interest Rate, as described in
the related Prospectus Supplement;
(6) Fully amortizing loans with an adjustable Interest Rate providing for
monthly payments less than the amount of interest accruing on such loan and for
such amount of interest accrued but not paid currently to be added to the
principal balance of such loan;
(7) ARM Loans providing for an election at the mortgagor's option, in the
event of an adjustment to the Interest Rate resulting in an Interest Rate in
excess of the Interest Rate at origination of the loan, to extend the term to
maturity for such period as will result in level monthly payments to maturity;
or
(8) Such other types of Residential Loans as may be described in the related
Prospectus Supplement.
If specified in the related Prospectus Supplement, the Trust Fund underlying
a Series of Securities may include previously issued asset-backed certificates,
collateralized mortgage obligations or participation certificates (each, and
collectively, "Mortgage Securities"), evidencing interests in, or collateralized
by, Residential Loans or Agency Securities as described herein. The Mortgage
Securities may have been issued previously by the Depositor or an affiliate
thereof, a financial institution or other entity engaged
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generally in the business of lending or a limited purpose corporation organized
for the purpose of, among other things, establishing trusts, acquiring and
depositing loans into such trusts, and selling beneficial interests in such
trusts. Except as otherwise set forth in the related Prospectus Supplement, such
Mortgage Securities will be generally similar to Securities offered hereunder.
As to any such Series of Securities, the related Prospectus Supplement will
include a description of such Mortgage Securities and any related credit
enhancement, and the Residential Loans underlying such Mortgage Securities will
be described together with any other Residential Loans included in the Trust
Fund relating to such Series. As to any such Series of Securities, as used
herein the term "Residential Loans" includes the Residential Loans underlying
such Mortgage Securities. Notwithstanding any other reference herein to the
Master Servicer, with respect to a Series of Securities as to which the Trust
Fund includes Mortgage Securities, the entity that services and administers such
Mortgage Securities on behalf of the holders of such Securities may be referred
to as the "Manager", if so specified in the related Prospectus Supplement.
References herein to advances to be made and other actions to be taken by the
Master Servicer in connection with the Residential Loans may include such
advances made and other actions taken pursuant to the terms of such Mortgage
Securities.
If so specified in the related Prospectus Supplement, certain Residential
Loans may contain provisions prohibiting prepayments for a specified period
after their origination date (a "Lockout Period"), prohibiting prepayments
entirely or requiring the payment of a prepayment penalty upon prepayment in
full or in part.
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. The inclusion of such Residential Loans in the
Trust Fund for a Series may cause the rate of defaults and prepayments on the
Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating first
or junior liens on the Mortgaged Properties. The Mortgage Loans will be secured
by one- to four-family residences, including detached and attached dwellings,
townhouses, rowhouses, individual condominium units, individual units in
planned-unit developments and individual units in DE MINIMIS planned-unit
developments. If so provided in the related Prospectus Supplement, the Mortgage
Loans will be insured by the FHA ("FHA Loans") or partially guaranteed by the VA
("VA Loans"). See "The Trust Funds--Residential Loans--FHA Loans and VA Loans"
and "Description of Primary Insurance Coverage--FHA Insurance and VA
Guarantees".
Certain of the Mortgage Loans may be secured by junior liens, and the
related senior liens ("Senior Liens") 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 Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a 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 Liens. The claims of the holders
of Senior Liens 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 Liens. 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 Liens or purchase the Mortgaged
Property subject to the Senior Liens. In the event that such proceeds from a
foreclosure or similar sale of the related
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Mortgaged Property are insufficient to satisfy all Senior Liens and the Mortgage
Loan in the aggregate, the Trust Fund, as the holder of the junior lien, and,
accordingly, holders of one or more classes of the Securities bear (i) the risk
of delay in distributions while a deficiency judgment against the borrower is
obtained and (ii) the risk of loss if the deficiency judgment is 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 mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted junior mortgage loan having a small remaining principal balance
as it would in the case of a defaulted junior mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small junior mortgage loan than would be the case with the defaulted junior
mortgage loan having a large remaining principal balance. Because the average
outstanding principal balance of the Mortgage Loans is smaller relative to the
size of the average outstanding principal balance of the loans in a typical pool
of conventional first priority mortgage loans, liquidation proceeds may also be
smaller as a percentage of the principal balance of a Mortgage Loan than would
be the case in a typical pool of conventional first priority mortgage loans.
MULTIFAMILY LOANS
The Multifamily Loans will be evidenced by Mortgage Notes secured by
Mortgages creating first or junior liens on rental apartment buildings or
projects containing five or more dwelling units. Unless otherwise specified in
the related Prospectus Supplement, Multifamily Loans will have had original
terms to stated maturity of not more than 30 years. If so provided in the
related Prospectus Supplement, the Multifamily Loans will be FHA Loans.
Mortgaged Properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. See "The Trust Funds--Residential Loans--FHA
Loans and VA Loans" and "Description of Primary Insurance Coverage--FHA
Insurance and VA Guarantees".
If so provided in the related Prospectus Supplement, the Multifamily Loans
may contain provisions containing a Lockout Period, prohibiting prepayments
entirely or requiring the payment of a prepayment penalty upon prepayment in
full or in part. In the event that Securityholders will be entitled to all or a
portion of any prepayment penalties collected in respect of the related
Multifamily Loans, the related Prospectus Supplement will specify the method or
methods by which the prepayment penalties are calculated.
HOME EQUITY LOANS AND HOME IMPROVEMENT CONTRACTS
As specified in the related Prospectus Supplement, the Home Equity Loans
will be secured by first or junior liens on the related Mortgaged Properties for
property improvement, debt consolidation or home equity purposes. The Home
Improvement Contracts will either be unsecured or secured by Mortgages on one-
to four-family, multifamily properties or manufactured housing which Mortgages
are generally subordinate to other mortgages on the same property. Except as
otherwise specified in the related Prospectus Supplement, the Home Improvement
Contracts will be fully amortizing and may have fixed or adjustable rates of
interest and may provide for other payment characteristics. Except as specified
in the related Prospectus Supplement, the home improvements relating to the Home
Equity Loans and Home Improvement Contracts may include replacement windows,
house siding, new roofs, swimming pools, satellite dishes, kitchen and bathroom
remodeling and solar heating panels. If so provided in the related Prospectus
Supplement certain of the Home Improvement Contracts may be FHA Loans. See "The
Trust Funds--Residential Loans--FHA Loans and VA Loans" and "Description of
Primary Insurance Coverage--FHA Insurance and VA Guarantees".
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COOPERATIVE LOANS
The Cooperative Loans will be evidenced by promissory notes (the
"Cooperative Notes") secured by security interests in shares issued by
Cooperatives and in the related proprietary leases or occupancy agreements
granting exclusive rights to occupy specific Cooperative Units in the related
buildings.
MANUFACTURED HOUSING CONTRACTS
The Manufactured Housing Contracts will consist of manufactured housing
conditional sales contracts and installment loan agreements each secured by a
Manufactured Home, or in the case of a Land Contract, by a lien on the real
estate to which the Manufactured Home is deemed permanently affixed and, in some
cases, the related Manufactured Home which is not real property under the
applicable state law. The Manufactured Homes securing the Manufactured Housing
Contracts will generally consist of manufactured homes within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter".
If so provided in the related Prospectus Supplement, the Manufactured
Housing Contracts may be FHA Loans or VA Loans. See "The Trust
Funds--Residential Loans--FHA Loans and VA Loans" and "Description of Primary
Insurance Coverage--FHA Insurance and VA Guarantees".
BUYDOWN LOANS
If provided in the related Prospectus Supplement, certain of the Residential
Loans may be subject to temporary buydown plans ("Buydown Loans"), pursuant to
which the monthly payments made by the borrower in the early years of the
Buydown Loan (the "Buydown Period") will be less than the scheduled payments on
the Buydown Loan, the resulting difference to be made up from (i) an amount
contributed by the borrower, the seller of the Residential Property or another
source and placed in a custodial account and (ii) unless otherwise specified in
the related Prospectus Supplement, investment earnings on the buydown funds.
Generally, the borrower under each Buydown Loan will be qualified at a reduced
interest rate. Accordingly, the repayment of a Buydown Loan is dependent on the
ability of the borrower to make larger monthly payments after the buydown funds
have been depleted and, for certain Buydown Loans, during the Buydown Period.
See "Residential Loan Program--Underwriting Standards".
FHA LOANS AND VA LOANS
FHA Loans will be insured by the FHA as authorized under the National
Housing Act of 1934, as amended (the "Housing Act"), and the United States
Housing Act of 1937, as amended. One- to four-family FHA Loans will be insured
under various FHA programs including the standard FHA 203-b programs to finance
the acquisition of one- to four-family housing units and the FHA 245 graduated
payment mortgage program. Such FHA Loans generally require a minimum down
payment of approximately 5% of the original principal amount of the FHA Loan. No
FHA Loan may have an interest rate or original principal balance exceeding the
applicable FHA limits at the time of origination of such FHA Loan. See
"Description of Primary Insurance Coverage--FHA Insurance and VA Guarantees".
Home Improvement Contracts and Manufactured Housing Contracts that are FHA
Loans are insured by the FHA (as described in the related Prospectus Supplement,
up to an amount equal to 90% of the sum
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of the unpaid principal of the FHA Loan, a portion of the unpaid interest and
certain other liquidation costs) pursuant to Title I of the Housing Act.
There are two primary FHA insurance programs that are available for
Multifamily FHA Loans. Sections 221(d)(3) and (d)(4) of the Housing Act allow
HUD to insure multifamily loans that are secured by newly constructed and
substantially rehabilitated multifamily rental projects. Section 244 of the
Housing Act provides for co-insurance of such loans made under Sections
221(d)(3) and (d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the
term of such a multifamily loan may be up to 40 years and the ratio of the loan
amount to property replacement cost can be up to 90%.
Section 223(f) of the Housing Act allows HUD to insure multifamily loans
made for the purchase or refinancing of existing apartment projects that are at
least three years old. Section 244 also provides for co-insurance of mortgage
loans made under Section 223(f). Under Section 223(f), the loan proceeds cannot
be used for substantial rehabilitation work, but repairs may be made for up to,
in general, the greater of 15% of the value of the project and a dollar amount
per apartment unit established from time to time by HUD. In general the loan
term may not exceed 35 years and a loan-to-value ratio of no more than 85% is
required for the purchase of a project and 70% for the refinancing of a project.
VA Loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended (the "Servicemen's Readjustment Act"). The
Servicemen's Readjustment Act permits a veteran (or in certain instances the
spouse of a veteran) to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchasers and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no VA Loan will have an
original principal amount greater than five times the partial VA guarantee for
such VA Loan. The maximum guarantee that may be issued by the VA under this
program will be set forth in the related Prospectus Supplement. See "Description
of Primary Insurance Coverage--FHA Insurance and VA Guarantees".
LOAN-TO-VALUE RATIO
The "Loan-to-Value Ratio" of a Residential Loan at any given time is the
ratio, expressed as a percentage, of the then outstanding principal balance of
the Residential Loan, plus, in the case of a Mortgage Loan secured by a junior
lien, the outstanding principal balance of the related Senior Liens, to the
Collateral Value of the related Residential Property. Except as otherwise
specified in the Prospectus Supplement, the "Collateral Value" of a Residential
Property or Cooperative Unit, other than with respect to Refinance Loans, is 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 or loans
made to a borrower who was a tenant in a building prior to its conversion to
cooperative ownership. The "Collateral Value" of the Residential Property
securing a Refinance Loan is the appraised value thereof determined in an
appraisal obtained at the time of origination of the Refinance Loan. Unless
otherwise specified in the related Prospectus Supplement, for purposes of
calculating the Loan-to-Value Ratio of a Manufactured Housing Contract relating
to a new Manufactured Home, the Collateral Value is no greater than the sum of a
fixed percentage of the list price of the unit actually billed by the
manufacturer to the dealer (exclusive of freight to the dealer site) including
"accessories" identified in the invoice (the "Manufacturer's Invoice Price"),
plus the actual cost of any accessories purchased from the dealer, a delivery
and set-up allowance, depending on the size of the unit, and the cost of state
and local taxes, filing fees and up to three years prepaid hazard insurance
premiums. Unless otherwise specified in the related Prospectus Supplement, with
respect to used Manufactured Homes, the Collateral Value is the least of the
sales price, appraised value, and National Automobile Dealer's Association book
value plus prepaid taxes and hazard insurance premiums. The appraised value of a
Manufactured Home is based upon the age and condition of the manufactured
housing unit and the quality and condition of the mobile home park in which it
is situated, if applicable.
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Residential Properties may be subject to subordinate financing at the time
of origination. As is customary in residential lending, subordinate financing
may be obtained with respect to a Residential Property after the origination of
the Residential Loan without the lender's consent.
No assurance can be given that values of the Residential Properties have
remained or will remain at their historic levels on the respective dates of
origination of the related Residential Loans. If the residential real estate
market were to experience an overall decline in property values such that the
outstanding principal balances of the Residential Loans, and any other financing
on the related Residential Properties, become equal to or greater than the value
of the Residential Properties, the actual rates of delinquencies, foreclosures
and losses may be higher than those now generally experienced in the mortgage
lending industry. In addition, adverse economic conditions (which may or may not
affect real property values) may affect the timely payment by borrowers of
scheduled payments of principal and interest on the Residential Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses. To the
extent that such losses are not covered by the applicable insurance policies and
other forms of credit support described herein and in the related Prospectus
Supplement, such losses will be borne, at least in part, by the holders of one
or more classes of the Securities of the related Series. See "Description of the
Securities" and "Description of Credit Support".
AGENCY SECURITIES
The Agency Securities will consist of any combination of "fully modified
pass-through" mortgage-backed certificates guaranteed by the GNMA ("GNMA
Certificates"), guaranteed mortgage pass-through securities issued by the FNMA
("FNMA Certificates") and mortgage participation certificates issued by the
FHLMC ("FHLMC Certificates").
GNMA
GNMA is a wholly-owned corporate instrumentality of the United States within
the Department of Housing and Urban Development. Section 306(g) of Title III of
the Housing Act authorizes GNMA to guarantee the timely payment of the principal
of and interest on certificates that are based on and backed by a pool of FHA
Loans, VA Loans or by pools of other eligible residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection". In order to meet
its obligations under such guaranty, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount, to perform its obligations under its guarantee.
GNMA CERTIFICATES
Each GNMA Certificate will be a "fully modified pass-through"
mortgage-backed certificate issued and serviced by an issuer approved by GNMA or
FNMA as a seller-servicer of FHA Loans or VA Loans, except as described below
with respect to Stripped Agency Securities (as defined below). The loans
underlying GNMA Certificates may consist of FHA Loans, VA Loans and other loans
eligible for inclusion in loan pools underlying GNMA Certificates. GNMA
Certificates may be issued under either or both of the GNMA I program and the
GNMA II program, as described in the related Prospectus Supplement. The
Prospectus Supplement for Certificates of each Series evidencing interests in a
Trust Fund including GNMA Certificates will set forth additional information
regarding the GNMA guaranty program, the characteristics of the pool underlying
such GNMA Certificates, the servicing of the related pool, the payment of
principal and interest on GNMA Certificates to the extent not described herein
and other relevant matters with respect to the GNMA Certificates.
Except as otherwise specified in the related Prospectus Supplement or as
described below with respect to Stripped Agency Securities, each GNMA
Certificate will provide for the payment, by or on behalf of the
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issuer, to the registered holder of such GNMA Certificate of monthly payments of
principal and interest equal to the holder's proportionate interest in the
aggregate amount of the monthly principal and interest payments on each related
FHA Loan or VA Loan, less servicing and guaranty fees aggregating the excess of
the interest on such FHA Loan or VA Loan over the GNMA Certificates pass-through
rate. In addition, each payment to a holder of a GNMA Certificate will include
proportionate pass-through payments to such holder of any prepayments of
principal of the FHA Loans or VA Loans underlying the GNMA Certificate and the
holder's proportionate interest in the remaining principal balance in the event
of a foreclosure or other disposition of any such FHA Loan or VA Loan.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the GNMA Certificates, the Depositor or any
affiliates thereof, and the only recourse of a registered holder, such as the
Trustee, is to enforce the guaranty of GNMA.
GNMA will have approved the issuance of each of the GNMA Certificates
included in a Trust Fund in accordance with a guaranty agreement or contract
between GNMA and the issuer of such GNMA Certificates. Pursuant to such
agreement, such issuer, in its capacity as servicer, is required to perform
customary functions of a servicer of FHA Loans and VA Loans, including
collecting payments from borrowers and remitting such collections to the
registered holder, maintaining escrow and impoundment accounts of borrowers for
payments of taxes, insurance and other items required to be paid by the
borrower, maintaining primary hazard insurance, and advancing from its own funds
in order to make timely payments of all amounts due on the GNMA Certificate,
even if the payments received by such issuer on the loans backing the GNMA
Certificate are less than the amounts due thereon. If the issuer is unable to
make payments on a GNMA Certificate as they become due, it must promptly notify
GNMA and request GNMA to make such payment. Upon such notification and request,
GNMA will make such payments directly to the registered holder of the GNMA
Certificate. In the event no payment is made by the issuer and the issuer fails
to notify and request GNMA to make such payment, the registered holder of the
GNMA Certificate has recourse against only GNMA to obtain such payment. The
Trustee or its nominee, as registered holder of the GNMA Certificates included
in a Trust Fund, is entitled to proceed directly against GNMA under the terms of
the guaranty agreement or contract relating to such GNMA Certificates for any
amounts that are not paid when due under each GNMA Certificate.
The GNMA Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above so long as such
GNMA Certificates and underlying residential loans meet the criteria of the
Rating Agency or Agencies. Such GNMA Certificates and underlying residential
loans will be described in the related Prospectus Supplement.
FNMA
FNMA is a federally chartered and stockholder-owned corporation organized
and existing under the Federal National Mortgage Association Charter Act, as
amended (the "Charter Act"). FNMA was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed
corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market by purchasing mortgage loans from
lenders. FNMA acquires funds to purchase loans from many capital market
investors, thereby expanding the total amount of funds available for housing.
Operating nationwide, FNMA helps to redistribute mortgage funds from
capital-surplus to capital-short areas. In addition, FNMA issues mortgage-backed
securities primarily in exchange for pools of mortgage loans from lenders. FNMA
receives fees for its guaranty of timely payment of principal and interest on
its mortgage-backed securities.
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FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
typically issued pursuant to a prospectus which is periodically revised by FNMA.
FNMA Certificates represent fractional undivided interests in a pool of mortgage
loans formed by FNMA. Each mortgage loan must meet the applicable standards of
the FNMA purchase program. Mortgage loans comprising a pool are either provided
by FNMA from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program. Mortgage loans underlying FNMA Certificates included in a
Trust Fund will consist of conventional mortgage loans, FHA Loans or VA Loans.
The Prospectus Supplement for Securities of each Series evidencing interests in
a Trust Fund including FNMA Certificates will set forth additional information
regarding the FNMA program, the characteristics of the pool underlying such FNMA
Certificates, the servicing of the related pool, payment of principal and
interest on the FNMA Certificates to the extent not described herein and other
relevant matters with respect to the FNMA Certificates.
Except as described below with respect to Stripped Agency Securities, FNMA
guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing such holder's proportionate share of scheduled
principal and interest at the applicable pass-through rate provided for by such
FNMA Certificate on the underlying mortgage loans, whether or not received, and
such holder's proportionate share of the full principal amount of any prepayment
or foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered.
The obligations of FNMA under its guarantees are obligations solely of FNMA
and are not backed by, nor entitled to, the full faith and credit of the United
States. If FNMA were unable to satisfy such obligations, distributions to the
holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying loans and, accordingly, monthly distributions to
the holders of FNMA Certificates would be affected by delinquent payments and
defaults on such loans.
FNMA Certificates evidencing interests in pools of mortgage loans formed on
or after May 1, 1985 (other than FNMA Certificates backed by pools containing
graduated payment mortgage loans or multifamily loans) are available in
book-entry form only. With respect to a FNMA Certificate issued in book-entry
form, distributions thereon will be made by wire, and with respect to a fully
registered FNMA Certificate, distributions thereon will be made by check.
The FNMA Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
FNMA Certificates and underlying mortgage loans meet the criteria of the Rating
Agency or Rating Agencies rating the Certificates of such Series. Such FNMA
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
FHLMC
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended (the "FHLMC
Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. It seeks to
provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase of
first lien, conventional residential mortgage loans or participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates. FHLMC is confined to
purchasing, so far as practicable, mortgage loans and participation interests
therein which it deems to be of such quality, type and class as to meet
generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC CERTIFICATES
Each FHLMC Certificate represents an undivided interest in a pool of
residential loans that may consist of first lien conventional residential loans,
FHA Loans or VA Loans ("FHLMC Certificate
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Group"). Each such mortgage loan must meet the applicable standards set forth in
the FHLMC Act. A FHLMC Certificate Group may include whole loans, participation
interests in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate Group. The Prospectus
Supplement for Securities of each Series evidencing interests in a Trust Fund
including FHLMC Certificates will set forth additional information regarding the
FHLMC guaranty program, the characteristics of the pool underlying such FHLMC
Certificate, the servicing of the related pool, payment of principal and
interest on the FHLMC Certificate to the extent not described herein and other
relevant matters with respect to the FHLMC Certificates.
Except as described below with respect to Stripped Agency Securities, FHLMC
guarantees to each registered holder of a FHLMC Certificate the timely payment
of interest on the underlying mortgage loans to the extent of the applicable
pass-through rate on the registered holder's pro rata share of the unpaid
principal balance outstanding on the underlying mortgage loans in the FHLMC
Certificate Group represented by such FHLMC Certificate, whether or not
received. FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by such holder of all principal on the underlying mortgage loans,
without any offset or deduction, to the extent of such holder's pro rata share
thereof, but does not, except if and to the extent specified in the related
Prospectus Supplement, guarantee the timely payment of scheduled principal.
Pursuant to its guarantees, FHLMC also guarantees ultimate collection of
scheduled principal payments, prepayments of principal and the remaining
principal balance in the event of a foreclosure or other disposition of a
mortgage loan. FHLMC may remit the amount due on account of its guarantee of
collection of principal at any time after default on an underlying mortgage
loan, but not later than 30 days following the latest of (i) foreclosure sale,
(ii) payment of the claim by any mortgage insurer and (iii) the expiration of
any right of redemption, but in any event no later than one year after demand
has been made upon the mortgagor for accelerated payment of principal. In taking
actions regarding the collection of principal after default on the mortgage
loans underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its servicing judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time necessary for FHLMC to determine
that a mortgage loan should be accelerated varies with the particular
circumstances of each mortgagor, and FHLMC has not adopted servicing standards
that require that the demand be made within any specified period.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such Mortgage Loans.
The FHLMC Certificates included in a Trust Fund may have other
characteristics and terms, different from those described above, so long as such
FHLMC Certificates and underlying mortgage loans meet the criteria of the Rating
Agency or Rating Agencies rating the Securities of such Series. Such FHLMC
Certificates and underlying mortgage loans will be described in the related
Prospectus Supplement.
STRIPPED AGENCY SECURITIES
The GNMA Certificates, FNMA Certificates or FHLMC Certificates may be issued
in the form of certificates ("Stripped Agency Securities") which represent an
undivided interest in all or part of either the principal distributions (but not
the interest distributions) or the interest distributions (but not the principal
distributions), or in some specified portion of the principal or interest
distributions (but not all of such distributions), on an underlying pool of
mortgage loans or certain other GNMA Certificates, FNMA Certificates or FHLMC
Certificates. GNMA, FNMA or FHLMC, as applicable, will guarantee each Stripped
Agency Security to the same extent as such entity guarantees the underlying
securities backing
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such Stripped Agency Securities or to the extent described above with respect to
a Stripped Agency Security backed by a pool of mortgage loans, unless otherwise
specified in the related Prospectus Supplement. The Prospectus Supplement for
Securities of each Series evidencing interests in a Trust Fund including
Stripped Agency Securities will set forth additional information regarding the
characteristics of the assets underlying such Stripped Agency Securities, the
payments of principal and interest on the Stripped Agency Securities and other
relevant matters with respect to the Stripped Agency Securities.
ADDITIONAL INFORMATION CONCERNING THE TRUST FUNDS
Each Prospectus Supplement relating to a Series of Securities will contain
information, as of the date of such Prospectus Supplement, if applicable and to
the extent specifically known to the Depositor, with respect to the Residential
Loans or Agency Securities contained in the related Trust Fund, including, but
not limited to (i) the aggregate outstanding principal balance and the average
outstanding principal balance of the Trust Fund Assets as of the applicable
Cut-off Date, (ii) the types of related Residential Properties (e.g., one- to
four-family dwellings, multifamily residential properties, shares in
Cooperatives and the related proprietary leases or occupancy agreements,
condominiums and planned-unit development units, vacation and second homes and
new or used Manufactured Homes), (iii) the original terms to maturity, (iv) the
outstanding principal balances, (v) the origination dates, (vi) with respect to
Multifamily Loans, the Lockout Periods and prepayment penalties, (vii) the
loan-to-value ratios or, with respect to Residential Loans secured by a junior
lien, the combined loan-to-value ratios at origination, (viii) the Interest
Rates or range of Interest Rates borne by the Residential Loans or residential
loans underlying the Agency Securities, (ix) the geographical distribution of
the Residential Properties on a state-by-state basis, (x) the fixed Security
Interest Rate, or the initial Security Interest Rate in the case of a Series or
class of Securities with a variable or adjustable Security Interest Rate, (xi)
the number and aggregate principal balance of Buydown Loans, if any, (xii) the
Retained Interest, if any, (xiii) with respect to ARM Loans, the adjustment
dates, the highest, lowest and weighted average margin, and the maximum Interest
Rate variations at the time of adjustments and over the lives of the ARM Loans,
and (xiv) information as to the payment characteristics of the Residential
Loans. If specific information respecting the Trust Fund Assets is not known to
the Depositor at the time a Series of Securities is initially offered, more
general information of the nature described above will be provided in the
related Prospectus Supplement, and specific information will be set forth in a
report made available at or before the issuance of such Securities, which
information will be included in a report on Form 8-K which will be available to
purchasers of the related Securities at or before the initial issuance thereof
and will be filed with the Commission within fifteen days after the initial
issuance of such Securities. If Mortgage Loans are added to or deleted from a
Trust Fund after the date of the related Prospectus Supplement, such addition or
deletion will be noted in a report on Form 8-K.
The Depositor will cause the Residential Loans comprising each Trust Fund
(or Mortgage Securities evidencing interests therein) to be assigned to the
Trustee for the benefit of the holders of the Certificates of the related
Series. The Master Servicer will service the Residential Loans comprising any
Trust Fund, either directly or through other servicing institutions (each, a
"Sub-Servicer"), pursuant to a Pooling and Servicing Agreement or Servicing
Agreement among itself, the Depositor and the Trustee (each, a "Servicing
Agreement"), and will receive a fee for such services. See "Residential Loan
Program" and "Description of the Securities". With respect to Residential Loans
serviced through a Sub-Servicer, the Master Servicer will remain liable for its
servicing obligations under the related Servicing Agreement as if the Master
Servicer alone were servicing such Residential Loans.
The Depositor will assign the Residential Loans to the related Trustee on a
non-recourse basis. Unless otherwise specified in the related Prospectus
Supplement, the obligations of the Depositor with respect to the Residential
Loans will be limited to certain representations and warranties made by it. See
"Description of the Securities--Assignment of Trust Fund Assets". The
obligations of the Master Servicer with respect to the Residential Loans will
consist principally of its contractual servicing obligations under the related
Servicing Agreement (including its obligation to enforce certain purchase and
other obligations of
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Sub-Servicers or Unaffiliated Sellers, or both, as more fully described herein
under "Residential Loan Program--Representations by Unaffiliated Sellers;
Repurchases"; "--Sub-Servicing" and "Description of the Certificates--Assignment
of Trust Fund Assets") and, unless otherwise provided in the related Prospectus
Supplement, its obligation to make certain cash advances in the event of
delinquencies in payments on or with respect to the Residential Loans in amounts
described herein under "Description of the Certificates--Advances" or pursuant
to the terms of any Mortgage Securities. Any obligation of the Master Servicer
to make advances may be subject to limitations, to the extent provided herein
and in the related Prospectus Supplement.
The Depositor will cause the Agency Securities comprising each Trust Fund to
be registered in the name of the Trustee or its nominee on the books of the
issuer or guarantor or its agent or, in the case of Agency Securities issued
only in book-entry form, through the Federal Reserve System, in accordance with
the procedures established by the issuer or guarantor for registration of such
certificates with a member of the Federal Reserve System, and distributions on
such securities to which the Trust Fund is entitled will be made directly to the
Trustee. The Trustee will administer the Trust Fund Assets comprising any Trust
Fund including Agency Securities pursuant to a Trust Agreement between the
Depositor and the Trustee, and will receive a fee for such service. The Agency
Securities and any moneys attributable to distributions on such Agency
Securities will not be subject to any right, charge, security interest, lien or
claim of any kind in favor of the Trustee or any person claiming through it. The
Trustee will not have the power or authority to assign, transfer, pledge or
otherwise dispose of any assets of any Trust Fund to any person, except to a
successor trustee, to the Depositor or the Securityholders to the extent they
are entitled thereto or to such other persons as may be specified in the related
Prospectus Supplement and except for its power and authority to invest assets of
the Trust Fund in Permitted Instruments (as hereinafter defined) in compliance
with the Trust Agreement. The Trustee will have no responsibility for
distributions on the Securities, other than to pass through all distributions
received with respect to the Agency Securities to the holders of the related
Securities without deduction, other than for any applicable trust administration
fee payable to the Trustee, certain expenses of the Trustee, if any, in
connection with legal actions relating to the Agency Securities, any applicable
withholding tax required to be withheld by the Trustee and as otherwise
described in the related Prospectus Supplement.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Trust Fund Assets, (ii) to repay indebtedness which
has been incurred to obtain funds to acquire such Trust Fund Assets, (iii) to
establish any Reserve Funds or other funds described in the related Prospectus
Supplement and (iv) to pay costs of structuring, guaranteeing and issuing such
Securities, including the costs of obtaining credit support, if any. If so
specified in the related Prospectus Supplement, the purchase of the Trust Fund
Assets for a Series may be effected by an exchange of Securities with the seller
of such Trust Fund Assets.
YIELD CONSIDERATIONS
Unless otherwise specified in the related Prospectus Supplement, each
monthly or other periodic interest payment on a Trust Fund Asset is calculated
as one-twelfth of the applicable interest rate multiplied by the unpaid
principal balance thereof. The amount of such interest payment distributed (or
accrued in the case of Accrual Securities) to Securityholders (other than
holders of Strip Securities) with respect to each Trust Fund Asset will be
similarly calculated for the applicable period, based on the applicable Security
Interest Rate. In the case of Strip Securities, except as otherwise described in
the related Prospectus Supplement, such distributions of Stripped Interest will
be made in the manner and amount described in the related Prospectus Supplement.
The Securities of each Series may bear a fixed, variable or adjustable Security
Interest Rate.
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The effective yield to Securityholders will be below the yield otherwise
produced by the applicable Security Interest Rate (or as to a Strip Security,
the distributions of interest thereon ("Stripped Interest")) and purchase price
paid by the investors, because while interest will accrue on each Trust Fund
Asset from the first day of each month (unless otherwise provided in the related
Prospectus Supplement), the distribution of such interest (or the accrual
thereof in the case of Accrual Securities) will not be made until the
Distribution Date occurring in the month or other periodic interval (as
specified in the related Prospectus Supplement) following the month or other
period of accrual in the case of Residential Loans, and in later months in the
case of Agency Securities and in the case of a Series of Securities having
Distribution Dates occurring at intervals less frequently than monthly.
Unless otherwise provided in the related Prospectus Supplement, when a full
prepayment is made on a Residential Loan, the borrower is charged interest only
for the number of days actually elapsed from the due date of the preceding
monthly payment up to the date of such prepayment, instead of for a full month
and accordingly, the effect of such prepayments is to reduce the aggregate
amount of interest collected that is available for distribution to
Securityholders. However, if so provided in the related Prospectus Supplement,
certain of the Residential Loans may contain provisions limiting prepayments
thereof or requiring the payment of a prepayment penalty upon prepayment in full
or in part. Unless otherwise provided in the Prospectus Supplement, the
prepayment penalty collected with respect to the Residential Loans will be
applied to offset such shortfalls in interest collections on the related
Distribution Date. Holders of Agency Securities are entitled to a full month's
interest in connection with prepayments in full of the underlying residential
loans. Unless otherwise specified in the related Prospectus Supplement, partial
principal prepayments are applied on the first day of the month following
receipt, with no resulting reduction in interest payable by the borrower for the
month in which the partial principal prepayment is made. Unless provided
otherwise in the related Prospectus Supplement, neither the Trustee, the Master
Servicer nor the Depositor will be obligated to fund shortfalls in interest
collections resulting from full prepayments. Full and partial prepayments
collected during the applicable Prepayment Period will be available for
distribution to Securityholders on the related Distribution Date. Unless
otherwise provided in the related Prospectus Supplement, a "Prepayment Period"
in respect of any Distribution Date will commence in the case of Distribution
Dates that occur monthly, on the first day of the preceding calendar month and,
in the case of Distribution Dates that occur less frequently than monthly, on
the first day of the month in which the immediately preceding Distribution Date
occurred (or, with respect to the first Prepayment Period, the Cut-off Date) and
will end in both cases on the last day of the preceding calendar month. See
"Maturity and Prepayment Considerations" and "Description of the Securities".
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of defaulted Mortgaged Loans and corresponding delays in the
receipt of related proceeds by Securityholders could occur. An action to
foreclose on a Mortgaged Property securing a Mortgaged Loan is regulated by
state statutes and rules and is subject to many of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
several years to complete. Furthermore, in some states an action to obtain a
deficiency judgment is not permitted following a nonjudicial sale of a property.
In the event of a default by a borrower, these restrictions among other things,
may impede the ability of the Master Servicer to foreclose on or sell the
Mortgaged Property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related Mortgaged Loan. In addition, the Master Servicer will
be entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amounts due on defaulted Mortgaged Loans and
not yet reimbursed, including payments to senior lienholders, legal fees and
costs of legal action, real estate taxes and maintenance and preservation
expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized
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after expenses of liquidation would be smaller as a percentage of the remaining
principal balance of the small mortgage loan than would be the case with the
other defaulted mortgage loan having a large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of Residential Loans. In addition, most have other laws, public policy
and general principles of equity relating to the protection of consumers, unfair
and deceptive practices and practices which may apply to the origination,
servicing and collection of the Residential Loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Master Servicer to collect all or part of the principal of or interest on the
Residential Loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject to the Trustee or Master Servicer to
damages and administrative sanctions which could reduce the amount of
distributions available to holders of the Certificates.
The Prospectus Supplement for each Series of Securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a given Trust
Fund may vary depending upon the type of Residential Loans or the residential
loans underlying the Agency Securities included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Trust Fund Assets in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, the Residential Loans or residential loans
underlying the Agency Securities may be prepaid in full or in part at any time
without penalty. The prepayment experience on the Residential Loans or
residential loans underlying the Agency Securities will affect the life of the
related Securities. The average life of a Security refers to the average amount
of time that will elapse from the date of issuance of a Security until the
principal amount of such Security has been reduced to zero. The average life of
the Securities will be affected by, among other things, the rate at which
principal on the related Residential Loans is paid, which may be in the form of
scheduled amortization payments or unscheduled prepayments and liquidations due
to default, casualty, insurance, condemnation and similar sources. If
substantial principal prepayments on the Residential Loans are received, the
actual average life of the Securities may be significantly shorter than would
otherwise be the case. As to any Series of Securities, based on the public
information with respect to the residential lending industry, it may be
anticipated that a significant number of the related Residential Loans will be
paid in full prior to stated maturity.
