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PROSPECTUS SUPPLEMENT DATED NOVEMBER 3, 1998
(TO PROSPECTUS DATED NOVEMBER 3, 1998)
$283,580,654
HOME LOAN ASSET BACKED NOTES, SERIES 1998-3
[LOGO OF EMPIRE FUNDING]
EMPIRE FUNDING HOME LOAN OWNER TRUST 1998-3
(ISSUER)
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
(DEPOSITOR)
EMPIRE FUNDING CORP.
(TRANSFEROR AND SERVICER)
NORWEST BANK OF MINNESOTA, NATIONAL ASSOCIATION
(MASTER SERVICER)
The Issuer, an Owner Trust, is issuing notes that have an original principal
balance of $283,580,654 and an interest rate of 6.75%.
Interest and principal is due monthly on the notes on the 25th day of each
month, beginning in December 1998.
The notes are backed primarily by a pool of second lien mortgage loans on
single family residences, in which the borrowers have little or negative equity
(i.e., the combined loan-to-value ratios approach or exceed 100%).
Credit enhancement consisting of an unconditional and irrevocable guarantee of
timely payment of interest and ultimate payment of principal on the notes is
provided by a financial guaranty insurance policy issued by MBIA Insurance
Corporation.
[LOGO of MBIA]
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-13 OF
THIS PROSPECTUS SUPPLEMENT AND PAGE 14 IN THE PROSPECTUS.
The notes will represent obligations of the Issuer only and will not
represent obligations of PaineWebber Mortgage Acceptance Corporation IV or any
other person or entity. No governmental agency or any other person will insure
the notes or the collateral securing the notes, except that MBIA Insurance
Corporation will insure the notes.
You should consult with your own advisors to determine if the notes are
appropriate investments for you and to determine the applicable legal, tax,
regulatory and accounting treatment of the notes.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE NOTES OR
DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PaineWebber Incorporated will not list the notes on any national securities
exchange or on any automated quotation system of any registered securities
association such as NASDAQ.
The underwriter, PaineWebber Incorporated, will purchase the notes from
PaineWebber Mortgage Acceptance Corporation IV and will offer them to the public
at a price equal to 99.97742% of the initial principal amount of the notes.
PaineWebber Incorporated will receive an underwriting discount equal to 0.50% of
the initial principal amount of the notes. PaineWebber Incorporated expects to
deliver the notes to purchasers on November 5, 1998. PaineWebber Mortgage
Acceptance Corporation IV expects to receive from this offering approximately
99.47742% of the initial principal amount of the notes, before deducting
expenses payable by PaineWebber Mortgage Acceptance Corporation IV.
PAINEWEBBER INCORPORATED
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
Information about the notes for the Series 1998-3 is provided in two
separate documents that progressively include more detail: (a) the accompanying
prospectus dated November 3, 1998, which provides general information, some of
which may not apply to the notes for the Series 1998-3; and (b) this prospectus
supplement, which describes the specific terms of the notes for the Series
1998-3. Sales of the notes may not be completed unless you have received both
this prospectus supplement and the prospectus. You are urged to read both this
prospectus supplement and the prospectus in full.
IF THE TERMS OF THE NOTES VARY BETWEEN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS, THEN YOU SHOULD RELY ON THE INFORMATION IN THIS
PROSPECTUS SUPPLEMENT.
Cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials are included to assist in locating
further related discussions. The following table of contents and the table of
contents in the accompanying prospectus provide the pages on which these
captions are located.
Certain capitalized terms are defined and used in this prospectus
supplement and the prospectus to assist you in understanding the terms of the
notes and this offering. A listing of the pages where capitalized terms used in
this prospectus supplement and the accompanying prospectus are defined is
included under the caption 'Index of Defined Terms' beginning on page S-69 in
this prospectus supplement and under the caption 'Index of Defined Terms'
beginning on page 134 in the accompanying prospectus.
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TABLE OF CONTENTS
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SUMMARY................................................................................................... S-5
RISK FACTORS.............................................................................................. S-13
Yield, Prepayment and Maturity Considerations........................................................... S-13
Limited Liquidity....................................................................................... S-13
Adequacy of Credit Enhancement.......................................................................... S-13
Limitations on Rights of Noteholders.................................................................... S-14
Underwriting Guidelines................................................................................. S-14
Realization Upon Defaulted Loans........................................................................ S-15
Geographic Concentration................................................................................ S-15
Non-Recordation of Assignments.......................................................................... S-16
Legal Considerations.................................................................................... S-16
Limitations on the Transferor and Servicer.............................................................. S-16
Variations in Statistical Characteristics of Loan Pool.................................................. S-17
THE POOL.................................................................................................. S-18
General................................................................................................. S-18
Payments on the Loans................................................................................... S-18
Characteristics of the Loans............................................................................ S-19
Loan Statistics......................................................................................... S-19
EMPIRE FUNDING............................................................................................ S-25
General................................................................................................. S-25
Servicing Procedures.................................................................................... S-25
Repurchase of Loans..................................................................................... S-26
Delinquency Experience.................................................................................. S-28
MASTER SERVICER........................................................................................... S-29
General................................................................................................. S-29
Master Servicer Duties.................................................................................. S-29
UNDERWRITING CRITERIA..................................................................................... S-30
General................................................................................................. S-30
Conventional high LTV Loans............................................................................. S-31
PREPAYMENT AND YIELD CONSIDERATIONS....................................................................... S-33
General................................................................................................. S-33
Excess Spread and Reduction of Overcollateralization Amount............................................. S-36
Reinvestment Risk....................................................................................... S-36
Maturity Date........................................................................................... S-37
Weighted Average Lives of the Notes..................................................................... S-37
THE OWNER TRUST........................................................................................... S-40
General................................................................................................. S-40
The Owner Trustee....................................................................................... S-40
THE GRANTOR TRUST......................................................................................... S-41
DESCRIPTION OF THE NOTES.................................................................................. S-42
General................................................................................................. S-42
Payments on the Notes................................................................................... S-42
Priority of Payments.................................................................................... S-43
Related Definitions..................................................................................... S-43
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Securities Insurer Reimbursement Amount................................................................. S-45
Optional Termination.................................................................................... S-46
DESCRIPTION OF CREDIT ENHANCEMENT......................................................................... S-46
The Guaranty Policy..................................................................................... S-47
The Securities Insurer.................................................................................. S-49
Overcollateralization................................................................................... S-50
Subordination........................................................................................... S-52
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS...................................................... S-52
Sale and Assignment of the Loans and the Grantor Trust Certificate...................................... S-52
Representations and Warranties.......................................................................... S-53
Fees and Expenses....................................................................................... S-54
Servicing............................................................................................... S-54
Collection Account, Note Payment Account and Certificate Distribution Account........................... S-54
Income from Accounts.................................................................................... S-55
Collection and Other Servicing Procedures for Loans..................................................... S-55
Insurance............................................................................................... S-56
Realization upon Defaulted Loans........................................................................ S-56
Evidence as to Compliance............................................................................... S-57
Certain Matters Regarding the Servicer.................................................................. S-57
Servicer Determinations and Events of Default........................................................... S-57
Rights of Noteholders Upon Occurrence of Event of Default............................................... S-59
Restrictions on Noteholders' Rights..................................................................... S-59
The Owner Trustee, Indenture Trustee and Grantor Trustee................................................ S-59
Duties of the Owner Trustee and Indenture Trustee....................................................... S-60
Reports to Noteholders.................................................................................. S-61
FEDERAL INCOME TAX CONSEQUENCES........................................................................... S-62
Classification of Investment Arrangement................................................................ S-62
Taxation of Holders..................................................................................... S-62
Backup Withholding and Information Reporting............................................................ S-63
ERISA CONSIDERATIONS...................................................................................... S-64
General................................................................................................. S-64
Prohibited Transactions................................................................................. S-64
Review by Plan Fiduciaries.............................................................................. S-65
LEGAL INVESTMENT MATTERS.................................................................................. S-65
USE OF PROCEEDS........................................................................................... S-65
UNDERWRITING.............................................................................................. S-66
EXPERTS................................................................................................... S-66
LEGAL MATTERS............................................................................................. S-67
RATINGS................................................................................................... S-67
INDEX OF DEFINED TERMS.................................................................................... S-68
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S-4
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SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND DOES
NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING AN
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF THE OFFERING OF THE
NOTES, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING
PROSPECTUS.
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RELEVANT PARTIES
Issuer..................................... Empire Funding Home Loan Owner Trust 1998-3, a Delaware business
trust, will be established pursuant to a trust agreement among the
Depositor, the Paying Agent, the Owner Trustee and Empire Funding
Corp.
Grantor Trust.............................. Empire Funding Grantor Trust 1998-3, a New York trust, will be
established pursuant to a grantor trust agreement among the
Depositor, the Grantor Trustee and Empire Funding Corp.
Depositor.................................. PaineWebber Mortgage Acceptance Corporation IV, a Delaware
corporation. See 'Depositor' in the accompanying prospectus.
Transferor and Servicer.................... Empire Funding Corp., an Oklahoma corporation.
Master Servicer............................ Norwest Bank Minnesota, National Association.
Securities Insurer......................... MBIA Insurance Corporation.
Indenture Trustee, Grantor Trustee, Paying
Agent and Custodian..................... U.S. Bank National Association, a national banking association.
Owner Trustee.............................. Wilmington Trust Company, a Delaware banking corporation.
RELEVANT DATES
Closing Date............................... November 5, 1998.
Cut-Off Date............................... October 31, 1998.
Statistical Calculation Date............... September 30, 1998.
Payment Date............................... The 25th day of each month or, if such day is not a business day,
the next business day, commencing in December 1998.
Due Period................................. The calendar month preceding the relevant payment date.
Determination Date......................... The 14th calendar day of each month or, if such day is not a
business day, then the preceding business day.
OFFERED SECURITIES........................... The Issuer is offering the Series 1998-3 notes that have an
original principal balance of $283,580,654 and accrue interest at
a fixed rate of 6.75%.
The notes represent obligations of the Issuer only, and will be
secured by the assets of the Issuer pursuant to the Indenture. See
'Description of the Notes' in this prospectus supplement.
Interest Payments.......................... On each payment date, interest accrued during the preceding
Accrual Period on the notes will be due. The notes will accrue
interest for each Accrual Period on their unpaid principal balance
at a fixed rate per annum equal to 6.75%. Interest on the notes
will be calculated on the basis of a 360-day year consisting of
twelve 30-day months.
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When the clean-up call is first exercisable (when the aggregate
principal balance of the loans is less than or equal to 10% of the
original aggregate principal balance of the loans), the interest
rate on the notes will be increased by an annual rate of 0.50%.
Each 'Accrual Period' is the calendar month immediately before a
payment date (or for the first payment date, the portion of the
month beginning on the closing date).
See 'Description of the Notes -- Payments on the Notes' in this
prospectus supplement.
Principal Payments......................... On each payment date, the notes will be due payments of principal.
See 'Description of the Notes -- Payments on the Notes' in this
prospectus supplement for a discussion of the amount and timing of
principal payments.
The final payment of principal is scheduled to occur on November
25, 2024 (the 'Maturity Date'). The notes are expected to have
received payments of principal in full by no later than the
Maturity Date. However, the actual final payment date, on which
the notes receive payment of principal in full, may occur earlier
than the Maturity Date. See 'Prepayment and Yield
Considerations -- Maturity Dates' in this prospectus supplement.
OTHER SECURITIES
ISSUED....................................... In addition to the Home Loan Asset Backed Notes, Series 1998-3,
the Issuer is also issuing Residual Interest Certificates that
evidence the residual interest in the assets of the Issuer. The
Residual Interest Certificates are subordinate to the notes.
THE RESIDUAL INTEREST CERTIFICATES ARE NOT BEING OFFERED THROUGH
THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS.
ASSETS OF THE ISSUER......................... The assets of the Issuer will consist primarily of the grantor
trust certificate, which evidences the entire beneficial interest
in the assets of the grantor trust.
The Loans.................................. The assets of the grantor trust will consist primarily of a pool
of home loans, which will have an original aggregate principal
balance of approximately $299,609,777 as of October 31, 1998.
The home loans included in the pool will consist of either:
mortgage loans on single family (i.e., one- to four-unit)
residences, condominium units and townhouses; or
unsecured consumer loans.
Substantially all of the loans will be secured by second liens on
mortgaged properties in which the borrowers have little or
negative equity at origination (i.e., the combined loan-to-value
ratios approach or exceed 100%), and which are known as high LTV
loans. All of the loans will be closed-end, fixed-rate home loans,
which are not insured or guaranteed by any governmental agency
(i.e., conventional
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loans). See 'The Pool' in this prospectus supplement and 'The
Trust Funds -- Residential Loans' in the accompanying prospectus.
SERVICING OF THE
LOANS........................................ Empire Funding Corp., as the Servicer, will perform the loan
servicing and receive a monthly servicing fee and other servicing
compensation. See 'Description of the Transfer and Servicing
Agreements -- Servicing' in this prospectus supplement. Norwest
Bank Minnesota, National Association, will be the master servicer.
The Master Servicer will monitor the servicing activities of the
Servicer and will be available to assume the servicing upon a
termination of the Servicer. See 'The Master Servicer' in this
prospectus supplement.
CREDIT ENHANCEMENT........................... Credit enhancement for the notes will be provided by and utilized
in the following order of priority:
First, the subordination of the Residual Interest Certificates;
Second, the overcollateralization feature; and
Third, the Guaranty Policy (as described below).
Each of these sources of credit enhancement is intended to
increase the likelihood that the holders of the notes will receive
the full and timely amount of interest payments and full amount of
principal payments due such holders and to provide such holders
protection against losses on the loans. The credit enhancement for
the Series 1998-3 notes is for the benefit of these notes only and
these notes will not be entitled to the benefits of any other
credit enhancement. See 'Risk Factors -- Adequacy of Credit
Enhancement' in this prospectus supplement.
Guaranty Policy............................ A Financial Guaranty Insurance Policy (the 'Guaranty Policy') from
MBIA Insurance Corporation (the 'Securities Insurer') will
irrevocably and unconditionally guaranty timely payment of
interest and ultimate payment of principal due on the notes. The
Guaranty Policy may not be canceled for any reason. The Guaranty
Policy does not guaranty any specified rate of prepayments, nor
does the Guaranty Policy provide funds to redeem any of the notes,
unless such redemption is at the option of the Securities Insurer.
See 'Description of Credit Enhancement -- The Guaranty Policy' and
' -- The Securities Insurer' in this prospectus supplement.
The insurance provided by the Guaranty Policy is not covered by
the Property/Casualty Insurance Security Fund specified in
Article 76 of the New York Insurance Law.