Prepayments on residential loans are commonly measured relative to a
prepayment standard or model. For certain Series of Securities comprised of more
than one class, or as to other types of Series where applicable, the Prospectus
Supplement will describe the prepayment standard or model used in connection
with the offering of such Series and, if applicable, will contain tables setting
forth the projected weighted average life of the Securities of such Series and
the percentage of the initial Security Principal Balance that would be
outstanding on specified Distribution Dates based on the assumptions stated in
the Prospectus Supplement, including assumptions that prepayments on the related
Residential Loans or residential loans underlying the Agency Securities are made
at rates corresponding to various percentages of the prepayment standard or
model specified in the Prospectus Supplement.
It is unlikely that prepayment of the Trust Fund Assets will conform to any
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of residential loans is influenced by a variety of
economic, social, geographic, demographic and other factors, including homeowner
mobility, economic conditions, enforceability of due-on-sale clauses, market
interest rates and the availability of funds, the existence of lockout
provisions and prepayment penalties, the inclusion of delinquent, non-performing
or sub-performing Residential Loans in the Trust Fund Assets, the relative tax
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benefits associated with the ownership of property and, in the case of
Multifamily Loans, the quality of management of the property. The rate of
prepayments of conventional residential loans has fluctuated significantly in
recent years. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Trust Fund Assets, such Trust Fund
Assets are likely to be the subject of higher principal prepayments than if
prevailing rates remain at or above the interest rates borne by such Trust Fund
Assets.
Other factors that might be expected to affect the prepayment rate of
Securities backed by junior lien mortgage loans or Home Improvement Contracts
include the amounts of, and interest rates on, the underlying senior mortgage
loans, and the use of first mortgage loans as long-term financing for home
purchase and subordinate mortgage loans as shorter-term financing for a variety
of purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. In addition, any future limitations on
the right of borrowers to deduct interest payments on junior liens that are home
equity loans for federal income tax purposes may increase the rate of
prepayments on such Residential Loans.
In addition, acceleration of payments on the Residential Loans or
residential loans underlying the Agency Securities as a result of certain
transfers of the underlying properties is another factor affecting prepayment
rates. Unless otherwise provided in the related Prospectus Supplement, all
Residential Loans, except for FHA Loans and VA Loans, will contain "due-on-sale"
provisions permitting the lender to accelerate the maturity of the Residential
Loan upon sale or certain transfers by the borrower with respect to the
underlying Residential Property. Conventional residential loans that underlie
FHLMC Certificates and FNMA Certificates may contain, and in certain cases must
contain, "due-on-sale" clauses permitting the lender to accelerate the unpaid
balance of the loan upon transfer of the property by the borrower. FHA Loans and
VA Loans and all residential loans underlying GNMA Certificates contain no such
clause and may be assumed by the purchaser of the property. In addition,
Multifamily Loans may contain "due-on-encumbrance" clauses permitting the lender
to accelerate the maturity of the Multifamily Loan upon further encumbrance by
the borrower of the underlying Residential Property. In general, where a
"due-on-sale" or "due-on-encumbrance" clause is contained in a conventional
residential loan under a FHLMC or the FNMA program, the lender's right to
accelerate the maturity of the residential loan upon transfer or further
encumbrance of the property must be exercised, so long as such acceleration is
permitted under applicable law.
With respect to a Series of Securities evidencing interests in a Trust Fund
including Residential Loans, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer generally will enforce any provision limiting
prepayments and any due-on-sale or due-on-encumbrance clause, to the extent it
has knowledge of the conveyance or encumbrance or the proposed conveyance or
encumbrance of the underlying Residential Property and reasonably believes that
it is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See "Description of the
Securities-- Collection and Other Servicing Procedures" and "Certain Legal
Aspects of Residential Loans--Enforceability of Certain Provisions" and
"Repayment Charges and Prepayments" for a description of certain provisions of
each Pooling and Servicing Agreement and certain legal developments that may
affect the prepayment experience on the Residential Loans. See also "Description
of the Securities--Termination" for a description of the possible early
termination of any Series of Securities. See also "Residential Loan
Program--Representations by Unaffiliated Sellers; Repurchases" and "Description
of the Securities-- Assignment of Trust Fund Assets" for a description of the
obligation of the Unaffiliated Sellers, the Master Servicer and the Depositor to
repurchase Residential Loans under certain circumstances.
With respect to a Series of Securities evidencing interests in a Trust Fund
including Agency Securities, principal prepayments may also result from guaranty
payments and from the exercise by the issuer or guarantor of the related Agency
Securities of any right to repurchase the underlying residential loans. The
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Prospectus Supplement relating to each Series of Securities will describe the
circumstances and the manner in which such optional repurchase right, if any,
may be exercised.
In addition, certain Mortgage Securities included in the Trust Fund may be
backed by underlying Residential Loans having differing interest rates.
Accordingly, the rate at which principal payments are received on the related
Securities will, to a certain extent, depend on the interest rates on such
underlying Residential Loans.
The Prospectus Supplement for each Series of Securities may set forth
additional information regarding related maturity and prepayment considerations.
THE DEPOSITOR
PaineWebber Mortgage Acceptance Corporation IV, the Depositor, is a Delaware
corporation organized on April 23, 1987, as a wholly-owned limited purpose
finance subsidiary of PaineWebber Group Inc. The Depositor maintains its
principal office at 1285 Avenue of the Americas, New York, New York. Its
telephone number is (212) 713-2000.
The Depositor does not have, nor is it expected in the future to have, any
significant assets. It is not expected that the Depositor will have any business
operations other than acquiring and pooling residential loans and agency
securities, offering Certificates of the type described herein or other
mortgage- or asset-related securities, and related activities.
Neither the Depositor nor any of the Depositor's affiliates will insure or
guarantee distributions on the Securities of any Series.
RESIDENTIAL LOAN PROGRAM
The Residential Loans will have been purchased by the Depositor, either
directly or through affiliates, from sellers. Unless otherwise specified in the
related Prospectus Supplement, all Residential Loans will have been originated
in general accordance with the criteria specified below. The underwriting
standards applicable to Residential Loans underlying Mortgage Securities may
vary substantially from the underwriting standards set forth below.
UNDERWRITING STANDARDS
Unless otherwise specified in the related Prospectus Supplement, each seller
will represent and warrant that all Residential Loans originated and/or sold by
it to the Depositor or one of its affiliates will have been underwritten in
general accordance with standards consistent with those utilized by mortgage
lenders generally during the period of origination for similar types of loans.
As to any Residential Loan insured by the FHA or partially guaranteed by the VA,
the seller will represent that it has complied with underwriting policies of the
FHA or the VA, as the case may be.
Underwriting standards are applied by or on behalf of a lender to evaluate
the borrower's credit standing and repayment ability, and the value and adequacy
of the Residential Property as collateral. In general, a prospective borrower
applying for a Residential Loan is required to fill out a detailed application
designed to provide to the underwriting officer pertinent credit information,
including the principal balance and payment history with respect to any senior
mortgage, if any. Unless otherwise specified in the related Prospectus
Supplement, a verification of the borrower's income will be obtained from an
independent source and, as part of the description of the borrower's financial
condition, the borrower generally is required to provide a current list of
assets and liabilities and a statement of income and expenses, as well as an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy.
Unless otherwise specified in the related Prospectus Supplement, an employment
verification is obtained from an independent source
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(typically the borrower's employer) which verification reports the length of
employment with that organization, the current salary, and whether it is
expected that the borrower will continue such employment in the future. If a
prospective borrower is self-employed, the borrower may be required to submit
copies of signed tax returns. The borrower may also be required to authorize
verification of deposits at financial institutions where the borrower has
demand, savings or brokerage accounts.
In determining the adequacy of the property to be used as collateral, an
appraisal will generally be made of each property considered for financing. The
appraiser is generally required to inspect the property, issue a report on its
condition and, if applicable, verify that construction, if new, has been
completed. The appraisal is based on the market value of comparable homes, the
estimated rental income (if considered applicable by the appraiser) and the cost
of replacing the home.
Once all applicable employment, credit and property information is received,
a determination generally is made as to whether the prospective borrower has
sufficient monthly income available (i) to meet the borrower's monthly
obligations on the proposed mortgage loan (generally determined on the basis of
the monthly payments due in the year of origination) and other expenses related
to the property (such as property taxes and hazard insurance) and (ii) to meet
monthly housing expenses and other financial obligations and monthly living
expenses. The underwriting standards applied by Sellers, particularly with
respect to the level of loan documentation and the mortgagor's income and credit
history, may be varied in appropriate cases where factors such as low
loan-to-value ratios, or combined-loan-to-value ratios, as applicable, or other
favorable and compensating credit factors exist.
The underwriting guidelines with respect to some Unaffiliated Sellers' loan
programs may be less stringent than those of FNMA or FHLMC, primarily in that
they generally may permit the borrower to have a higher debt-to-income ratio and
a larger number of derogatory credit items than do the guidelines of FNMA or
FHLMC. These underwriting guidelines are intended to provide for the origination
of single family mortgage loans for non-conforming credits. A mortgage loan made
to a "non-conforming credit" means a mortgage loan that is ineligible for
purchase by FNMA or FHLMC due to borrower credit characteristics that do not
meet FNMA or FHLMC underwriting guidelines, including a loan made to a borrower
whose creditworthiness and repayment ability do not satisfy such FNMA or FHLMC
underwriting guidelines or a borrower who may have a record of major derogatory
credit items such as default on a prior mortgage loan, credit write-offs,
outstanding judgments and prior bankruptcies. Accordingly, Mortgage Loans
underwritten pursuant to these guidelines are likely to experience rates of
delinquency and foreclosure that are higher, and may be substantially higher,
than mortgage loans originated in accordance with FNMA or FHLMC underwriting
guidelines.
QUALIFICATIONS OF UNAFFILIATED SELLERS
Unless otherwise specified in the related Prospectus Supplement, each
Unaffiliated Seller will be required to satisfy the qualifications set forth
herein. Each Unaffiliated Seller must be an institution experienced in
originating and servicing the types of residential loans sold by it for
inclusion in a Trust Fund in accordance with accepted practices and prudent
guidelines, and must maintain satisfactory facilities to originate and service
those loans. Unless otherwise specified in the related Prospectus Supplement,
each Unaffiliated Seller must be a seller/servicer approved by either FNMA or
FHLMC, and must be a mortgagee approved by the FHA or an institution the deposit
accounts in which are insured by the Bank Insurance Fund ("BIF") or Savings
Association Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation
(the "FDIC"). In addition, each Unaffiliated Seller must satisfy certain
criteria as to financial stability evaluated on a case by case basis by the
Depositor.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Each Unaffiliated Seller will have made representations and warranties in
respect of the Residential Loans sold by such Unaffiliated Seller. Unless
otherwise provided in the related Prospectus Supplement,
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such representations and warranties include, among other things: (i) that title
insurance (or in the case of Residential Properties located in areas where such
policies are generally not available, an attorney's certificate of title) and
any FHA insurance, VA guarantee and any required hazard and primary credit
insurance was effective at the origination of each Residential Loan, and that
each policy (or certificate of title) remained in effect on the date of purchase
of the Residential Loan from the Unaffiliated Seller by or on behalf of the
Depositor; (ii) that the Unaffiliated Seller had good title to each such
Residential Loan and such Residential Loan was subject to no offsets, defenses,
counterclaims or rights of rescission except to the extent that any buydown
agreement described herein may forgive certain indebtedness of a borrower; (iii)
if the Trust Fund includes Mortgage Loans, that each Mortgage constituted a
valid lien on the Mortgaged Property (subject only to permissible title
insurance exceptions and Senior Liens, if any); (iv) if the Trust Fund includes
Manufactured Housing Contracts, each Manufactured Housing Contract creates a
valid, subsisting and enforceable first priority security interest in the
Manufactured Home covered thereby; (v) that the Residential Property was free
from damage and was in good repair; (vi) that there were no delinquent tax or
assessment liens against the Residential Property; (vii) that each Residential
Loan was current as to all required payments; and (viii) that each Residential
Loan was made in compliance with, and is enforceable under, all applicable
local, state and federal laws and regulations in all material respects.
In certain cases, the representations and warranties of an Unaffiliated
Seller in respect of a Residential Loan may have been made as of the date on
which such Unaffiliated Seller sold the Residential Loan to the Depositor or its
affiliate. A substantial period of time may have elapsed between such date and
the date of initial issuance of the Series of Securities evidencing an interest
in such Residential Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of a
Residential Loan by such Unaffiliated Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation occurs after the date of such sale to or on
behalf of the Depositor.
The only representations and warranties, if any, to be made for the benefit
of holders of Securities in respect of any Residential Loan relating to the
period commencing on the date of sale of such Residential Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under "Description of the
Securities--Assignment of Trust Fund Assets". If the Master Servicer is also an
Unaffiliated Seller of Residential Loans with respect to a particular Series,
such representations will be in addition to the representations and warranties
made by the Master Servicer in its capacity as an Unaffiliated Seller.
The Master Servicer will promptly notify the relevant Unaffiliated Seller of
any breach of any representation or warranty made by it in respect of a
Residential Loan which materially and adversely affects the interests of the
Securityholders in such Residential Loan. If such Unaffiliated Seller cannot
cure such breach within 60 days (or such other time period set forth in the
related Prospectus Supplement) from the date on which the Unaffiliated Seller
was notified of such breach, then such Unaffiliated Seller will be obligated to
repurchase such Residential Loan from the Trustee within 90 days (or such other
time period set forth in the related Prospectus Supplement) from the date on
which the Unaffiliated Seller was notified of such breach, at the Purchase Price
therefor. As to any Residential Loan, unless otherwise specified in the related
Prospectus Supplement, the "Purchase Price" is equal to the sum of (i) the
unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated
Principal Balance (as defined below) from the date as to which interest was last
paid by the borrower to the end of the calendar month in which the purchase is
to occur at a rate equal to the Net Mortgage Rate minus the rate at which the
Sub-Servicer's servicing fee is calculated if the Sub-Servicer is the purchaser,
(iii) any unpaid servicing fees and certain unreimbursed servicing expenses
payable or reimbursable to the Master Servicer with respect to such Residential
Loan, (iv) any unpaid Retained Interest with respect to such Residential Loan,
(v) any Realized Losses incurred with respect to such Residential Loan, as
described below under "Description of the Certificates--Subordination", and (vi)
if applicable, any expenses reasonably incurred or to be
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incurred by the Master Servicer or the Trustee in respect of the breach or
defect giving rise to a purchase obligation. If so provided in the related
Prospectus Supplement, an Unaffiliated Seller, rather than repurchase a
Residential Loan as to which a breach has occurred, will have the option, within
a specified period after initial issuance of the related Series of Securities,
to cause the removal of such Residential Loan from the Trust Fund and substitute
in its place one or more other Residential Loans, in accordance with the
standards described in the related Prospectus Supplement. The Master Servicer or
the Trustee, unless otherwise specified in the related Prospectus Supplement,
will be required under the applicable Servicing Agreement to use its best
efforts to enforce such obligations of the Unaffiliated Seller for the benefit
of the Trustee and the holders of the Securities, following the practices it
would employ in its good faith business judgment were it the owner of such
Residential Loan. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by an Unaffiliated Seller. For each Series with respect to which
a REMIC election is to be made, unless the related Prospectus Supplement
provides otherwise, the Master Servicer will be obligated to pay any prohibited
transaction tax which may arise in connection with such repurchase or
substitution. See "Description of the Certificates-- General".
The "Stated Principal Balance" of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss (as hereinafter defined) thereon has been
(or, if it had not been covered by any form of credit support, would have been)
allocated to one or more class of Securities on or before the date of
determination.
Neither the Depositor nor the Master Servicer (unless the Master Servicer is
an Unaffiliated Seller) will be obligated to purchase or substitute for a
Residential Loan if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out such
obligations with respect to Residential Loans. To the extent that a breach of
the representations and warranties of an Unaffiliated Seller also constitutes a
breach of a representation made by the Depositor, the Depositor may have a
repurchase or substitution obligation as described below under "Description of
the Securities-- Assignment of Trust Fund Assets". Any Residential Loan that is
not repurchased or substituted for shall remain in the related Trust Fund and
any losses thereon shall be borne by Securityholders, to the extent not covered
by credit enhancement.
SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of a
Residential Loan to Sub-Servicers pursuant to a sub-servicing agreement (a
"Sub-Servicing Agreement"), which will be consistent with the terms of the
Servicing Agreement relating to the Trust Fund that includes such Residential
Loan. Although each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Pooling and Servicing Agreement
pursuant to which a Series of Securities is issued will provide that, if for any
reason the Master Servicer for such Series of Securities is no longer acting in
such capacity, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain primarily liable for such obligations under the related Sub-Servicing
Agreement. Each Sub-Servicer will be required to perform the customary functions
of a servicer of residential loans, including collecting payments from borrowers
and remitting such collections to the Master Servicer; maintaining FHA
insurance, any VA guarantee, and primary hazard and credit insurance as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any
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such settlement; maintaining escrow or impoundment accounts of borrowers for
payment of taxes, insurance and other items required to be paid by the borrower
pursuant to the Residential Loan; processing assumptions or substitutions,
although, unless otherwise specified in the related Prospectus Supplement, the
Master Servicer generally is required to exercise due-on-sale and
due-on-encumbrance clauses to the extent such exercise is permitted by law and
would not adversely affect insurance coverage; attempting to cure delinquencies;
effecting foreclosures or repossessions; inspecting and managing Residential
Properties under certain circumstances; and maintaining accounting records
relating to the Residential Loans. The Master Servicer will be responsible for
filing and settling claims in respect of Residential Loans in a particular Trust
Fund under any applicable pool insurance policy, bankruptcy bond, special hazard
insurance policy or letter of credit. See "Description of Credit Support". To
the extent specified in the related Prospectus Supplement, a Sub-Servicer will
also be obligated to make advances in respect of delinquent installments of
principal and interest on Residential Loans, as described more fully under
"Description of the Securities--Payments on Residential Loans" and "--Deposits
to Certificate Account", and in respect of certain taxes and insurance premiums
not paid on a timely basis by borrowers.
As compensation for its servicing duties, each Sub-Servicer will be entitled
to a monthly servicing fee (to the extent the related Residential Loan payment
has been collected) in the amount set forth in the related Prospectus
Supplement. Each Sub-Servicer is also entitled to collect and retain, as part of
its servicing compensation late charges provided in the Mortgage Note,
Cooperative Note or Manufactured Housing Contract or related instruments. If so
provided in the related Prospectus Supplement, a Sub-Servicer may be entitled to
any prepayment penalties and a Retained Interest in certain Residential Loans.
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 a Pooling and Servicing Agreement. See "Description of
the Securities--Retained Interest, Administration Compensation and Payment of
Expenses".
Each Sub-Servicer may be required to agree to indemnify the Master Servicer
for any liability or obligation sustained by the Master Servicer in connection
with any act or failure to act by the Sub-Servicer in its servicing capacity.
Unless otherwise provided in the related Prospectus Supplement, each Sub-
Servicer is required to maintain a fidelity bond and an errors and omissions
policy with respect to its officers, employees and other persons acting on its
behalf or on behalf of the Master Servicer.
DESCRIPTION OF THE SECURITIES
The Certificates of each Series evidencing interests in a Trust Fund
including Residential Loans will be issued pursuant to a separate Pooling and
Servicing Agreement among the Depositor, the Master Servicer and the Trustee and
the Securities of each Series evidencing interests in a Trust Fund including
Agency Securities will be issued pursuant to a separate Trust Agreement ("Trust
Agreement") between the Depositor and the Trustee. Each series of Notes (or, in
certain instances, two or more series of Notes) will be issued pursuant to an
Indenture between the related Issuer and the Trustee. The related Trust Fund
will be created pursuant to an Owner Trust Agreement (the "Owner Trust
Agreement"; an Owner Trust Agreement, Pooling and Servicing Agreement, Servicing
Agreement, Indenture, an "Agreement") between the Depositor and the Owner
Trustee. As to each series of Notes where the Issuer is an Owner Trust, the
ownership of the Trust Fund will be evidenced by certificates (the "Equity
Certificates") issued under the Owner Trust Agreement, which, unless otherwise
specified in the Prospectus Supplement, are not offered thereby. Forms of each
of the Agreements are filed as exhibits to the Registration Statement of which
this Prospectus is a part. The Agreement relating to each Series of Securities
will be filed as an exhibit to a report on Form 8-K to be filed with the
Commission within fifteen days after the initial issuance of such Securities and
a copy thereof will be available for inspection at the corporate trust office of
the Trustee specified in the related Prospectus Supplement (the "Corporate Trust
Office"). The following summaries describe certain provisions of the Agreements.
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 related Prospectus Supplement.
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GENERAL
The Certificates of each Series (including any class of Certificates not
offered hereby) will be issued in fully registered form only and will represent
the entire beneficial ownership interest in the Trust Fund created pursuant to
the related Agreement. Unless otherwise specified in the related Prospectus
Supplement, each series of Notes covered by a particular Indenture will evidence
indebtedness of a separate Trust Fund created pursuant to the related Owner
Trust Agreement. As to each Series, the Securities will be issued in authorized
denominations evidencing a portion of all of the Securities of such Series (a
"Percentage Interest"), as set forth in the related Prospectus Supplement. Each
Trust Fund will consist of (i) such Residential Loans (including any Mortgage
Securities) or Agency Securities (exclusive of any portion of interest payments
relating thereto retained by the Depositor, any of its affiliates or its
predecessor in interest (the "Retained Interest") and exclusive of principal and
interest due on or before the Cut-off Date) as from time to time are subject to
the Agreement; (ii) such funds or assets as from time to time are deposited in
the Trust Account described below and any other account held for the benefit of
Securityholders; (iii) with respect to Trust Funds that include Residential
Loans, (a) property acquired by foreclosure or deed in lieu of foreclosure of
Mortgage Loans on behalf of the Securityholders, or, in the case of Manufactured
Housing Contracts that are not Land Contracts, by repossession; (b) any Primary
Credit Insurance Policies and Primary Hazard Insurance Policies (as defined
under "Description of Primary Insurance Coverage"); (c) any combination of a
Pool Insurance Policy, a Bankruptcy Bond, a special hazard insurance policy or
other type of credit support (as defined under "Description of Credit Support");
and (d) the rights of the Trustee to any cash advance reserve fund or surety
bond as described under "Advances"; (iv) if specified in the related Prospectus
Supplement, the Reserve Fund and (v) any other assets as described in the
related Prospectus Supplement. The Securities will be transferable and
exchangeable for Securities of the same class and Series in authorized
denominations at the Corporate Trust Office. No service charge will be made for
any registration of exchange or transfer of Securities on the Certificate
Register maintained by the Certificate Registrar, but the Depositor may require
payment of a sum sufficient to cover any tax or other governmental charge.
Each Series of Securities may consist of either (i) a single class of
Securities; (ii) two or more classes of Securities, one or more classes of which
("Senior Securities") will be senior in right of payment to one or more of the
other classes ("Subordinate Securities") to the extent described in the related
Prospectus Supplement (any such Series, a "Senior/Subordinate Series"); (iii)
two or more classes of Securities, one or more classes of which will be entitled
to (a) principal distributions, with disproportionate, nominal or no interest
distributions or (b) interest distributions, with disproportionate, nominal or
no principal distributions ("Strip Securities"); (iv) two or more classes of
Securities that differ as to the timing, sequential order or amount of
distributions of principal or interest or both, which may include one or more
classes of Securities ("Accrual Securities") with respect to which accrued
interest will not be distributed but rather will be added to the Security
Principal Balance thereof on each Distribution Date for the period described in
the related Prospectus Supplement; or (v) other types of classes of Securities,
as described in the related Prospectus Supplement. Credit support for each
Series of Securities evidencing interests in a Trust Fund that includes
Residential Loans will be provided by a Pool Insurance Policy, a special hazard
insurance policy, a Bankruptcy Bond, a letter of credit, a Reserve Fund or a
similar credit support instrument as described under "Description of Credit
Support", by the subordination of one or more classes of Securities as described
under "Description of the Securities--Subordination", or by any combination of
the foregoing.
Each class of Securities (other than certain Strip Securities) will have a
Security Principal Balance and, unless otherwise provided in the related
Prospectus Supplement, will be entitled to payments of interest thereon based on
a specified Security Interest Rate. See "Principal and Interest on the
Securities" below. The Security Interest Rates of the various classes of
Securities of each Series may differ, and as to some classes may be in excess of
the lowest Net Interest Rate in a Trust Fund; however, the weighted average of
the Security Interest Rates on the Securities based on their respective Security
Principal
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Balances will not exceed the lowest Net Interest Rate. The specific percentage
ownership interests of each class of Securities and the minimum denomination per
Security will be set forth in the related Prospectus Supplement. As to any
Mortgage Loan, the "Net Interest Rate" is equal to the Interest Rate minus the
sum of the Administration Fee Rate and the rate at which the Retained Interest,
if any is calculated (the "Retained Interest Rate").
If so provided in the related Prospectus Supplement relating to a series of
Certificates, one or more elections may be made to treat the related Trust Fund,
or designated portions thereof, as a "real estate mortgage investment conduit"
(a "REMIC") as defined in the Code. If such an election is made with respect to
a Series, one of the classes will be designated as evidencing all "residual
interests" in the related REMIC as defined under the Code. All other classes of
Securities in such a Series will constitute "regular interests" in the related
REMIC as defined in the Code. As to each Series, all of the Securities of each
class offered hereby will be rated in one of the four highest rating categories
by one or more Rating Agencies. As to each Series of Certificates as to which a
REMIC election is to be made, the Trustee or the Master Servicer, if any, will
be obligated to take all actions required in order to comply with applicable
laws and regulations and, unless otherwise specified in the related Prospectus
Supplement, will be obligated to pay any prohibited transaction taxes or
contribution taxes arising out of a breach of its obligations with respect to
such compliance without any right of reimbursement therefor from the Trust Fund
or from any Certificateholder. Unless otherwise provided in the related
Prospectus Supplement, a prohibited transaction tax or contribution tax
resulting from any other cause will be charged against the related Trust Fund,
resulting in a reduction in amounts otherwise distributable to
Certificateholders. See "Certain Federal Income Tax
Consequences--REMIC--Prohibited Transactions and Other Possible REMIC Taxes".
ASSIGNMENT OF TRUST FUND ASSETS
At the time of issuance of each Series of Securities, the Depositor will
cause the assets comprising the related Trust Fund or Mortgage Securities being
included in the related Trust Fund to be assigned to the Trustee, together with
all principal and interest received by or on behalf of the Depositor with
respect to the Trust Fund Assets after the applicable Cut-off Date, other than
principal and interest due on or before the applicable Cut-off Date and other
than any Retained Interest. The Residential Loan or Agency Security documents
described below will be delivered to the Trustee (or to the custodian
hereinafter referred to). The Trustee will, concurrently with such assignment,
deliver the Securities to the Depositor in exchange for the Trust Fund Assets.
Each Trust Fund Asset will be identified in a schedule appearing as an exhibit
to the related Agreement. Such schedule will include, among other things,
information as to the outstanding principal balance of each Trust Fund Asset
after application of payments due on or before the Cut-off Date, the maturity of
the Mortgage Note, Cooperative Note, Manufactured Housing Contract or Agency
Securities, the Net Interest Rate, any Retained Interest, with respect to a
Series of Securities evidencing interests in a Trust Fund including Agency
Securities, the pass-through rate on the Agency Securities, and with respect to
a Series of Securities evidencing interests in Residential Loans, information
respecting the Interest Rate, the current scheduled payment of principal and
interest, the original Loan-to-Value Ratio and certain other information.
MORTGAGE LOANS AND MULTIFAMILY LOANS
The Depositor will, as to each Mortgage Loan (other than Mortgage Loans
underlying any Mortgage Securities) and Multifamily Loan, deliver or cause to be
delivered to the Trustee (or to the custodian) the mortgage file for each
Mortgage Loan, containing legal documents relating to such Mortgage Loan,
including the Mortgage Note endorsed without recourse to the order of the
Trustee, the Mortgage with evidence of recording indicated thereon (except for
any Mortgage not returned from the public recording office, in which case the
Depositor will deliver or cause to be delivered a copy of such Mortgage
certified by the related Unaffiliated Seller that it is a true and complete copy
of the original of such Mortgage
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submitted for recording) and an assignment in recordable form of the Mortgage to
the Trustee. Unless otherwise provided in the related Prospectus Supplement, the
Depositor will promptly cause the assignment of each related Mortgage Loan and
Multifamily Loan to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the Mortgage Loan or Multifamily Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor or the originator of
such Mortgage Loan.
HOME EQUITY LOANS AND HOME IMPROVEMENT CONTRACTS
Unless otherwise provided in the related Prospectus Supplement, the
Depositor will, as to each Home Equity Loan and Home Improvement Contract,
deliver or cause to be delivered to the Trustee (or to the custodian) the note
endorsed to the order of the Trustee, with respect to Home Equity Loans and
secured Home Improvement Contracts, the Mortgage with evidence of recording
indicated thereon (except for any Mortgage not returned from the public
recording office, in which case the Depositor will deliver or cause to be
delivered a copy of such Mortgage certified by the related Unaffiliated Seller
that it is a true and complete copy of the original of such Mortgage submitted
for recording) and, with respect to Home Equity Loans and secured Home
Improvement Contracts, an assignment in recordable form of the Mortgage to the
Trustee. Unless otherwise provided in the related Prospectus Supplement, the
Depositor will promptly cause the assignment of each related Home Equity Loan
and secured Home Improvement Contract to be recorded in the appropriate public
office for real property records, except in states where, in the opinion of
counsel acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the Home Equity Loan and Home Improvement Contract against
the claim of any subsequent transferee or any successor to or creditor of the
Depositor or the originator of such Home Equity Loan or Home Improvement
Contract. With respect to unsecured Home Improvement Contracts, the Depositor or
Unaffiliated Seller, under the related Agreement, will transfer physical
possession of the Home Improvement Contracts to the Trustee or a designated
custodian or, in the case of an Unaffiliated Seller, may retain possession of
the Home Improvement Contracts as custodian for the Trustee. In addition, the
Depositor will cause to be made, an appropriate filing of a UCC-1 financing
statement in the appropriate states to give notice of the Trustee's ownership of
the Home Improvement Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement Contracts will not be stamped or
otherwise marked to reflect their assignment from the Unaffiliated Seller or the
Depositor, as the case may be, 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
the contracts could be defeated.
COOPERATIVE LOANS
The Depositor will, as to each Cooperative Loan, deliver or cause to be
delivered to the Trustee (or to the custodian) the related Cooperative Note, the
original security agreement, the proprietary lease or occupancy agreement, the
related stock certificate and related stock powers endorsed in blank, and a copy
of the original filed financing statement together with an assignment thereof to
the Trustee in a form sufficient for filing. The Depositor will promptly cause
the assignment and financing statement of each related Cooperative Loan to be
filed in the appropriate public office, except in states where in the opinion of
counsel acceptable to the Trustee, such filing is not required to protect the
Trustee's interest in the Cooperative Loan against the claim of any subsequent
transferee or any successor to or creditor of the Depositor or the originator of
such Cooperative Loan.
MANUFACTURED HOUSING CONTRACTS
Unless otherwise provided in the related Prospectus Supplement, the
Depositor will, as to each Manufactured Housing Contract, deliver or cause to be
delivered to the Trustee (or to the custodian) the
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original Manufactured Housing Contract endorsed to the order of the Trustee and
copies of documents and instruments related to each Manufactured Housing
Contract and the security interest in the Manufactured Home securing each
Manufactured Housing Contract, together with a blanket assignment to the Trustee
of the Manufactured Housing Contracts in the related Trust Fund and such
documents and instruments. Unless otherwise provided in the related Prospectus
Supplement, in order to give notice of the right, title and interest of the
Securityholders to the Manufactured Housing Contracts, the Depositor will cause
to be executed and delivered to the Trustee a UCC-1 financing statement
identifying the Trustee as the secured party and identifying all Manufactured
Housing Contracts as collateral of the Trust Fund.
AGENCY SECURITIES
Agency Securities will be registered in the name of the Trustee or its
nominee on the books of the issuer or guarantor or its agent or, in the case of
Agency Securities issued only in book-entry form, through the Federal Reserve
System, in accordance with the procedures established by the issuer or guarantor
for registration of such certificates with a member of the Federal Reserve
System, and distributions on such securities to which the Trust Fund is entitled
will be made directly to the Trustee.
REVIEW OF RESIDENTIAL LOANS
The Trustee (or the custodian) will review the Residential Loan documents
within 45 days (or such other period specified in the Prospectus Supplement)
after receipt thereof, and the Trustee (or such custodian) will hold such
documents in trust for the benefit of the Securityholders. 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 applicable Unaffiliated Seller. If the
Unaffiliated Seller cannot cure the omission or defect within 90 days (or such
other period specified in the Prospectus Supplement) after receipt of such
notice, the Unaffiliated Seller will be obligated to repurchase the related
Residential Loan from the Trustee at the Purchase Price or, in certain cases,
substitute for such Residential Loan. There can be no assurance that an
Unaffiliated Seller will fulfill this repurchase or substitution obligation.
Although the Master Servicer or Trustee is obligated to enforce such obligation
to the extent described above under "Residential Loan Program--Representations
by Unaffiliated Sellers; Repurchases", neither the Master Servicer nor the
Depositor will be obligated to repurchase or substitute for such Residential
Loan if the Unaffiliated Seller defaults on its obligation. Unless otherwise
specified in the related Prospectus Supplement, this repurchase or substitution
obligation, if applicable, constitutes the sole remedy available to the
Securityholders or the Trustee for omission of, or a material defect in, a
constituent document.
The Trustee will be authorized to appoint a custodian pursuant to a
custodial agreement to maintain possession of and review the documents relating
to the Residential Loans as agent of the Trustee.
Unless otherwise provided in the related Prospectus Supplement, with respect
to Residential Loans, except as to Mortgage Loans underlying any Mortgage
Securities, in a Trust Fund, the Depositor will make representations and
warranties as to the types and geographical distribution of such Residential
Loans and as to the accuracy in all material respects of certain identifying
information furnished to the Trustee in respect of each such Residential Loan
(e.g., original Loan-to-Value Ratio, principal balance as of the Cut-off Date,
Interest Rate and maturity). In addition, unless otherwise provided in the
related Prospectus Supplement, the Depositor will represent and warrant that, as
of the Cut-off Date for the related Series of Securities, no Residential Loan
was currently more than 30 days delinquent as to payment of principal and
interest and no Residential Loan was 30 days or more delinquent more than once
during the previous 12 months. Upon a breach of any such representation of the
Depositor that materially and adversely affects the interests of the
Securityholders in a Residential Loan, the Depositor will be obligated either to
cure the breach in all material respects, repurchase the Residential Loan at the
Purchase Price or, if provided in the related Prospectus Supplement, substitute
for such Residential Loan.
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With respect to any Series of Securities evidencing interests in a Trust
Fund including Residential Loans as to which credit support is provided by means
of a pool insurance policy, in addition to making the representations and
warranties described above, the Depositor or the Unaffiliated Seller will, to
the extent required by the Rating Agency or Agencies, represent and warrant to
the Trustee for such Series of Securities that no action, inaction or event has
occurred and no state of facts exists or has existed on or prior to the date of
the initial issuance of the Securities that has resulted or will result in the
exclusion from, denial of or defense to coverage under any applicable primary
credit insurance policy, pool insurance policy, special hazard insurance policy
or bankruptcy bond, irrespective of the cause of such failure of coverage but
excluding any failure of an insurer to pay by reason of the insurer's own breach
of its insurance policy or its financial inability to pay (such representation
being referred to herein as the "insurability representation"). See "Description
of Primary Insurance Coverage" and "Description of Credit Support" herein and in
the related Prospectus Supplement for information regarding the extent of
coverage under the aforementioned insurance policies. As described in the
related Prospectus Supplement, upon a breach of the insurability representation
that materially and adversely affects the interests of the Securityholders in a
Residential Loan, the Depositor or the Unaffiliated Seller may be obligated
either to cure the breach in all material respects or to purchase such
Residential Loan at the Purchase Price, subject to the limitations specified in
the related Prospectus Supplement. The related Prospectus Supplement may provide
that the performance of the Depositor of its obligation to repurchase
Residential Loans following a breach of its insurability representation will be
ensured in the manner specified therein.
The related Prospectus Supplement may provide that, the obligation to
repurchase or, other than with respect to the insurability representation, if
applicable, to substitute Residential Loans as described above constitutes the
sole remedy available to the Securityholders or the Trustee for any breach of
the Depositor's representations.