Subordination.............................. The rights of the holders of the Residual Interest Certificates to
receive payments from any remaining amounts available on each
payment date are subordinate to such rights of the holders of the
notes. See 'Description of
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Credit Enhancement -- Subordination' in this prospectus
supplement.
Overcollateralization...................... The 'Overcollateralization Amount' with respect to any payment
date, will equal the excess of the aggregate principal balance of
the loans over the unpaid principal balance of the notes (after
giving effect to payments on the notes on such payment date). On
the closing date, the initial Overcollateralization Amount will be
$16,029,123, which is approximately 5.35% of the original
aggregate principal balance of the loans as of the Cut-Off Date.
The application of Excess Spread in reduction of the unpaid
principal balance of the notes is intended to create and maintain
the Overcollateralization Amount at a level equal to a certain
target amount described in this prospectus supplement.
The overcollateralization target amount will generally be equal to
12.65% of the Cut-Off Date loan pool principal balance, which is
approximately $37,900,637. The overcollateralization target amount
may increase or decrease over time, subject to certain minimum and
maximum amounts and trigger events that are based on the
delinquency and loss experience of the loans and the outstanding
loan pool principal balance.
An increase in the overcollateralization target amount will occur
if the delinquency or loss experience of the loans exceeds certain
levels established by the Securities Insurer. If an increase
occurs, then the principal amortization of the notes would be
accelerated by the payment of any available Excess Spread to the
notes, until the Overcollateralization Amount equals the increased
overcollateralization target amount.
If the delinquency or loss experience of the loans does not exceed
the levels established by the Securities Insurer, then a decrease
or stepdown in the overcollateralization target amount may
initially occur when the outstanding loan pool principal balance
is reduced to an amount established by the Securities Insurer. A
decrease or stepdown will likely result in the current
Overcollateralization Amount exceeding the decreased
overcollateralization target amount. If the Overcollateralization
Amount exceeds the overcollateralization target amount, then (i)
all or a portion of the principal payments that would otherwise be
paid to the notes will instead be paid to the Residual Interest
Certificates and (ii) the principal amortization of the notes
would be reduced in relation to the principal amortization of the
loans.
See 'Description of Credit Enhancement -- Overcollateralization'
in this prospectus supplement.
ALLOCATION AND PAYMENTS TO THE NOTES......... Interest and principal payments due on the notes will be paid from
the Available Payment Amount and any Insured Payment made under
the Guaranty Policy.
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On each payment date, the priority of payments from the Available
Payment Amount will be as follows:
First, to pay the Regular Payment Amount; and
Second, to pay the Excess Spread, if any.
The 'Available Payment Amount' (as further described in this
prospectus supplement) with respect to any payment date, will
generally equal the interest and principal payments collected from
the loans during the preceding calendar month (a 'Due Period'),
minus the payment of the Issuer's fees and expenses that are owed
to the Master Servicer, the Servicer, the Securities Insurer, the
Indenture Trustee, the Custodian and the Owner Trustee.
The Securities Insurer will be required to make an Insured Payment
to the Indenture Trustee upon receipt of a claim under the
Guaranty Policy. See 'Description of Credit Enhancement -- The
Guaranty Policy' in this prospectus supplement.
An 'Insured Payment' (as further described in this prospectus
supplement) with respect to any payment date, will generally be
made under the Guaranty Policy to cover any deficiency
attributable to the sum of
any insufficiency resulting from the Available Payment Amount
being less than the accrued and unpaid interest due on the
notes; and
any deficiency resulting from the aggregate outstanding
principal balances of the loans being less than the aggregate
unpaid principal balances of the notes.
The 'Regular Payment Amount' (as further described in this
prospectus supplement) with respect to any payment date, will
generally equal the lesser of:
(1) the Available Payment Amount; and
(2) the sum of the following amounts:
(a) the accrued and unpaid interest due on the notes for the
related Accrual Period; and
(b) the principal amounts collected on or with respect to the
loans during the related Due Period, subject to certain
adjustments resulting from the notes being overcollateralized
in certain circumstances.
The 'Excess Spread' with respect to any payment date, will equal
the excess, if any, of (1) the Available Payment Amount, over (2)
the Regular Payment Amount.
See 'Description of the Notes' in this prospectus supplement for a
further discussion of the payments of interest and principal on
the notes.
Application of the Regular Payment
Amount.................................. The Regular Payment Amount and any Insured Payment will be paid on
each payment date in the following order of priority:
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First, to pay the holders of the notes accrued and unpaid
interest;
Second, to pay to the holders of the notes principal in an
amount equal to the principal amounts collected on or with
respect to the loans during the preceding Due Period, subject to
certain adjustments resulting from the notes being either
overcollateralized or undercollateralized in certain
circumstances, until the notes have been paid their principal in
full; and
Third, any remaining amount to be applied together with Excess
Spread for payment as specified in ' -- Application of Excess
Spread' below.
See 'Description of the Notes' in this prospectus supplement.
Application of Excess Spread............... The Excess Spread, if any, will be paid on each payment date in
the following order of priority (after giving effect to all
payments specified above under ' -- Application of the Regular
Payment Amount'):
First, to pay the Securities Insurer any Excess Spread in the
amount that is needed to reimburse the Securities Insurer for
any Insured Payments previously made under the Guaranty Policy
and any other amounts owed under the Insurance Agreement, in
each case, together with interest at a rate specified in the
agreement pursuant to which the Guaranty Policy was issued;
Second, to pay the holders of the notes as principal any Excess
Spread, in an amount up to the Overcollateralization Deficiency
Amount, if any, until the notes have been paid their principal
in full; and
Third, to pay any remaining Excess Spread (A) first, to the
Servicer in an amount needed to reimburse any non-recoverable
servicing advances, and (B) then to the holders of the Residual
Interest Certificates.
The 'Overcollateralization Deficiency Amount' with respect to any
payment date, will equal the excess, if any, of (1) the
overcollateralization target amount, over (2) the
Overcollateralization Amount.
See 'Description of the Notes' in this prospectus supplement.
OPTIONAL TERMINATION......................... The holders of Residual Interest Certificates have the option to
effect an early termination of the notes on or after any payment
date on which the outstanding aggregate principal balance of the
loans declines to 10% or less of the original aggregate principal
balance of the loans (the first such Payment Date, the 'Clean-up
Call Date'), by purchasing all of the loans at a price that will
at least pay in full interest and principal on the notes. On or
after any payment date on which the outstanding aggregate
principal balance of the loans declines to 5% or less of the
original
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aggregate principal balance of the loans, the Securities Insurer
or the Master Servicer will have the option to effect the same
early termination of the notes if the holders of the Residual
Interest Certificates fail to exercise this early termination
option.
In addition, whether or not the Clean-up Call Date has occurred,
if certain events of default occur with respect to the Issuer, the
Securities Insurer may, at its option, cause an early termination
of the notes. See 'Description of the Notes -- Optional
Termination' in this prospectus supplement.
REGISTRATION AND DENOMINATIONS OF THE
NOTES........................................ The notes will be registered in the name of the nominee of The
Depository Trust Company ('DTC') and issued only in book-entry
form. Transfers within DTC will be in accordance with the usual
rules and operating procedures of DTC. You will not receive a
definitive certificate representing your note, except in limited
circumstances described in the accompanying prospectus. See 'Risk
Factors -- Book-Entry Registration' and 'Description of the
Securities -- Book-Entry Registration of Securities' in the
accompanying Prospectus.
Beneficial interests in the notes will be offered in minimum
denominations of $25,000 and integral multiples of $1,000 in
excess of that amount.
TAX STATUS................................... Special counsel to the Depositor and the Underwriter is of the
opinion that under the existing law the notes will be
characterized as debt for federal income tax purposes and that
neither the Grantor Trust nor the Issuer will be characterized as
an association (or a publicly traded partnership) taxable as a
corporation or a taxable mortgage pool for federal income tax
purposes.
By acceptance of a Note, you are deemed to agree to treat your
notes as debt for Federal, state and local income tax purposes and
franchise tax purposes. See 'Federal Income Tax Consequences' in
this prospectus supplement and 'Certain Federal Income Tax
Consequences' in the accompanying prospectus for additional
information concerning the application of federal income tax laws.
ERISA CONSIDERATIONS......................... Subject to important considerations described in this prospectus
supplement and in the accompanying prospectus, the notes are
eligible for purchase by persons investing assets of employee
benefit plans or individual retirement accounts. You should
carefully review with your legal advisors whether the purchase or
holding of the notes could give rise to a prohibited transaction.
See 'ERISA Considerations' in this prospectus supplement and in
the accompanying prospectus.
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LEGAL INVESTMENT............................. Your 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
secured by second lien mortgages. The appropriate characterization
of your notes under various legal investment restrictions, and
therefore your ability, if you are subject to these restrictions,
to purchase the notes may be subject to significant interpretative
uncertainties. You should consult your own legal advisors to
determine whether the notes constitute legal investments for you.
See 'Legal Investment Matters' in this prospectus supplement and
'Legal Investment' in the accompanying Prospectus.
NOTE RATINGS................................. On the closing date, the notes are required to be rated 'Aaa' by
Moody's Investors Service, Inc., 'AAA' by Standard & Poor's
Ratings Services and 'AAA' by Fitch IBCA, Inc. (the 'Rating
Agencies'). See 'Ratings' in this prospectus supplement and
'Rating' in the accompanying prospectus for a discussion of the
primary factors upon which the ratings are based.
IMPORTANT COVENANTS OF NOTEHOLDERS........... By acceptance of your note, you agree not to institute or join in
any bankruptcy, reorganization or other insolvency or similar
proceeding against the Transferor, the Servicer, the Master
Servicer or the Issuer. You also agree to allow the Securities
Insurer to exercise all of your voting rights with respect to your
notes. See 'Risk Factors -- Limitations on Rights of Noteholders'
and 'Description of the Transfer and Servicing
Agreements -- Restrictions on Noteholders' Rights' in this
prospectus supplement.
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RISK FACTORS
You should carefully consider the following risks before making an
investment decision. In particular, payments on your notes will depend on
payments received on and other recoveries with respect to the loans. Therefore,
you should carefully consider the risk factors relating to the loans.
The risks and uncertainties described below are not the only ones relating
to your notes. Additional risks and uncertainties not presently known to Empire
Funding Corp. or PaineWebber Mortgage Acceptance Corporation IV or that they
currently consider immaterial may also impair your investment.
If any of the following risks are realized, your investment could be
materially and adversely affected.
This prospectus supplement also contains forward-looking statements that
involve risks and uncertainties. Actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including the risks described below and elsewhere in this prospectus
supplement.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
VARIATIONS IN YIELD TO MATURITY. The degree to which the actual yield of
your notes may vary from the anticipated yield will depend upon:
the prices paid by you for your notes, including the amount of any premium
or discount;
the degree to which the timing of payments on the notes is sensitive to
the prepayment experience of loans and the application of Excess Spread as
principal on the notes; and
the timing of delinquencies, defaults and losses on the loans to the
extent not covered by the credit enhancement for the notes, including the
Guaranty Policy.
On each payment date, until the Overcollateralization Amount equals the
overcollateralization target amount, the allocation of the Excess Spread as an
additional payment of principal on the notes will accelerate the principal
amortization of the notes relative to the speed at which principal is paid on
loans. However, any reduction in the Overcollateralization Amount, which is paid
to the holders of the Residual Interest Certificates, will slow the principal
amortization of the notes. See 'Prepayment and Yield Considerations' in this
prospectus supplement.
PREPAYMENT EXPERIENCE OF THE LOANS. The rate and timing of payments of
principal on the loans (i.e., the prepayment experience), among other factors,
will affect the rates of principal payments on the notes and the aggregate
amount of payments and the yield to maturity of the notes. Because the
prepayment experience of the loans will depend on future events and a variety of
factors, the prepayment experience of the loans is uncertain and in all
likelihood will not conform to any projected rates of prepayments. See
'Prepayment and Yield Considerations' in this prospectus supplement.
LIMITED HISTORICAL PREPAYMENT EXPERIENCE OF HIGH LTV LOANS. High LTV loans
similar to the loans have been originated in significant volumes only during the
past few years. In addition, since January 1996, Empire Funding Corp. has
substantially increased its production of high LTV loans and the size of its
servicing portfolio of high LTV loans. Accordingly, limited historical data with
respect to the delinquency, loss and prepayment experience of high LTV loans is
available on which to rely in formulating projections of future rates of
delinquencies, losses and prepayments on the loans. See 'Empire
Funding -- Delinquency Experience,' and 'Prepayment and Yield Considerations' in
this prospectus supplement. You should not base your investment determination on
any prior prepayment experience of high LTV loans or any prior delinquency,
default and loss experience of Empire Funding Corp. set forth in this prospectus
supplement.
LIMITED LIQUIDITY
A secondary market for the notes may not develop or, if it does develop,
this market may not provide you with liquidity of investment or continue while
your notes are outstanding. See 'Risk Factors -- Limited Liquidity' in the
accompanying prospectus.
ADEQUACY OF CREDIT ENHANCEMENT
RATINGS OF SECURITIES INSURER. Any reduction in a rating assigned to the
claims-paying ability of the Securities Insurer may result in a reduction in the
rating of the notes. Future events may reduce the
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rating of the Securities Insurer or impair the ability of the Securities Insurer
to pay claims for Insured Payments under the Guaranty Policy. In that event, the
Guaranty Policy may not cover delays or shortfalls in payments of interest or
ultimate principal due on the notes. See 'Description of Credit
Enhancement -- The Guaranty Policy' in this prospectus supplement.
LOAN DELINQUENCIES, DEFAULTS AND LOSSES. Delinquencies, defaults and losses
on the loans will reduce the credit enhancement available from the subordination
and overcollateralization features. If amounts available from this credit
enhancement are not adequate to protect against the delinquencies, defaults and
losses experienced on the loans, then delays or shortfalls in payments of
interest or principal due on the notes will occur, unless such delays or
shortfalls are covered under the Guaranty Policy. See 'Description of Credit
Enhancement' in this prospectus supplement.
AVAILABILITY OF EXCESS SPREAD FOR OVERCOLLATERALIZATION. Excess Spread may
not be generated in sufficient amounts to create and maintain the
Overcollateralization Amount at the overcollateralization target amount at all
times. In particular, delinquencies, defaults and principal prepayments on the
loans will reduce the Excess Spread that otherwise would be available on a
payment date. The reduction of the available Excess Spread will result in a
slower principal amortization of the notes in relation to the loans, which in
turn will result in a lower level of Overcollateralization Amount. See
'Description of Credit Enhancement -- Overcollateralization' in this prospectus
supplement.