The Master Servicer will make certain representations and warranties
regarding its authority to enter into, and its ability to perform its
obligations under, the related Pooling and Servicing Agreement. Upon the
occurrence of an Event of Default under the related Pooling and Servicing
Agreement for which the Master Servicer is responsible, the Master Servicer will
be obligated to remedy such Event of Default within the time period set forth in
the related Pooling and Servicing Agreement or be subject to termination
pursuant thereto. See "Description of the Securities Events of Default" and
"Rights Upon Event of Default" herein.
DEPOSITS TO THE TRUST ACCOUNT
The Master Servicer or the Trustee shall, as to each Trust Fund, establish
and maintain or cause to be established and maintained a separate Trust Account
or Trust Accounts for the collection of payments on the related Trust Fund
Assets, which must either be (i) maintained with a federal or state chartered
depository institution, and in a manner, satisfactory to each Rating Agency
rating the Securities of such Series at the time any amounts are held on deposit
therein or (ii) maintained with a federal or state chartered depository
institution, the deposits in which are insured by the BIF or the SAIF (to the
limits established by the FDIC) and any uninsured deposits in which are
otherwise secured such that the Securityholders have a claim with respect to the
funds in the Trust 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 depository institution with which
the Trust Account is maintained. The collateral eligible to secure amounts in
the Trust Account is limited to United States government securities and other
high quality investments ("Permitted Instruments"). A Trust Account may be
maintained as an interest bearing or non-interest bearing account, or the funds
held therein may be invested pending the distribution on each succeeding
Distribution Date in Permitted Instruments. Unless otherwise provided in the
related Prospectus Supplement, the Trustee or the Master Servicer will be
entitled to receive any such interest or other income earned on funds in the
Trust Account as additional compensation for administration of the Trust Fund
Assets. In respect of any Series of Securities having Distribution Dates
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occurring less frequently than monthly, the Master Servicer may obtain from an
obligor named in the related Prospectus Supplement a guaranteed investment
contract to assure a specified rate of return on funds held in the Trust
Account. If permitted by each Rating Agency rating the Securities of such
Series, a Trust Account may contain funds relating to more than one Series of
Securities.
In the event that a Sub-Servicer is servicing one or more Residential Loans
in a Trust Fund, the Sub-Servicer will establish and maintain a separate account
or accounts (a "Sub-Servicing Account"), which may be interest bearing or
non-interest bearing and which shall comply with the standards for Trust
Accounts set forth above, and which is otherwise acceptable to the Master
Servicer. The Sub-Servicer is required to credit to the related Sub-Servicing
Account on a daily basis the amount of all proceeds of Residential Loans
received by the Sub-Servicer, less its servicing compensation, its Retained
Interest, if any, and unreimbursed expenses and advances to which it is entitled
pursuant to the related Sub-Servicing Agreement. As specified in the related
Prospectus Supplement, the Sub-Servicer shall remit to the Master Servicer all
funds held in the Sub-Servicing Account with respect to each Residential Loan
and any amount required to be advanced pursuant to the related Sub-Servicing
Agreement on a monthly basis.
PRE-FUNDING ACCOUNT
If so provided in the related Prospectus Supplement, the Master Servicer
will establish and maintain a Pre-Funding Account, in the name of the related
Trustee on behalf of the related Securityholders, into which the Depositor will
deposit the Pre-Funded Amount on the related Closing Date. The Pre-Funded Amount
will be used by the related Trustee to purchase Subsequent Loans from the
Depositor from time to time during the Funding Period. The Funding Period, if
any, for a Trust Fund will begin on the related Closing Date and will end on the
date specified in the related Prospectus Supplement, which in no event will be
later than the date that is three months after the Closing Date. Any amounts
remaining in the Pre-Funding Account at the end of the Funding Period will be
distributed to the related Securityholders in the manner and priority specified
in the related Prospectus Supplement, as a prepayment of principal of the
related Securities.
PAYMENTS ON RESIDENTIAL LOANS
The Master Servicer will deposit or cause to be deposited in the Trust
Account for each Trust Fund including Residential Loans as and when received
(or, in the case of Advances on or before the applicable Distribution Date),
unless otherwise provided in the related Agreement, the following payments and
collections received or made by or on behalf of the Master Servicer subsequent
to the Cut-off Date (unless otherwise specified in the related Prospectus
Supplement, 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 Residential Loans;
(ii) all payments on account of interest on the Residential Loans,
exclusive of any portion thereof representing interest in excess of the Net
Interest Rate (unless such excess amount is required to be deposited
pursuant to the related Agreement) and, if provided in the related
Prospectus Supplement, prepayment penalties;
(iii) all proceeds of any Primary Hazard Insurance Policies and any
special hazard insurance policy (to the extent such proceeds are not applied
to the restoration of the property or released to the borrower in accordance
with the Master Servicer's normal servicing procedures), any Primary Credit
Insurance Policy, any FHA Insurance, VA Guarantee, any Bankruptcy Bond and
any Pool Insurance Policy (as hereinafter defined) (collectively, "Insurance
Proceeds"), other than proceeds that represent reimbursement of the Master
Servicer's costs and expenses incurred in connection with presenting claims
under the related insurance policies, and all other cash amounts received,
by foreclosure,
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eminent domain, condemnation or otherwise, in connection with the
liquidation of defaulted Residential Loans included in the related Trust
Fund ("Liquidation Proceeds"), together with the net proceeds on a monthly
basis with respect to any properties acquired for the benefit of
Securityholders by deed in lieu of foreclosure or repossession;
(iv) any Advances made as described below under "Advances";
(v) all amounts required to be transferred to the Trust Account from a
Reserve Fund, if any, as described below under "Subordination";
(vi) all proceeds of any Residential Loan or property in respect thereof
purchased by the Master Servicer, the Depositor, any Sub-Servicer or any
Unaffiliated Seller as described under "Residential Loan
Program--Representations by Unaffiliated Sellers; Repurchases" and
"Description of the Certificates--Assignment of Trust Fund Assets" above,
exclusive of the Retained Interest, if any, in respect of such Residential
Loan, and all proceeds of any Residential Loan repurchased as described
under "Termination" below;
(vii) all payments required to be deposited in the Trust Account with
respect to any deductible clause in any blanket insurance policy described
under "Description of Primary Insurance Coverage-- Primary Hazard Insurance
Policies";
(viii) any amount required to be deposited by the Trustee or the Master
Servicer in connection with losses realized on investments of funds held in
the Trust Account;
(ix) any amounts required to be transferred to the Trust Account
pursuant to any guaranteed investment contract;
(x) any distributions received on any Mortgage Securities included in
the related Trust Fund; and
(xi) any other amount required to be deposited in the Trust Account
pursuant to the Agreement.
PAYMENTS ON AGENCY SECURITIES
The Agency Securities included in a Trust Fund will be registered in the
name of the Trustee so that all distributions thereon will be made directly to
the Trustee. The Trustee will deposit or cause to be deposited into the Trust
Account for each Trust Fund including Agency Securities as and when received,
unless otherwise provided in the related Trust Agreement, all distributions
received by the Trustee with respect to the related Agency Securities (other
than payments due on or before the Cut-off Date and exclusive of any trust
administration fee and amounts representing the Retained Interest, if any).
DISTRIBUTIONS
Distributions of principal and interest on the Securities of each Series
will be made by or on behalf of the Trustee or the Master Servicer on the dates
(each, a "Distribution Date") and at the intervals (which may be monthly,
quarterly, semi-annual or other intervals) specified in the related Prospectus
Supplement, to the persons in whose names the Securities are registered at the
close of business on the record date ("Record Date") specified in the Prospectus
Supplement. The amount of each distribution will be determined as of the close
of business on each Determination Date specified in the related Prospectus
Supplement. Distributions 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 the Master Servicer and holds Securities in any requisite amount
specified in the related Prospectus Supplement, 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
will be made only upon presentation and surrender of the Securities at the
office or agency of the Security Registrar specified in the notice to
Securityholders of such final
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distribution. Unless otherwise specified in the Prospectus Supplement, all
distributions made to the holders of Securities of any Series on each
Distribution Date will be made on a pro rata basis among the Securityholders of
record on the next preceding Record Date (other than in respect of the final
distribution), based on the aggregate Percentage Interest represented by their
respective Securities.
FINAL DISTRIBUTION DATE
With respect to any Series consisting of classes having sequential
priorities for distributions of principal, the "Final Distribution Date" for
each such class of Securities is the latest Distribution Date on which the
Security Principal Balance thereof is expected to be reduced to zero, based on
certain assumptions, including the assumption that no prepayments or defaults
occur with respect to the related Trust Fund Assets, as further or as otherwise
specified in the related Prospectus Supplement. Since the rate of distribution
of principal of any such class of Securities will depend upon, among other
things, the rate of payment (including prepayments) of the principal of the
Trust Fund Assets, the actual last Distribution Date for any class of Securities
could occur significantly earlier than its Final Distribution Date. The rate of
payments on the Trust Fund Assets for any Series of Securities will depend upon
their particular characteristics, as well as on the prevailing level of interest
rates from time to time and other economic factors, and no assurance can be
given as to the actual prepayment experience of the Trust Fund Assets. See
"Maturity and Prepayment Considerations". In addition, substantial losses on the
Trust Fund Assets in a given period, even though within the limits of the
protection afforded by the instruments described under "Description of Credit
Support", or by the Subordinate Securities in the case of a Senior/Subordinate
Series, may cause the actual last Distribution Date of certain classes of
Securities to occur after their Final Distribution Date.
SPECIAL DISTRIBUTIONS
With respect to any Series of Securities with Distribution Dates occurring
at intervals less frequently than monthly, the Securities may be subject to
special distributions under the circumstances and in the manner described below
if and to the extent provided in the related Prospectus Supplement. If
applicable, the Master Servicer will be required to make or cause to be made
special distributions allocable to principal and interest on Securities of a
Series out of, and to the extent of, the amount available therefor in the
related Trust Account, on the day specified in the related Prospectus
Supplement, in the amount described below if, as a result of substantial
payments of principal on the Trust Fund Assets, low rates then available for
reinvestment of payments on such Trust Fund Assets, substantial Realized Losses
or some combination thereof, and based on the assumptions specified in the
related Agreement, it is determined that the amount anticipated to be on deposit
in the Trust Account on the next Distribution Date or on some intervening date
as provided in the related Prospectus Supplement, together with, if applicable,
the amount available to be withdrawn from any related Reserve Fund, may be
insufficient to make required distributions on the Securities of such Series on
such Distribution Date or such intervening date as may be provided in the
related Prospectus Supplement. The amount of any special distribution that is
allocable to principal will not exceed the amount that would otherwise be
distributed as principal on the next Distribution Date from amounts then on
deposit in the Trust Account. All special distributions will include interest at
the applicable Trust Interest Rate on the amount of the special distribution
allocable to principal to the date specified in the related Prospectus
Supplement.
All special distributions of principal will be made in the same priority and
manner as distributions in respect of principal on the Securities on a
Distribution Date. Special distributions of principal with respect to Securities
of the same class will be made on a pro rata basis. Notice of any special
distributions will be given by the Master Servicer or Trustee prior to the
special distribution date.
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PRINCIPAL AND INTEREST ON THE SECURITIES
Each class of Securities (other than certain classes of Strip Securities)
may have a different Certificate Interest Rate, which may be a fixed, variable
or adjustable Security Interest Rate. The related Prospectus Supplement will
specify the Security Interest Rate for each class, or in the case of a variable
or adjustable Security Interest Rate, the method for determining the Security
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.
As to each Series of Securities, with respect to each Distribution Date,
interest accruing with respect to each Security (the "Accrued Security
Interest"), other than a Strip Security, will be equal to interest on the
outstanding Security Principal Balance thereof immediately prior to the
Distribution Date, at the applicable Security Interest Rate, for a period of
time corresponding to the intervals between the Distribution Dates for such
Series. As to each Strip Security, the Stripped Interest with respect to any
Distribution Date will equal the amount described in the related Prospectus
Supplement for the related period. Unless otherwise specified in the related
Prospectus Supplement, the Accrued Security Interest on each Security of a
Series will be reduced, in the event of shortfalls in collections of interest
resulting from prepayments of Residential Loans that are not covered by payments
by the Master Servicer out of its servicing fees or by application of prepayment
penalties, with such shortfall allocated among all of the Securities of that
Series in proportion to the respective amounts of Accrued Security Interest that
would have been payable thereon absent such reductions and absent any
delinquencies or losses. See "Yield Considerations" and "Maturity and Prepayment
Considerations". Unless otherwise provided in the related Prospectus Supplement,
neither the Trustee, the Master Servicer nor the Depositor will be obligated to
fund shortfalls in interest collections resulting from prepayments. Unless
otherwise specified in the related Prospectus Supplement, distributions of
Accrued Certificate Interest that would otherwise be payable on any class of
Accrual Securities of a Series will be added to the Security Principal Balance
thereof on each Distribution Date until the Security Principal Balance of the
Securities of all other classes of such Series having a Final Distribution Date
prior to the Final Distribution Date of such class of Accrual Securities has
been reduced to zero, and actual payments of interest on the Accrual Securities
will be made thereafter. See "Final Distribution Date".
Unless the related Prospectus Supplement provides otherwise, each Security
will have a "Security Principal Balance" that, at any time, will equal the
maximum amount that the holder will be entitled to receive in respect of
principal out of the future cash flow on the Trust Fund Assets and other assets
included in the related Trust Fund. With respect to each such Security,
distributions generally will be applied to accrued and currently payable
interest thereon, and thereafter to principal. The outstanding Security
Principal Balance of a Security will be reduced to the extent of distributions
in respect of principal thereon, and in the case of Securities evidencing
interests in a Trust Fund that includes Residential Loans, by the amount of any
Realized Losses, as defined below, allocated thereto.
Unless the related Prospectus Supplement provides otherwise, the initial
aggregate Security Principal Balance of all classes of Securities of a Series
will equal the aggregate outstanding principal balance of the related Trust Fund
Assets as of the applicable Cut-off Date. The initial aggregate Security
Principal Balance of a Series and each class thereof will be specified in the
related Prospectus Supplement. Alternatively, the initial Security Principal
Balance for a Series of Securities may equal the initial aggregate "Cash Flow
Value" of the related Trust Fund Assets as the applicable Cut-off Date. The
aggregate Cash Flow Value of the Trust Fund Assets will be the Security
Principal Balance of the Certificates of such Series which, based on certain
assumptions (including the assumption that no defaults occur on the Trust Fund
Assets), can be supported by either the future scheduled payments on the Trust
Fund Assets (with the interest thereon adjusted to the Net Interest Rate), or
the proceeds of the prepayment of such Trust Fund Assets, together with
reinvestment earnings thereon, if any, at the applicable Assumed Reinvestment
Rate, and amounts available to be withdrawn from any Reserve Fund for such
Series, as further or as otherwise specified in the Prospectus Supplement
relating to a Series of Securities. The "Assumed
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Reinvestment Rate" for a Series of Securities will be the highest rate permitted
by the Rating Agency or Agencies, or a rate insured pursuant to a guaranteed
investment contract or similar arrangement satisfactory to such Rating Agency or
Agencies. If the Assumed Reinvestment Rate is so insured, the Prospectus
Supplement relating to a Series of Securities will set forth the terms of such
arrangement. The aggregate of the initial Cash Flow Values of the Trust Fund
Assets included in the Trust Fund for a Series of Certificates will be at least
equal to the aggregate Security Principal Balance of the Securities of such
Series at the date of initial issuance thereof.
With respect to any Series as to which the initial Security Principal
Balance is calculated on the basis of Cash Flow Values of the Trust Fund Assets,
the amount of principal distributed for such Series on each Distribution Date
will generally be calculated on the basis of (i) the decline in the aggregate
Cash Flow Values of the Trust Fund Assets during the related Due Period,
calculated in the manner prescribed in the related Agreement, minus (ii) with
respect to any Realized Loss incurred during the related Due Period and not
covered by any of the instruments described under "Description of Credit
Support", the portion of the Cash Flow Value of the Trust Fund Assets
corresponding to such Realized Loss; or as otherwise provided in the related
Prospectus Supplement as to any such Series which is a Senior/Subordinate
Series. Unless the related Prospectus Supplement provides otherwise, the "Due
Period" applicable to any Distribution Date will commence on the second day of
the month in which the immediately preceding Distribution Date occurs, or on 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.
Unless otherwise provided in the related Prospectus Supplement,
distributions in respect of principal will be made on each Distribution Date to
the class or classes of Security entitled thereto until the Security Principal
Balance of such class has been reduced to zero. In the case of a Series of
Securities that include two or more classes of Securities, the timing,
sequential order and amount of distributions (including distributions among
multiple classes of Senior Securities or Subordinate Securities) in respect of
principal on each such class shall be as provided in the related Prospectus
Supplement. Distributions in respect of principal of any class of Securities
will be made on a pro rata basis among all of the Securities of such class.
AVAILABLE DISTRIBUTION AMOUNT
Unless otherwise specified in the related Prospectus Supplement, all
distributions on the Certificates of each Series on each Distribution Date will
be made from the following amounts (collectively, the "Available Distribution
Amount"):
(i) the total amount of all cash on deposit in the related Trust Account
as of the corresponding Determination Date exclusive of:
(a) all monthly payments collected but due during a Due Period
subsequent to the applicable Due Period;
(b) all prepayments and any related prepayment penalties, and other
unscheduled recoveries of principal and related payments of interest
thereon, received subsequent to the related Prepayment Period; and
(c) all other amounts in the Trust Account which are payable or
reimbursable to the Depositor, the Master Servicer or the Trustee with
respect to such Distribution Date;
(ii) if so provided in the related Prospectus Supplement, any Advances
made with respect to such Distribution Date;
(iii) if so provided in the related Prospectus Supplement, any payments
in respect of interest shortfalls resulting from principal prepayments;
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(iv) if so provided in the related Prospectus Supplement, all net income
received in connection with the operation of any Residential Property
acquired on behalf of the Securityholders through deed in lieu of
foreclosure or repossession; and
(v) if the related Prospectus Supplement so provides, interest or
reinvestment income on amounts on deposit in the Trust Account (which may
include income provided under a guaranteed investment contract).
On each Distribution Date for a Series of Securities, the Trustee or the
Master Servicer will withdraw or cause to be withdrawn from the Trust Account
the entire Available Distribution Amount and distribute the same or cause the
same to be distributed to the related Securityholders in the manner set forth
herein and in the Prospectus Supplement.
SUBORDINATION
A Senior/Subordinate Series will consist of one or more classes of Senior
Securities and one or more classes of Subordinate Securities, as specified in
the related Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, only the Senior Securities will be offered hereby.
Subordination of the Subordinate Securities of any Series will be effected by
either of the two following methods, or by any other alternative method as may
be described in the related Prospectus Supplement.
SHIFTING INTEREST SUBORDINATION
With respect to any Series of Certificates as to which credit support is
provided by shifting interest subordination, in the event of any Realized Losses
on Residential Loans not in excess of the limitations described below, the
rights of the Subordinate Certificateholders to receive distributions with
respect to the Residential Loans will be subordinate to the rights of the Senior
Certificateholders. With respect to any defaulted Residential Loan that is
finally liquidated, through foreclosure sale, disposition of the related
Residential Property if acquired on behalf of the Certificateholders by deed in
lieu of foreclosure, repossession, or otherwise, the amount of loss realized, if
any (a "Realized Loss"), will equal the portion of the unpaid principal balance
remaining after application of all principal amounts recovered (net of amounts
reimbursable to the Master Servicer for related expenses). With respect to
certain Residential Loans the principal balances of which have been reduced in
connection with bankruptcy proceedings, the amount of such reduction will be
treated as a Realized Loss.
All Realized Losses will be allocated to the Subordinate Certificates of the
related Series, until the Security Principal Balance of the Subordinate
Certificates thereof has been reduced to zero. Any additional Realized Losses
will be allocated to the Senior Certificates (or, if such Series includes more
than one class of Senior Certificates, either on a pro rata basis among all of
the Senior Certificates in proportion to their respective outstanding
Certificate Principal Balances or as otherwise provided in the related
Prospectus Supplement). With respect to certain Realized Losses resulting from
physical damage to Residential Properties which are generally of the same type
as are covered under a special hazard insurance policy ("Special Hazard
Losses"), the amount thereof that may be allocated to the Subordinate
Certificates of the related Series may be limited to an amount (the "Special
Hazard Subordination Amount") specified in the related Prospectus Supplement.
See "Description of Credit Support--Special Hazard Insurance Policies". If so,
any Special Hazard Losses in excess of the Special Hazard Subordination Amount
will be allocated among all outstanding classes of Certificates of the related
Series, either on a pro rata basis in proportion to their outstanding
Certificate Principal Balances, regardless of whether any Subordinate
Certificates remain outstanding, or as otherwise provided in the related
Prospectus Supplement.
Any allocation of a Realized Loss to a Certificate will be made by reducing
the Security Principal Balance thereof as of the Distribution Date following the
Prepayment Period in which such Realized Loss was incurred. If so provided in
the related Prospectus Supplement, in the event of a Realized Loss, the
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Senior Certificateholders may be entitled to receive a distribution in respect
of principal, to be paid from and to the extent of funds otherwise distributable
to the Subordinate Certificateholders, equal to the amount, if any, by which (i)
the then applicable Senior Percentage (as defined below) times the Scheduled
Principal Balance (as defined below) of the related Residential Loan exceeds
(ii) the total amount of the related unscheduled recovery which is allocable to
principal (the "Unrecovered Senior Portion"). Payments to the Senior
Certificateholders in respect of any Unrecovered Senior Portion on any
Distribution Date will only be made with respect to Realized Losses incurred in
connection with Residential Loans that were finally liquidated during the
preceding Prepayment Period and will not be made as to any Special Hazard Losses
in excess of the Special Hazard Subordination Amount, if applicable. As with any
other distribution in respect of principal, any payment to the holders of Senior
Certificates attributable to an Unrecovered Senior Portion will be applied to
reduce the Security Principal Balance thereof. At any given time, the percentage
corresponding to the ratio of the Security Principal Balance of the Senior
Certificates to the Security Principal Balances of all of the Certificates is
the "Senior Percentage", determined in the manner set forth in the related
Prospectus Supplement. As specified in the related Prospectus Supplement, the
"Scheduled Principal Balance" of any Residential Loan as of any date of
determination is equal to the unpaid principal balance thereof as of the date of
determination, reduced by the principal portion of all monthly payments due but
unpaid as of the date of determination.
As set forth above, the rights of holders of the various classes of
Certificates of any Series to receive distributions of principal and interest is
determined by the aggregate Security Principal Balance of each such class. The
Security Principal Balance of any Certificate will be reduced by all amounts
previously distributed on such Certificate in respect of principal, and by any
Realized Losses allocated thereto. However, to the extent so provided in the
related Prospectus Supplement, holders of Senior Certificates may be entitled to
receive a disproportionately larger amount of prepayments received in certain
circumstances, which will have the effect (in the absence of offsetting losses)
of accelerating the amortization of the Senior Certificates and increasing the
respective percentage ownership interest evidenced by the Subordinate
Certificates in the related Trust Fund (with a corresponding decrease in the
Senior Percentage), as well as preserving the availability of the subordination
provided by the Subordinate Certificates. In addition, as set forth above,
Realized Losses will be first allocated to Subordinate Certificates by reduction
of the Security Principal Balance thereof, which will have the effect of
increasing the respective ownership interest evidenced by the Senior
Certificates in the related Trust Fund. If there were no Realized Losses or
prepayments of principal on any of the Residential Loans, the respective rights
of the holders of Certificates of any Series to future distributions would not
change.
CASH FLOW SUBORDINATION
With respect to any Series of Securities as to which credit support is
provided by cash flow subordination, in the event of losses on the Residential
Loans not in excess of the Available Subordination Amount, the rights of the
Subordinate Securityholders to receive distributions of principal and interest
with respect to the Residential Loans will be subordinate to the rights of the
Senior Securityholders. The Available Subordination Amount at any time is equal
to the difference between the then applicable Maximum Subordination Amount and
the "Cumulative Subordination Payments" at such time. At the time of any
determination, Cumulative Subordination Payments equal the aggregate of amounts
paid to the Senior Securityholders that, but for the subordination provisions,
would otherwise have been payable to the Subordinate Securityholders. The
Available Subordination Amount will decrease whenever amounts otherwise payable
to the Subordinate Securityholders are paid to the Senior Securityholders
(including amounts withdrawn from the Reserve Fund and paid to the Senior
Securityholders), and will increase whenever there is distributed to the
Subordinate Securityholders amounts in respect of which subordination payments
have previously been paid to the Senior Securityholders (which will occur only
when subordination payments in respect of delinquencies and certain other
deficiencies have been recovered). The "Maximum Subordination Amount" initially
will equal a fixed percentage amount specified in the related Prospectus
Supplement of the aggregate initial principal balance of the Residential Loans
in the
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related Trust Fund, and will periodically be adjusted in accordance with a
formula specified in the Prospectus Supplement.
The protection afforded to the Senior Securityholders from the subordination
provisions described herein will be effected both by the preferential right of
the Senior Securityholders to receive current distributions from the Trust Fund
(subject to the limitations described herein) and by the establishment and
maintenance of a cash reserve fund (the "Reserve Fund"). The Reserve Fund may be
funded by an initial cash deposit on the date of the initial issuance of the
related Series of Securities (the "Initial Deposit") and by deposits of amounts
otherwise due on the Subordinate Securities to the extent set forth in the
related Prospectus Supplement.
Amounts in the Reserve Fund (other than earnings thereon) will be withdrawn
for distribution to Senior Securityholders as may be necessary to make full
distributions to such holders on a particular Distribution Date, as described
above. If on any Distribution Date, after giving effect to the distributions to
the Senior Securityholders on such date, the amount of the Reserve Fund exceeds
the amount required to be held therein (the "Specified Reserve Fund Balance"),
such excess will be withdrawn and distributed in the manner specified in the
related Prospectus Supplement.
In the event the Reserve Fund is depleted before the Available Subordination
Amount is reduced to zero, the Senior Securityholders will nevertheless have a
preferential right to receive current distributions from the Trust Fund to the
extent of the then Available Subordination Amount. However, under these
circumstances, should current distributions be insufficient, the Senior
Securityholders could suffer shortfalls of amounts due to them. The Senior
Securityholders will bear their proportionate share of any losses realized on
the Trust Fund in excess of the Available Subordination Amount.
Amounts remaining in the Reserve Fund after the Available Subordination
Amount is reduced to zero will no longer be subject to any claims or rights of
the Senior Securityholders of such Series.
Funds in the Reserve Fund may be invested as provided in the related
Agreement in Permitted Instruments that mature according to a schedule set forth
in the related Agreement. The earnings or losses on such investments will be
applied in the manner described in the related Prospectus Supplement.
The time necessary for the Reserve Fund to reach the Specified Reserve Fund
Balance will be affected by the prepayment, foreclosure, and delinquency
experience of the Residential Loans and therefore cannot accurately be
predicted.
SUBORDINATION AND CASH FLOW VALUES
In the event that the Security Principal Balances of the various classes of
Securities comprising a Senior/Subordinate Series are based upon the Cash Flow
Value of the Residential Loans, a shortfall in amounts distributable to Senior
Securityholders on any Distribution Date will occur to the extent that the
Senior Percentage of the decline in the Cash Flow Value of the Residential Loans
during the related Deposit Period exceeds all collections and, if so provided in
the related Prospectus Supplement, Advances in respect of the Residential Loans,
minus Accrued Security Interest on the Security Principal Balances of the Senior
Securities for such Distribution Date. The loss attributable to any liquidated
Residential Loan shall be equal to the excess, if any, of the Cash Flow Value of
such Residential Loan over all net proceeds recovered and allocable to
principal. The "Deposit Period" with respect to any Distribution Date is the
period commencing on the day following the Determination Date immediately
preceding the related Determination Date and ending on the related Determination
Date.
Because the Cash Flow Value of a Residential Loan will never exceed the
outstanding principal balance thereof, prepayments in full and liquidations of
the Residential Loans may result in proceeds attributable to principal in excess
of the corresponding Cash Flow Value decline. Any excess will be applied to
offset losses realized during the related Deposit Period (as such losses are
described in the immediately preceding paragraph) in respect of other liquidated
Residential Loans without affecting the remaining
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subordination, and such excess may, if so provided in the related Prospectus
Supplement, be deposited in a Reserve Fund for future distributions.
ADVANCES
With respect to any Series of Securities evidencing interests in a Trust
Fund that includes Residential Loans, other than a Senior/Subordinate Series,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will be obligated to advance on or before each Distribution Date, from
its own funds, or from amounts held for future distribution in the Trust Account
that are not included in the Available Distribution Amount for such Distribution
Date (any such advance, an "Advance"), in an amount equal to the aggregate of
payments of principal and interest (adjusted to the applicable Net Interest
Rate) that were due during the related Due Period and that were delinquent (and
not advanced by any Sub-Servicer) on the Determination Date. Any amounts held
for future distribution and so used shall be replaced by the Master Servicer on
or before any future Distribution Date to the extent that funds in the Trust
Account on such Distribution Date shall be less than payments to Securityholders
required to be made on such date. Unless otherwise specified in a Prospectus
Supplement relating to a Series of Securities, the obligation of the Master
Servicer to make Advances will be subject to the good faith determination of the
Master Servicer that such advances will be reimbursable from related late
collections, Insurance Proceeds or Liquidation Proceeds. See "Description of
Credit Support". As specified in the related Prospectus Supplement with respect
to any Series of Securities as to which the Trust Fund includes Mortgage
Securities, the Master Servicer's advancing obligations, if any, will be
pursuant to the terms of such Mortgage Securities, as may be supplemented by the
terms of the applicable Pooling and Servicing Agreement.
With respect to a Senior/Subordinate Series in which subordination is
effected through the "shifting interest" method, previously described herein,
unless otherwise provided in the related Prospectus Supplement, the Master
Servicer will make an Advance on each Distribution Date from its own funds or
from funds held in the Trust Account that are not included in the Available
Distribution Amount for such Distribution Date, in an aggregate amount equal to
the lesser of (a) the total of all amounts required to be distributed on each
class of Senior Securities on such Distribution Date that remain after applying
towards such payment the entire Available Distribution Amount, including funds
otherwise payable to the Subordinate Securityholders, and (b) the aggregate of
payments of principal and interest (adjusted to the applicable Net Interest
Rate) that were due during the related Due Period but were delinquent on the
related Determination Date and were not advanced by any Sub-Servicer. With
respect to a Senior/ Subordinated Series in which subordination is effected
through the "cash flow" method previously described herein, unless otherwise
provided in the related Prospectus Supplement, the Master Servicer may be
obligated to make Advances in the manner provided in the preceding paragraph. In
either case, so long as the Security Principal Balance of the Subordinate
Securities in the case of subordination effected through the "shifting interest"
method, or the Available Subordination Amount in the case of subordination
effected through the "cash flow" method, has not been reduced to zero, the
Master Servicer will be obligated to make such Advances regardless of
recoverability from the related Residential Loans. Thereafter, such Advances are
required to be made only to the extent they are deemed by the Master Servicer to
be recoverable from related late collections, Insurance Proceeds, Liquidation
Proceeds, or otherwise, unless otherwise specified in the related Prospectus
Supplement. See "Description of Primary Insurance Coverage" and "Description of
Credit Support".
If Distribution Dates for any Series of Securities occur less frequently
than each month, Advances shall be made on the intervening dates specified in
the related Prospectus Supplement.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to Securityholders, rather than to guarantee or insure
against losses. Unless otherwise specified in a Prospectus Supplement relating
to a Series of Securities, Advances will be reimbursable to the Master Servicer,
without interest, out of related recoveries on the Residential Loans respecting
which such
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amounts were advanced, or, to the extent that the Master Servicer shall
determine that any such Advance previously made will not be ultimately
recoverable from Insurance Proceeds or Liquidation Proceeds (a "Nonrecoverable
Advance"), from any cash available in the Trust Account. If so specified in the
related Prospectus Supplement, the obligations of the Master Servicer to make
Advances may be secured by a cash advance reserve fund or a surety bond.
Information regarding the characteristics of, and the identity of any obligor
of, any such surety bond, will be set forth in the related Prospectus
Supplement.
STATEMENTS TO SECURITYHOLDERS
Unless otherwise provided in the related Prospectus Supplement, on each
Distribution Date, the Master Servicer or the Trustee will forward or cause to
be forwarded to each Securityholder of the related Series and to the Depositor a
statement including the following information (in the case of information
furnished pursuant to (i), (ii) and (iii) below, the amounts shall be expressed
as a dollar amount per minimum denomination Security):
(i) the amount of such distribution, if any, allocable to principal,
separately identifying the aggregate amount of principal prepayments and, if
applicable, related prepayment penalties received during the related
Prepayment Period;
(ii) the amount of such distribution, if any, allocable to interest;
(iii) the amount of administration and servicing compensation received by
or on behalf of the Trustee, Master Servicer and any Sub-Servicer with
respect to such Distribution Date and such other customary information as
the Master Servicer or the Trustee deems necessary or desirable to enable
Securityholders to prepare their tax returns or which a Securityholder
reasonably requests for such purpose;
(iv) if applicable, the aggregate amount of any Advances included in
such distribution and the aggregate amount of any unreimbursed Advances as
of the close of business on such Distribution Date;
(v) the Security Principal Balance of a minimum denomination Security,
and the aggregate Security Principal Balance of all of the Securities of
that Series, after giving effect to the amounts distributed on such
Distribution Date;
(vi) the number and aggregate principal balance of any Residential Loans
in the related Trust Fund (a) delinquent one month, (b) delinquent two or
more months and (c) as to which repossession or foreclosure proceedings have
been commenced;
(vii) with respect to any Residential Property acquired through
foreclosure, deed in lieu of foreclosure or repossession during the
preceding calendar month, the loan number and principal balance of the
related Residential Loan as of the close of business on the Distribution
Date in such month and the date of acquisition thereof;
(viii) the book value of any Residential Property acquired through
foreclosure, deed in lieu of foreclosure or repossession as of the close of
business on the last business day of the calendar month preceding the
Distribution Date;
(ix) the aggregate Scheduled Principal Balance and Stated Principal
Balance of the Mortgage Loans at the close of business on such Distribution
Date;
(x) in the case of Securities with a variable Security Interest Rate,
the Security Interest Rate applicable to such Distribution Date, as
calculated in accordance with the method specified in the Prospectus
Supplement relating to such Series;
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(xi) in the case of Securities with an adjustable Security Interest
Rate, for statements to be distributed in any month in which an adjustment
date occurs, the adjusted Certificate Interest Rate applicable to the next
succeeding Distribution Date;
(xii) as to any Series including one or more classes of Accrual
Securities, the interest accrued on each such class with respect to such
Distribution Date and added to the Security Principal Balance thereof;
(xiii) the amount deposited in the Reserve Fund, if any, on such
Distribution Date;
(xiv) the amount remaining in the Reserve Fund, if any, as of the close
of business on such Distribution Date, after giving effect to distributions
made on such Distribution Date;
(xv) as to any Series that includes credit support, the amount of
remaining coverage of each Insurance Instrument (as defined under
"Collection and Other Servicing Procedures") included therein as of the
close of business on such Distribution Date, or, in the case of a
Senior/Subordinate Series, information as to the remaining amount of
protection against losses afforded to the Senior Securityholders by the
subordination provisions and information regarding any shortfalls in
payments to the Senior Certificateholder which remain outstanding; and
(xvi) with respect to any Series of Securities as to which the Trust Fund
includes Mortgage Securities, certain additional information as required
under the related Pooling and Servicing Agreement or Trust Agreement, as
applicable.
Within a reasonable period of time after the end of each calendar year, the
Master Servicer or the Trustee will furnish or cause to be furnished a report to
every person who was a holder of record of a Security at any time during such
calendar year setting forth the aggregate of amounts reported pursuant to (i),
(ii) and (iii) above for such calendar year or in the event such person was a
holder of record during a portion of such calendar year, for the applicable
portion of such year.