LIMITATIONS ON SUBORDINATION. The holders of the Residual Interest
Certificates are not obligated to refund previous payments to such holders of
the Notes, including any payments of Excess Spread, regardless of whether on a
subsequent payment date insufficient funds are available to pay interest or
principal due on the notes. See 'Description of Credit Enhancement --
Subordination' in this prospectus supplement.
LIMITATIONS ON RIGHTS OF NOTEHOLDERS
Generally, the Securities Insurer may exercise all of your voting rights
with respect to the notes (the 'Noteholder Rights') without your consent. The
exercise, or a refusal to consent to the exercise, by the Securities Insurer of
certain Noteholder Rights could be adverse to your interest. For example, such
an event could cause an unanticipated prepayment of principal on your notes. See
'Description of the Transfer and Servicing Agreements -- Restrictions on
Noteholder Rights' in this prospectus supplement.
UNDERWRITING GUIDELINES
NON-CONFORMING UNDERWRITING GUIDELINES. In comparison to first lien
mortgage loans that conform to the underwriting guidelines of the Federal
National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage
Corporation ('FHLMC'), the loans have generally been underwritten with more
lenient underwriting criteria. Accordingly, the loans will likely experience
higher (and possibly substantially higher) rates of delinquencies, defaults and
losses than the rates experienced by first lien mortgage loans underwritten in
conformity with FNMA or FHLMC underwriting guidelines. See ' -- Realization Upon
Defaulted Loans' below. If certain loans have been originated or purchased by
the Transferor under less stringent underwriting requirements, then these loans
will likely experience higher rates of delinquencies, defaults and losses than
those loans originated or purchased under more stringent underwriting
requirements. See ' -- Adequacy of Credit Enhancement' above, and 'Underwriting
Criteria' in this prospectus supplement.
DETERIORATION IN CREDITWORTHINESS OF BORROWERS. Although the
creditworthiness of the borrowers is the primary consideration in the
underwriting of the loans, the creditworthiness of the borrowers may
subsequently deteriorate. For example, the borrowers may incur new consumer debt
following the origination of their loans. Any reloading of debt by borrowers
will likely deteriorate their creditworthiness. A deterioration in
creditworthiness will likely impair the ability of borrowers to timely pay their
debts and increase the rates of delinquencies, defaults and losses experienced
on the loans. See ' -- Adequacy of Credit Enhancement' above.
ECONOMIC DOWNTURN. National and regional economic conditions have generally
been favorable for the limited time period during which high LTV loans have been
originated. An economic downturn or recession will likely have an adverse effect
on the ability and willingness of borrowers to repay their loans. However,
because of the limited historical data with respect to high LTV loans, the
severity of the
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effect of an economic downturn or recession on the rates of delinquencies,
defaults and losses on the loans is uncertain and difficult to predict. See
' -- Realization Upon Defaulted Loans' below, and 'Prepayment and Yield
Considerations' in this prospectus supplement.
REALIZATION UPON DEFAULTED LOANS
ADEQUACY OF SECURITY AND SEVERITY OF LOSSES. Because the loans are
primarily secured by second liens, the mortgaged properties in all likelihood
will not provide adequate security for recoveries from defaulted loans. See
'Risk Factors -- Nature of Mortgages' in the accompanying prospectus. In
addition, defaulted loans will likely experience more severe losses (which may
be total losses) of outstanding principal and interest than first lien mortgage
loans, because the loans also have Combined Loan-to-Value Ratios at origination
in excess of 100%. See ' -- Adequacy of Credit Enhancement' above. Furthermore,
the Combined Loan-to-Value Ratios for a majority of the loans have been based
upon the borrowers' representation as to the value of the Mortgaged Property,
which may not accurately reflect prevailing market values. Absent appreciation
in property values, the borrowers will not build equity in the mortgaged
properties through scheduled amortization of their loans for an extended period
of time. Accordingly, foreclosures of mortgaged properties from defaulted loans
in all likelihood will not result in any significant recoveries, because of the
costs of such foreclosures, including the satisfaction of the senior liens. Even
assuming that the mortgaged properties provide adequate security for the loans,
substantial delays in recoveries may occur from the foreclosure or liquidation
of defaulted loans. The Transferor does not require that borrowers substantiate
or maintain hazard or flood insurance for their loans, except for loans that are
secured by a first lien mortgage. Accordingly, the loans also may experience
losses from uninsured hazards, floods or other casualties to the mortgaged
properties, because borrowers may not have sufficient insurance coverage. See
'Description of the Transfer and Servicing Agreements -- Realization Upon
Defaulted Loans' in this prospectus supplement, and 'Certain Legal Aspects of
Residential Mortgage Loans -- Foreclosure on Mortgages' and ' -- Junior
Mortgages' in the prospectus.
INTERFERENCE FROM BANKRUPTCY LAWS. The application of Federal and state
laws, including bankruptcy and debtor relief laws, may interfere with or
adversely affect the ability to realize upon the mortgaged properties, enforce
deficiency judgments or pursue collection litigation with respect to defaulted
loans. As a consequence, borrowers who have defaulted on their loans and sought,
or are considering seeking, relief under bankruptcy or debtor relief laws will
have substantially less incentive to repay their loans, and such loans will
likely experience more severe losses, which may be total losses. See
' -- Adequacy of Credit Enhancement' above and ' -- Legal
Considerations -- Legal Compliance and Regulation' below.
UNSECURED LOANS. Defaulted loans that are unsecured will likely experience
total losses of outstanding principal and interest on such loans. See
' -- Adequacy of Credit Enhancement' above.
BORROWER RELOCATIONS. The relocation of borrowers may result in such
borrowers being unable to pay-off their loans in full from the sale proceeds of
the mortgaged properties. Accordingly, borrower relocations may increase the
rates of delinquencies, defaults and losses experienced on the loans. See
' -- Adequacy of Credit Enhancement' above.
SALE OF DEFAULTED LOANS TO AFFILIATE OF SERVICER. A sale of defaulted loans
by the Servicer will likely recover only a small portion (which may be an
insignificant amount) of the outstanding principal and interest on such
defaulted loans. The Servicer may organize an affiliated company (the
'Affiliated Special Servicer') to purchase defaulted high LTV loans. The sale of
defaulted loans to an Affiliated Special Servicer creates a potential for
conflict of interest, because recoveries from such defaulted loans in excess of
the purchase price paid for such loans will be retained by the Affiliated
Special Servicer and not be available for payments on the notes.
GEOGRAPHIC CONCENTRATION
CALIFORNIA CONCENTRATION. Because of the geographic concentration of
mortgaged properties within California, the loans may experience higher rates of
delinquencies, defaults and losses than the rates experienced by loans having
greater geographical diversification. An economic downturn or recession in
California may affect the ability of the borrowers to timely pay their loans. In
addition, mortgaged
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properties located in California may experience special hazards that are not
covered by any available casualty insurance, including earthquakes, mudslides
and other disasters. Accordingly, these loans may experience higher rates of
delinquencies, defaults and losses than rates experienced for similar loans
secured by residential properties located in other states. See ' -- Adequacy of
Credit Enhancement' above.
NON-RECORDATION OF ASSIGNMENTS
The Transferor will not be required to record assignments of the mortgages
to the Grantor Trustee in the real property records of California and certain
other states. The Transferor, in its capacity as the Servicer, will retain
record title to such mortgages on behalf of the Grantor Trustee and the holders
of the Notes. See 'Description of the Transfer and Servicing Agreements -- Sale
and Assignment of the Loans and the Grantor Trust Certificate' in this
prospectus supplement.