The related Prospectus Supplement may provide that additional information
with respect to a Series of Securities will be included in such statements. In
addition, the Master Servicer or the Trustee shall file with the Internal
Revenue Service and furnish to holders of Securities such statements or
information as may be required by the Code or applicable procedures of the
Internal Revenue Service.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the Prospectus Supplement, if not issued in fully registered
form, each class of Certificates will be registered as book-entry certificates
(the "Book-Entry Securities"). Persons acquiring beneficial ownership interests
in the Securities ("Security Owners") will hold their Securities through the
Depository Trust Company ("DTC") in the United States, or CEDEL or Euroclear (in
Europe) if they are participants ("Participants") of such systems, or indirectly
through organizations which are Participants in such systems. The Book-Entry
Securities will be issued in one or more certificates which equal the aggregate
principal balance of the Securities and will initially be registered in the name
of Cede & Co., the nominee of DTC. CEDEL and Euroclear will hold omnibus
positions on behalf of their Participants through customers' securities accounts
in CEDEL's and Euroclear's names on the books of their respective depositaries
which in turn will hold such positions in customers' securities accounts in the
depositaries' names on the books of DTC. Citibank, N.A. will act as depositary
for CEDEL and the Brussels, Belgium branch of Morgan Guarantee Trust Company of
New York ("Morgan") will act as depositary for Euroclear (in such capacities,
individually the "Relevant Depositary" and collectively the "European
Depositaries"). Except as described below, no Security Owner will be entitled to
receive a physical certificate representing such Security (a "Definitive
Security"). Unless and until Definitive Securities are issued, it is anticipated
that the only "Securityholders" of the Securities will be Cede & Co., as nominee
of DTC. Security Owners are only permitted to exercise their rights indirectly
through Participants and DTC.
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The Security Owner's ownership of a Book-Entry Security will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary (each, a "Financial Intermediary") that maintains the Security
Owner's account for such purpose. In turn, the Financial Intermediary's
ownership of such Book-Entry Security will be recorded on the records of DTC (or
of a participating firm that acts as agent for the Financial Intermediary, whose
interest will in turn be recorded on the records of DTC, if the Security Owner's
Financial Intermediary is not a Participant and on the records of CEDEL or
Euroclear, as appropriate).
Security Owners will receive all distributions of principal of, and interest
on, the Securities from the Trustee through DTC and Participants. While the
Securities are outstanding (except under the circumstances described below),
under the rules, regulations and procedures creating and affecting DTC and its
operations (the "Rules"), DTC is required to make book-entry transfers among
Participants on whose behalf it acts with respect to the Securities and is
required to receive and transmit distributions of principal of, and interest on,
the Securities. Participants and indirect participants with whom Security Owners
have accounts with respect to securities are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Security Owners. Accordingly, although Security Owners will not
possess certificates, the Rules provide a mechanism by which Security Owners
will receive distributions and will be able to transfer their interest.
Security Owners will not receive or be entitled to receive certificates
representing their respective interests in the Securities, except under the
limited circumstances described below. Unless and until Definitive Securities
are issued, Security Owners who are not Participants may transfer ownership of
Securities only through Participants and indirect participants by instructing
such Participants and indirect participants to transfer Securities, by
book-entry transfer, through DTC for the account of the purchasers of such
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of Certificates will be executed through DTC and the accounts of the
respective Participants at DTC will be debited and credited. Similarly, the
Participants and indirect participants will make debits or credits, as the case
may be, on their records on behalf of the selling and purchasing Security
Owners.
Because of time zone differences, credits of Securities received in CEDEL or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such Certificates
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of Certificates by or through a CEDEL Participant (as defined
herein) or Euroclear Participant (as defined herein) to a DTC Participant will
be received with value on the DTC settlement date but will be available in the
relevant CEDEL or Euroclear cash account only as of the business day following
settlement in DTC.
Transfers between Participants will occur in accordance with the Rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons directly or indirectly through DTC,
on the one hand, and directly or indirectly through CEDEL Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
the Rules on behalf of the relevant European international clearing system by
the Relevant Depositary; however, such cross market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving Securities to
DTC, and making or receiving payment in accordance with normal procedures for
same day
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funds settlement applicable to DTC. CEDEL Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
CEDEL is incorporated under the laws of Luxembourg as a professional
depository. CEDEL holds securities for its participating organizations ("CEDEL
Participants") and facilitates the clearance and settlement of securities
transactions between CEDEL Participants through electronic book-entry changes in
accounts of CEDEL Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in CEDEL in any of 28
currencies, including United States dollars. CEDEL provides to its CEDEL
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. CEDEL interfaces with domestic markets in several
countries. As a professional depository, CEDEL is subject to regulation by the
Luxembourg Monetary Institute. CEDEL participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to CEDEL is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a CEDEL Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan, under contract with Euroclear Clearance Systems S.C., a Belgium
cooperative corporation (the "Euroclear Cooperative"). All operations are
conducted by Morgan, and all Euroclear securities clearance accounts and
Euroclear cash accounts are accounts with the Euroclear Operator, not the
Euroclear Cooperative. The Euroclear Cooperative establishes policy for
Euroclear on behalf of Euroclear Participants. Euroclear Participants include
banks (including central banks), securities brokers and dealers and other
professional financial intermediaries. Indirect access to Euroclear is also
available to other firms that clear through or maintain a custodial relationship
with a Euroclear Participant, either directly or indirectly.
Morgan is the Belgian branch of a New York banking corporation which is a
member bank of the Federal Reserve System. As such, it is regulated and examined
by the Board of Governors of the Federal Reserve System and the New York State
Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with Morgan are governed by
the Terms and Conditions Governing Use of Euroclear and the related Operating
Procedures of the Euroclear System and applicable Belgian law (collectively, the
"Terms and Conditions"). The Terms and Conditions govern transfers of securities
and cash within Euroclear, withdrawals of securities and cash from Euroclear,
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Under a book-entry format, beneficial owners of the Book-Entry Securities
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede & Co. Distributions with respect to
Securities held through CEDEL or Euroclear will be credited to the cash accounts
of CEDEL Participants or Euroclear Participants in accordance with the relevant
system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with the relevant United States tax laws and regulations. See "Certain Federal
Income Tax Consequences, Foreign Investors" herein. Because DTC can only act on
behalf of
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Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Securities to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Securities, may
by limited due to the lack of physical certificates for such Book-Entry
Securities. In addition, issuance of the Book-Entry Securities in book-entry
form may reduce the liquidity of such Securities in the secondary market since
certain potential investors may be unwilling to purchase Securities for which
they cannot obtain physical certificates.
Unless otherwise specified in the related Prospectus Supplement, monthly and
annual reports on the Trust Fund will be provided to Cede & Co., as nominee of
DTC, and may be made available by Cede & Co. to beneficial owners upon request,
in accordance with the rules, regulations and procedures creating and affecting
the Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Securities of such beneficial owners are credited.
It is the Depositor's understanding that, unless and until Definitive
Securities are issued, DTC will take any action permitted to be taken by the
holders of the Book-Entry Securities under the applicable Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Securities. CEDEL or the Euroclear Operator, as the case may be, will take any
other action permitted to be taken by a Securityholder under the applicable
Agreement on behalf of a CEDEL Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Securities which conflict with actions taken with respect to other
Securities.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Securities. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Securities and instructions for
re-registration, the Trustee will issue Definitive Securities, and thereafter
the Trustee will recognize the holders of such Definitive Securities as
Securityholders under the applicable Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Securities among Participants of DTC, CEDEL and
Euroclear, they are under no obligation to perform or continue to perform such
procedures and such procedures may be discontinued at any time.
None of the Master Servicer, the Depositor or the Trustee will have any
responsibility for any aspect of the records relating, to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
COLLECTION AND OTHER SERVICING PROCEDURES
RESIDENTIAL LOANS
The Master Servicer, directly or through Sub-Servicers, will make reasonable
efforts to collect all required payments under the Residential Loans and will
follow or cause to be followed such collection procedures as it would follow
with respect to the servicing of residential loans that are comparable to the
Residential Loans and held for its own account, provided such procedures are
consistent with the related Agreement and any insurance policy, bond or other
instrument described under "Description of Primary Insurance Coverage" or
"Description of Credit Support" (any such instrument providing, or insofar as it
provides, coverage as to losses resulting from physical damage, a "Hazard
Insurance Instrument", any such instrument providing, or insofar as it provides,
coverage as to credit or other risks, a "Credit Insurance Instrument", and
collectively, an "Insurance Instrument"). With respect to any Series of
Securities as to
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which the Trust Fund includes Mortgage Securities, the Master Servicer's
servicing and administration obligations, if any, will be pursuant to the terms
of such Mortgage Securities.
In any case in which a Residential Property has been, or is about to be,
conveyed, or in the case of a multifamily Residential Property, encumbered, by
the borrower, the Master Servicer will, to the extent it has knowledge of such
conveyance, encumbrance, or proposed conveyance or encumbrance, exercise or
cause to be exercised its rights to accelerate the maturity of such Residential
Loan under any due-on-sale or due-on-encumbrance clause applicable thereto, but
only if the exercise of such rights is permitted by applicable law and will not
impair or threaten to impair any recovery under any related Insurance
Instrument. If these conditions are not met or if the Master Servicer or
Sub-Servicer reasonably believes it is unable under applicable law to enforce
such due-on-sale or due-on-encumbrance clause, the Master Servicer or
Sub-Servicer will enter into or cause to be entered into an assumption and
modification agreement with the person to whom such property has been conveyed,
encumbered or is proposed to be conveyed or encumbered, pursuant to which such
person becomes liable under the Mortgage Note, Cooperative Note, Home
Improvement Contract or Manufactured Housing Contract and, to the extent
permitted by applicable law, the borrower remains liable thereon and provided
that coverage under any Insurance Instrument with respect to such Residential
Loan is not adversely affected. The Master Servicer is also authorized to enter
into a substitution of liability agreement with such person, pursuant to which
the original borrower is released from liability and such person is substituted
as the borrower and becomes liable under the Mortgage Note, Cooperative Note or
Contract. In connection with any such assumption, the Interest Rate, the amount
of the monthly payment or any other term affecting the amount or timing of
payment on the Residential Loan may not be changed. 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 compensation for
administering of the Trust Fund Assets. See "Certain Legal Aspects of
Residential Loans--Enforceability of Certain Provisions" and "--Prepayment
Charges and Prepayments". The Master Servicer shall notify the Trustee and any
custodian that any such assumption or substitution agreement has been completed.
AGENCY SECURITIES
The Trust Agreement will require the Trustee, if it has not received a
distribution with respect to any Agency Security by the fifth business day after
the date on which such distribution was due and payable pursuant to the terms of
such Agency Security, to request the issuer or guarantor, if any, of such Agency
Security to make such payment as promptly as possible and legally permitted and
to take such legal action against such issuer or guarantor as the Trustee deems
appropriate under the circumstances, including the prosecution of any claims in
connection therewith. The reasonable legal fees and expenses incurred by the
Trustee in connection with the prosecution of any such legal action will be
reimbursable to the Trustee out of the proceeds of any such action and will be
retained by the Trustee prior to the deposit of any remaining proceeds in the
Trust Account pending distribution thereof to Securityholders of the related
Series. In the event that the proceeds of any such legal action may be
insufficient to reimburse the Trustee for its legal fees and expenses, the
Trustee will be entitled to withdraw from the Trust Account an amount equal to
such expenses incurred by it, in which event the Trust Fund may realize a loss
up to the amount so charged.
REALIZATION UPON DEFAULTED RESIDENTIAL LOANS
As servicer of the Residential Loans, the Master Servicer, on behalf of
itself, the Trustee and the Securityholders, will present claims to the insurer
under each Insurance Instrument, to the extent specified in the related
Prospectus Supplement, and will take such reasonable steps as are necessary to
receive payment or to permit recovery thereunder with respect to defaulted
Residential Loans. As set forth above, all collections by or on behalf of the
Master Servicer under any Insurance Instrument, other than amounts to be applied
to the restoration of a Residential Property or released to the borrower, are to
be deposited in the Trust Account for the related Trust Fund, subject to
withdrawal as heretofore described. Unless
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otherwise provided in the Prospectus Supplement relating to a Series of
Securities, the Master Servicer will not receive payment under any letter of
credit included as an Insurance Instrument with respect to a defaulted
Residential Loan unless all Liquidation Proceeds and Insurance Proceeds which it
deems to be finally recoverable have been realized; however, the Master Servicer
will be entitled to reimbursement for any unreimbursed advances and reimbursable
expenses thereunder.
If any property securing a defaulted Residential Loan is damaged and
proceeds, if any, from the related Hazard Insurance Instrument are insufficient
to restore the damaged property to a condition sufficient to permit recovery
under the related Credit Insurance Instrument, if any, 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
Securityholders on liquidation of the Residential Loan 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.
If recovery on a defaulted Residential Loan under any related Credit
Insurance Instrument is not available for the reasons set forth in the preceding
paragraph, or for any other reason, the Master Servicer nevertheless will be
obligated to follow or cause to be followed such normal practices and procedures
as it deems necessary, and appropriate for the type of defaulted Residential
Loan, or advisable to realize upon the defaulted Residential Loan. If the
proceeds of any liquidation of the property securing the defaulted Residential
Loan are less than the outstanding principal balance of the defaulted
Residential Loan (or the Cash Flow Value of such Mortgage Loan in the event that
Security Principal Balances are based upon Cash Flow Values), the amount of any
liens senior thereto plus interest accrued thereon at the Net Interest Rate
plus, the aggregate amount of expenses incurred by the Master Servicer in
connection with such proceedings and which are reimbursable under the related
Agreement, the Trust Fund will realize a loss in the amount of such difference.
If the Master Servicer recovers Insurance Proceeds which, when added to any
related Liquidation Proceeds and after deduction of certain expenses
reimbursable to the Master Servicer, exceed the outstanding principal balance of
the defaulted Residential Loan together with accrued interest at the Net
Interest Rate, the Master Servicer will be entitled to withdraw or cause to be
withdrawn from the Trust Account amounts representing its normal administration
compensation on such Residential Loan. In the event that the Master Servicer has
expended its own funds to restore damaged property and such funds have not been
reimbursed under any Insurance Instrument, it will be entitled to withdraw from
the Trust Account out of related Liquidation Proceeds or Insurance Proceeds an
amount equal to such expenses incurred by it, in which event the Trust Fund may
realize a loss up to the amount so charged. Because Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the Master Servicer,
no such payment or recovery will result in a recovery to the Trust Fund which
exceeds the principal balance of the defaulted Residential Loan together with
accrued interest thereon at the Net Interest Rate. In addition, when property
securing a defaulted Residential Loan can be resold for an amount exceeding the
outstanding principal balance of the related Residential Loan together with
accrued interest and expenses, it may be expected that, if retention of any such
amount is legally permissible, the insurer will exercise its right under any
related pool insurance policy to purchase such property and realize for itself
any excess proceeds. See "Description of Primary Insurance Coverage" and
"Description of Credit Support".
With respect to collateral securing a Cooperative Loan, any prospective
purchaser will generally have to obtain the approval of the board of directors
of the relevant Cooperative before purchasing the shares and acquiring rights
under the proprietary lease or occupancy agreement securing that Cooperative
Loan. See "Certain Legal Aspects of Residential Loans--Foreclosure on
Cooperatives". This approval is usually based on the purchaser's income and net
worth and numerous other factors. The necessity of acquiring such approval could
limit the number of potential purchasers for those shares and otherwise limit
the Master Servicer's ability to sell, and realize the value of, those shares.
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RETAINED INTEREST, ADMINISTRATION COMPENSATION AND PAYMENT OF EXPENSES
The Prospectus Supplement for a Series of Securities will specify whether
there will be any Retained Interest in any of the Trust Fund Assets. If so, the
Retained Interest will be established on a loan-by-loan or security-by-security
basis and will be specified in the related Agreement or in an exhibit to the
related Agreement. A Retained Interest in a Trust Fund Asset represents a
specified portion of the interest payable thereon. The Retained Interest will be
deducted from related payments as received and will not be part of the related
Trust Fund. Unless otherwise provided in the related Prospectus Supplement, any
partial recovery of interest on a Residential Loan, after deduction of all
applicable administration fees, will be allocated between Retained Interest, if
any, and interest at the Net Interest Rate on a pro rata basis.
Unless otherwise specified in the related Prospectus Supplement, the primary
administration compensation of the Master Servicer (or in the case of a Trust
Fund consisting of Agency Securities, the Trustee) with respect to a Series of
Securities will come from the monthly payment to it, with respect to each
interest payment on a Trust Fund Asset, at a rate equal to one-twelfth of the
difference between the Interest Rate and the sum of the Net Interest Rate and
the Retained Interest Rate, if any (the "Administration Fee Rate"), times the
scheduled principal balance of such Trust Fund Asset. Notwithstanding the
foregoing, with respect to a Series of Securities as to which the Trust Fund
includes Mortgage Securities, the compensation payable to the Master Servicer or
Manager for servicing and administering such Mortgage Securities on behalf of
the holders of such Securities may be based on a percentage per annum described
in the related Prospectus Supplement of the outstanding balance of such Mortgage
Securities and may be retained from distributions thereon, if so specified in
the related Prospectus Supplement. Any Sub-Servicer will receive a portion of
the Master Servicer's primary compensation as its sub-servicing compensation.
Since any Retained Interest and the primary compensation of the Master Servicer
(or the Trustee) are percentages of the outstanding principal balance of each
Trust Fund Asset, such amounts will decrease as the Trust Fund Assets amortize.
As additional compensation in connection with a Series of Securities
relating to Residential Loans, the Master Servicer or the Sub-Servicers, if any,
will retain all assumption fees and late payment charges, if any, to the extent
collected from borrowers, and, if so provided in the related Prospectus
Supplement, any prepayment fees collected from the borrowers and any excess
recoveries realized upon liquidation of a defaulted Residential Loan. Unless
otherwise provided in the related Prospectus Supplement, any interest or other
income that may be earned on funds held in the Trust Account pending monthly,
quarterly, semiannual or other periodic distributions, as applicable, or any
Sub-Servicing Account may be paid as additional compensation to the Trustee, the
Master Servicer or the Sub-Servicers, as the case may be.
With respect to a Series of Securities relating to Residential Loans, the
Master Servicer will pay from its administration compensation certain expenses
incurred in connection with its servicing of the Residential Loans, including,
without limitation, amounts payable to any Sub-Servicer, payment of the premiums
and fees associated with any Pool Insurance Policy, special hazard insurance
policy, Bankruptcy Bond or, to the extent specified in the related Prospectus
Supplement, other insurance policy or credit support, payment of the fees and
disbursements of the Trustee and independent accountants, and payment of
expenses incurred in connection with distributions and reports to
Securityholders, and payment of any other expenses as described in the related
Prospectus Supplement.
It is anticipated that the administration compensation will in all cases
exceed such expenses. The Master Servicer is entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Residential Loans, including under certain circumstances reimbursement of
expenditures incurred by it in connection with the restoration of Residential
Properties, such right of reimbursement being prior to the rights of
Securityholders to receive any related Liquidation Proceeds. The Master Servicer
is also entitled to reimbursement from the Trust Account for Advances, if
applicable. With respect to a Series of Securities relating to Agency
Securities, the Trustee shall pay all expenses incurred in administration
thereof, subject to the limitations described in the related Prospectus
Supplement.
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EVIDENCE AS TO COMPLIANCE
Each Agreement will generally provide that on or before a specified date in
each year, beginning with the first such date that occurs at least six months
after the Cut-off Date, the Master Servicer, in the case of a Pooling and
Servicing Agreement, or the Trustee, in the case of a Trust Agreement, at its
expense shall cause a firm of independent public accountants (who may also
render other services to the Master Servicer, the Depositor, the Trustee or any
affiliate thereof) which is a member of the American Institute of Certified
Public Accountants to furnish a statement to the Depositor and, in the case of a
Pooling and Servicing Agreement, to the Trustee, to the effect that such firm as
part of their examination of the financial statements of the Master Servicer or
the Trustee, as the case may be, has performed tests in accordance with
generally accepted accounting principles regarding the records and documents
relating to residential loans or agency securities serviced and that their
examination disclosed no exceptions that, in their opinion, were material. In
rendering such statement, such firm may rely, as to matters relating to direct
servicing of Residential Loans by Sub-Servicers, upon comparable statements for
examinations conducted substantially in compliance with generally accepted
accounting principles in the residential loan servicing industry (rendered
within one year of such statement) of independent public accountants with
respect to the related Sub-Servicer.
Each Agreement will also provide for delivery to the Depositor and, in the
case of a Servicing Agreement, to the Trustee, on or before a specified date in
each year, of an annual statement signed by two officers of the Master Servicer,
in the case of a Pooling and Servicing Agreement, or of the Trustee, in the case
of a Trust Agreement, to the effect that, to the best of such officers'
knowledge, the Master Servicer or the Trustee, as the case may be, has fulfilled
its obligations under such Agreement throughout the preceding year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE DEPOSITOR AND THE TRUSTEE
THE MASTER SERVICER
The Master Servicer under each Servicing Agreement will be identified in the
related Prospectus Supplement. Each such Servicing Agreement will provide that
the Master Servicer may resign from its obligations and duties under the
Servicing Agreement with the prior written approval of the Depositor and the
Trustee and shall resign upon a determination that its duties thereunder are no
longer permissible under applicable law. No such resignation will become
effective until a successor master servicer meeting the eligibility requirements
set forth in the Servicing Agreement has assumed, in writing, the Master
Servicer's obligations and responsibilities under the Pooling and Servicing
Agreement.
Each Servicing Agreement will further provide that neither the Master
Servicer nor any director, officer, employee, or agent of the Master Servicer
shall 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 Servicing Agreement, or for errors in judgment; provided,
however, that neither the Master Servicer nor any such person shall be protected
against any liability for any breach of warranties or representations made in
the Servicing Agreement or against any specific liability imposed on the Master
Servicer by the terms of the Servicing Agreement or by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Master Servicer and any director, officer, employee or agent of
the Master Servicer may rely in good faith on any document of any kind prima
facie properly executed and submitted by any person respecting any matters
arising under the related Servicing Agreement. Each Servicing Agreement will
further provide that the Master Servicer and any director, officer, employee or
agent of the Master Servicer will be entitled to indemnification by the Trust
Fund and will be held harmless against any loss, liability, or expense incurred
in connection with any legal action relating to the Servicing Agreement or the
Securities, the Pool Insurance Policy, the special hazard insurance policy and
the Bankruptcy Bond, if any, other than any loss,
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liability, or expense related to any specific Residential Loan or Residential
Loans (except any such loss, liability, or expense otherwise reimbursable
pursuant to the Servicing Agreement) and any loss, liability, or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Servicing Agreement will
provide that the Master Servicer will be under no obligation to appear in,
prosecute, or defend any legal action which is not incidental to its duties
under the Servicing Agreement and which in its opinion may involve it in any
expense or liability. The Master Servicer may, however, in its discretion
undertake any such action which it may deem necessary or desirable with respect
to the Servicing Agreement and the rights and duties of the parties thereto and
the interests of the Securityholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs and liabilities of the Trust Fund and the Master Servicer will
be entitled to be reimbursed therefor out of the Trust Account, such right of
reimbursement being prior to the rights of Securityholders to receive any amount
in the Trust Account.
Any entity into which the Master Servicer may be merged, consolidated or
converted, or any entity resulting from any merger, consolidation or conversion
to which the Master Servicer is a party, or any entity succeeding to the
business of the Master Servicer, will be the successor of the Master Servicer
under each Servicing Agreement, provided that the successor or surviving entity
meets the qualifications specified in the related Prospectus Supplement.
If the Prospectus Supplement so provides, the Master Servicer's duties may
be terminated upon payment of a termination fee as specified therein, and the
Master Servicer may be replaced with a successor meeting the qualifications
specified in the Prospectus Supplement.
THE DEPOSITOR
Each Servicing Agreement, Owner Trust Agreement and Trust Agreement will
provide that neither the Depositor nor any director, officer, employee, or agent
of the Depositor shall 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 such Agreement, or for errors in judgment;
provided, however, that neither the Depositor nor any such person shall be
protected against any liability for any breach of warranties or representations
made in the Agreement or against any specific liability imposed on the Depositor
by the terms of the Agreement or by reason of willful misfeasance, bad faith or
gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder. The Depositor and any
director, officer, employee or agent of the Depositor may rely in good faith on
any document of any kind prima facie properly executed and submitted by any
person respecting any matters arising under the related Agreement. Each
Agreement will further provide that the Depositor and any director, officer,
employee or agent of the Depositor will be entitled to indemnification by the
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, the Pool Insurance Policy, the special hazard insurance policy and
the Bankruptcy Bond, if any, or the Agency Securities, if any, other than any
loss, liability, or expense related to any specific Residential Loan or
Residential Loans (except any such loss, liability, or expense otherwise
reimbursable pursuant to the Agreement) and any loss, liability, or expense
incurred by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties thereunder. In addition, each Agreement will provide that
the Depositor will be under no any obligation to appear in, prosecute, or defend
any legal action which is not incidental to its duties under such Agreement and
which in its opinion may involve it in any expense or liability. The Depositor
may, however, in its discretion undertake any such action which it may deem
necessary or desirable with respect to the related Agreement and the rights and
duties of the parties thereto and the interests of the Securityholders
thereunder. In such event, the legal expenses and costs of such action and any
liability resulting therefrom will be expenses, costs and liabilities of the
Trust Fund, and the Depositor will be entitled to be reimbursed therefor out of
the Trust Account,
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such right of reimbursement being prior to the rights of Securityholders to
receive any amount in the Trust Account.
Any entity into which the Depositor may be merged, consolidated or
converted, or any entity resulting from any merger, consolidation or conversion
to which the Depositor is a party, or any entity succeeding to the business of
the Depositor will be the successor of the Depositor under each Agreement.
THE TRUSTEES
The Trustee for any Series of Securities (or, Trustees, in the case of an
issuance of Notes) will be a corporation possessing corporate trust powers
having a combined capital and surplus of at least $50,000,000 and subject to
supervision or examination by federal or state authority and identified in the
related Prospectus Supplement. The commercial bank or trust company serving as
Trustee may have normal banking relationships with the Depositor and its
affiliates and the Master Servicer, if any, and its affiliates. For the purpose
of meeting the legal requirements of certain local jurisdictions, the Depositor
and the Trustee acting jointly shall have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement relating to such Series shall be conferred or
imposed upon the Trustee and such separate trustee or co-trustee jointly, or, in
any jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who shall
exercise and perform such rights, powers, duties and obligations solely at the
direction of the Trustee.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee. The Depositor may also remove the
Trustee if the Trustee ceases to be eligible to continue as such under the
Agreement or if the Trustee becomes insolvent, incapable of acting or a receiver
or similar person shall be appointed to take control of its affairs. In such
circumstances, the Depositor will be obligated to appoint a successor Trustee.
The holders of Securities evidencing not less than 51% of the Percentage
Interests of any Series of Securities may at any time remove the Trustee and
appoint a successor Trustee by written instrument in accordance with additional
procedures set forth in the related Agreement. Any resignation or removal of the
Trustee and appointment of a successor Trustee does not become effective until
acceptance of the appointment by a successor Trustee.
DUTIES OF THE TRUSTEES
The Trustee will make no representations as to the validity or sufficiency
of any Agreement, the Securities, any Trust Fund Asset or related document other
than the certificate of authentication, and does not assume any responsibility
for their correctness. The Trustee under any Agreement is not accountable for
the use or application by or on behalf of the Master Servicer of any funds paid
to the Master Servicer in respect of the Securities, the Trust Fund Assets, or
deposited into or withdrawn from the Trust Account or any other account by or on
behalf of the Depositor or the Master Servicer. If no Event of Default (as
hereinafter defined) has occurred and is continuing, the Trustee is required to
perform only those duties specifically required under the related Agreement.
However, upon receipt of the various certificates, reports or other instruments
required to be furnished to it under an Agreement, the Trustee is required to
examine such documents and to determine whether they conform to the requirements
of the Agreement.
Each Agreement will further provide that neither the Trustee nor any
director, officer, employee, or agent of the Trustee shall 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, or for errors in judgment; provided, however, that neither the
Trustee nor any such person shall be protected against specific liability
imposed on the Trustee by the terms of the Agreement or by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. The Trustee and any director, officer, employee or agent of the
Trustee
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may rely in good faith on any document of any kind prima facie properly executed
and submitted by any person respecting any matters arising under the related
Agreement. Each Agreement will further provide that the Trustee and any
director, officer, employee or agent of the Trustee will be entitled to
indemnification by the Trust Fund and will be held harmless against any loss,
liability, or expense incurred in connection with any legal action relating to
the Agreement, the Securities or the Agency Securities, if any other than any
loss, liability, or expense incurred by reason of willful misfeasance, bad faith
or gross negligence in the performance of duties thereunder or by reason of
reckless disregard of obligations and duties thereunder.
DEFICIENCY EVENTS
With respect to each Series of Securities with Distribution Dates occurring
at intervals less frequently than monthly, and with respect to each Series of
Securities including two or more classes with sequential priorities for
distribution of principal, the following provisions will apply unless otherwise
specified in the related Prospectus Supplement.
A deficiency event (a "Deficiency Event") with respect to the Securities of
any such Series is the inability to distribute to holders of one or more classes
of Securities of such Series, in accordance with the terms thereof and the
related Agreement, any distribution of principal or interest thereon when and as
distributable, in each case because of the insufficiency for such purpose of the
funds then held in the related Trust Fund.
Upon the occurrence of a Deficiency Event, the Trustee or Master Servicer,
as set forth in the related Prospectus Supplement, will be required to determine
whether or not the application on a monthly basis (regardless of frequency of
regular Distribution Dates) of all future scheduled payments on the Residential
Loans included in the related Trust Fund and other amounts receivable with
respect to such Trust Fund towards payments on such Securities in accordance
with the priorities as to distributions of principal and interest set forth in
such Securities will be sufficient to make distributions of interest at the
applicable Security Interest Rates and to distribute in full the principal
balance of each such Security on or before the latest Final Distribution Date of
any outstanding Securities of such Series.
The Trustee or Master Servicer will obtain and rely upon an opinion or
report of a firm of independent accountants of recognized national reputation as
to the sufficiency of the amounts receivable with respect to such Trust Fund to
make such distributions on the Securities, which opinion or report will be
conclusive evidence as to such sufficiency. Prior to making any such
determination, distributions on the Securities shall continue to be made in
accordance with their terms.
In the event that the Trustee or Master Servicer makes a positive
determination, the Trustee or Master Servicer will apply all amounts received in
respect of the related Trust Fund (after payment of expenses of the Trust Fund)
to distributions on the Securities of such Series in accordance with their
terms, except that such distributions shall be made monthly and without regard
to the amount of principal that would otherwise be distributable on any
Distribution Date. Under certain circumstances following such positive
determination, the Trustee or Master Servicer may resume making distributions on
such Securities expressly in accordance with their terms.
If the Trustee or Master Servicer is unable to make the positive
determination described above, the Trustee or Master Servicer will apply all
amounts received in respect of the related Trust Fund (after payment of
expenses) to monthly distributions on the Certificates of such Series pro rata,
without regard to the priorities as to distribution of principal set forth in
such Securities, and such Securities will, to the extent permitted by applicable
law, accrue interest at the highest Security Interest Rate borne by any Security
of such Series, or in the event any class of such Series shall have an
adjustable or variable Security Interest Rate, at the weighted average Security
Interest Rate, calculated on the basis of the maximum Security Interest Rate
applicable to the class having the initial Security Principal Balance of the
Securities of that class. In such event, the holders of Securities evidencing a
majority of the Voting Rights may direct
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the Trustee to sell the related Trust Fund, any such direction being irrevocable
and binding upon the holders of all Securities of such Series and upon the
owners of any residual interests in such Trust Fund. In the absence of such a
direction, the Trustee may not sell all or any portion of the Trust Fund.
EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENTS
Events of default ("Events of Default") under each Pooling and Servicing
Agreement will generally consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Certificateholders any required payment
which continues unremedied for five days after the giving of written notice of
such failure 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 Percentage Interests in the related Trust
Fund; (ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the Agreement which
continues unremedied for sixty days after the giving of written notice of such
failure 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 Percentage Interests in the related Trust
Fund; and (iii) 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. A default pursuant to the terms of any Mortgage Securities included
in any Trust Fund will not constitute an Event of Default under the related
Pooling and Servicing Agreement.
So long as an Event of Default under a Pooling and Servicing Agreement
remains unremedied, the Depositor or the Trustee may, and at the direction of
holders of Certificates evidencing not less than 25% of the Percentage Interests
shall, by notice in writing to the Master Servicer terminate all of the rights
and obligations of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Residential Loans and the proceeds thereof. Upon receipt by
the Master Servicer of such written notice, all authority and power of the
Master Servicer under this Pooling and Servicing Agreement shall pass to and be
vested in the Trustee, and the Trustee shall be authorized and empowered to
execute and deliver, on behalf of the Master Servicer, as attorney-in-fact, or
otherwise, any and all documents and other instruments, and to do or accomplish
all other acts or things necessary or appropriate to effect the purposes of such
termination. Upon receipt by the Master Servicer of notice of termination, the
Trustee will succeed to all the responsibilities, duties and liabilities of the
Master Servicer under the Pooling and Servicing Agreement (except that if the
Trustee is prohibited by law from obligating itself to make advances regarding
delinquent Residential Loans, then the Trustee will not be so obligated) and
will be entitled to similar compensation arrangements. In the event that the
Trustee is unwilling, it may, or if it is unable or if the holders of
Certificates evidencing not less than 25% of the Percentage Interests request in
writing, it shall appoint, or petition a court of competent jurisdiction for the
appointment of, a residential loan servicing institution with a net worth of at
least $10,000,000 to act as successor to the Master Servicer under the Pooling
and Servicing Agreement. Pending such appointment, the Trustee is obligated to
act in such capacity. The Trustee and such successor may agree upon the
administration compensation to be paid, which in no event may be greater than
the compensation to the Master Servicer under the Pooling and Servicing
Agreement.
No Certificateholder will have the right under any Pooling and Servicing
Agreement to institute any proceeding with respect thereto unless: (i) such
holder previously has given to the Trustee written notice of an Event of Default
or of a default by the Depositor or the Trustee in the performance of any
obligation under the Pooling and Servicing Agreement, and of the continuance
thereof; (ii) the holders of Certificates evidencing not less than 25% of the
Percentage Interests 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 as it may require against the costs, expenses and
liabilities to be incurred thereby; and (iii) the Trustee for sixty days after
receipt of such notice, request and offer of indemnity has neglected
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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 Pooling
and Servicing 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
Certificates covered by such Pooling and Servicing Agreement, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
SERVICING AGREEMENT
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, a "Servicing Default" under the related Servicing Agreement generally
will include: (i) any failure by the Master Servicer to make a required deposit
to the Security Account or, if the Master Servicer is so required, to distribute
to the holders of any class of Notes or Equity Certificates of such series any
required payment which continues unremedied for five business days (or other
period of time described in the related Prospectus Supplement) after the giving
of written notice of such failure to the Master Servicer by the Trustee or the
Issuer; (ii) any failure by the Master Servicer duly to observe or perform in
any material respect any other of its covenants or agreements in the Servicing
Agreement with respect to such series of Securities which continues unremedied
for 45 days after the giving of written notice of such failure to the Master
Servicer by the Trustee or the Issuer; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings regarding the Master Servicer and certain actions by the Master
Servicer indicating its insolvency or inability to pay its obligations and (iv)
any other Servicing Default as set forth in the Servicing Agreement.
So long as a Servicing Default remains unremedied, either the Depositor or
the Trustee may, by written notification to the Master Servicer and to the
Issuer or the Trustee or Trust Fund, as applicable, terminate all of the rights
and obligations of the Master Servicer under the Servicing Agreement (other than
any right of the Master Servicer as Noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the Mortgage Loans during any period prior to the date of
such termination), whereupon the Trustee will succeed to all responsibilities,
duties and liabilities of the Master Servicer under such Servicing Agreement
(other than the obligation to purchase Mortgage Loans under certain
circumstances) and will be entitled to similar compensation arrangements. In the
event that the Trustee would be obligated to succeed the Master Servicer but is
unwilling so to act, it may appoint (or if it is unable so to act, it shall
appoint) or petition a court of competent jurisdiction for the appointment of an
approved mortgage servicing institution with a net worth of at least $10,000,000
to act as successor to the Master Servicer under the Servicing Agreement (unless
otherwise set forth in the Servicing Agreement). Pending such appointment, the
Trustee is obligated to act in such capacity. The Trustee and such successor may
agree upon the servicing compensation to be paid, which in no event may be
greater than the compensation to the initial Master Servicer under the Servicing
Agreement.