The recordation of the assignments of the mortgages in favor of the Grantor
Trustee is not necessary to effect a transfer of the loans to the Grantor
Trustee. However, if the Transferor or the Depositor were to sell, assign,
satisfy or discharge any loan prior to recording the related assignment in favor
of the Grantor Trustee, the other parties to such sale, assignment, satisfaction
or discharge may have rights superior to those of the Grantor Trustee. In some
states, in the absence of such recordation of the assignments of the mortgages,
the transfer to the Grantor Trustee of the loans may not be effective against
certain creditors or purchasers from the Transferor or a trustee in bankruptcy
of the Transferor. If such other parties, creditors or purchasers have rights to
the loans that are superior to those of the Grantor Trustee, you could lose the
right to future payments of principal and interest from such loans and could
suffer a loss of principal and interest to the extent that such loss is not
otherwise covered by the applicable credit enhancement.
LEGAL CONSIDERATIONS
INSOLVENCY OF TRANSFEROR. If the Transferor becomes insolvent, then a
receiver or bankruptcy trustee of the Transferor may attempt to challenge the
sale treatment of the loans by the Transferor and re-characterize such sale as a
borrowing secured by a pledge of the loans. An attempt to challenge such sale
treatment, even if unsuccessful, may cause delays or shortfalls in payments of
interest or principal due on the notes, unless such delays or shortfalls are
covered under the Guaranty Policy. See 'Description of the Transfer and
Servicing Agreements -- Sale and Assignment of the Loans and the Grantor Trust
Certificate' in this prospectus supplement.
LEGAL COMPLIANCE AND REGULATION. Federal and state laws regulate the
underwriting, origination, servicing and collection of the loans. These laws
will likely change over time and may become more restrictive or stringent with
respect to certain of these activities of the Servicer and Transferor.
Violations of these Federal and state laws may limit the ability of the Servicer
to collect principal or interest on the loans, may entitle the borrowers to a
refund of amounts previously paid, and may subject the Servicer or the
Transferor to damages and administrative sanctions. See ' -- Realization Upon
Defaulted Loans -- Interference from Bankruptcy Laws' above. The inability to
collect principal or interest on the loans because of violations of Federal or
state laws will likely cause the loans to experience higher rates of
delinquencies, defaults and losses. An assessment of damages or sanctions
against the Servicer or the Transferor may adversely affect the ability of the
Servicer to service the loans or the Transferor to repurchase or replace
defective loans. See 'Risk Factors -- Certain Other Legal Considerations
Regarding Residential Loans' in the Prospectus. The Transferor will be required
to repurchase or replace any loan that did not comply with applicable Federal
and state laws. See ' -- Limitations on the Transferor and Servicer' below.
LIMITATIONS ON THE TRANSFEROR AND SERVICER
DEPENDENCE ON SERVICER. The amount and timing of payments on the notes is
dependent upon Empire Funding Corp. as the Servicer to perform its servicing
obligations in an adequate and timely manner. See 'Empire Funding -- Servicing
Procedures' in this prospectus supplement. The failure of the Indenture Trustee
or Securities Insurer to renew the term of Empire Funding Corp. as the Servicer
every sixty days or the occurrence of certain events of default may result in
the termination of the
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Servicer. For example, an event that causes a material adverse effect, such as
the Security Insurer paying claims under another guarantee policy for another
series of asset-backed securities issued by Empire Funding Corp. or its
affiliates, may result in the termination of the Servicer. See 'Description of
the Transfer and Servicing Agreements -- Servicing Determinations and Events of
Default' in this prospectus supplement. The Master Servicer will assume the loan
servicing functions upon a termination of Empire Funding Corp. as Servicer. Such
termination with its transfer of daily collection activities will likely
increase the rates of delinquencies, defaults and losses on the loans.
ABILITY TO REPURCHASE OR REPLACE DEFECTIVE LOANS. If the Transferor fails
to cure a breach of its loan representations and warranties with respect to any
loan in a timely manner, then the Transferor is required to repurchase or
replace such defective loan. See 'Description of the Transfer and Servicing
Agreements -- Representations and Warranties' in this prospectus supplement. The
Transferor may not be capable of repurchasing or replacing any defective loans,
for financial or other reasons. The Transferor's inability to repurchase or
replace defective loans would likely cause the loans to experience higher rates
of delinquencies, defaults and losses. See ' -- Adequacy of Credit Enhancement'
above, and 'Empire Funding' and 'Description of Credit Enhancement' in this
prospectus supplement.
LIQUIDITY OF THE TRANSFEROR. The Transferor requires substantial capital to
fund its operations and has operated, and, may operate in the future, on a
negative operating cash flow basis. Currently, the Transferor funds
substantially all of its operations, including its loan production, from
borrowings under its lending arrangements with certain third parties (including
an affiliate of the Depositor and the Underwriter). As its existing lending
arrangements mature, the Transferor may not access the financing necessary for
its operations. Recently, lenders have been less willing to extend credit on
high LTV loans. In addition, lenders who are willing to extend credit on high
LTV loans are doing so on terms that are less favorable than have recently been
available.
The inability of the Transferor to arrange for new or alternative methods
of financing on favorable terms may curtail its loan production activities,
which may adversely affect its financial condition and, in turn, its ability to
service the loans and to repurchase or replace any defective loans.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE. The Transferor and the
Depositor are aware of the issues associated with the programming code in
existing computer systems as the year 2000 approaches. The 'year 2000 problem'
is pervasive and complex; virtually every computer operation will be affected in
some way by the rollover of the two-digit year value to 00. The issue is whether
the computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
Each of the Master Servicer, the Servicer, and the Indenture Trustee will
certify that they are committed either to (i) implement modifications to their
respective existing systems to the extent required to cause them to be year 2000
ready or (ii) acquire computer systems that are year 2000 ready in each case
prior to January 1, 2000. However, neither the Transferor nor the Depositor has
made any independent investigation of the computer systems of the Maser
Servicer, the Servicer or the Indenture Trustee. In the event that computer
problems arise out of a failure of such efforts to be completed on time, or in
the event that the computer systems of the Master Servicer, Servicer, and the
Indenture Trustee are not fully year 2000 ready, the resulting disruptions in
the collection or distribution of receipts on the loans could materially and
adversely affect your investment.
VARIATIONS IN STATISTICAL CHARACTERISTICS OF LOAN POOL
Unless the context indicates otherwise, any numerical or statistical
information presented in this prospectus supplement is based upon the
characteristics of a portion of the total pool of loans that will be included in
the Grantor Trust on the Closing Date. This portion consists of loans having an
aggregate principal balance of $203,728,616 as of September 30, 1998. The
Transferor will deliver additional loans to the Grantor Trustee on the Closing
Date and expects the total pool of loans to have an original aggregate principal
balance of approximately $299,609,777 as of the Cut-Off Date. As a result, the
statistical characteristics of the total pool of loans will vary from the
statistical characteristics of the portion of such pool as presented in this
prospectus supplement, although such variation is not expected to be material.
See 'The Pool' in this prospectus supplement.