INDENTURE
Unless otherwise provided in the related Prospectus Supplement for a series
of Notes, an Event of Default under the Indenture generally will include: (i) a
default for five days or more (or other period of time described in the related
Prospectus Supplement) in the payment of any principal of or interest on any
Note of such series; (ii) failure to perform any other covenant of the Issuer or
the Trust Fund in the Indenture which continues for a period of thirty days
after notice thereof is given in accordance with the procedures described in the
related Prospectus Supplement; (iii) any representation or warranty made by the
Issuer or the Trust Fund in the Indenture or in any certificate or other writing
delivered pursuant thereto or in connection therewith with respect to or
affecting such series having been incorrect in a material respect as of the time
made, and such breach is not cured within thirty days after notice thereof is
given in accordance with the procedures described in the related Indenture; (iv)
certain events of
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bankruptcy, insolvency, receivership or liquidation of the Issuer or the Trust
Fund; or (v) any other Event of Default provided with respect to Notes of that
series.
If an Event of Default with respect to the Notes of any series at the time
outstanding occurs and is continuing, the 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 related Notes.
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 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 payments 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
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a series following an Event of Default, unless (a) the holders of 100% of the
then aggregate outstanding amount of the Notes of such series consent to such
sale, (b) the proceeds of such sale or liquidation are sufficient to pay in full
the principal of and accrued interest, due and unpaid, on the outstanding Notes
of such series at the date of such sale or (c) the 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 Trustee obtains the consent of the holders of
66 2/3% of the then aggregate outstanding amount of the Notes of such series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default, the Indenture provides that the 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 payments to the Noteholders would be less than would otherwise be the case.
However, the 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.
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 that is unamortized.
No Noteholder or holder of an Equity Certificate generally will have any
right under an Owner Trust Agreement or Indenture to institute any proceeding
with respect to such Agreement unless (a) such holder previously has given to
the Trustee written notice of default and the continuance thereof, (b) the
holders of Notes or Equity Certificates of any class evidencing not less than
25% of the aggregate Percentage Interests constituting such class (i) have made
written request upon the Trustee to institute such proceeding in its own name as
Trustee thereunder and (ii) have offered to the Trustee reasonable indemnity,
(c) the Trustee has neglected or refused to institute any such proceeding for 60
days after receipt of such request and indemnity and (d) no direction
inconsistent with such written request has been given to the Trustee during such
60 day period by the Holders of a majority of the Note Balances of such class.
However, the Trustee will be under no obligation to exercise any of the trusts
or powers vested in it by the applicable Agreement 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 Notes or Equity Certificates covered by such
Agreement, unless such holders have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
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AMENDMENT
Each Agreement may be amended by the Depositor, the Trustee and, in the case
of a Pooling and Servicing Agreement, the Master Servicer, (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein, (iii) to make any other
provisions with respect to matters or questions arising under the Agreement and
(iv) if such amendment, as evidenced by an opinion of counsel, is reasonably
necessary to comply with any requirements imposed by the Code (or any successor
or mandatory statutes) or any temporary or final regulation, revenue ruling,
revenue procedure or other written official announcement or interpretation
relating to federal income tax law or any proposed such action which, if made
effective, would apply retroactively to the Trust Fund at least from the
effective date of such amendment, each without the consent of any of the
Certificateholders of the related Series, provided that such action (other than
an amendment described in (iv) above) will not adversely affect in any material
respect the interests of any holder of the Certificates covered by the
Agreement. Each Agreement may also be amended, subject to certain restrictions
to continue favorable tax treatment of the entity by the Depositor, the Trustee
and, in the case of a Pooling and Servicing Agreement the Master Servicer, with
the consent of the holders of Certificates evidencing not less than 51% of the
Percentage Interests of the related Series for any purpose; provided, however,
that no such amendment may (a) reduce in any manner the amount of, or delay the
timing of, payments received on Trust Fund Assets which are required to be
distributed on any Certificate without the consent of the holder of such
Certificate, or (b) reduce the aforesaid percentage of Percentage Interests
required for the consent to any such amendment without the consent of the
holders of all Certificates of the related Series then outstanding.
With respect to each series of Notes, each related Servicing Agreement or
Indenture may be amended by the parties thereto without the consent of any of
the holders of the Notes covered by such Agreement, to cure any ambiguity, to
correct, modify or supplement any provision therein, or to make any other
provisions with respect to matters or questions arising under the Agreement
which are not inconsistent with the provisions thereof, provided that such
action will not adversely affect in any material respect the interests of any
holder of Notes covered by the Agreement. Each Agreement may also be amended by
the parties thereto with the consent of the holders of Notes evidencing not less
than 66 2/3% of the voting rights, for any purpose; provided, however, that no
such amendment may (i) reduce in any manner the amount of or delay the timing
of, payments received on Trust Fund Assets which are required to be distributed
on any Note without the consent of the holder of such Note, (ii) adversely
affect in any material respect the interests of the holders of any class of
Notes in a manner other than as described in (i), without the consent of the
holders of Notes of such class evidencing not less than 66 2/3% of the aggregate
voting rights of such class or (iii) reduce the aforesaid percentage of voting
rights required for the consent to any such amendment without the consent of the
holders of all Notes covered by such Agreement then outstanding. The voting
rights evidenced by any Note will be the portion of the voting rights of all of
the Notes in the related series allocated in the manner described in the related
Prospectus Supplement.
TERMINATION
The obligations created by the Agreement for each Series of Securities will
terminate upon payment to the Securityholders of that Series of all amounts held
in the Trust Account and required to be paid to the Securityholders pursuant to
such Agreement, following the final payment or other liquidation, including the
disposition of all property acquired upon foreclosure or repossession, of the
last Trust Fund Asset remaining in the related Trust Fund or, 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, whichever occurs first. In no event, however, will the
trust created by the Agreement continue beyond the period 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
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only upon surrender and cancellation of the Securities at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
Any such purchase of assets of the Trust Fund shall be made at a price equal
to (a) in the case of a Series of Securities evidencing interests in a Trust
Fund that includes Residential Loans, the sum of (i) 100% of the unpaid
principal balance of each outstanding Residential Loan (net of any unreimbursed
Advances attributable to principal) as of the date of such purchase plus accrued
interest thereon at the Net Interest Rate to the first day of the month of such
purchase, plus (ii) the appraised value of any property acquired in respect of
any defaulted Residential Loan (but not more than the unpaid principal balance
of that Residential Loan) together with accrued interest at the applicable Net
Interest Rate to the first day of the month of such purchase less the good faith
estimate of the Master Servicer of liquidation expenses to be incurred in
connection with its disposal thereof, and (b) in the case of a Series of
Securities evidencing interests in a Trust Fund that includes Agency Securities
or Mortgage Securities, the sum of 100% of the unpaid principal balance of each
outstanding Trust Fund Asset as of the day of such purchase plus accrued
interest thereon at the Net Interest Rate to the first day of the month of such
purchase, or at such other price as may be specified in the related Prospectus
Supplement. The exercise of the right to purchase the assets of the Trust Fund
as set forth in the preceding paragraph will effect early retirement of the
Securities of that Series.
VOTING RIGHTS
If so provided in the related Agreement, a provider of credit support may be
entitled to direct certain actions of the Master Servicer and the Trustee or to
exercise certain rights of the Master Servicer, the Trustee or the holders of
Securities.
DESCRIPTION OF PRIMARY INSURANCE COVERAGE
If provided in the related Prospectus Supplement, each Residential Loan will
be covered by a Primary Hazard Insurance Policy (as defined herein) and, if
required as described in the related Prospectus Supplement, a Primary Credit
Insurance Policy. In addition, if provided in the related Prospectus Supplement,
a Trust Fund may include any combination of a Pool Insurance Policy, a special
hazard insurance policy, a Bankruptcy Bond or another form of credit support, as
described under "Description of Credit Support".
The following is only a brief description of certain insurance policies and
does not purport to summarize or describe all of the provisions of these
policies. Such insurance is subject to underwriting and approval of individual
Residential Loans by the respective insurers.
PRIMARY CREDIT INSURANCE POLICIES
If provided in the related Prospectus Supplement and as set forth under
"Description of the Certificates--Realization Upon Defaulted Residential Loans",
the Master Servicer will maintain or cause to be maintained in accordance with
the underwriting standards adopted by the Depositor a Primary Credit Insurance
Policy with respect to each Residential Loan (other than Multifamily Loans, FHA
Loans, and VA Loans) for which such insurance is required. While the terms and
conditions of Primary Credit Insurance Policies differ, each Primary Credit
Insurance Policy generally will cover losses up to an amount equal to the excess
of the outstanding principal balance of a defaulted Residential Loan (plus
accrued and unpaid interest thereon and certain approved expenses) over a
specified percentage of the Collateral Value of the related Residential
Property.
The Master Servicer will cause to be paid the premium for each Primary
Credit Insurance Policy on a timely basis. The Master Servicer, or the related
Sub-Servicer, if any, will exercise its best reasonable efforts to be named the
insured or a loss payee under any Primary Credit Insurance Policy. The ability
to assure that insurance proceeds are appropriately applied may be dependent
upon its being so named, or
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upon the extent to which information in this regard is furnished by borrowers.
All amounts collected by the Master Servicer under any such policy will be
deposited in the Trust Account. The Master Servicer will not cancel or refuse to
renew any such Primary Credit Insurance Policy in effect at the time of the
initial issuance of the Securities that is required to be kept in force under
the related Agreement unless the Master Servicer uses its best efforts to obtain
a replacement Primary Credit Insurance Policy for such canceled or nonrenewed
policy maintained with an insurer the claims-paying ability of which is
acceptable to the Rating Agency or Agencies for pass-through certificates having
the same rating as the Securities on their date of issuance.
As conditions precedent to the filing or payment of a claim under a Primary
Credit Insurance Policy, the insured typically will be required, in the event of
default by the borrower, among other things, to: (i) advance or discharge (a)
hazard insurance premiums and (b) as necessary and approved in advance by the
insurer, real estate taxes (if applicable), protection and preservation expenses
and foreclosure and related costs; (ii) in the event of any physical loss or
damage to the Residential Property, have the Residential Property restored to at
least its condition at the effective date of the Primary Credit Insurance Policy
(ordinary wear and tear excepted); and (iii) tender to the insurer good and
merchantable title to, and possession of, the Residential Property.
FHA INSURANCE AND VA GUARANTEES
Residential Loans designated in the related Prospectus Supplement as insured
by the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1934, as amended. Certain Residential Loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated payment
mortgage program and the FHA Title I Program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. The
Prospectus Supplement for Securities of each Series evidencing interests in a
Trust Fund including FHA Loans will set forth additional information regarding
the regulations governing the applicable FHA insurance programs. Except as
otherwise specified in the related Prospectus Supplement, the following
describes FHA insurance programs and regulations as generally in effect with
respect to FHA Loans.
The insurance premiums for FHA Loans are collected by lenders approved by
the Department of Housing and Urban Development ("HUD") or by the Master
Servicer or any Sub-Servicer and are paid to the FHA. The regulations governing
FHA single-family mortgage insurance programs provide that insurance benefits
are payable either upon foreclosure (or other acquisition of possession) and
conveyance of the mortgaged premises to the United States of America or upon
assignment of the defaulted Loan to the United States of America. With respect
to a defaulted FHA-insured Residential Loan, the Master Servicer or any
Sub-Servicer is limited in its ability to initiate foreclosure proceedings. When
it is determined, either by the Master Servicer or any Sub-Servicer or HUD, that
default was caused by circumstances beyond the mortgagor's control, the Master
Servicer or any Sub-Servicer is expected to make an effort to avoid foreclosure
by entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. Such plans may involve the reduction or suspension of
regular mortgage payments for a specified period, with such payments to be made
upon or before the maturity date of the mortgage, or the recasting of payments
due under the mortgage up to or, other than Residential Loans originated under
the Title I Program of the FHA, beyond the maturity date. In addition, when a
default caused by such circumstances is accompanied by certain other criteria,
HUD may provide relief by making payments to the Master Servicer or any
Sub-Servicer in partial or full satisfaction of amounts due under the
Residential Loan (which payments are to be repaid by the mortgagor to HUD) or by
accepting assignment of the loan from the Master Servicer or any Sub-Servicer.
With certain exceptions, at least three full monthly installments must be due
and unpaid under the FHA Loan, and HUD must have rejected any request for relief
from the mortgagor before the Master Servicer or any Sub-Servicer may initiate
foreclosure proceedings.
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HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Currently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debentures interest rate. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer or any Sub-Servicer of each FHA-insured single
family Loan will be obligated to purchase any such debenture issued in
satisfaction of such Residential Loan upon default for an amount equal to the
principal amount of any such debenture.
Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted Residential Loan adjusted to reimburse the
Master Servicer or Sub-Servicer for certain costs and expenses and to deduct
certain amounts received or retained by the Master Servicer or Sub-Servicer
after default. When entitlement to insurance benefits results from foreclosure
(or other acquisition of possession) and conveyance to HUD, the Master Servicer
or Sub-Servicer is compensated for no more than two-thirds of its foreclosure
costs, and is compensated for interest accrued and unpaid prior to such date but
in general only to the extent it was allowed pursuant to a forbearance plan
approved by HUD. When entitlement to insurance benefits results from assignment
of the Residential Loan to HUD, the insurance payment includes full compensation
for interest accrued and unpaid to the assignment date. The insurance payment
itself, upon foreclosure of an FHA-insured Residential Loan, bears interest from
a date 30 days after the borrower's first uncorrected failure to perform any
obligation to make any payment due under the mortgage and, upon assignment, from
the date of assignment to the date of payment of the claim, in each case at the
same interest rate as the applicable HUD debenture interest rate as described
above.
Residential Loans designated in the related Prospectus Supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended (a "VA Guaranty Policy"). The
Serviceman's Readjustment Act of 1944, as amended, permits a veteran (or in
certain instances the spouse of a veteran) to obtain a mortgage loan guarantee
by the VA covering mortgage financing of the purchase of a one- to four-family
dwelling unit at interest rates permitted by the VA. The program has no mortgage
loan limits, requires no down payment from the purchaser and permits the
guarantee of mortgage loans of up to 30 years' duration. However, no Residential
Loan guaranteed by the VA will have an original principal amount greater than
five times the partial VA guarantee for such Residential Loan. The Prospectus
Supplement for Securities of each Series evidencing interests in a Trust Fund
including VA Loans will set forth additional information regarding the
regulations governing the applicable VA insurance programs.
With respect to a defaulted VA guaranteed Residential Loan, the Master
Servicer or Sub-Servicer is, absent exceptional circumstances, authorized to
announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee is submitted after
liquidation of the Residential Property.
The amount payable under the guarantee will be the percentage of the
VA-insured Residential Loan originally guaranteed applied to indebtedness
outstanding as of the applicable date of computation specified in the VA
regulations. Payments under the guarantee will be equal to the unpaid principal
amount of the Residential Loan, interest accrued on the unpaid balance of the
Residential Loan to the appropriate date of computation and limited expenses of
the mortgagee, but in each case only to the extent that such amounts have not
been recovered through liquidation of the Residential Property. The amount
payable under the guarantee may in no event exceed the amount of the original
guarantee.
PRIMARY HAZARD INSURANCE POLICIES
Unless otherwise provided in the Prospectus Supplement in respect of a
Series, the related Servicing Agreement will require the Master Servicer to
cause the borrower on each Residential Loan to maintain a hazard insurance
policy (a "Primary Hazard Insurance Policy") providing for coverage of the
standard
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form of fire insurance policy with extended coverage customary in the state in
which the Residential Property is located. Unless otherwise specified in the
related Prospectus Supplement, such coverage in general will equal the lesser of
the principal balance owing on such Residential Loan and the amount necessary to
fully compensate for any damage or loss to the improvements on the Residential
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 policy. The Master Servicer, or the related Sub-Servicer, if any, will
exercise its best reasonable efforts to be named as an additional insured under
any Primary Hazard Insurance Policy and under any flood insurance policy
referred to below. The ability to assure that hazard insurance proceeds are
appropriately applied may be dependent upon its being so named, or upon the
extent to which information in this regard is furnished by borrowers. All
amounts collected by the Master Servicer under any such policy (except for
amounts to be applied to the restoration or repair of the Residential Property
or released to the borrower 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 Trust Account. Each
Servicing Agreement provides that the Master Servicer may satisfy its obligation
to cause each borrower to maintain such a hazard insurance policy by the Master
Servicer's maintaining a blanket policy insuring against hazard losses on the
Residential Loans. If such blanket policy contains a deductible clause, the
Master Servicer will deposit in the Trust Account all sums which would have been
deposited therein but for such clause. The Master Servicer also is required to
maintain a fidelity bond and errors and omissions policy with respect to its
officers and employees that provides coverage against losses that may be
sustained as a result of an officer's or employee's misappropriation of funds or
errors and omissions in failing to maintain insurance, subject to certain
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions.
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 Residential 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 the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects or domestic animals, theft,
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. When a
Residential Property is located at origination in a federally designated flood
area, each Servicing Agreement requires the Master Servicer to cause the
borrower to acquire and maintain flood insurance in an amount equal in general
to the lesser of (i) the amount necessary to fully compensate for any damage or
loss to the improvements which are part of the Residential Property on a
replacement cost basis and (ii) the maximum amount of insurance available under
the federal flood insurance program, whether or not the area is participating in
the program.
The hazard insurance policies covering the Residential Properties 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 greater 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.
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The Master Servicer will not require that a hazard or flood insurance policy
be maintained for any Cooperative Loan. Generally, the Cooperative is
responsible for maintenance of hazard insurance for the property owned by the
Cooperative, and the tenant-stockholders of that Cooperative do not maintain
individual hazard insurance policies. To the extent, however, that a Cooperative
and the related borrower on a Cooperative Note do not maintain such insurance or
do not maintain adequate coverage or any insurance proceeds are not applied to
the restoration of the damaged property, damage to such borrower's Cooperative
apartment or such Cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
Since the amount of hazard insurance the Master Servicer will cause to be
maintained on the improvements securing the Residential Loans will decline as
the principal balances owing thereon decrease, and since residential properties
have historically appreciated in value over time, the effect of co-insurance in
the event of partial loss may be that hazard insurance proceeds may be
insufficient to restore fully the damaged property. Under the terms of the
Residential Loans, borrowers are required to present claims to insurers under
hazard insurance policies maintained on the Residential Properties. The Master
Servicer, on behalf 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 Residential Properties. 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 borrowers. However, if provided in the related Prospectus
Supplement, to the extent of the amount available to cover hazard losses under
the special hazard insurance policy for a Series, Certificateholders will not
suffer loss by reason of delinquencies or foreclosures following hazard losses,
whether or not subject to co-insurance claims.
DESCRIPTION OF CREDIT SUPPORT
If so provided in the related Prospectus Supplement, the Trust Fund that
includes Residential Loans for a Series of Securities may include credit support
for such Series or for one or more classes of Securities comprising such Series,
which credit support may consist of any combination of the following separate
components, any of which may be limited to a specified percentage of the
aggregate principal balance of the Residential Loans covered thereby or a
specified dollar amount: a Pool Insurance Policy, a special hazard insurance
policy, a Bankruptcy Bond, a reserve fund, or a similar credit support
instrument. Alternatively, if so specified in the Prospectus Supplement for a
Series of Securities, credit support may be provided by subordination of one or
more classes of Securities, in combination with or in lieu of any one or more of
the instruments set forth above. See "Description of the
Securities--Subordination". The amount and type of credit support with respect
to a Series of Securities or with respect to one or more classes of Securities
comprising such Series, and the obligors on such credit support, will be set
forth in the related Prospectus Supplement.
To the extent provided in the related Prospectus Supplement and the
Agreement, credit support may be periodically reduced based on the aggregate
outstanding principal balance of the Residential Loans covered thereby.
POOL INSURANCE POLICIES
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Master Servicer will exercise its best reasonable efforts to
maintain or cause to be maintained a Pool Insurance Policy in full force and
effect, unless coverage thereunder has been exhausted through payment of claims.
The Pool Insurance Policy for any Series of Securities will be issued by the
Pool Insurer named in the related Prospectus Supplement. Each Pool Insurance
Policy will, subject to the limitations described below, provide coverage in an
amount equal to a percentage (specified in the related Prospectus Supplement) of
the aggregate principal balance of the Residential Loans on the Cut-off Date.
The Master Servicer will pay the premiums for each Pool Insurance Policy on a
timely basis unless, as described in the related Prospectus Supplement, the
payment of such fees is otherwise provided. The Master Servicer will present
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or cause to be presented claims under each Pool Insurance Policy to the Pool
Insurer on behalf of itself, the Trustee and the Securityholders. Pool Insurance
Policies, however, are not blanket policies against loss, since claims
thereunder may be made only upon satisfaction of certain conditions, as
described below and, if applicable, in the related Prospectus Supplement.
Pool Insurance Policies do not cover losses arising out of the matters
excluded from coverage under Primary Credit Insurance Policies, FHA Insurance or
VA Guarantees or losses due to a failure to pay or denial of a claim under a
Primary Credit Insurance Policy, FHA Insurance or VA Guarantee, irrespective of
the reason therefor.
Pool Insurance Policies in general provide that no claim may be validly
presented thereunder with respect to a residential loan unless (i) an acceptable
Primary Credit Insurance Policy, in the event that the initial Collateral Value
of the Residential Loan exceeded 80%, has been kept in force until such
Collateral Value is reduced to 80%; (ii) premiums on the Primary Hazard
Insurance Policy have been paid by the insured and real estate taxes (if
applicable) and foreclosure, protection and preservation expenses have been
advanced by or on behalf of the insured, as approved by the Pool Insurer; (iii)
if there has been physical loss or damage to the Residential Property, it has
been restored to its physical condition at the time the Residential Loan became
insured under the Pool Insurance Policy, subject to reasonable wear and tear;
and (iv) the insured has acquired good and merchantable title to the Residential
Property, free and clear of all liens and encumbrances, except permitted
encumbrances, including any right of redemption by or on behalf of the borrower,
and if required by the Pool Insurer, has sold the property with the approval of
the Pool Insurer.
Assuming the satisfaction of these conditions, the Pool Insurer typically
has the option to either (i) acquire the property securing the defaulted
Residential Loan for a payment equal to the principal balance thereof plus
accrued and unpaid interest at the Interest Rate to the date of acquisition and
certain expenses described above advanced by or on behalf of the insured, on
condition that the Pool Insurer must be provided with good and merchantable
title to the Residential Property (unless the property has been conveyed
pursuant to the terms of the applicable Primary Credit Insurance Policy) or (ii)
pay the amount by which the sum of the principal balance of the defaulted
Residential Loan and accrued and unpaid interest at the Interest Rate to the
date of the payment of the claim and such expenses exceeds the proceeds received
from a sale of the Residential Property that the Pool Insurer has approved. In
both (i) and (ii), the amount of payment under a Pool Insurance Policy will be
reduced by the amount of such loss paid under any Primary Credit Insurance
Policy.
Unless earlier directed by the Pool Insurer, a claim under a Pool Insurance
Policy generally must be filed (i) in the case when a Primary Credit Insurance
Policy is in force, within a specified number of days (typically, 60 days) after
the claim for loss has been settled or paid thereunder, or after acquisition by
the insured or a sale of the property approved by the Pool Insurer, whichever is
later, or (ii) in the case when a Primary Credit Insurance Policy is not in
force, within a specified number of days (typically, 60 days) after acquisition
by the insured or a sale of the property approved by the Pool Insurer. A claim
must be paid within a specified period (typically, 30 days) after the claim is
made by the insured.
Unless otherwise specified in the Prospectus Supplement relating to a Series
of Securities, the amount of coverage under each Pool Insurance Policy will be
reduced over the life of the Securities of such Series by the aggregate dollar
amount of claims paid less the aggregate of the net amounts realized by the Pool
Insurer upon disposition of all acquired properties. The amount of claims paid
includes certain expenses incurred by the Master Servicer as well as accrued
interest on delinquent Residential Loans to the date of payment of the claim.
However, Securityholders may experience a shortfall in the amount of interest
distributed in connection with the payment of claims under a Pool Insurance
Policy, because the Pool Insurer is required to remit only unpaid interest
through the date a claim is paid, rather than unpaid interest through the end of
the month in which such claim is paid. In addition, Securityholders may
experience losses in connection with payments made under a Pool Insurance Policy
to the extent that the
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Master Servicer expends funds for the purpose of enabling it to make a claim
under such Pool Insurance Policy. Such expenditures could include amounts
necessary to cover real estate taxes and to repair the related Residential
Property. The Master Servicer will be reimbursed for such expenditures from
amounts that otherwise would be distributed to Securityholders, and such
expenditures will not be covered by payments made under the related Pool
Insurance Policy. See "Certain Legal Aspects of Residential Loans--Foreclosure
on Mortgages" and "--Repossession with respect to Manufactured Housing
Contracts". Accordingly, if aggregate net claims paid under a Pool Insurance
Policy reach the applicable policy limit, coverage under that Pool Insurance
Policy will be exhausted and any further losses will be borne by Securityholders
of the related Series.
In the event that a Pool Insurer ceases to be a Qualified Insurer (such term
being defined to mean a private mortgage guaranty insurance company duly
qualified as such under applicable laws and approved as an insurer by FHLMC,
FNMA, or any successor entity, and having a claims-paying ability acceptable to
the Rating Agency or Agencies), the Master Servicer will use its best reasonable
efforts to obtain or cause to be obtained from another Qualified Insurer a
replacement insurance policy comparable to the Pool Insurance Policy with a
total coverage equal to the then outstanding coverage of such Pool Insurance
Policy; provided, however, that, unless otherwise provided in the related
Prospectus Supplement, if the cost of the replacement policy is greater than the
cost of such Pool Insurance Policy, the coverage of the replacement policy may
be reduced to a level such that its premium rate does not exceed the premium
rate on such Pool Insurance Policy. However, in the event that the Pool Insurer
ceases to be a Qualified Insurer solely because it ceases to be approved as an
insurer by FHLMC, FNMA, or any successor entity, the Master Servicer will
review, or cause to be reviewed, the financial condition of the Pool Insurer
with a view towards determining whether recoveries under the Pool Insurance
Policy are jeopardized for reasons related to the financial condition of the
Pool Insurer. If the Master Servicer determines that recoveries are so
jeopardized, it will exercise its best reasonable efforts to obtain from another
Qualified Insurer a replacement policy as described above, subject to the same
cost limitation.
Because each Pool Insurance Policy will require that the property subject to
a defaulted Residential Loan be restored to its original condition prior to
claiming against the Pool Insurer, such policy will not provide coverage against
hazard losses. As set forth above, the Primary Hazard Insurance Policies
covering the Residential Loans typically exclude from coverage physical damage
resulting from a number of causes and, even when the damage is covered, may
afford recoveries that are significantly less than full replacement cost of such
losses. Further, a special hazard insurance policy will not cover all risks, and
the coverage thereunder will be limited in amount. Certain hazard risks will, as
a result, be uninsured and will therefore be borne by the Securityholders.
SPECIAL HAZARD INSURANCE POLICIES
If so specified in the Prospectus Supplement with respect to a Series of
Securities, the Master Servicer will obtain a special hazard insurance policy
for such Series, issued by the insurer specified in such Prospectus Supplement
(the "Special Hazard Insurer") covering any Special Hazard Amount (as defined
below). The Master Servicer will be obligated to exercise its best reasonable
efforts to keep or cause to be kept a special hazard insurance policy in full
force and effect, unless coverage thereunder has been exhausted through payment
of claims; provided, however, that the Master Servicer will be under no
obligation to maintain such policy in the event that a Pool Insurance Policy
covering such Series is no longer in effect or if otherwise provided in the
related Prospectus Supplement. The Master Servicer will be obligated to pay the
premiums on each special hazard insurance policy on a timely basis unless, as
described in the related Prospectus Supplement, payment of such premiums is
otherwise provided for. Claims under each special hazard insurance policy will
generally be limited to (i) a percentage set forth in the Prospectus Supplement
(expected to be not greater than 1%) of the aggregate principal balance as of
the Cut-off Date of the Residential Loans comprising the related Trust Fund,
(ii) twice the unpaid principal balance as of the Cut-off Date of the largest
Residential Loan in the Trust Fund, or (iii) the
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greatest aggregate principal balance of Residential Loans secured by Residential
Properties located in any one California postal zip code area, whichever is the
greatest (the "Special Hazard Amount").
As more specifically provided in the related Prospectus Supplement, each
special hazard insurance policy will, subject to limitations of the kind
described below, typically protect holders of Securities of the related Series
from (i) loss by reason of damage to Residential Properties caused by certain
hazards (including earthquakes and mudflows) not insured against under the
Primary Hazard Insurance Policies or a flood insurance policy if the property is
in a federally designated flood area and (ii) loss from partial damage caused by
reason of the application of the co-insurance clause contained in the Primary
Hazard Insurance Policies. Special hazard insurance policies will typically not
cover losses such as those occasioned by normal wear and tear, war, civil
insurrection, certain governmental actions, errors in design, faulty workmanship
or materials (except under certain circumstances), nuclear or chemical reaction
or contamination, flood (if the property is located in a federally designated
flood area) and certain other risks.
Subject to the foregoing limitations, each special hazard insurance policy
will typically provide that, when there has been damage to property securing a
defaulted Residential Loan acquired by the insured and to the extent the damage
is not covered by the related Primary Hazard Insurance Policy or flood insurance
policy, the insurer will pay the lesser of (i) the cost of repair to the
property and (ii) upon transfer of the property to the insurer, the unpaid
principal balance of such Residential Loan at the time of acquisition of the
property by foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest at the Interest Rate to the date of claim settlement and
certain expenses incurred by or on behalf of the Master Servicer with respect to
the property. The amount of coverage under the special hazard insurance policy
will be reduced by the sum of (a) the unpaid principal balance plus accrued
interest and certain expenses paid by the insurer, less any net proceeds
realized by the insurer from the sale of the property, plus (b) any amount paid
as the cost of repair of the property.
Typically, restoration of the property with the proceeds described under
clause (i) of the immediately preceding paragraph will satisfy the condition
under a Pool Insurance Policy that the property be restored before a claim
thereunder may be validly presented with respect to the defaulted Residential
Loan secured by such property. The payment described under clause (ii) of the
immediately preceding paragraph will render unnecessary presentation of a claim
in respect of such Residential Loan under a Pool Insurance Policy. Therefore, so
long as the Pool Insurance Policy remains in effect, the payment by the insurer
of either of the above alternative amounts will not affect the total insurance
proceeds paid to Securityholders, but will affect the relative amounts of
coverage remaining under any special hazard insurance policy and any Pool
Insurance Policy.
The sale of a Residential Property must typically be approved by the Special
Hazard Insurer under any special hazard insurance policy and funds received by
the insured in excess of the unpaid principal balance of the Residential Loan
plus interest thereon to the date of sale plus certain expenses incurred by or
on behalf of the Master Servicer with respect to the property (not to exceed the
amount actually paid by the Special Hazard Insurer) must be refunded to such
Special Hazard Insurer and, to that extent, coverage under the special hazard
insurance policy will be restored. If aggregate claim payments under a special
hazard insurance policy reach the policy limit, coverage thereunder will be
exhausted and any further losses will be borne by the Securityholders.
A claim under a special hazard insurance policy generally must be filed
within a specified number of days (typically, 60 days) after the insured has
acquired good and merchantable title to the property, and a claim payment is
generally payable within a specified number of days (typically, 30 days) after a
claim is accepted by the Special Hazard Insurer. Special hazard insurance
policies generally provide that no claim may be paid unless Primary Hazard
Insurance Policy premiums, flood insurance premiums (if the property is located
in a federally designated flood area) and, as approved by the Special Hazard
Insurer, real estate property taxes (if applicable), property protection and
preservation expenses and foreclosure costs have been paid by or on behalf of
the insured, and unless the insured has maintained the Primary Hazard
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Insurance Policy and, if the property is located in a federally designated flood
area, flood insurance, as required by the special hazard insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason (other than the exhaustion of total policy coverage), the Master Servicer
will be obligated to use its best reasonable efforts to obtain or cause to be
obtained from another insurer a replacement policy comparable to such special
hazard insurance policy with a total coverage that is equal to the then existing
coverage of such special hazard insurance policy; provided, however, that,
unless otherwise provided in the related Prospectus Supplement, if the cost of
the replacement policy is greater than the cost of such special hazard insurance
policy, the coverage of the replacement policy may be reduced to a level such
that its premium rate does not exceed the premium rate on such special hazard
insurance policy.
Since each special hazard insurance policy is designed to permit full
recoveries under a Pool Insurance Policy in circumstances in which such
recoveries would otherwise be unavailable because property has been damaged by a
cause not insured against by a Primary Hazard Insurance Policy and thus would
not be restored, each Pooling and Servicing Agreement will provide that, if the
related Pool Insurance Policy shall have lapsed or terminated or been exhausted
through payment of claims, the Master Servicer will be under no further
obligation to maintain the special hazard insurance policy.
BANKRUPTCY BONDS
If so specified in the Prospectus Supplement with respect to a Series of
Securities, the Master Servicer will obtain a Bankruptcy Bond for such Series.
The obligor on, and the amount of coverage of, any such Bankruptcy Bond will be
set forth in the related Prospectus Supplement. The Master Servicer will
exercise its best reasonable efforts to maintain or cause to be maintained the
Bankruptcy Bond in full force and effect, unless coverage thereunder has been
exhausted through payment of claims. The Master Servicer will pay or cause to be
paid the premiums for each Bankruptcy Bond on a timely basis, unless, as
described in the Prospectus Supplement, payment of such premiums is otherwise
provided for. Subject to the limit of the dollar amount of coverage provided,
each Bankruptcy Bond will cover certain losses resulting from an extension of
the maturity of a Residential Loan, or a reduction by the bankruptcy court of
the principal balance of or the Interest Rate on a Residential Loan, and the
unpaid interest on the amount of a principal reduction during the pendency of a
proceeding under the Bankruptcy Code. See "Certain Legal Aspects of Residential
Loans--Foreclosure on Mortgages" and "--Repossession with respect to
Manufactured Housing Contracts".
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a "Reserve Fund") any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Instruments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of a portion of the interest payment on each Mortgage Loan or of all or a
portion of amounts otherwise payable on the Subordinate Securities. Amounts in a
Reserve Fund may be distributed to Securityholders, or applied to reimburse the
Master Servicer for outstanding Advances, or may be used for other purposes, in
the manner and to the extent specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, any such Reserve
Fund will not be deemed to be part of the related Trust Fund.
Amounts deposited in any Reserve Fund for a Series will be invested in
Permitted Instruments by, or at the direction of, the Master Servicer or any
other person named in the related Prospectus Supplement.
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CROSS-SUPPORT PROVISIONS
If so provided in the related Prospectus Supplement, the Residential Loans
for a Series of Securities may be divided into separate groups, each supporting
a separate class or classes of Securities of a Series, and credit support may be
provided by cross-support provisions requiring that distributions be made on
Securities evidencing interests in one group of Mortgage Loans prior to
distributions on Securities evidencing interests in a different group of
Mortgage Loans 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.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related Trust Funds. If applicable, the related
Prospectus Supplement will identify the Trust Funds to which such credit support
relates and the manner of determining the amount of the coverage provided
thereby and of the application of such coverage to the identified Trust Funds.
LETTER OF CREDIT
If so provided in the Prospectus Supplement for a Series of Securities, the
Residential Loans in the related Trust Fund 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, equal to the percentage specified in
the related Prospectus Supplement of the aggregate principal balance of the
Residential Loans on the related Cut-off Date or 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. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder.
INSURANCE POLICIES AND SURETY BONDS
If so provided in the Prospectus Supplement for a Series of Certificates,
one or more classes of Securities of such Series 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.