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THE POOL
GENERAL
On November 5, 1998 (the 'Closing Date'), the Depositor will acquire a pool
(the 'Pool') of high LTV loans (the 'Loans'), having an aggregate unpaid
principal balance as of October 31, 1998 (the 'Cut-Off Date') of approximately
$299,609,777 (the 'Original Pool Principal Balance'), from the Transferor. The
Depositor will then transfer the Loans to the Grantor Trust pursuant to the
Grantor Trust Agreement in exchange for the Grantor Trust Certificate. The
Grantor Trust will be entitled to all payments of principal and interest in
respect of the Loans received after the Cut-Off Date (except for approximately
13.33% of accrued interest collected on the Loans in the month of November 1998,
which will be retained by the Transferor). The Loans will be (a) secured by
mortgages, deeds of trust and security deeds of trust and security deeds on
residences (the 'Mortgaged Properties') that are generally junior (i.e., second)
in priority to one or more senior liens on the related Mortgaged Properties or
(b) unsecured (the 'Unsecured Loans').
All of the Loans will be closed-end, fixed-rate home loans, which are not
insured or guaranteed by any governmental agency (i.e., conventional loans). The
Loans have been originated for the purpose of (1) financing property
improvements, (2) financing the acquisition of personal property such as home
appliances or furnishings, (3) consolidating debt, (4) financing the partial
refinancing of residential properties, (5) providing cash to the borrower for
unspecified purposes or (6) a combination of the foregoing. Generally, the Loans
will have been originated or acquired by the Transferor in one of four ways: (1)
the wholesale purchase of loans, on a flow basis, originated by unaffiliated
lenders, as correspondents ('correspondent originations'), including delegated
underwriting correspondents, (2) the origination and purchase of loans, on a
flow basis, through a network of small independent mortgage brokers ('broker
originations') or (3) the origination of loans directly to consumers, including
but not limited to solicitations through advertising and telemarketing ('direct
originations').
The Loans will have been underwritten or re-underwritten to determine
whether such Loans comply with the underwriting standards of the Transferor.
Loans that have been acquired from a delegated underwriting correspondent will
be underwritten by such correspondent, but will not be re-underwritten or
reviewed until after their purchase by the Transferor. The Transferor intends to
limit delegated underwriting correspondents to a select number of larger
correspondents that have a strong financial position. See 'Underwriting
Criteria' in this Prospectus Supplement.
PAYMENTS ON THE LOANS
Interest on each Loan is payable monthly on its outstanding Principal
Balance at a fixed rate per annum (the 'Loan Rate'). The 'Principal Balance' of
a Loan on any day is equal to its Principal Balance as of the Cut-Off Date 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 short pay-off, short sale or other modification of such Loan
affecting the Principal Balance thereof; 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 Loans will be serviced under an 'actuarial interest' method in which
interest is charged to the related borrowers, and payments are due from such
borrowers as of a scheduled day each month that is fixed at the time of
origination. Payments received after a grace period following such scheduled day
are subject to a late charge. Each regular scheduled payment made by the
borrower is, therefore, treated as containing a predetermined amount of interest
and principal. Scheduled monthly payments made by the borrowers on the Loans
either earlier or later than their scheduled due dates 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.
In connection with a partial prepayment, the Servicer, at the request of
the borrower, may recalculate the amortization schedule of the related Loan to
reduce the scheduled monthly payment over the remaining term to maturity.
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CHARACTERISTICS OF THE LOANS
Set forth below is certain statistical information regarding
characteristics of only a portion of the Loans included in the Pool that have
been identified as of the date of this Prospectus Supplement. This portion
consists of loans having an aggregate principal balance of $203,728,616 (the
'Statistical Principal Balance') as of September 30, 1998 (the 'Statistical
Calculation Date'). The Transferor will transfer additional loans to the
Depositor, who in turn will transfer such loans to the Grantor Trust on the
Closing Date. The Transferor expects that the total pool of loans will have an
Original Pool Principal Balance of approximately $299,609,777 as of the Cut-Off
Date. Unless the context indicates otherwise, any numerical or statistical
information presented in this prospectus supplement is based upon the
characteristics of such portion of the total pool of loans that will be included
in the Grantor Trust and that comprise the Statistical Principal Balance as of
the Statistical Calculation Date.
The information set forth below does not take into account any unidentified
Loans as of the date of this Prospectus Supplement. In addition, before the
Closing Date, the Transferor may substitute comparable loans for any of the
Loans identified as of the date of this Prospectus Supplement; provided,
however, that the aggregate Principal Balance of such Loans will not exceed 5%
of the Original Pool Principal Balance. As a result, the statistical information
presented below regarding the characteristics of the Loans included in the Pool
may vary in certain respects from comparable information based on the actual
composition of the Loans included in the Pool on the Closing Date. In addition,
after the Cut-Off Date, the characteristics of the actual Loans may materially
vary from the information below due to a number of factors, including
prepayments after the Cut-Off Date or the substitution or repurchase of Loans
after the Closing Date.
LOAN STATISTICS
As of the Statistical Calculation Date, the Loans consisted of 6,396 Loans
with an aggregate Principal Balance of totaling $203,728,616. As of the
Statistical Calculation Date, the Loans bear interest at fixed Loan Rates, which
range from 9.50% per annum to 19.477% per annum and have a weighted average Loan
Rate of approximately 13.57% per annum. As of the Statistical Calculation Date,
the Principal Balances of the Loans range from $1,292 to $122,722 and average
$31,853. As of the Statistical Calculation Date, the weighted average remaining
term to stated maturity of the Loans was approximately 231 months and the
weighted average number of months that have elapsed since origination was 3
months. As of the Statistical Calculation Date, 5,837 of the Loans (other than
Unsecured Loans) (representing approximately 97.63% of the Statistical Principal
Balance) had a Combined Loan-to-Value Ratio in excess of 100%. As of the
Statistical Calculation Date, the weighted average Combined Loan-to-Value Ratio
of the Loans (other than the Unsecured Loans) was approximately 116.74%, with
the highest Combined Loan-to-Value Ratio being 133.00%. As of the Statistical
Calculation Date, all of the Loans have original stated maturities of not more
than 25 years. As of the Statistical Calculation Date, no Loan was scheduled to
mature later than September 2023.
As of the Statistical Calculation Date, all of the Loans (other than
Unsecured Loans) were secured by Mortgaged Properties located in 49 states and
the District of Columbia. As of the Statistical Calculation Date, all of the
Loans (other than Unsecured Loans) were secured by Mortgaged Properties
represented by the related borrowers to be owner-occupied.
As of the Statistical Calculation Date, none of the Loans were 30 days or
more past due. As of the Statistical Calculation Date, the weighted average
Credit Score for the Loans as determined at origination was 684. As of the
Statistical Calculation Date, 1.63% of the Loans were unsecured. See
'Underwriting Criteria' in this Prospectus Supplement.
The following tables are based on certain statistical characteristics with
respect to those Loans that comprise the Statistical Principal Balance as of the
Statistical Calculation Date. The sum of the dollar amounts and percentages in
the following tables may not equal the totals due to rounding.