EXCESS SPREAD
If so provided in the Prospectus Supplement for a Series of Securities, a
portion of the interest payment on each Mortgage Loan may be applied to reduce
the principal balance of one or more classes of Securities to provide or
maintain a cushion against losses on the related Residential Loans.
CERTAIN LEGAL ASPECTS OF RESIDENTIAL LOANS
The following discussion contains general summaries of certain legal aspects
of loans secured by residential properties. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the security
for the Residential Loans is situated. The summaries are qualified in their
entirety by reference to the applicable federal and state laws governing the
Residential Loans. In this regard, the following discussion does not fully
reflect federal regulations with respect to FHA Loans and VA Loans. See "The
Trust Funds--Residential Loans" and "Description of Primary Insurance
Coverage--FHA Insurance and VA Guarantees".
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GENERAL
All of the Residential Loans, except as described below, are loans to
homeowners and all of the Mortgage Loans and Multifamily Loans are evidenced by
notes or bonds and secured by instruments which may be mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the type of
security instrument customary to grant a security interest in real property in
the state in which the Residential Property is located. If specified in the
Prospectus Supplement relating to a Series of Securities, a Trust Fund may also
contain (i) Home Improvement Contracts evidenced by promissory notes, which may
be secured by an interest in the related Mortgaged Property (ii) Cooperative
Loans evidenced by promissory notes secured by security interests in shares
issued by private, cooperative housing corporations and in the related
proprietary leases or occupancy agreements granting exclusive rights to occupy
specific dwelling units in the related buildings or (iii) Manufactured Housing
Contracts evidencing both (a) the obligation of the obligor to repay the loan
evidenced thereby and (b) the grant of a security interest in the related
Manufactured Home or with respect to Land Contracts, a lien on the real estate
(the "Mortgaged Property") to which the related Manufactured Homes are deemed to
be affixed, and including in some cases a security interest in the related
Manufactured Home, to secure repayment of such loan. Unless otherwise specified
in the Prospectus Supplement, any of the foregoing types of encumbrance 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, the knowledge of the parties to such instruments, as well as the
order of recordation or filing of the instrument in the appropriate public
office. Such a lien is generally not prior to the lien for real estate taxes and
assessments and other charges imposed under governmental police powers.
MORTGAGE LOANS
The Mortgage Loans and Multifamily Loans will be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
Mortgage Loan or Multifamily Loan is located. Any of the foregoing types of
encumbrance creates a lien upon or conveys title to the real property encumbered
by such instrument and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. Such a lien is
generally not prior to the lien for real estate taxes and assessments and other
charges imposed under governmental police powers. Priority with respect to these
security instruments depends on their terms and generally on the order of
recording with the applicable state, county or municipal office. There are two
parties to a mortgage, the mortgagor, who is the borrower and usually the owner
of the subject property or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. (In the case of a
land trust, title to the property is held by a land trustee under a land trust
agreement, while the owner is the beneficiary of the land trust; at origination
of a mortgage loan, the borrower executes a separate undertaking to make
payments on the mortgage note.) Although a deed of trust is similar to a
mortgage, a deed of trust normally has three parties, the trustor (similar to a
mortgagor), who is the owner of the subject property and may or may not be the
borrower, the beneficiary (similar to a mortgagee), who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed and
a deed to secure debt are special types of deeds which indicate on their face
that they are granted to secure an underlying debt. By executing a security deed
or 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. The mortgagee's authority under a mortgage and the
trustee's authority under a deed of trust, security deed or deed to secure debt
are governed by the law of the state in which the real property is located, the
express provisions of the mortgage, deed of trust, security deed or deed to
secure debt and, in some cases, with respect to deeds of trust, the directions
of the beneficiary.
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COOPERATIVE LOANS
The Cooperative owns all the real property or some interest therein
sufficient to permit it to own the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes, other governmental impositions and
hazard and liability insurance. If there is a blanket mortgage on the
cooperative apartment building and/or underlying land, as is generally the case,
or an underlying lease of the land, as is the case in some instances, the
Cooperative, as mortgagor, or lessee, as the case may be, is also responsible
for meeting these blanket 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 the
obtaining of capital by the Cooperative. The interests of the occupants under
proprietary leases or occupancy agreements as to which the Cooperative is the
landlord are generally subordinate to the interests of the holder of the 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 its blanket
mortgage, the mortgagee holding the 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 final
maturity. The inability of the Cooperative to refinance such a mortgage and its
consequent inability to make such final payment could lead to foreclosure by the
mortgagee. Similarly, a land lease has an expiration date and the inability of
the Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. In either event,
foreclosure by the holder of the 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 Trust Fund, the
collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements which confer exclusive rights to occupy specific
units. Generally, a tenant-stockholder of a Cooperative must make a monthly
payment to the Cooperative representing such tenant-stockholder's pro rata share
of the Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights is financed through
a Cooperative share loan evidenced by a promissory note and secured by 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 on Cooperative
Shares" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder" (as defined in Section 216(b)(2) of the
Code) of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction
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under Section 216(a) of the Code to the corporation under Sections 163 and 164
of the Code. In order for a corporation to qualify under Section 216(b)(1) of
the Code for its taxable year in which such items are allowable as a deduction
to the corporation, such section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of
Section 216(b)(1) of the Code must be determined on a year-to-year basis.
Consequently, there can be no assurance that cooperatives relating to the
Cooperative Loans will qualify under such section for any particular year. In
the event that such a cooperative fails to qualify for one or more years, the
value of the collateral securing any related Cooperative Loans could be
significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
MANUFACTURED HOUSING CONTRACTS OTHER THAN LAND CONTRACTS
Under the laws of most states, manufactured housing constitutes personal
property and is subject to the motor vehicle registration laws of the state or
other jurisdiction in which the unit is located. In a few states, where
certificates of title are not required for manufactured homes, security
interests are perfected by the filing of a financing statement under Article 9
of the UCC which has been adopted by all states except Louisiana. Such financing
statements are effective for five years and must be renewed at the end of each
five years. The certificate of title laws adopted by the majority of states
provide that ownership of motor vehicles and manufactured housing shall be
evidenced by a certificate of title issued by the motor vehicles department (or
a similar entity) of such state. In the states which have enacted certificate of
title laws, a security interest in a unit of manufactured housing, so long as it
is not attached to land in so permanent a fashion as to become a fixture, is
generally perfected by the recording of such interest on the certificate of
title to the unit in the appropriate motor vehicle registration office or by
delivery of the required documents and payment of a fee to such office,
depending on state law.
The Master Servicer will be required under the related Servicing Agreement
to effect such notation or delivery of the required documents and fees, and to
obtain possession of the certificate of title, as appropriate under the laws of
the state in which any Manufactured Home is registered. In the event the Master
Servicer fails, due to clerical errors or otherwise, 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
Trustee may not have a first priority security interest in the Manufactured Home
securing a Manufactured Housing 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
may, under certain circumstances, 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. Generally, Manufactured Housing
Contracts will contain provisions prohibiting the obligor from permanently
attaching the Manufactured Home to its site. So long as the obligor does not
violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the 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 seller and
transferred to the Depositor.
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The Depositor will assign or cause to be assigned a security interest in the
Manufactured Homes to the Trustee, on behalf of the Securityholders. Unless
otherwise specified in the related Prospectus Supplement, neither the Depositor,
the Master Servicer nor the Trustee will amend the certificates of title to
identify the Trustee, on behalf of the Securityholders, as the new secured party
and, accordingly, the Depositor or the Unaffiliated Seller will continue to be
named as the secured party on the certificates of title relating to the
Manufactured Homes. In most states, such assignment is an effective conveyance
of such security interest without amendment of any lien noted on the related
certificate of title and the new secured party succeeds to the Depositor's
rights as the secured party. However, in some states there exists a risk that,
in the absence of an amendment to the certificate of title, such assignment of
the security interest might not be held effective against creditors of the
Depositor or Unaffiliated Seller.
In the absence of fraud, forgery or permanent affixation of the Manufactured
Home to its site by the Manufactured Home owner, or administrative error by
state recording officials, the notation of the lien of the Depositor on the
certificate of title or delivery of the required documents and fees or, in
states where a security interest in manufactured homes is perfected pursuant to
Article 9 of the UCC, the filing of a financing statement will be sufficient to
protect the Trustee 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 Depositor
has failed to perfect or cause to be perfected the security interest assigned to
the Trust Fund, 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, on
behalf of the Securityholders as the new secured 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 until the
owner re-registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and re-register the Manufactured
Home in such state, and if the Depositor did not take steps to re-perfect its
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
Depositor 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 Depositor would receive notice of
surrender if the security interest in the Manufactured Home is noted on the
certificate of title. Accordingly, the Depositor 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.
Similarly, when an obligor under a manufactured housing conditional sales
contract sells a manufactured home, the obligee must surrender possession of the
certificate of title or it 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 Servicing Agreement, the Master Servicer will be obligated to
take such steps, at the Master Servicer's expense, as are necessary to maintain
perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a Manufactured
Home take priority even over a perfected security interest. The Depositor will
obtain the representation of the Unaffiliated Seller that it has no knowledge of
any such liens with respect to any Manufactured Home securing a Contract.
However, such liens could arise at any time during the term of a Contract. No
notice will be given to the Trustee or Securityholders in the event such a lien
arises.
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FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure may occasionally result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of a judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage in and to the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a mortgagor is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, the court may relieve a mortgagor of a default
and deny the mortgagee foreclosure on proof that the mortgagor's default was
neither willful nor in bad faith and that the mortgagee's action was such as to
establish a waiver, or fraud, bad faith, oppressive or unconscionable conduct as
to warrant a court of equity to refuse affirmative relief to the mortgagee.
Under certain circumstances a court of equity may relieve the mortgagor from an
entirely technical default where such default was not willful.
A foreclosure action or sale pursuant to a power of sale is subject to most
of the delays and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring up to several years to complete. Moreover, a
non-collusive, regularly conducted foreclosure sale or sale pursuant to a power
of sale may be challenged as a fraudulent conveyance, regardless of the parties'
intent, if a court determines that the sale was for less than fair consideration
and such sale occurred while the mortgagor was insolvent and within one year (or
within the state statute of limitations if the trustee in bankruptcy elects to
proceed under state fraudulent conveyance law) of the filing of bankruptcy.
Similarly, a suit against the debtor on the mortgage note may take several years
and, generally, is a remedy alternative to foreclosure, the Mortgagee being
precluded from pursuing both at the same time. In some states, mortgages may
also be foreclosed by advertisement pursuant to a power of sale provided in the
mortgage. Foreclosure of a mortgage by advertisement is essentially similar to
foreclosure of a deed of trust by nonjudicial power of sale.
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property upon default by the borrower under the terms of
the note or deed of trust. In some states, prior to such sale, the trustee must
record a notice of default and send a copy to the borrower-trustor and to any
person who has recorded a request for a copy of a notice of default and notice
of sale. In addition, in some states the trustee must provide notice to any
other individual having an interest in the real property, including any junior
lienholder. In some states, the trustor, borrower, or any person having a junior
encumbrance on the real estate, may, during a reinstatement period, cure the
default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation to the extent allowed by applicable law.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys' fees, which may be recovered by a lender. Certain states
require that a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in a specified manner prior to
the date of the trustee's sale. In addition, some state laws require that a copy
of the notice of sale be posted on the property, recorded and sent to all
parties having an interest in the real property. In certain states, foreclosure
under a deed of trust may also be accomplished by judicial action in the manner
provided for foreclosure of mortgages.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is generally a
public sale. However, because of the difficulty potential
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third party purchasers at the sale might have in determining the exact status of
title and because the physical condition of the property may have deteriorated
during the foreclosure proceedings, it is uncommon for a third party to purchase
the property at the foreclosure sale. In some states, potential buyers may be
further unwilling to purchase a property at a foreclosure sale as a result of
the 1980 decision of the United States Court of Appeals for the Fifth Circuit in
DURRETT V. WASHINGTON NATIONAL INSURANCE COMPANY. The court in Durrett held that
even a non-collusive, regularly conducted foreclosure sale was a fraudulent
transfer under section 67 of the former Bankruptcy Act (section 548 of the
current United States Bankruptcy Code) and, therefore, could be rescinded in
favor of the bankrupt's estate, if (i) the foreclosure sale was held while the
debtor was insolvent and not more than one year prior to the filing of the
bankruptcy petition, and (ii) the price paid for the foreclosed property did not
represent "fair consideration" ("reasonably equivalent value" under the United
States Bankruptcy Code). However, on May 23, 1994, Durrett was effectively
overruled by the United States Supreme Court in BFP V. RESOLUTION TRUST
CORPORATION, AS RECEIVER FOR IMPERIAL FEDERAL SAVINGS AND LOAN ASSOCIATION, ET
AL., in which the Court held that "'reasonably equivalent value', for foreclosed
property, is the price in face received at the foreclosure sale, so long as all
the requirements of the State's foreclosure law have been complied with". For
these reasons, it is common for the lender to purchase the property from the
trustee or referee for an amount equal to the principal amount of the mortgage
or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure. Generally, state law controls the amount of foreclosure costs and
expenses, including attorneys' and trustee's fees, which may be recovered by a
lender. In some states there is a statutory minimum purchase price which the
lender may offer for the property. Thereafter, subject to the right of the
borrower in some states to remain in possession during the redemption period,
the lender will assume ownership of the mortgaged property and, therefore, the
burdens of ownership, including obtaining casualty insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. Depending upon market conditions, the ultimate proceeds of
the sale of the property may not equal the lender's investment in the property.
Any loss may be reduced by the receipt of any mortgage insurance proceeds, if
any.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Mortgage Loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims 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 or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In
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other cases, courts have limited the right of a lender to foreclose if the
default under the mortgage instrument is not monetary, such as the borrower's
failure to adequately maintain the property or the borrower's execution of a
second mortgage or deed of trust affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under deeds of trust or mortgages receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that the sale by a trustee
under a deed of trust, or under a mortgage having a power of sale, does not
involve sufficient state action to afford constitutional protections to the
borrower.
In addition, 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 may 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 possibly 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 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 secured lender on residential properties. In
the event that title to a Residential Property was acquired on behalf of
Securityholders and cleanup costs were incurred in respect of the Residential
Property, such Securityholders might realize a loss if such costs were required
to be paid by the related Trust Fund.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative shares and proprietary lease or occupancy agreement owned by
the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the Cooperative's
Certificate of Incorporation and By-laws, as well as in the proprietary lease or
occupancy agreement, and may be canceled by the Cooperative, even while pledged,
for failure by the tenant-stockholder to pay rent or other obligations or
charges owed by such tenant-stockholder, including mechanics' liens against the
Cooperative apartment building incurred by such tenant-stockholder. Commonly,
rent and other obligations and charges arising under a proprietary lease or
occupancy agreement which are owed to the cooperative are made liens upon the
shares to which the proprietary lease or occupancy agreement relates. In
addition, the proprietary lease or occupancy agreement generally permits the
Cooperative to terminate such lease or agreement in the event the
tenant-stockholder 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, together with any lender protection
provisions contained in the proprietary lease, establishes the rights and
obligations of both parties in the event of a default by the tenant-stockholder
on its obligations under the proprietary lease or occupancy agreement. A default
by the tenant-stockholder under the proprietary lease or occupancy agreement
will usually constitute a default under the security agreement between the
lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with notice of and an opportunity
to cure the default. The recognition agreement typically provides that if the
proprietary lease or occupancy agreement is terminated, the Cooperative will
recognize the lender's lien against proceeds from a sale of the Cooperative
apartment, subject, however, to the Cooperative's right to sums due under such
proprietary lease or occupancy agreement or which have become liens on the
shares relating to the proprietary lease or occupancy agreement. The total
amount owed to the Cooperative by the tenant-stockholder, which the lender
generally cannot restrict and does not monitor, could reduce the value of the
collateral below the outstanding principal balance of the Cooperative Loan and
accrued and unpaid interest thereon.
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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.
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 sale has been
conducted in a "commercially reasonable" manner will depend on the facts in each
case. In determining commercial reasonableness, a court will look to the notice
given the debtor and the method, manner, time, place and terms of the sale.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains unpaid, the tenant-stockholder is
generally responsible for the deficiency. See "Anti-Deficiency Legislation and
Other Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS THAT ARE NOT LAND
CONTRACTS
Repossession of manufactured housing is governed by state law. A few states
have enacted legislation which requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC (except
in Louisiana). Article 9 of the UCC provides the statutory framework for the
repossession of manufactured housing. While the UCC as adopted by the various
states may vary in certain small particulars, the general repossession procedure
established by the UCC is as follows:
(i) Except in those states where the debtor must receive notice of his
right to cure his default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of the
manufactured home. In cases where the debtor objects or raises a defense to
repossession, a court order must be obtained from the appropriate state
court, and the manufactured home must then be repossessed in accordance with
that order. Whether the method employed is self-help, voluntary repossession
or judicial repossession, the repossession can be accomplished either by an
actual physical removal of the manufactured home to a secure location for
refurbishment and resale or by removing the occupants and their belongings
from the manufactured home and maintaining possession of the manufactured
home on the location where the occupants were residing. Various factors may
affect whether the manufactured home is physically removed or left on
location, such as the nature and term of the lease of the site on which it
is located and the condition of the unit. In many cases, leaving the
manufactured home on location is preferable, in the event that the home is
already set up, because the expenses of retaking and redelivery will be
saved. However, in those cases where the home is left on location, expenses
for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the subsequent
disposition of the manufactured home can commence. The disposition may be by
public or private sale provided the method, manner, time, place and terms of
the sale are commercially reasonable. The UCC and
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consumer protection laws in most states place restrictions on repossession
sales, including requiring prior notice to the debtor.
(iii) Sale proceeds are to be applied first to repossession expenses
(expenses incurred in retaking, storage, preparing for sale to include
refurbishing costs and selling) and then to satisfaction of the
indebtedness. While some states impose prohibitions or limitations on
deficiency judgments if the net proceeds from resale do not cover the full
amount of the indebtedness, the remainder may be sought from the debtor in
the form of a deficiency judgment in those states which do not prohibit or
limit such judgments. The deficiency judgment is a personal judgment against
the debtor for the shortfall. Occasionally, after resale of a manufactured
home and payment of all expenses and indebtedness, there is a surplus of
funds. In that case, the UCC requires the party suing for the deficiency
judgment to remit the surplus to the debtor. Because the defaulting owner of
a manufactured home generally has very little capital or income available
following repossession, a deficiency judgment may not be sought in many
cases or, if obtained, will be settled at a significant discount in light of
the defaulting owner's strained financial condition.
LOUISIANA LAW
Any contract secured by a manufactured home located in Louisiana will be
governed by Louisiana law rather than Article 9 of the UCC. Louisiana laws
provide similar mechanisms for perfection and enforcement of security interests
in manufactured housing used as collateral for an installment sale contract or
installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently affixed
to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
RIGHTS OF REDEMPTION WITH RESPECT TO RESIDENTIAL PROPERTIES
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 foreclosing mortgagee, from 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 duly summoned to the foreclosure
action in order for their equity of redemption to be barred.
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The equity of redemption which is a non-statutory right that must be
exercised prior to foreclosure sale, should be distinguished from statutory
rights of redemption. In some states, after sale pursuant to a deed of trust or
foreclosure of a mortgage, the trustor or mortgagor and certain foreclosed
junior lienors are given a statutory period in which to redeem the property from
the foreclosure sale. In some states, redemption may occur only upon payment of
the foreclosure sales price, accrued interest and expenses of foreclosure. In
other states, redemption may be authorized if the former borrower pays only a
portion of the sums due. The effect of a statutory right of redemption is to
diminish the ability of the lender to sell the foreclosed property. The exercise
of a right of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In some states, there is no right to redeem property after a
trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given debtors prior to
repossession, many states do require delivery of a notice of default and of the
debtor's right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of the home
so that the owner may redeem at or before resale. In addition, the sale must
comply with the requirements of the UCC.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security; however
in some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial sale to the
excess of the outstanding debt over the fair market value of the property at the
time of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against virtually all actions against the debtor,
including the enforcement of remedies of collection of a debt and, often, no
interest or principal payments are made during the bankruptcy proceeding.
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 or Chapter 11 rehabilitative plan to cure a
monetary default with respect to 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
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in state court (provided no sale of the property 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.
Except with respect to arrearages and the right to judicial sale, with rare
exception courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured only by property of the debtor that is the
debtor's principal residence may not be modified if the borrower has filed a
petition under Chapter 11 or 13. Courts may be able to modify the terms of a
cooperative loan, but no case law exists on this point. In all cases, the
secured creditor is entitled to the amount of its debt plus post-petition
interest, attorney's fees and costs to the extent the value of the security
equals or exceeds the debt.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted Mortgage Loan. 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. The laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate 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.
FOR COOPERATIVE 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.
JUNIOR MORTGAGES
Some of the Mortgage Loans, Multifamily Loans and Home Improvement Contracts
may be secured by junior mortgages or deeds of trust, which are junior to senior
mortgages or deeds of trust which are not part of the Trust Fund. The rights of
the Certificateholders as the holders of a junior deed of trust or a junior
mortgage are subordinate in lien priority and in payment priority 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, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust
will govern generally. 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 senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
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CONSUMER PROTECTION LAWS WITH RESPECT TO HOME IMPROVEMENT AND MANUFACTURED
HOUSING CONTRACTS
Numerous Federal and state consumer protection laws impose substantial
requirements upon creditors involved in consumer finance. These laws include the
Federal Truth-in-Lending Act, Regulation "Z", the Equal Credit Opportunity Act,
Regulation "B", the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the contract.
Contracts often contain provisions obligating the obligor to pay late
charges if payments are not timely made. In certain cases, Federal and state law
may specifically limit the amount of late charges that may be collected. Unless
otherwise provided in the related Prospectus Supplement, under an Agreement,
late charges will be retained by the Master Servicer as additional servicing
compensation, and any inability to collect these amounts will not affect
payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided secured
parties under the UCC and related laws violate the due process protections
provided under the 14th Amendment to the Constitution of the United States. For
the most part, courts have upheld the notice provisions of the UCC and related
laws as reasonable or have found that the repossession and resale by the
creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called "Holder-in-Due-Course" Rule of the Federal Trade Commission
(the "FTC Rule") has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Manufactured Housing Contracts and certain of the Home
Improvement Contracts in the Trust Fund will be subject to the requirements of
the FTC Rule. Accordingly, the Trustee, as holder of Manufactured Housing
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Unaffiliated Seller had or should have had knowledge of such
claim or defense, the Master Servicer will have the right to require the
Unaffiliated Seller to repurchase the Contract because of a breach of its
Unaffiliated Seller's representation and warranty that no claims or defenses
exist which would affect the obligor's obligation to make the required payments
under the Contract. The Unaffiliated Seller would then have the right to require
the originating dealer to repurchase the Contract from it and might also have
the right to recover from the dealer for any losses suffered by the Unaffiliated
Seller with respect to which the dealer would have been primarily liable to the
obligor.
OTHER LIMITATIONS
In addition to the laws limiting or prohibiting deficiency judgments,
numerous other statutory provisions, including Federal bankruptcy laws and
related state laws, may interfere with or affect the ability of a lender to
realize upon collateral and/or enforce a deficiency judgment. For example, in a
proceeding under the Federal bankruptcy law, a court may prevent a lender from
repossessing a home. In the case of an individual eligible for relief in a
proceeding under Chapter 11 of the Federal bankruptcy law, as part of the
rehabilitation plan under Chapter 11, a court may reduce the amount of the
secured indebtedness to the market value of the home at the time of bankruptcy
(as determined by the court), leaving the party providing financing as a general
unsecured creditor for the remainder of the indebtedness. A bankruptcy
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court may also reduce the payments due under a contract or change the rate of
interest and time of repayment of the indebtedness pursuant to a Chapter 11 plan
of reorganization. Generally, any plan filed in a proceeding under Chapter 13 of
the Federal bankruptcy law must provide for the full payment of the claim of the
lender without changing the terms of payment if the borrower elects to retain
the property, the property is the borrower's principal residence and the
property is the lender's only collateral.
ENFORCEABILITY OF CERTAIN PROVISIONS
Unless the Prospectus Supplement indicates otherwise, all the related
Residential Loans, except for FHA Loans and VA Loans, contain due-on-sale
clauses. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers, or conveys the property without the prior
consent of the mortgagee. The enforceability of these clauses has been impaired
in various ways in certain states by statute or decisional law. The ability of
mortgage lenders and their assignees and transferees to enforce due-on-sale
clauses was addressed by the Garn-St. Germain Depository Institutions Act of
1982 (the "Garn-St. Germain Act") which was enacted on October 15, 1982. This
legislation, subject to certain exceptions, preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale clauses.
The Garn-St. Germain Act does "encourage" lenders to permit assumptions of loans
at the original rate of interest or at some other rate less than the average of
the original rate and the market rate.
MORTGAGE LOANS
Exempted from this preemption pursuant to the Garn-St. Germain Act are
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made or assumed during the period beginning
on the date a state, by statute or final appellate court decision having
statewide effect, prohibited the exercise of due-on-sale clauses and ending on
October 15, 1982 ("Window Period Loans"). However, this exception applies only
to transfers of property underlying Window Period Loans occurring between
October 15, 1982 and October 15, 1985 and does not restrict enforcement of a
due-on-sale clause in connection with current transfers or property underlying
Window Period Loans unless the property underlying such Window Period Loan is
located in one of the five "window period states" identified below. Due-on-sale
clauses contained in Mortgage Loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
due-on-sale clauses. Mortgage Loans originated by such institutions are
therefore not deemed to be Window Period Loans.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "window period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of a total
of eleven "window period states", three states (Michigan, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans. The Garn-St. Germain Act also sets forth
eight specific instances in which a mortgage lender covered by the Garn-St.
Germain Act (including federal savings and loan associations and federal savings
banks) may not exercise a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. These include intra-family
transfers, certain transfers by operation of law, leases of fewer than three
years and the creation of a junior encumbrance. The Garn-St. Germain Act also
grants the Director of the Office of Thrift Supervision (successor to the
Federal Home Loan Bank Board) authority to prescribe by regulation further
instances in which a due-on-sale clause may not be enforced upon the transfer of
the property. To date no
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such regulations have been issued. 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 Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a Series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting the
sale or transfer of the related manufactured homes without the consent of the
obligee on the contract and permitting the acceleration of the maturity of such
contracts by the obligee on the contract upon any such sale or transfer that is
not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of "due-
on-sale" clauses, subject to applicable state law. 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 as to 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 Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a "due-on-sale" clause in
respect of certain Manufactured Homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, conventional mortgage loans, Cooperative Loans, Home Improvement
and Manufactured Housing Contracts, residential owner occupied FHA loans and VA
loans may be prepaid in full or in part without penalty. Generally, multifamily
residential loans, including multifamily FHA Loans, may contain provisions
limiting prepayments on such loans, including prohibiting prepayment for a
specified period after origination, prohibiting partial prepayments entirely or
requiring the payment of a prepayment penalty upon prepayment in full or in
part.
The laws of certain states may render prepayment fees unenforceable after a
Mortgage Loan has been outstanding for a certain number of years, or may limit
the amount of any prepayment fee to a specified percentage of the original
principal amount of the Mortgage Loan, to a specified percentage of the
outstanding principal balance of a Mortgage Loan, or to a fixed number of
months' interest on the prepaid amount. In certain states, prepayment fees
payable on default or other involuntary acceleration of a Residential Loan may
not be enforceable against the related mortgagor or obligor. Some state
statutory provisions may also treat certain prepayment fees as usurious if in
excess of statutory limits.
SUBORDINATE FINANCING
When the 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 an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior
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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 statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. In addition, even where Title
V is not so rejected, any state is authorized by the law to adopt a provision
limiting discount points or other charges on mortgage loans covered by Title V.
Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
The Depositor has been advised by counsel that a court interpreting Title V
would hold that mortgage loans related to a Series 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
Loans originated after the date of such state action will be eligible for
inclusion in a Trust Fund if such Mortgage Loans bear interest or provide for
discount points or charges in excess of permitted levels. No Mortgage Loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
Title V also provides that, subject to the following conditions, state usury
limitations shall not apply to any loan which is secured by a first lien on
certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM 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 complied
with applicable law. These difficulties were simplified 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,
(i) state-chartered banks may originate "alternative mortgage instruments"
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) state-chartered credit unions may originate
alternative mortgage instruments in accordance with regulations promulgated by
the National
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Credit Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and (iii) all other non-federally chartered
housing creditors, including without limitation state-chartered savings and loan
associations, 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
further 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.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans which were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans which were originated by a state-chartered lender after
the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans which were originated by federally chartered lenders or which were
originated by state-chartered lenders prior to enactment of a state law or
constitutional provision rejecting the applicability of Title VIII were
originated in compliance with all applicable federal regulations.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ("CERCLA"), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the "Conservation Act") amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that "merely having the capacity to influence, or
unexercised right to control" operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
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Other federal and state laws in certain circumstances may impose liability
on a secured party which takes a deed-in-lieu of foreclosure, purchases a
mortgaged property at a foreclosure sale, or operates a mortgaged property on
which contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an "Environmental Lien"). All subsequent
liens on such property generally are subordinated to such an Environmental Lien
and, in some states, even prior recorded liens are subordinated to Environmental
Liens. In the latter states, the security interest of the Trustee in a related
parcel of real property that is subject to such an Environmental Lien could be
adversely affected.
Unless otherwise provided in the related Prospectus Supplement, the Mortgage
Loan Seller with respect to any Mortgage Loan included in a Trust Fund for a
particular Series of Securities will represent as to the material compliance of
the related Residential Property with applicable environmental laws and
regulations as of the date of transfer and assignment of such Mortgage Loan to
the Trustee. In addition, unless otherwise provided in the related Prospectus
Supplement, the related Agreement will provide that the Master Servicer and any
Special Servicer acting on behalf of the Trustee, may not acquire title to a
Residential Property or take over its operation unless the Master Servicer (or
Special Servicer) has previously determined, based on a report prepared by a
person who regularly conducts environmental audits, that (a) there are no
circumstances present at the Residential Property relating to substances for
which some action relating to their investigation or clean-up could be required
or that it would be in the best economic interest of the Trust Fund to take such
actions with respect to the affected Residential Property and (b) that the
Residential Property is in compliance with applicable environmental laws or that
it would be in the best economic interest of the Trust Fund to take the actions
necessary to comply with such laws. See "Description of the
Certificates--Realization Upon Defaulted Mortgage Loans".
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the
Unaffiliated Seller, and the Securityholders would suffer a loss only to the
extent that (i) the Unaffiliated Seller breached its obligation to repurchase
the Contract in the event an obligor is successful in asserting such a claim,
and (ii) the Unaffiliated Seller, the Depositor or the Trustee were unsuccessful
in asserting any claim of contribution or subrogation on behalf of the
Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
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SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Generally, 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 or Contract (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 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 the Master 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 Securities, 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 Securities. In addition, the
Relief Act imposes limitations that would impair the ability of the Master
Servicer to foreclose on an affected Mortgage Loan or enforce rights under a
Contract 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 or Contract goes into default, there may be
delays and losses occasioned thereby.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Securities offered hereunder. This discussion is directed solely to
Securityholders that hold the Securities as capital assets within the meaning of
Section 1221 of the Internal Revenue Code of 1986 (the "Code") and it does not
purport to discuss all federal income tax consequences that may be applicable to
particular categories of investors, some of which (such as banks, insurance
companies and foreign investors) may be subject to special rules. Further, the
authorities on which this discussion, and the opinion referred to below, are
based are subject to change or differing interpretations, which could apply
retroactively. Taxpayers and preparers of tax returns (including those filed by
any REMIC or other issuer) should be aware that under applicable Treasury
regulations a provider of advice on specific issues of law is not considered an
income tax return preparer unless the advice (i) is given with respect to events
that have occurred at the time the advice is rendered and is not given with
respect to the consequences of contemplated actions, and (ii) is directly
relevant to the determination of an entry on a tax return. Accordingly,
taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership and
disposition of the Securities. See "State and Other Tax Consequences".
Securityholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of three general types: (i)
certificates ("Grantor Trust Certificates") representing interests in a Trust
Fund ("Grantor Trust Fund") which the Master Servicer will covenant not to elect
to have treated as a real estate mortgage investment conduit ("REMIC"), (ii)
notes representing indebtedness of a trust fund and (iii) certificates ("REMIC
Certificates") representing interests in a Trust Fund, or a portion thereof,
which the Master Servicer will covenant to elect to have treated as a REMIC
under Sections 860A through 860G (the "REMIC Provisions") of the Code. The
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Prospectus Supplement for each Series of Certificates will indicate whether a
REMIC election (or elections) will be made for the related Trust Fund and, if
such an election is to be made, will identify all "regular interests" and
"residual interests" in the REMIC. For purposes of this tax discussion,
references to a "Securityholder" or a "holder" are to the beneficial owner of a
Security.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each Series of Grantor Trust Certificates, Thacher Proffitt
& Wood, counsel to the Depositor, will deliver its opinion to the effect that
assuming compliance with all provisions of the related Pooling and Servicing
Agreement, the related Grantor Trust Fund will be classified as a grantor trust
under subpart E, part I of subchapter J of the Code and not as a partnership or
an association taxable as a corporation. Accordingly, each holder of a Grantor
Trust Certificate generally will be treated as the owner of an interest in the
Residential Loans included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Residential Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate". A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Residential Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate". A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Residential Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Cooperative Loans, Manufactured Homes and
Buydown Loans, counsel to the Depositor will deliver an opinion that, in
general, Grantor Trust Fractional Interest Certificates will represent interests
in (i) "loans...secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code; (ii) "obligation[s] (including any
participation or certificate of beneficial ownership therein) which ... [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code; and (iii) "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code. In addition, counsel to the
Depositor will deliver an opinion that interest on Grantor Trust Fractional
Interest Certificates will to the same extent be considered "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code.
Some Grantor Trust Fractional Interest Certificates may evidence interests
in loans secured by Cooperative Shares. Such Grantor Trust Fractional Interest
Certificates will represent "real estate assets" within the meaning of Section
856(c)(5)(A) of the Code and "obligation[s](including any participation or
certificate of beneficial ownership therein) which ... [are]principally secured
by an interest in real property" within the meaning of Section 860G(a)(3)(A) of
the Code. In addition, interest on such Grantor Trust
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Fractional Interest Certificates will to the same extent be considered "interest
on obligations secured by mortgages on real property or on interests in real
property" within the meaning of Section 856(c)(3)(B) of the Code. The Internal
Revenue Service (the "IRS") has issued a private letter ruling to the effect
that Grantor Trust Fractional Interest Certificates which evidence interests in
loans secured by Cooperative Shares would be treated as representing an
ownership interest in qualifying assets under Section 7701(a)(19)(C) of the
Code. Certificateholders should consult their tax advisors concerning this
question. If Grantor Trust Certificates evidence interests in loans secured by
Cooperative Shares, that fact will be disclosed in the applicable Prospectus
Supplement.
Some Grantor Trust Fractional Interest Certificates may evidence interests
in loans secured by Manufactured Homes. Whether such Certificates will be
treated as representing an ownership interest in qualifying assets under
Sections 7701(a)(19)(C), 856(c)(5)(A), 856(c)(3)(B) and 860G(a)(3)(A) of the
Code will depend upon the particular characteristics of such Manufactured Homes.
The proper characterization of such Certificates will be disclosed in the
applicable Prospectus Supplement.
The assets constituting certain Grantor Trust Funds may include Buydown
Loans. The characterization of an 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 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. No directly applicable precedents exist with respect to the federal
income tax treatment or the characterization of investments in Buydown Loans.
Accordingly, holders of Grantor Trust Certificates should consult their own tax
advisors with respect to the characterization of investments in Grantor Trust
Certificates representing an interest in a Grantor Trust Fund that includes
Buydown Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Residential Loans that are "loans...secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C)(v) of
the Code and "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which ... [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular Series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Residential Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Residential Loans. Under
Section 67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to
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the extent that the aggregate of such holder's miscellaneous itemized deductions
exceeds two percent of such holder's adjusted gross income. In addition, Section
68 of the Code provides that the amount of itemized deductions otherwise
allowable for an individual whose adjusted gross income exceeds a specified
amount will be reduced by the lesser of (i) 3% of the excess of the individual's
adjusted gross income over such amount or (ii) 80% of the amount of itemized
deductions otherwise allowable for the taxable year. The amount of additional
taxable income reportable by holders of Grantor Trust Fractional Interest
Certificates who are subject to the limitations of either Section 67 or Section
68 of the Code may be substantial. Further, Certificateholders (other than
corporations) subject to the alternative minimum tax may not deduct
miscellaneous itemized deductions in determining such holder's alternative
minimum taxable income. Although it is not entirely clear, it appears that in
transactions in which multiple classes of Grantor Trust Certificates (including
Grantor Trust Strip Certificates) are issued, such fees and expenses should be
allocated among the classes of Grantor Trust Certificates using a method that
recognizes that each such class benefits from the related services. In the
absence of statutory or administrative clarification as to the method to be
used, it currently is intended to base information returns or reports to the IRS
and Certificateholders on a method that allocates such expenses among classes of
Grantor Trust Certificates with respect to each period based on the
distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any Series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust Fractional
Interest Certificates may be subject to those rules if (i) a class of Grantor
Trust Strip Certificates is issued as part of the same Series of Certificates or
(ii) the Depositor or any of its affiliates retains (for its own account or for
purposes of resale) a right to receive a specified portion of the interest
payable on the Residential Loans. Further, the IRS has ruled that an
unreasonably high servicing fee retained by a seller or servicer will be treated
as a retained ownership interest in mortgages that constitutes a stripped
coupon. For purposes of determining what constitutes reasonable servicing fees
for various types of mortgages the IRS has established certain "safe harbors".
The servicing fees paid with respect to the Residential Loans for certain Series
of Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The related
Prospectus Supplement will include information regarding servicing fees paid to
the Master Servicer, any Sub-Servicer or their respective affiliates necessary
to determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding DE MINIMIS market discount. See
"--Taxation of Grantor Trust Fractional Interest Certificates--Market Discount".
Under the stripped bond rules, the holder of a Grantor Trust Fractional Interest
Certificate (whether a cash or accrual method taxpayer) will be required to
report interest income from its Grantor Trust Fractional Interest Certificate
for each month in an amount equal to the income that accrues on such Certificate
in that month calculated under a constant yield method, in accordance with the
rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Grantor Trust Fractional Interest Certificate. The stated
redemption price of a Grantor Trust Fractional Interest Certificate will be the
sum of all payments to be made on such Certificate, other than "qualified stated
interest", if any, as well as such Certificate's share of reasonable servicing
fees and other expenses. See "-- Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply" for a definition of
"qualified stated interest". In general, the amount of such income that accrues
in any month would equal the product of such holder's adjusted basis in such
Grantor Trust Fractional
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Interest Certificate at the beginning of such month (see "--Sales of Grantor
Trust Certificates") and the yield of such Grantor Trust Fractional Interest
Certificate to such holder. Such yield would be computed at the rate (compounded
based on the regular interval between payment dates) that, if used to discount
the holder's share of future payments on the Residential Loans, would cause the
present value of those future payments to equal the price at which the holder
purchased such Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Residential Loans will not
include any payments made in respect of any ownership interest in the
Residential Loans retained by the Depositor, the Master Servicer, any
Sub-Servicer or their respective affiliates, but will include such
Certificateholder's share of any reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on these rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Grantor Trust Fractional Interest Certificate by that holder.
Certificateholders are advised to consult their own tax advisors concerning
reporting original issue discount in general and, in particular, whether a
prepayment assumption should be used in reporting original issue discount with
respect to Grantor Trust Fractional Interest Certificates.
In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the Residential Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Residential Loan prepays
in full, the holder of a Grantor Trust Fractional Interest Certificate acquired
at a discount or a premium generally will recognize ordinary income or loss
equal to the difference between the portion of the prepaid principal amount of
the Residential Loan that is allocable to such Certificate and the portion of
the adjusted basis of such Certificate that is allocable to such
Certificateholder's interest in the Residential Loan. If a prepayment assumption
is used, it appears that no separate item of income or loss should be recognized
upon a prepayment. Instead, a prepayment should be treated as a partial payment
of the stated redemption price of the Grantor Trust Fractional Interest
Certificate and accounted for under a method similar to that described for
taking account of original issue discount on REMIC Regular Certificates. See
"REMICs-- Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount". It is unclear whether any other adjustments would be required to
reflect differences between an assumed prepayment rate and the actual rate of
prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor nor the Master Servicer will make any representation that
the Residential Loans will in fact prepay at a rate conforming to such
Prepayment Assumption or any other rate and Certificateholders should bear in
mind that the use of a representative initial offering price will
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mean that such information returns or reports, even if otherwise accepted as
accurate by the IRS, will in any event be accurate only as to the initial
Certificateholders of each Series who bought at that price.
Under Treasury regulation Section 1.1286-1T, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a DE MINIMIS amount of original issue discount)
or (ii) the annual stated rate of interest payable on the original bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Residential Loans, the related Prospectus Supplement will disclose that
fact. If the original issue discount or market discount on a Grantor Trust
Fractional Interest Certificate determined under the stripped bond rules is less
than 0.25% of the stated redemption price multiplied by the weighted average
maturity of the Residential Loans, then such original issue discount or market
discount will be considered to be DE MINIMIS. Original issue discount or market
discount of only a DE MINIMIS amount will be included in income in the same
manner as DE MINIMIS original issue and market discount described in "--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond
Rules Do Not Apply" and "-- Market Discount" below.
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Residential Loans in accordance with such Certificateholder's normal method
of accounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Residential Loans issued with original issue discount.
The original issue discount, if any, on the Residential Loans will equal the
difference between the stated redemption price of such Residential Loans and
their issue price. Under the OID Regulations, the stated redemption price is
equal to the total of all payments to be made on such Residential Loan other
than "qualified stated interest". "Qualified stated interest" includes interest
that is unconditionally payable at least annually at a single fixed rate, or at
a "qualified floating rate", an "objective rate", a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate", or a combination of "qualified floating rates" that does not
operate in a manner that accelerates or defers interest payments on such
Residential Loan. In general, the issue price of a Residential Loan will be the
amount received by the borrower from the lender under the terms of the
Residential Loan, less any "points" paid by the borrower, and the stated
redemption price of a Residential Loan will equal its principal amount, unless
the Residential Loan provides for an initial below-market rate of interest or
the acceleration or the deferral of interest payments.
In the case of Residential Loans bearing adjustable or variable interest
rates, the related Prospectus Supplement will describe the manner in which such
rules will be applied with respect to those Residential Loans in preparing
information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be DE MINIMIS if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Residential Loan. For this purpose, the
weighted average maturity of the Residential Loan will be computed as the sum of
the amounts determined, as to each payment included in the stated redemption
price of such Residential Loan, by multiplying (i) the number of complete years
(rounding down for partial years) from the issue date until such payment is
expected to be made by (ii) a fraction, the numerator of which is the amount of
the payment and the
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denominator of which is the stated redemption price of the Residential Loan.
Under the OID Regulations, original issue discount of only a DE MINIMIS amount
(other than DE MINIMIS original issue discount attributable to a so-called
"teaser" rate or initial interest holiday) will be included in income as each
payment of stated principal is made, based on the product of the total amount of
such DE MINIMIS original issue discount and a fraction, the numerator of which
is the amount of each such payment and the denominator of which is the
outstanding stated principal amount of the Residential Loan. The OID Regulations
also permit a Certificateholder to elect to accrue DE MINIMIS original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of Grantor Trust Fractional Interest Certificates--Market Discount"
below.
If original issue discount is in excess of a DE MINIMIS amount, all original
issue discount with respect to a Residential Loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption for certificates backed
by whole mortgage loans not subject to the stripped bond rules. However, Section
1272(a)(6) of the Code may require that a prepayment assumption be made in
computing yield with respect to all mortgage-backed securities.
Certificateholders are advised to consult their own tax advisors concerning
whether a prepayment assumption should be used in reporting original issue
discount with respect to Grantor Trust Fractional Interest Certificates.
Certificateholders should refer to the related Prospectus Supplement with
respect to each Series to determine whether and in what manner the original
issue discount rules will apply to Residential Loans in such Series.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Grantor Trust Fractional Interest Certificate at a cost less than
such Certificate's allocable portion of the aggregate remaining stated
redemption price of the Residential Loans held in the related Trust Fund will
also be required to include in gross income such Certificate's daily portions of
any original issue discount with respect to such Residential Loans. However,
each such daily portion will be reduced, if the cost of such Grantor Trust
Fractional Interest Certificate to such purchaser is in excess of such
Certificate's allocable portion of the aggregate "adjusted issue prices" of the
Residential Loans held in the related Trust Fund, approximately in proportion to
the ratio such excess bears to such Certificate's allocable portion of the
aggregate original issue discount remaining to be accrued on such Residential
Loans. The adjusted issue price of a Residential Loan on any given day equals
the sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Residential Loan at the beginning of the
accrual period that includes such day and (ii) the daily portions of original
issue discount for all days during such accrual period prior to such day. The
adjusted issue price of a Residential Loan at the beginning of any accrual
period will equal the issue price of such Residential Loan, increased by the
aggregate amount of original issue discount with respect to such Residential
Loan that accrued in prior accrual periods, and reduced by the amount of any
payments made on such Residential Loan in prior accrual periods of amounts
included in its stated redemption price.
The Trustee will provide to any holder of a Grantor Trust Fractional
Interest Certificate such information as such holder may reasonably request from
time to time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Certificates. See "--Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificate, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Residential Loan is considered to have been purchased at a "market discount",
that is, in the case of a Residential Loan issued without original issue
discount, at a purchase price less than its remaining stated redemption price
(as defined above), or in the case of a Residential Loan issued
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with original issue discount, at a purchase price less than its adjusted issue
price (as defined above). If market discount is in excess of a DE MINIMIS amount
(as described below), the holder generally will be required to include in income
in each month the amount of such discount that has accrued (under the rules
described in the next paragraph) through such month that has not previously been
included in income, but limited, in the case of the portion of such discount
that is allocable to any Residential Loan, to the payment of stated redemption
price on such Residential Loan that is received by (or, in the case of accrual
basis Certificateholders, due to) the Trust Fund in that month. A
Certificateholder may elect to include market discount in income currently as it
accrues (under a constant yield method based on the yield of the Certificate to
such holder) 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 during or after the first taxable year to
which such election applies. In addition, the OID Regulations would 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 made with respect to
a Residential Loan with market discount, the Certificateholder would be deemed
to have made an election to include currently market discount in income with
respect to all other debt instruments having market discount that such
Certificateholder acquires during the taxable year of the election and
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate acquired at a
premium would 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 "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Premium" below. Each of these elections to accrue
interest, discount and premium with respect to a Certificate on a constant yield
method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing 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 Department, certain
rules described in the Conference Committee Report (the "Committee Report")
accompanying the Tax Reform Act of 1986 will apply. Under those rules, in each
accrual period market discount on the Residential Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Residential Loan issued without original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
stated interest paid in the accrual period bears to the total stated interest
remaining to be paid on the Residential Loan as of the beginning of the accrual
period, or (iii) in the case of a Residential Loan issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining at the beginning of the accrual
period. The prepayment assumption, if any, used in calculating the accrual of
original issue discount is to be used in calculating the accrual of market
discount. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a Residential Loan purchased at a
discount in the secondary market.
Because the Residential Loans will provide for periodic payments of stated
redemption price, such discount may be required to be included in income at a
rate that is not significantly slower than the rate at which such discount would
be included in income if it were original issue discount.
Market discount with respect to Residential Loans generally will be
considered to be DE MINIMIS if it is less than 0.25% of the stated redemption
price of the Residential Loans multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption used,
if any. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. If market
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discount is treated as DE MINIMIS under the foregoing rule, it appears that
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Do Not Apply".
Further, under the rules described in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Market Discount" below, any discount that is not original
issue discount and exceeds a DE MINIMIS amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues.
PREMIUM
If a Certificateholder is treated as acquiring the underlying Residential
Loans at a premium, that is, at a price in excess of their remaining stated
redemption price, such Certificateholder may elect under Section 171 of the Code
to amortize using a constant yield method the portion of such premium allocable
to Residential Loans originated after September 27, 1985. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. However, premium allocable to Residential
Loans originated before September 28, 1985 or to Residential Loans for which an
amortization election is not made, should be allocated among the payments of
stated redemption price on the Residential Loan and be allowed as a deduction as
such payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Residential Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Residential Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Residential Loan. If a prepayment
assumption is used to amortize such premium, it appears that such a loss would
be unavailable. Instead, if a prepayment assumption is used, a prepayment should
be treated as a partial payment of the stated redemption price of the Grantor
Trust Fractional Interest Certificate and accounted for under a method similar
to that described for taking account of original issue discount on REMIC Regular
Certificates. See "REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount". It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply", no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the Grantor Trust Strip Certificates. Accordingly, holders of
Grantor Trust Strip Certificates should consult their own tax advisors
concerning the method to be used in reporting income or loss with respect to
such Certificates.
The OID Regulations do not apply to "stripped coupons", although they
provide general guidance as to how the original issue discount sections of the
Code will be applied. In addition, the discussion below is subject to the
discussion under "--Possible Application of Proposed Contingent Payment Rules"
and assumes that the holder of a Grantor Trust Strip Certificate will not own
any Grantor Trust Fractional Interest Certificates.
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Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Grantor
Trust Strip Certificate at the beginning of such month and the yield of such
Grantor Trust Strip Certificate to such holder. Such yield would be calculated
based on the price paid for that Grantor Trust Strip Certificate by its holder
and the payments remaining to be made thereon at the time of the purchase, plus
an allocable portion of the servicing fees and expenses to be paid with respect
to the Residential Loans. See "--Taxation of Owners of Grantor Trust Fractional
Interest Certificates--If Stripped Bond Rules Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor the Master Servicer will make
any representation that the Residential Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate and
Certificateholders should bear in mind that the use of a representative initial
offering price will mean that such information returns or reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders of each Series who bought at that price.
Prospective purchasers of the Grantor Trust Strip Certificates should consult
their own tax advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a
Residential Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete Residential Loans) and the
effect of prepayments is taken into account in computing yield with respect to
such Grantor Trust Strip Certificate, it appears that no loss may be available
as a result of any particular prepayment unless prepayments occur at a rate
faster than the Prepayment Assumption. However, if a Grantor Trust Strip
Certificate is treated as an interest in discrete Residential Loans, or if the
Prepayment Assumption is not used, then when a Residential Loan is prepaid, the
holder of a Grantor Trust Strip Certificate should be able to recognize a loss
equal to the portion of the adjusted issue price of the Grantor Trust Strip
Certificate that is allocable to such Residential Loan.
POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Residential Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
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respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt instruments
but it appears that Grantor Trust Strip Certificates, due to their similarity to
other mortgage-backed securities (such as REMIC regular interests) that are
expressly excepted from the application of such proposed regulations, may be
excepted from such proposed regulations. Like the OID Regulations, such proposed
regulations do not specifically address securities, such as the Grantor Trust
Strip Certificates, that are subject to the stripped bond rules of Section 1286
of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply the "noncontingent bond method". Under the "noncontingent bond method",
the issuer of a Grantor Trust Strip Certificate determines a projected payment
schedule on which interest will accrue. Holders of Grantor Trust Strip
Certificates are bound by the issuer's projected payment schedule. The projected
payment schedule consists of all noncontingent payments and a projected amount
of each contingent payment based on the projected yield (as described below) of
the Grantor Trust Strip Certificate.
The projected amount of each payment is determined so that the projected
payment schedule reflects the projected yield. The projected amount of each
payment must reasonably reflect the relative expected values of the payments to
be received by the holders of a Grantor Trust Strip Certificate. The projected
yield referred to above is a reasonable rate, not less than the "applicable
Federal rate" that, as of the issue date, reflects general market conditions,
the credit quality of the issuer, and the terms and conditions of the Mortgage
Loans. The holder of a Grantor Trust Strip Certificate would be required to
include as interest income in each month the adjusted issue price of the Grantor
Trust Strip Certificate at the beginning of the period multiplied by the
projected yield.
Assuming that a prepayment assumption were used, if the proposed regulations
or their principles were applied to Grantor Trust Strip Certificates, the amount
of income reported with respect thereto would be substantially similar to that
described under "Taxation of Owners of Grantor Trust Strip Certificates".
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss, equal to the difference between the amount realized on the
sale of a Grantor Trust Certificate, recognized on the sale or exchange of a
Grantor Trust Certificate by an investor who holds such Grantor Trust
Certificate as a capital asset, will be capital gain or loss, except to the
extent of accrued and unrecognized market discount, which will be treated as
ordinary income, and (in the case of banks and other financial institutions)
except as provided under Section 582(c) of the Code. The adjusted basis of a
Grantor Trust Certificate generally will equal its cost, increased by any income
reported by the seller (including original issue discount and market discount
income) and reduced (but not below zero) by any previously reported losses, any
amortized premium and by any distributions with respect to such Grantor Trust
Certificate. The Code as of the date of this Prospectus provides a top marginal
tax rate of 39.6% for individuals and lower rates for long-term capital gains of
individuals depending on the holding period of the property and the tax bracket
of the individual. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
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generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction. Finally, a
taxpayer may elect to have net capital gain taxed at ordinary income rates
rather than capital gains rates in order to include such net capital gain in
total net investment income for that taxable year, for purposes of the rule that
limits the deduction of interest on indebtedness incurred to purchase or carry
property held for investment to a taxpayer's net investment income.
GRANTOR TRUST REPORTING
Unless otherwise provided in the related Prospectus Supplement, the Trustee
will furnish to each holder of a Grantor Trust Certificate with each
distribution a statement setting forth the amount of such distribution allocable
to principal on the underlying Residential Loans and to interest thereon at the
related Pass-Through Rate. In addition, within a reasonable time after the end
of each calendar year, the Master Servicer or Trustee will furnish to each
Certificateholder during such year who was such a holder at any time during such
year, information regarding the amount of servicing compensation received by the
Master Servicer and Sub-Servicer (if any) and such other such customary factual
information as the Master Servicer or the Trustee, as the case may be, deems
necessary or desirable to enable holders of Grantor Trust Certificates to
prepare their tax returns and will furnish comparable information to the IRS as
and when required by law to do so. Because the rules for accruing discount and
amortizing premium with respect to the Grantor Trust Certificates are uncertain
in various respects, there is no assurance the IRS will agree with the Master
Servicer's or Trustee's information reports of such items of income and expense.
Moreover, such information reports, even if otherwise accepted as accurate by
the IRS, will in any event be accurate only as to the initial Certificateholders
that bought their Certificates at the representative initial offering price used
in preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "--REMICS--Backup Withholding with
Respect to REMIC Certificates" will also apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"REMICS--Foreign Investors in REMIC Certificates--REMIC Regular Certificates"
applies to Grantor Trust Certificates except that Grantor Trust Certificates
will, unless otherwise disclosed in the related Prospectus Supplement, be
eligible for exemption from United States withholding tax, subject to the
conditions described in such discussion, only to the extent the related
Residential Loans were originated after July 18, 1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
under Sections 871(h)(1) and 881(c) of the Code from United States withholding
tax, and the Grantor Trust Certificate is not held in connection with a
Certificateholder's trade or business in the United States, such Grantor Trust
Certificate will not be subject to United States estate taxes in the estate of a
non-resident alien individual.
NOTES
Upon the issuance of each series of Notes, Thacher Proffitt & Wood, counsel
to the Depositor (or such other counsel thereto as set forth in the Prospectus
Supplement), will deliver its opinion generally to the effect that, for federal
income tax purposes, assuming compliance with all provisions of the Indenture,
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Owner Trust Agreement and certain related documents, (i) the Notes will be
treated as indebtedness and (ii) the Issuer, as created pursuant to the terms
and conditions of the Owner Trust Agreement, will not be characterized as an
association (or publicly traded partnership within the meaning of Code section
7704) taxable as a corporation or as a taxable mortgage pool within the meaning
of Code section 7701(i). The following discussion is based in part upon the OID
Regulations. The OID Regulations do not adequately address certain issues
relevant to, and in some instances provide that they are not applicable to,
securities such as the Notes. For purposes of this tax discussion, references to
a "Noteholder" or a "holder" are to the beneficial owner of a Note.
STATUS AS REAL PROPERTY LOANS
Notes held by a domestic building and loan association will not constitute
"loans . . . secured by an interest in real property" within the meaning of Code
section 7701(a)(19)(C)(v); and (ii) Notes held by a real estate investment trust
will not constitute "real estate assets" within the meaning of Code section
856(c)(5)(A) and interest on Notes will not be considered "interest on
obligations secured by mortgages on real property" within the meaning of Code
section 856(c)(3)(B).
ORIGINAL ISSUE DISCOUNT, MARKET DISCOUNT AND PREMIUM
With respect to any series of Notes, the related Notes will be treated
identically with respect to original issue discount, market discount and premium
as REMIC Regular Certificates. See "REMICs Taxation of Owners of REMIC Regular
Certificates Original Issue Discount," "Market Discount" and "Premium" below.
REALIZED LOSSES
With respect to any series of Notes, the related Notes will be treated
identically with respect to realized losses as REMIC Regular Certificates. See
"REMICs Taxation of Owners of REMIC Regular Certificates Realized Losses" below.
SALES OF NOTES
With respect to any series of Notes, the related Notes will be treated
identically with respect to sales of Notes as REMIC Regular Certificates except
that the special ordinary income rule for accrued income not in excess of 110%
of the applicable federal rate will not apply. See "REMICs Sales of REMIC
Certificates" below.
BACKUP WITHHOLDING
With respect to any series of Notes, the related Notes will be treated
identically with respect to backup withholding as REMIC Regular Certificates.
See "REMICs Backup Withholding With Respect to REMIC Certificates" below.
TAX TREATMENT OF FOREIGN INVESTORS
The tax treatment of foreign investors in any series of Notes will be
identical to such treatment for REMIC Regular Certificates. See "REMICs Foreign
Investors in REMIC Certificates" below.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each Series of REMIC Certificates, Thacher Proffitt &
Wood, counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the related Pooling and
Servicing Agreement, the related Trust Fund (or each applicable portion thereof)
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will qualify as a REMIC and the REMIC Certificates offered with respect thereto
will be considered to evidence ownership of "regular interests" ("REMIC Regular
Certificates") or "residual interests" ("REMIC Residual Certificates") in that
REMIC within the meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year and thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an inadvertent termination of REMIC status, 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 Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "real estate assets" within the
meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Residential Loans,
payments on Residential Loans held pending distribution on the REMIC
Certificates and property acquired by foreclosure held pending sale, and may
include amounts in reserve accounts. It is unclear whether property acquired by
foreclosure held pending sale and amounts in reserve accounts would be
considered to be part of the Residential Loans, or whether such assets (to the
extent not invested in assets described in the foregoing sections) otherwise
would receive the same treatment as the Residential Loans for purposes of all of
the foregoing sections. In addition, in some instances Residential Loans may not
be treated entirely as assets described in the foregoing sections. If so, the
related Prospectus Supplement will describe the Residential Loans that may not
be so treated. The REMIC Regulations do provide, however, that payments on
Residential Loans held pending distribution are considered part of the
Residential Loans for purposes of Section 856(c)(5)(A) of the Code. Furthermore,
foreclosure property will qualify as "real estate assets" under Section
856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain Series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
Series of REMIC Certificates, Thacher Proffitt & Wood, counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a
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REMIC and the REMIC Certificates issued by the Tiered REMICs, 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.
Solely for purposes of determining whether the REMIC Certificates will be
"real estate assets" within the meaning of Section 856(c)(5)(A) of the Code, and
"loans secured by an interest in real property" under Section 7701(a)(19)(C) of
the Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
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
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Residential Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Committee Report indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each Series of REMIC Regular Certificates
will be consistent with this standard and will be disclosed in the related
Prospectus Supplement. However, neither the Depositor, nor the Master Servicer
will make any representation that the Residential Loans will in fact prepay at a
rate conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price at maturity over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
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 the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest".
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, or at a "qualified floating rate", an
"objective rate", a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate", or a
combination of
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"qualified floating rates" that does not operate in a manner that accelerates or
defers interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of such
REMIC Regular Certificates. If the original issue discount rules apply to such
Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the IRS.
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on
the day prior to each Distribution Date, in some cases, as a consequence of this
"long first accrual period", some or all interest payments may be required to be
included in the stated redemption price of the REMIC Regular Certificate and
accounted for as original issue discount. Because interest on REMIC Regular
Certificates must in any event be accounted for under an accrual method,
applying this analysis would result in only a slight difference in the timing of
the inclusion in income of the yield on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that portion of the
interest paid on the first Distribution Date in excess of interest accrued for a
number of days corresponding to the number of days from the Closing Date to the
first Distribution Date should be included in the stated redemption price of
such REMIC Regular Certificate. However, the OID Regulations state that all or
some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Distribution Date. It is unclear how an election to do so would be made under
the OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be DE
MINIMIS if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of the payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a DE MINIMIS amount (other than DE MINIMIS original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such DE MINIMIS original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue DE MINIMIS original issue
discount into income currently based on a constant yield method. See "--Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
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If original issue discount on a REMIC Regular Certificate is in excess of a
DE MINIMIS amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period", that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to the
day prior to each Distribution Date and begins on the first day following the
immediately preceding accrual period (or in the case of the first such period,
begins on the Closing Date), a calculation will be made of the portion of the
original issue discount that accrued during such accrual period. The portion of
original issue discount that accrues in any accrual period will equal the
excess, if any, of (i) the sum of (A) the present value, as of the end of the
accrual period, of all of the distributions remaining to be made on the REMIC
Regular Certificate, if any, in future periods and (B) the distributions made on
such REMIC Regular Certificate during the accrual period of amounts included in
the stated redemption price, over (ii) the adjusted issue price of such REMIC
Regular Certificate at the beginning of the accrual period. The present value of
the remaining distributions referred to in the preceding sentence will be
calculated (i) assuming that distributions on the REMIC Regular Certificate will
be received in future periods based on the Residential Loans being prepaid at a
rate equal to the Prepayment Assumption and (ii) using a discount rate equal to
the original yield to maturity of the Certificate. For these purposes, the
original yield to maturity of the Certificate will be calculated based on its
issue price and assuming that distributions on the Certificate will be made in
all accrual periods based on the Residential Loans being prepaid at a rate equal
to the Prepayment Assumption. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of its "adjusted issue
price", in proportion to the ratio such excess bears to the aggregate original
issue discount remaining to be accrued on such REMIC Regular Certificate. The
adjusted issue price of a REMIC Regular Certificate on any given day equals the
sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Certificate at the beginning of the accrual
period which includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price 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.
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If made, such election will apply to all market discount bonds acquired by such
Certificateholder on or after the first day of the first taxable year to which
such election applies. In addition, the OID Regulations permit a
Certificateholder to elect to accrue all interest, discount (including DE
MINIMIS market or original issue discount) and premium in income as interest,
based on a constant yield method. If such an election were made with respect to
a REMIC Regular Certificate with market discount, the Certificateholder would be
deemed to have made an election to include currently market discount in income
with respect to all other debt instruments having market discount that such
Certificateholder acquires during the taxable year of the election or
thereafter, and possibly previously acquired instruments. Similarly, a
Certificateholder that made this election for a Certificate that is acquired at
a premium would 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 "--Taxation of Owners of REMIC Regular
Certificates--Premium" below. Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be DE MINIMIS for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as DE MINIMIS under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a DE MINIMIS amount. See "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount" above. Such treatment would result in
discount being included in income at a slower rate than discount would be
required to be included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. The Committee Report indicates
that in each accrual period market discount on REMIC Regular Certificates should
accrue, at the Certificateholder's option: (i) on the basis of a constant yield
method, (ii) in the case of a REMIC Regular Certificate issued without original
issue discount, in an amount that bears the same ratio to the total remaining
market discount as the stated interest paid in the accrual period bears to the
total amount of stated interest remaining to be paid on the REMIC Regular
Certificate as of the beginning of the accrual period, or (iii) in the case of a
REMIC Regular Certificate issued with original issue discount, in an amount that
bears the same ratio to the total remaining market discount as the original
issue discount accrued in the accrual period bears to the total original issue
discount remaining on the REMIC Regular Certificate at the beginning of the
accrual period. Moreover, the Prepayment Assumption used in calculating the
accrual of original issue discount is also used in calculating the accrual of
market discount. Because the regulations referred to in this paragraph have not
been issued, it is not possible to predict what effect such regulations might
have on the tax treatment of a REMIC Regular Certificate purchased at a discount
in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
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Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate 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 a REMIC Regular 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 REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument, rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to include all interest,
discount and premium in income based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "--Taxation of Owners of REMIC Regular Certificates--Market
Discount" above. The Committee Report states that the same rules that apply to
accrual of market discount (which rules will require use of a Prepayment
Assumption in accruing market discount with respect to REMIC Regular
Certificates without regard to whether such Certificates have original issue
discount) will also apply in amortizing bond premium under Section 171 of the
Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Residential Loans. However, it
appears that a noncorporate holder that does not acquire a REMIC Regular
Certificate in connection with a trade or business will not be entitled to
deduct a loss under Section 166 of the Code until such holder's Certificate
becomes wholly worthless (i.e., until its outstanding principal balance has been
reduced to zero) and that the loss will be characterized as a short-term capital
loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificate, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Residential Loans or the Underlying Certificates until it
can be established that any such reduction ultimately will not be recoverable.
As a result, the amount of taxable income reported in any period by the holder
of a REMIC Regular Certificate could exceed the amount of economic income
actually realized by the holder in such period. Although the holder of a REMIC
Regular Certificate eventually will recognize a loss or reduction in income
attributable to previously accrued and included income that as the result of a
realized loss ultimately will not be realized, the law is unclear with respect
to the timing and character of such loss or reduction in income.
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TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Residential Loans or as debt instruments issued by
the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income or
allowed as a loss of any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "--Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount 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 limitations under Section 469
of the Code on the deductibility of "passive losses".
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder of such Certificate also will be required to report on its
federal income tax return amounts representing its daily share of the taxable
income (or net loss) of the REMIC for each day that it holds such REMIC Residual
Certificate. Those daily amounts generally will equal the amounts of taxable
income or net loss determined as described above. The Committee Report indicates
that certain modifications of the general rules may be made, by regulations,
legislation or otherwise to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such REMIC Residual Certificate from a prior
holder of such Certificate at a price greater than (or less than) the adjusted
basis (as defined below) such REMIC Residual Certificate would have had in the
hands of an original holder of such Certificate. The REMIC Regulations, however,
do not provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions",
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual
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Certificateholders for the corresponding period may significantly adversely
affect such REMIC Residual Certificateholders' after-tax rate of return.
TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Residential
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Residential Loans,
bad debt losses with respect to the Residential Loans and, except as described
below, for servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Residential Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount".
The issue price of a REMIC Certificate received in exchange for an interest in
the Residential Loans or other property will equal the fair market value of such
interests in the Residential Loans or other property. Accordingly, if one or
more classes of REMIC Certificates are retained initially rather than sold, the
Master Servicer may be required to estimate the fair market value of such
interests in order to determine the basis of the REMIC in the Residential Loans
and other property held by the REMIC.
Subject to possible application of the DE MINIMIS rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Residential Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently, as it accrues,
on a constant interest basis. See "--Taxation of Owners of REMIC Regular
Certificates" above, which describes a method for accruing such discount income
that is analogous to that required to be used by a REMIC as to Residential Loans
with market discount that it holds.
A Residential Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
in the preceding paragraph, is less than (or greater than) its stated redemption
price. Any such discount 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 original issue
discount on the REMIC Regular Certificates. It is anticipated that each REMIC
will elect under Section 171 of the Code to amortize any premium on the
Residential Loans. Premium on any Residential Loan to which such election
applies may be amortized under a constant yield method, presumably taking into
account a Prepayment Assumption. Further, such an election would not apply to
any Residential Loan originated on or before September 27, 1985. Instead,
premium on such a Residential Loan should be allocated among the principal
payments thereon and be deductible by the REMIC as those payments become due or
upon the prepayment of such Residential Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered
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to accrue for this purpose as described above under "--Taxation of Owners of
REMIC Regular Certificates--Original Issue Discount", except that the DE MINIMIS
rule and the adjustments for subsequent holders of REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount".
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions". If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such REMIC Residual Certificate, increased by amounts included
in the income of the REMIC Residual Certificateholder and decreased (but not
below zero) by distributions made, and by net losses allocated, to such REMIC
Residual Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such REMIC Residual Certificate. To the extent a distribution
on a REMIC Residual Certificate exceeds such adjusted basis, it will be treated
as gain from the sale of such REMIC Residual Certificate. Holders of certain
REMIC Residual Certificates may be entitled to distributions early in the term
of the related REMIC under circumstances in which their bases in such REMIC
Residual Certificates will not be sufficiently large that such distributions
will be treated as nontaxable returns of capital. Their bases in such REMIC
Residual Certificates will initially equal the amount paid for such REMIC
Residual Certificates and will be increased by their allocable shares of taxable
income of the REMIC. However, such bases increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is
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allocated to the REMIC Residual Certificateholders. To the extent such REMIC
Residual Certificateholders' initial bases are less than the distributions to
such REMIC Residual Certificateholders, and increases in such initial bases
either occur after such distributions or (together with their initial bases) are
less than the amount of such distributions, gain will be recognized to such
REMIC Residual Certificateholders on such distributions and will be treated as
gain from the sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates" below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General".
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will be
subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
such REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal 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. Although it
has not done so, the Treasury has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value".
For REMIC Residual Certificateholders, excess inclusions (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "-- Foreign
Investors in REMIC Certificates", below. Furthermore, for purposes of the
alternative minimum tax, (i) excess inclusions will not be permitted to be
offset by the alternative tax net operating loss deduction and (ii) alternative
minimum taxable income may not be less than the taxpayer's excess inclusions.
The latter rule has the effect of preventing nonrefundable tax credits from
reducing the taxpayer's income tax to an amount lower than the tentative minimum
tax on excess inclusions.
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
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real estate investment trust taxable income (within the meaning of Section
857(b)(2) of the Code, 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. Treasury regulations yet to be issued could apply
a similar rule to regulated investment companies, common trust funds and certain
cooperatives; the REMIC Regulations currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, transfers of "noneconomic" REMIC Residual
Certificates will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax". If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls, or
required liquidation provided for in the REMIC's organizational documents, (1)
the present value of the expected future distributions (discounted using the
"applicable Federal rate" for obligations whose term ends on the close of the
last quarter in which excess inclusions are expected to accrue with respect to
the REMIC Residual Certificate, which rate is computed and published monthly by
the IRS) on the REMIC Residual Certificate equals at least the present value of
the expected tax on the anticipated excess inclusions, and (2) the transferor
reasonably expects that the transferee will receive distributions with respect
to the REMIC Residual Certificate at or after the time the taxes accrue on the
anticipated excess inclusions in an amount sufficient to satisfy the accrued
taxes. Accordingly, all transfers of REMIC Residual Certificates that may
constitute noneconomic residual interests will be subject to certain
restrictions under the terms of the related Pooling and Servicing Agreement that
are intended to reduce the possibility of any such transfer being disregarded.
Such restrictions will require each party to a transfer to provide an affidavit
that no purpose of such transfer is to impede the assessment or collection of
tax, including certain representations as to the financial condition of the
prospective transferee, as to which the transferor is also required to make a
reasonable investigation to determine such transferee's historic payment of its
debts and ability to continue to pay its debts as they come due in the future.
Prior to purchasing a REMIC Residual Certificate, prospective purchasers should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such a purchaser to another purchaser at some future date may be
disregarded in accordance with the above-described rules which would result in
the retention of tax liability by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "-- Foreign Investors in REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 24, 1996, the IRS released final regulations (the
"Mark-to-Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-market
requirement applies to all securities owned by a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, a REMIC Residual Certificate issued after January 4, 1995 is not
treated as a security and thus may not be marked to market. Prospective
purchasers
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of a REMIC Residual Certificate should consult their tax advisors regarding the
possible application of the mark-to-market requirement to REMIC Residual
Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by REMIC Certificateholders that
are subject to the limitations of either Section 67 or Section 68 of the Code
may be substantial. Furthermore, in determining the alternative minimum taxable
income of such a holder of a REMIC Certificate that is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, no deduction will be allowed for such holder's allocable
portion of servicing fees and other miscellaneous itemized deductions of the
REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates,
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the REMIC Certificate. The adjusted basis of a REMIC
Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions".
Except as provided in the following two paragraphs, any such gain or loss will
be capital gain or loss, provided such REMIC Certificate is held as a capital
asset (generally, property held for investment) within the meaning of Section
1221 of the Code. The Code as of the date of this Prospectus provides for a top
marginal tax rate of 39.6% for individuals and lower tax rates for long-term
capital gains of individuals depending on the holding period of the property and
the tax bracket of the individual. No such rate differential exists for
corporations. In addition, the distinction between a capital gain or loss and
ordinary income or loss remains relevant for other purposes.
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Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally, a rate based on an average of current yields on Treasury
securities having a maturity comparable to that of the Certificate based on the
application of the Prepayment Assumption to such Certificate, which rate is
computed and published monthly by the IRS), determined as of the date of
purchase of such REMIC Regular Certificate, over (ii) the amount of ordinary
income actually includible in the seller's income prior to such sale. In
addition, gain recognized on the sale of a REMIC Regular Certificate by a seller
who purchased such REMIC Regular Certificate at a market discount will be
taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount" and "--Premium".
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires a REMIC Residual Certificate,
or acquires any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) 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 Section 1091 of
the Code. In that event, any loss realized by the REMIC Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly-acquired
asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transactions Tax"). In general,
subject to certain specified exceptions a prohibited transaction means the
disposition of a Residential Loan, the receipt of income from a source other
than a Residential Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Residential Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that the
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REMIC will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are 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 gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, 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 the REMIC will be borne by
the related Master Servicer or the Trustee in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required liquidation
provided for in the REMIC's organizational documents. Such a tax generally would
be imposed on the transferor of the REMIC Residual Certificate, except that
where such transfer is through an agent for a disqualified organization, the tax
would instead be imposed on such agent. However, a transferor of a REMIC
Residual Certificate would in no event be liable for such tax with respect to a
transfer if the transferee furnishes to the transferor an affidavit that the
transferee is not a disqualified organization and, as of the time of the
transfer, the transferor does not have actual knowledge that such affidavit is
false. Moreover, an entity will not qualify as a REMIC unless there are
reasonable arrangements designed to ensure that (i) residual interests in such
entity are not held by disqualified organizations and (ii) information necessary
for the application of the tax described herein will be made available.
Restrictions on the transfer of REMIC Residual Certificates and certain other
provisions that are intended to meet this requirement will be included in the
Pooling and Servicing Agreement, and will be discussed more fully in any
Prospectus Supplement relating to the offering of any REMIC Residual
Certificate.
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In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate, and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(but would not include instrumentalities described in Section 168(h)(2)(D) of
the Code or the Federal Home Loan Mortgage Corporation), (ii) any organization
(other than a cooperative described in Section 521 of the Code) that is exempt
from federal income tax, unless it is subject to the tax imposed by Section 511
of the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Residential Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee, which generally will hold at least a nominal amount of
REMIC Residual Certificates, will file REMIC federal income tax returns on
behalf of the related REMIC, will be designated as and will act as the "tax
matters person" with respect to the REMIC in all respects.
As the tax matters person, the Trustee will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any
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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 to the related REMIC, in a manner to
be provided in Treasury regulations, the name and address of such person and
other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the information set forth in
the following paragraph upon request in accordance with the requirements of the
applicable regulations. The information must be provided by the later of 30 days
after the end of the quarter for which the information was requested, or two
weeks after the receipt of the request. The REMIC must also comply with rules
requiring a REMIC Regular Certificate issued with original issue discount to
disclose on its face the amount of original issue discount and the issue date,
and requiring such information to be reported to the IRS. Reporting with respect
to the REMIC Residual Certificates, including income, excess inclusions,
investment expenses and relevant information regarding qualification of the
REMIC's assets will be made as required under the Treasury regulations,
generally on a quarterly basis.
As applicable, 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 required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the Master Servicer will not have, such regulations only
require that information pertaining to the appropriate proportionate method of
accruing market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates-- Market Discount".
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee, unless otherwise stated in the related Prospectus
Supplement.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax" under
Section 3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States person"
means a citizen or resident of the United States, a corporation, partnership or
other entity created or
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organized in, or under the laws of, the United States or any political
subdivision thereof, an estate whose income is subject to United States federal
income tax regardless of its source, or a trust if a court within the United
States is able to exercise primary jurisdiction over the administration of the
trust and one or more United States fiduciaries is able to control all
significant decisions of the trust. It is possible that the IRS may assert that
the foregoing tax exemption should not apply with respect to a REMIC Regular
Certificate held by a REMIC Residual Certificateholder that owns directly or
indirectly a 10% or greater interest in the REMIC Residual Certificates. If the
holder does not qualify for exemption, distributions of interest, including
distributions in respect of accrued original issue discount, to such holder may
be subject to a tax rate of 30%, subject to reduction under any applicable tax
treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless otherwise stated in the related Prospectus Supplement, transfers of
REMIC Residual Certificates to investors that are not United States Persons will
be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences", potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Securities offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Securities offered hereunder.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code impose certain requirements on employee benefit plans and on
certain other retirement plans and arrangements, including individual retirement
accounts and annuities, Keogh plans and bank collective investment funds and
insurance company general and separate accounts in which such plans, accounts or
arrangements are invested, subject to ERISA and the Code (all of which are
hereinafter referred to as "Plans") and on persons who are fiduciaries with
respect to such Plans. Certain employee benefit plans, such as governmental
plans (as defined in Section 3(32) of ERISA), and, if no election has been made
under Section 410(d) of the Code, church plans (as defined in Section 3(33) of
ERISA), are not subject to the ERISA requirements discussed herein. Accordingly,
assets of such plans may be invested in Certificates without regard to the ERISA
considerations described below, subject to the provisions of applicable federal,
state and local law. Any such plan which is qualified and exempt from taxation
under Sections 401(a) and 501(a) of the Code, however, is subject to the
prohibited transaction rules set forth in Section 503 of the Code.
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In addition to the imposition of general fiduciary requirements including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan,
Section 406(a) of ERISA and Section 4975(c)(1)(A), (B), (C) and (D) of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
("Parties in Interest" within the meaning of Section 3(14) of ERISA and
"Disqualified Persons" within the meaning of Section 4975(e)(2) of the Code,
collectively referred to as "Parties in Interest") who have certain specified
relationships to the Plan. In addition, Section 406(b) of ERISA and Section
4975(c)(1)(E) and (F) of the Code impose certain prohibitions on Parties in
Interest who are fiduciaries with respect to the Plan. Certain Parties in
Interest to a prohibited transaction may be subject to a penalty imposed under
Section 502(i) of ERISA or an excise tax pursuant to Sections 4975(a) and (b) of
the Code, unless a statutory or administrative exemption is available.
Certain transactions involving a Trust Fund might be deemed to constitute
prohibited transactions under ERISA and the Code with respect to a Plan that
purchases the Securities, if the Residential Loans, Agency Securities, Mortgage
Securities and other assets included in such Trust Fund are deemed to be assets
of the Plan. The U.S. Department of Labor (the "DOL") has promulgated
regulations at 29 C.F.R. Section2510.3-101 (the "DOL Regulations") defining the
term "Plan Assets" for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code. Under the DOL Regulations, generally, when a Plan acquires an equity
interest in an entity, the Plan's assets include the investment in the entity
and an undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable here apply, or unless the equity participation
in the entity by "Benefit Plan Investors" is not significant. For this purpose,
in general, equity participation is considered "significant" on any date if 25%
or more of the value of any class of equity interests is held by "Benefit Plan
Investors," which include Plans, as well as any "employee benefit plan" (as
defined in Section 3(3) or ERISA) which is not subject to Title I of ERISA, such
as governmental plans (as defined in Section 3(32) of ERISA) and church plans
(as defined in Section 3(33) of ERISA) which have not made an election under
Section 410(d) of the Code, and any entity whose underlying assets include Plan
Assets by reason of a Plan's investment in the entity. Under the DOL
Regulations, Plan Assets will be deemed to include an interest in the instrument
evidencing the equity interest of a Plan (such as a Certificate or a Note with
"substantial equity features" as described below), and, because of the factual
nature of certain of the rules set forth in the DOL Regulations, Plan Assets may
be deemed to include an interest in the underlying assets of the entity in which
a Plan acquires an interest (such as a Trust Fund). Therefore, neither Plans nor
persons investing Plan Assets should acquire or hold Securities in reliance upon
the availability of any exception under the DOL Regulations.
In addition, the DOL Regulations provide that the term "equity interest"
means any interest in an entity other than an instrument which is treated as
indebtedness under applicable local law and which has no "substantial equity
features." If Notes of a particular Series are deemed to be indebtedness under
applicable local law without any substantial equity features, an investing
Plan's assets would include such Notes, but would not, by reason of such
purchase, include the underlying assets of the related Trust Fund. However,
without regard to whether such Notes are treated as an equity interest for such
purposes, the purchase, sale or holding of Notes by or on behalf of a Plan could
be considered to result in a prohibited transaction if the Issuer or Trustee or
any of their respective affiliates is or becomes a Party in Interest with
respect to such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Residential Loans, Agency Securities, Mortgage Securities and other
assets included in a Trust Fund constitute Plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the Master Servicer or any Sub-Servicer, may be deemed to be a Plan "fiduciary"
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Residential Loans, Agency
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Securities, Mortgage Securities or other assets included in a Trust Fund
constitute Plan assets, the purchase of Securities by a Plan, as well as the
operation of the related Trust Fund, may constitute or involve a prohibited
transaction under ERISA and the Code.
Some of the transactions involving the Securities that might otherwise
constitute prohibited transactions under ERISA or the Code might qualify for
relief from the prohibited transaction rules under certain administrative
exemptions, which may be individual or class exemptions. The DOL issued an
individual exemption, Prohibited Transaction Exemption 90-36 (the "Exemption"),
on June 19, 1990 to PaineWebber Incorporated, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code and Section 502(i) of ERISA, certain transactions,
among others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of mortgage pass-through certificates, such as a
senior class of Certificates, underwritten by an Underwriter (as hereinafter
defined), provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section "ERISA Considerations", the term
"Underwriter" shall include (a) PaineWebber Incorporated, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with PaineWebber Incorporated and (c) any
member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Certificates of
the same series. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's Corporation, Moody's Investors Service, Inc., Duff & Phelps, Inc. or
Fitch Investors Service, Inc. (collectively, the "Exemption Rating Agencies").
Fourth, the Trustee cannot be an affiliate of any other member of the
"Restricted Group" which consists of any Underwriter, the Depositor, the
Trustee, the Master Servicer, any Sub-Servicer, the obligor on credit support
and any mortgagor with respect to Trust Fund Assets constituting more than 5% of
the aggregate unamortized principal balance of the Trust Fund Assets in the
related Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Trust Fund Assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
Sub-Servicer must represent not more than reasonable compensation for such
person's services under the related Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the investing Plan must be 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.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) Securities evidencing
interests in such other investment pools must have been rated in one of the
three highest categories of one of the Exemption Rating Agencies for at least
one year prior to the acquisition of Securities by or on behalf of a Plan or
with Plan Assets; and (iii) Securities evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Securities by or on behalf of a Plan
or with Plan Assets.
A fiduciary of a Plan contemplating purchasing a Certificate must make its
own determination that the general conditions set forth above will be satisfied
with respect to such Certificate. However, to the
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extent that Certificates are subordinate, the Exemption will not apply to an
investment by a Plan. In addition, any Certificates representing a beneficial
ownership in unsecured obligations will not satisfy the general conditions of
the Exemption.
If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) in connection with the direct or
indirect sale, exchange, transfer, holding or the direct or indirect acquisition
or disposition in the secondary market of Certificates by Plans. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a Certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such Excluded Plan. For purposes
of the Certificates, an Excluded Plan is a Plan sponsored by any member of the
Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (1) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Depositor or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of Plan
assets in the Certificates is (a) a mortgagor with respect to 5% or less of the
fair market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Funds. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Certificates so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Trust Funds,
provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code if such
restrictions are deemed to otherwise apply merely because a person is deemed to
be a "party in interest" (within the meaning of Section 3(14) of ERISA) or a
"disqualified person" (within the meaning of Section 4975(e)(2) of the Code)
with respect to an investing Plan by virtue of providing services to the Plan
(or by virtue of having certain specified relationships to such a person) solely
as a result of the Plan's ownership of Certificates.
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. In addition to making its own determination as to the availability of
the exemptive relief provided in the Exemption, the Plan fiduciary should
consider its general fiduciary obligations under ERISA in determining whether to
purchase any Certificates on behalf of a Plan.
In addition to the Exemption, a Plan fiduciary or other Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
("Class Exemptions"), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ("PTCE") 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
transactions effected by a "qualified professional asset manager"; PTCE 90-1,
regarding transactions by insurance company pooled separate
131
<PAGE>
accounts; PTCE 91-38, regarding investments by bank collective investment funds;
PTCE 95-60, regarding transactions by insurance company general accounts; and
PTCE 96-23, regarding transactions effected by an "in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase, sale and holding of the Securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA and Section 4975 of the Code, including the
prohibited transaction restrictions imposed by ERISA and the related excise
taxes imposed by the Code, for transactions involving an insurance company
general account. Pursuant to Section 401(c) of ERISA, the DOL is required to
issue final regulations ("401(c) Regulations") no later than December 31, 1997
which are to provide guidance for the purpose of determining, in cases where
insurance policies supported by an insurer's general account are issued to or
for the benefit of a Plan on or before December 31, 1998, which general account
assets constitute Plan Assets. Section 401(c) of ERISA generally provides that,
until the date which is 18 months after the 401(c) Regulations become final, no
person shall be subject to liability under Part 4 of Title I of ERISA and
Section 4975 of the Code on the basis of a claim that the assets of an insurance
company general account constitute Plan Assets, unless (i) as otherwise provided
by the Secretary of Labor in the 401(c) Regulations to prevent avoidance of the
regulations or (ii) an action is brought by the Secretary of Labor for certain
breaches of fiduciary duty which would also constitute a violation of federal or
state criminal law. Any assets of an insurance company general account which
support insurance policies issued to a Plan after December 31, 1998 or issued to
Plans on or before December 31, 1998 for which the insurance company does not
comply with the 401(c) Regulations may be treated as Plan Assets. In addition,
because Section 401(c) does not relate to insurance company separate accounts,
separate account assets are still treated as Plan Assets of any Plan invested in
such separate account. Insurance companies contemplating the investment of
general account assets in the Securities should consult with their legal counsel
with respect to the applicability of Section 401(c) of ERISA, including the
general account's ability to continue to hold the Securities after the date
which is 18 months after the date the 401(c) Regulations become final.
Because the exemptive relief afforded by the Exemption (or any similar
exemption that might be available) will not apply to the purchase, sale or
holding of certain Securities, such as Notes with "substantial equity features,"
subordinate Securities, REMIC Residual Certificates and certain Securities which
are not rated in one of the three highest generic rating categories by the
Exemption Rating Agencies transfers of any such Securities to a Plan, to a
trustee or other person acting on behalf of any Plan, or to any other person
investing Plan Assets to effect such acquisition will not be registered by the
Trustee unless the transferee provides the Depositor, the Trustee and the Master
Servicer with an opinion of counsel satisfactory to the Depositor, the Trustee
and the Master Servicer, which opinion will not be at the expense of the
Depositor, the Trustee or the Master Servicer, that the purchase of such
Securities by or on behalf of such Plan is permissible under applicable law,
will not constitute or result in any non-exempt prohibited transaction under
ERISA or Section 4975 of the Code and will not subject the Depositor, the
Trustee or the Master Servicer to any obligation in addition to those undertaken
in the related Agreement.
In lieu of such opinion of counsel, the transferee may provide a
certification substantially to the effect that the purchase of Securities by or
on behalf of such Plan is permissible under applicable law, will not constitute
or result in any non-exempt prohibited transaction under ERISA or Section 4975
of the Code, will not subject the Depositor, the Trustees or the Master Servicer
to any obligation in addition to those undertaken in the Agreement and the
following statements are correct: (i) the transferee is an insurance company,
(ii) the source of funds used to purchase such Securities is an "insurance
company general account" (as such term is defined in PTCE 95-60), (iii) the
conditions set forth in PTCE 95-60 have been satisfied and (iv) there is no Plan
with respect to which the amount of such general account's reserves and
liabilities for contracts held by or on behalf of such Plan and all other Plans
maintained by the same employer (or any "affiliate" thereof, as defined in PTCE
95-60) or by the same employee organization
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<PAGE>
exceed 10% of the total of all reserves and liabilities of such general account
(as determined under PTCE 95-60) as of the date of the acquisition of such
Securities.
An opinion of counsel or certification will not be required with respect to
the purchase of DTC registered Securities. Any purchaser of a DTC registered
Security will be deemed to have represented by such purchase that either (a)
such purchaser is not a Plan and is not purchasing such Securities on behalf of,
or with Plan Assets of, any Plan or (b) the purchase of any such Security by or
on behalf of, or with Plan Assets of, any Plan is permissible under applicable
law, will not result in any non-exempt prohibited transaction under ERISA or
Section 4975 of the Code and will not subject the Depositor, the Trustees or the
Master Servicer to any obligation in addition to those undertaken in the related
Agreement.
Any plan fiduciary which proposes to cause a Plan to purchase Securities
should consult with its counsel with respect to the potential applicability of
ERISA and the Code to such investment and the availability of the Exemption or
any Class Exemption in connection therewith. There can be no assurance that the
Exemption or any other individual or Class Exemption will apply with respect to
any particular Plan that acquires or holds Securities or, even if all of the
conditions specified therein were satisfied, that such exemption would apply to
all transactions involving the Trust Fund. The Prospectus Supplement with
respect to a series of Securities may contain additional information regarding
the application of the Exemption or any other exemption with respect to the
Certificates offered thereby.
Any Plan fiduciary considering whether to purchase 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.
LEGAL INVESTMENT
The Prospectus Supplements for each Series of Securities will specify which,
if any, of the classes of Securities offered thereby constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984 ("SMMEA"). "Mortgage related securities" are legal investments 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 persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including depository institutions, insurance companies and pension funds
created pursuant to or existing under the laws of the United States or of any
state, the authorized investments of which are subject to state regulation).
Under SMMEA, if a state enacts legislation prior to October 3, 1991 specifically
limiting the legal investment authority of any such entities with respect to
"mortgage related securities", the Securities will constitute legal investments
for entities subject to such legislation 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.
Any class of Securities offered hereby and by the related Prospectus
Supplement that is not initially rated in one of the two highest rating
categories by at least one Rating Agency or that represents an interest in a
Trust Fund that includes junior Residential Loans will not constitute "mortgage
related
133
<PAGE>
securities" for purposes of SMMEA. Prospective investors in such classes of
Securities, in particular, should consider the matters discussed in the
following paragraphs.
The Federal Financial Institutions Examination Council has issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities". The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the OTS with an effective date of
February 10, 1992. 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 as to which classes of Securities will be treated as high-risk
under the Policy Statement.
The predecessor of the Office of Thrift Supervision ("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 addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in certain specified types of securities, which may include certain classes of
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors' assets. The
Depositor will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Securities. 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 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.
PLANS OF DISTRIBUTION
The 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 Securities will be distributed in a firm commitment
underwriting, subject to the terms and conditions of the underwriting agreement,
by PaineWebber Incorporated ("PaineWebber") 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
Securities agreed to be purchased by purchasers pursuant to purchase agreements
acceptable to the Depositor. In connection with the sale of the Securities,
underwriters may receive compensation from the Depositor or from purchasers of
the Securities in the form of discounts, concessions or commissions. The
Prospectus Supplement will describe any such compensation paid by the Depositor.
134
<PAGE>
Alternatively, the Prospectus Supplement may specify that the Securities
will be distributed by PaineWebber acting as agent or in some cases as principal
with respect to Securities which it has previously purchased or agreed to
purchase. If PaineWebber acts as agent in the sale of Securities, PaineWebber
will receive a selling commission with respect to each Series of Securities,
depending on market conditions, expressed as a percentage of the aggregate
principal balance of the related Residential Loans 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 PaineWebber elects to purchase
Securities as principal, PaineWebber 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 Securities
of such Series.
The Depositor will indemnify PaineWebber and any underwriters against
certain civil liabilities, including liabilities under the Securities Act of
1933, or will contribute to payments PaineWebber and any underwriters may be
required to make in respect thereof.
In the ordinary course of business, PaineWebber and the Depositor, or their
affiliates, may engage in various securities and financing transactions,
including repurchase agreements to provide interim financing of the Depositor's
residential loans pending the sale of such residential loans or interests
therein, including the Securities.
The Depositor anticipates that the Securities will be sold primarily to
institutional investors. Purchasers of 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 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 one of the four
highest rating categories by any Rating Agency will be offered hereby. Any
unrated class may be initially retained by the Depositor, and may be sold by the
Depositor at any time to one or more institutional investors.
LEGAL MATTERS
Certain legal matters in connection with the Securities will be passed upon
for the Depositor by Thacher Proffitt & Wood, New York, New York or such other
counsel thereto as set forth in the Prospectus Supplement.
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
Unless otherwise specified in the related Prospectus Supplement, it is a
condition to the issuance of the Securities of each Series offered hereby and by
the Prospectus Supplement that they shall have been rated in one of the four
highest rating categories by the nationally recognized statistical rating agency
or agencies (each, a "Rating Agency") specified in the related Prospectus
Supplement.
Any such rating would be based on, among other things, the adequacy of the
value of the Trust Fund Assets and any credit enhancement with respect to such
class and will reflect such Rating Agency's assessment solely of the likelihood
that holders of a class of Securities of such class will receive payments to
which such Securityholders are entitled under the related Agreement. Such rating
will not constitute an
135
<PAGE>
assessment of the likelihood that principal prepayments on the related
Residential Loans 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 should not be
deemed a recommendation to purchase, hold or sell Securities, inasmuch as it
does not address market price or suitability for a particular investor. 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.
There is also no assurance that any such rating will remain in effect for
any given period of time or that it may not be lowered or withdrawn entirely by
the Rating Agency in the future if in its judgment circumstances in the future
so warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Trust Fund Assets or any credit enhancement with
respect to a Series, such rating might also be lowered or withdrawn among other
reasons, because of an adverse change in the financial or other condition of a
credit enhancement provider or a change in the rating of such credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a Series of Securities will be determined on the basis of criteria
established by each Rating Agency rating classes of such Series. Such criteria
are sometimes based upon an actuarial analysis of the behavior of mortgage loans
in a larger group. Such analysis is often the basis upon which each Rating
Agency determines the amount of credit enhancement required with respect to each
such class. There can be no assurance that the historical data supporting any
such actuarial analysis will accurately reflect future experience nor any
assurance that the data derived from a large pool of mortgage loans accurately
predicts the delinquency, foreclosure or loss experience of any particular pool
of Residential Loans. No assurance can be given that values of any Residential
Properties have remained or will remain at their levels on the respective dates
of origination of the related Residential Loans. If the residential real estate
markets should experience an overall decline in property values such that the
outstanding principal balances of the Residential Loans in a particular Trust
Fund and any secondary financing on the related Residential Properties become
equal to or greater than the value of the Residential Properties, the rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. In additional, adverse economic
conditions (which may or may not affect real property values) may affect the
timely payment by mortgagors of scheduled payments of principal and interest on
the Residential Loans and, accordingly, the rates of delinquencies, foreclosures
and losses with respect to any Trust Fund. To the extent that such losses are
not covered by credit enhancement, such losses will be borne, at least in part,
by the holders of one or more classes of the Security of the related Series.
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<PAGE>
INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
--4--
401(c) Regulations.............................................................................. 165
--A--
accessories..................................................................................... 27
accrual period.................................................................................. 114, 115
Accrual Securities.............................................................................. 7, 42
Accrued Security Interest....................................................................... 50
Administration Fee Rate......................................................................... 63
Advance......................................................................................... 13, 55
Advances........................................................................................ 42, 48
Agency Securities............................................................................... 1
Agreement....................................................................................... 5, 41
applicable Federal rate......................................................................... 110, 122, 124,
125
ARM Loans....................................................................................... 23
Assumed Reinvestment Rate....................................................................... 50
Available Distribution Amount................................................................... 51
--B--
BIF............................................................................................. 38
Book-Entry Securities........................................................................... 57
Buydown Loans................................................................................... 26
Buydown Period.................................................................................. 26
--C--
Cash Flow Value................................................................................. 50
CEDEL Participants.............................................................................. 59
CERCLA.......................................................................................... 19, 97
Certificates.................................................................................... 5, 131
Charter Act..................................................................................... 29
Class Exemptions................................................................................ 131
Closing Date.................................................................................... 113
Code............................................................................................ 8, 99
Collateral Value................................................................................ 27
Commission...................................................................................... 3
Committee Report................................................................................ 106
Conservation Act................................................................................ 97
Contributions Tax............................................................................... 125
Cooperative..................................................................................... 10, 23
Cooperative Loans............................................................................... 10, 23
Cooperative Notes............................................................................... 26
Cooperative Unit................................................................................ 23
Corporate Trust Office.......................................................................... 41
Credit Insurance Instrument..................................................................... 60
</TABLE>
137
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Cumulative Subordination Payments............................................................... 53
Cut-off Date.................................................................................... 9
--D--
Deficiency Event................................................................................ 67
Definitive Security............................................................................. 57
Deposit Period.................................................................................. 54
Depositor....................................................................................... 5
Description of the Certificates................................................................. 1
disqualified organization....................................................................... 125, 126
Distribution Date............................................................................... 8, 48
DOL............................................................................................. 129
DOL Regulations................................................................................. 129
DTC............................................................................................. 21, 57
Due Period...................................................................................... 51
--E--
EDGAR........................................................................................... 3
Environmental Lien.............................................................................. 98
Equity Certificates............................................................................. 6, 41
equity interest................................................................................. 129
equity of redemption............................................................................ 90
ERISA........................................................................................... 14, 128
ERISA Considerations............................................................................ 15, 130
Euroclear Cooperative........................................................................... 59
Euroclear Participants.......................................................................... 59
European Depositaries........................................................................... 57
Events of Default............................................................................... 68
excess inclusions............................................................................... 121
Exemption....................................................................................... 130
Exemption Rating Agencies....................................................................... 130
--F--
FDIC............................................................................................ 38
FHA............................................................................................. 12
FHA Loans....................................................................................... 24
FHLMC........................................................................................... 1, 12
FHLMC Act....................................................................................... 30
FHLMC Certificate Group......................................................................... 30
FHLMC Certificates.............................................................................. 12, 28
Final Distribution Date......................................................................... 49, 50
Financial Intermediary.......................................................................... 58
FNMA............................................................................................ 1, 12
FNMA Certificates............................................................................... 12, 28
FTC Rule........................................................................................ 93
fully modified pass-through..................................................................... 28
Funding Period.................................................................................. 22
</TABLE>
138
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
--G--
Garn-St. Germain Act............................................................................ 94
GNMA............................................................................................ 1, 12
GNMA Certificates............................................................................... 12, 28
Grantor Trust Certificates...................................................................... 14, 99
Grantor Trust Fractional Interest Certificate................................................... 100
Grantor Trust Fund.............................................................................. 99
Grantor Trust Strip Certificate................................................................. 100
--H--
Hazard Insurance Instrument..................................................................... 60
holder.......................................................................................... 100, 111
Holder in Due Course Rules...................................................................... 19
Home Equity Loans............................................................................... 10
Home Improvement Contracts...................................................................... 10, 22
Housing Act..................................................................................... 26
HUD............................................................................................. 73
--I--
Indenture....................................................................................... 5
Initial Deposit................................................................................. 64
insurability representation..................................................................... 46
Insurance Instrument............................................................................ 60
Insurance Proceeds.............................................................................. 47
Interest Rate................................................................................... 11, 23
IRS............................................................................................. 101
Issue Premium................................................................................... 120
Issuer.......................................................................................... 5
--L--
L/C Bank........................................................................................ 81
Land Contracts.................................................................................. 11, 23
Liquidation Proceeds............................................................................ 48
Loan-to-Value Ratio............................................................................. 27
Lockout Period.................................................................................. 24
long-term Federal rate.......................................................................... 121
--M--
Manager......................................................................................... 24
manufactured home............................................................................... 26
Manufactured Housing Contracts.................................................................. 10, 23
Manufacturer's Invoice Price.................................................................... 27
Mark-to-Market Regulations...................................................................... 122
Master Servicer................................................................................. 5
Maximum Subordination Amount.................................................................... 53
Morgan.......................................................................................... 57
Mortgage Loans.................................................................................. 10, 22
Mortgage Notes.................................................................................. 24
</TABLE>
139
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
mortgage related securities..................................................................... 15, 133
Mortgage Securities............................................................................. 12, 23
Mortgaged Properties............................................................................ 10, 22
Mortgaged Property.............................................................................. 10, 22, 23, 82
Mortgages....................................................................................... 24
Multifamily Loans............................................................................... 10, 22
--N--
Net Interest Rate............................................................................... 43
non-conforming credit........................................................................... 21, 38
non-conforming credits.......................................................................... 21
Nonrecoverable Advance.......................................................................... 56
Noteholder...................................................................................... 111
Notes........................................................................................... 1, 5
--O--
Obligor......................................................................................... 21
OID Regulations................................................................................. 100
operator........................................................................................ 19
Optional Termination............................................................................ 14
OTS............................................................................................. 134
owner........................................................................................... 19
Owner Trust Agreement........................................................................... 5, 41
Owner Trustee................................................................................... 5
--P--
PaineWebber..................................................................................... 134
Participants.................................................................................... 21, 57
pass-through entity............................................................................. 123, 126
Percentage Interest............................................................................. 42
Permitted Instruments........................................................................... 46
Plans........................................................................................... 128
Policy Statement................................................................................ 134
Pooling and Servicing Agreement................................................................. 5
Pre-Funded Amount............................................................................... 22
Pre-Funding Account............................................................................. 10
Prepayment Assumption........................................................................... 103, 113
Prepayment Period............................................................................... 34
Primary Hazard Insurance Policy................................................................. 74
Prohibited Transactions Tax..................................................................... 124
PTCE............................................................................................ 131
Purchase Price.................................................................................. 39
</TABLE>
140
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
--Q--
qualified stated interest....................................................................... 104
--R--
Rating Agency................................................................................... 135
real estate mortgage investment conduit......................................................... 1, 8, 43
Realized Loss................................................................................... 52
Record Date..................................................................................... 48
Refinance Loans................................................................................. 27
regular interests............................................................................... 43
Relevant Depositary............................................................................. 57
Relief Act...................................................................................... 99
REMIC........................................................................................... 1, 8, 43, 99
REMIC Certificates.............................................................................. 99
REMIC Provisions................................................................................ 99
REMIC Regular Certificates...................................................................... 14, 112
REMIC Regulations............................................................................... 100
REMIC Residual Certificates..................................................................... 14, 112
Reserve Fund.................................................................................... 54, 80
Residential Loans............................................................................... 1, 24
Residential Properties.......................................................................... 11, 23
residual interests.............................................................................. 14, 43, 99, 112
Restricted Group................................................................................ 130
Retained Interest............................................................................... 42
Retained Interest Rate.......................................................................... 42
Riegle Act...................................................................................... 19
Rules........................................................................................... 58
--S--
SAIF............................................................................................ 38
Scheduled Principal Balance..................................................................... 53
Securities...................................................................................... 1, 5
Security Interest Rate.......................................................................... 6
Security Owners................................................................................. 57
Security Principal Balance...................................................................... 6, 50
Securityholder.................................................................................. 100
Securityholders................................................................................. 57
Senior Liens.................................................................................... 24
Senior Percentage............................................................................... 53
Senior Securities............................................................................... 6, 42
Senior/Subordinate Series....................................................................... 42
Series.......................................................................................... 1
Servicemen's Readjustment Act................................................................... 27
Servicing Agreement............................................................................. 32
Servicing Default............................................................................... 69
SMMEA........................................................................................... 15, 133
Special Hazard Amount........................................................................... 79
Special Hazard Insurer.......................................................................... 78
</TABLE>
141
<PAGE>
<TABLE>
<CAPTION>
PAGE ON WHICH
TERM IS DEFINED
TERM IN THE IN THE
PROSPECTUS PROSPECTUS
- - - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Special Hazard Losses........................................................................... 52
Special Hazard Subordination Amount............................................................. 52
Specified Reserve Fund Balance.................................................................. 54
Stated Principal Balance........................................................................ 40
Strip Securities................................................................................ 7, 42
Stripped Agency Securities...................................................................... 31
Stripped Interest............................................................................... 34
Subordinate Securities.......................................................................... 6, 42
Subordination................................................................................... 48
Subsequent Loans................................................................................ 22
Sub-Servicer.................................................................................... 32
Sub-Servicing Account........................................................................... 47
Sub-Servicing Agreement......................................................................... 40
--T--
Terms and Conditions............................................................................ 59
Tiered REMICs................................................................................... 112
Title V......................................................................................... 96
Title VIII...................................................................................... 96
Trust Account................................................................................... 12
Trust Agreement................................................................................. 5, 41
Trust Fund...................................................................................... 6
Trust Fund Asset................................................................................ 6
Trustee......................................................................................... 5
--U--
Unaffiliated Sellers............................................................................ 22
Underwriter..................................................................................... 130
United States person............................................................................ 127
Unrecovered Senior Portion...................................................................... 53
--V--
VA.............................................................................................. 12
VA Guaranty Policy.............................................................................. 74
VA Loans........................................................................................ 24
--W--
Window Period Loans............................................................................. 94
</TABLE>
142
<PAGE>
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPO- RATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES
OFFERED HEREBY, NOR AN OFFER OF THE SECURITIES IN ANY STATE OR JURISDICTION IN
WHICH, OR TO ANY PERSON TO WHOM, SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF
THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
INFORMATION HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference.................................... S-3
Available Information.......................... S-3
Summary........................................ S-4
Risk Factors................................... S-14
The Pool....................................... S-21
Empire Funding................................. S-28
Prepayment and Yield Considerations............ S-33
The Trust...................................... S-48
Description of the Offered Notes............... S-49
Description of Credit Enhancement.............. S-55
Description of the Transfer and Servicing
Agreements................................... S-57
Federal Income Tax Consequences................ S-63
ERISA Considerations........................... S-65
Legal Investment Matters....................... S-66
Use of Proceeds................................ S-67
Method of Distribution......................... S-67
Legal Matters.................................. S-67
Ratings........................................ S-67
Index of Defined Terms......................... S-69
<CAPTION>
PROSPECTUS
<S> <C>
Available Information.......................... 3
Reports to Securityholders..................... 3
Incorporation of Certain Information by
Reference.................................... 4
Prospectus Supplement or
Current Report on Form 8-K..................... 4
Summary of Terms............................... 5
Risk Factors................................... 16
The Trust Funds................................ 22
Use of Proceeds................................ 33
Yield Considerations........................... 33
Maturity and Prepayment Considerations......... 35
The Depositor.................................. 37
Residential Loan Program....................... 37
Description of the Securities.................. 41
Description of Primary Insurance Coverage...... 72
Description of Credit Support.................. 76
Certain Legal Aspects of Residential Loans..... 81
Certain Federal Income Tax Consequences........ 99
State and Other Tax Consequences............... 128
ERISA Considerations........................... 128
Legal Investment............................... 133
Plans of Distribution.......................... 134
Legal Matters.................................. 135
Financial Information.......................... 135
Rating......................................... 135
Index of Significant Definitions............... 137
</TABLE>
$219,737,268
EMPIRE FUNDING HOME LOAN
OWNER TRUST 1997-3
[LOGO]
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
(DEPOSITOR)
EMPIRE FUNDING CORP.
(TRANSFEROR AND SERVICER)
-----------------------------------------
PROSPECTUS SUPPLEMENT
----------------------------
PAINEWEBBER INCORPORATED
AUGUST 19, 1997
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