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GEOGRAPHIC DISTRIBUTION OF LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
STATE LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
California.......................................................... 672 $ 24,459,456 12.01%
Indiana............................................................. 370 12,093,797 5.94
Illinois............................................................ 357 11,888,141 5.84
Florida............................................................. 339 10,530,797 5.17
Missouri............................................................ 317 9,346,562 4.59
Ohio................................................................ 298 9,058,436 4.45
Pennsylvania........................................................ 257 8,415,644 4.13
Michigan............................................................ 238 8,068,470 3.96
Arizona............................................................. 243 7,871,624 3.86
Maryland............................................................ 194 7,561,206 3.71
North Carolina...................................................... 225 7,051,048 3.46
Virginia............................................................ 197 6,947,010 3.41
Georgia............................................................. 203 6,806,913 3.34
Colorado............................................................ 154 5,108,787 2.51
Washington.......................................................... 158 4,908,895 2.41
Kentucky............................................................ 162 4,839,103 2.38
Minnesota........................................................... 135 4,739,539 2.33
Kansas.............................................................. 147 4,735,244 2.32
Wisconsin........................................................... 130 4,254,112 2.09
Oklahoma............................................................ 165 4,181,705 2.05
Nevada.............................................................. 116 3,950,101 1.94
New Jersey.......................................................... 99 3,561,786 1.75
Iowa................................................................ 105 3,552,557 1.74
Louisiana........................................................... 99 2,913,641 1.43
South Carolina...................................................... 78 2,324,486 1.14
Nebraska............................................................ 81 2,303,074 1.13
Idaho............................................................... 72 2,194,016 1.08
Massachusetts....................................................... 50 1,979,670 0.97
Utah................................................................ 59 1,978,276 0.97
Texas............................................................... 217 1,788,086 0.88
Connecticut......................................................... 49 1,781,933 0.87
Tennessee........................................................... 74 1,605,697 0.79
New Mexico.......................................................... 44 1,532,743 0.75
Oregon.............................................................. 48 1,407,458 0.69
New York............................................................ 40 1,379,945 0.68
Mississippi......................................................... 44 1,096,826 0.54
New Hampshire....................................................... 24 928,793 0.46
Hawaii.............................................................. 18 724,315 0.36
Maine............................................................... 20 660,865 0.32
Alaska.............................................................. 13 556,705 0.27
Delaware............................................................ 13 454,023 0.22
Wyoming............................................................. 13 406,936 0.20
Montana............................................................. 12 376,421 0.18
Arkansas............................................................ 14 365,938 0.18
Rhode Island........................................................ 8 284,052 0.14
North Dakota........................................................ 7 227,548 0.11
West Virginia....................................................... 9 211,149 0.10
South Dakota........................................................ 4 166,425 0.08
Vermont............................................................. 3 112,935 0.06
District of Columbia................................................ 2 35,730 0.02
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
S-20
<PAGE>
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF PRINCIPAL BALANCES LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
$10,000 or less..................................................... 455 $ 2,614,050 1.28%
$10,000.01 to $20,000............................................... 845 14,122,356 6.93
$20,000.01 to $30,000............................................... 2,022 52,274,527 25.66
$30,000.01 to $40,000............................................... 1,629 56,950,039 27.95
$40,000.01 to $50,000............................................... 808 36,815,092 18.07
$50,000.01 to $60,000............................................... 283 15,774,455 7.74
$60,000.01 to $70,000............................................... 213 13,713,681 6.73
$70,000.01 to $80,000............................................... 92 6,855,124 3.36
$80,000.01 or greater............................................... 49 4,609,294 2.26
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the average Statistical Calculation
Date Principal Balance of the Loans was $31,853.
LOAN RATES
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
9.001% to 9.500%.................................................. 1 $ 3,316 0.00%
9.501% to 10.000%.................................................. 6 71,365 0.04
10.001% to 10.500%.................................................. 11 308,853 0.15
10.501% to 11.000%.................................................. 70 2,761,234 1.36
11.001% to 11.500%.................................................. 527 20,112,314 9.87
11.501% to 12.000%.................................................. 533 20,803,988 10.21
12.001% to 12.500%.................................................. 360 11,390,974 5.59
12.501% to 13.000%.................................................. 1,146 33,090,036 16.24
13.001% to 13.500%.................................................. 464 15,975,382 7.84
13.501% to 14.000%.................................................. 1,348 42,340,731 20.78
14.001% to 14.500%.................................................. 388 12,041,050 5.91
14.501% to 15.000%.................................................. 505 15,343,898 7.53
15.001% to 15.500%.................................................. 177 5,716,208 2.81
15.501% to 16.000%.................................................. 317 9,255,273 4.54
16.001% to 16.500%.................................................. 249 6,908,603 3.39
16.501% to 17.000%.................................................. 154 4,063,439 1.99
17.001% to 17.500%.................................................. 52 1,266,845 0.62
17.501% to 18.000%.................................................. 66 1,712,821 0.84
18.001% to 18.500%.................................................. 20 529,803 0.26
18.501% to 19.000%.................................................. 1 29,819 0.01
19.001% to 19.500%.................................................. 1 2,664 0.00
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average Loan Rate of
the Loans was approximately 13.57% per annum.
S-21
<PAGE>
<PAGE>
LIEN PRIORITY
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
LIEN PRIORITY LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
First Lien.......................................................... 23 $ 798,234 0.39%
Second Lien......................................................... 5,874 199,608,139 97.98
Third Lien.......................................................... 1 2,664 0.00
Unsecured........................................................... 498 3,319,579 1.63
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF COMBINED LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
Unsecured........................................................... 498 $ 3,319,579 1.63%
5.01% to 10.00%.................................................. 1 9,636 0.00
10.01% to 15.00%.................................................. 1 4,938 0.00
15.01% to 20.00%.................................................. 3 58,836 0.03
20.01% to 25.00%.................................................. 1 10,675 0.01
25.01% to 30.00%.................................................. 4 50,050 0.02
30.01% to 35.00%.................................................. 4 119,257 0.06
35.01% to 40.00%.................................................. 7 148,552 0.07
40.01% to 45.00%.................................................. 6 173,645 0.09
45.01% to 50.00%.................................................. 6 132,313 0.06
50.01% to 55.00%.................................................. 2 67,792 0.03
55.01% to 60.00%.................................................. 1 25,965 0.01
60.01% to 65.00%.................................................. 3 57,850 0.03
75.01% to 80.00%.................................................. 1 10,901 0.01
85.01% to 90.00%.................................................. 4 123,818 0.06
90.01% to 95.00%.................................................. 6 184,311 0.09
95.01% to 100.00%.................................................. 11 326,007 0.16
100.01% to 105.00%.................................................. 464 14,048,209 6.90
105.01% to 110.00%.................................................. 774 23,973,887 11.77
110.01% to 115.00%.................................................. 1,152 36,821,232 18.07
115.01% to 120.00%.................................................. 1,314 45,381,599 22.28
120.01% to 125.00%.................................................. 2,117 78,063,431 38.32
125.01% or greater.................................................. 16 616,133 0.30
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average Combined
Loan-To-Value Ratio of the Loans (excluding the Unsecured Loans) was
approximately 116.74%.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF LOAN AGE (IN MONTHS) LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
Less than one....................................................... 876 $ 30,476,038 14.96%
1 to 3.............................................................. 4,353 145,662,503 71.50
4 to 6.............................................................. 590 16,352,537 8.03
7 to 9.............................................................. 386 6,128,952 3.01
10 or greater....................................................... 191 5,108,587 2.51
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average number of
months since origination of the Loans was 3 months.
S-22
<PAGE>
<PAGE>
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
RANGE OF REMAINING TERMS TO NUMBER OF PRINCIPAL PRINCIPAL
MATURITY (IN MONTHS) LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
0 to 30.......................................................... 36 $ 118,671 0.06%
31 to 60.......................................................... 178 1,030,920 0.51
61 to 90.......................................................... 78 690,863 0.34
91 to 120.......................................................... 786 16,522,738 8.11
121 to 150.......................................................... 40 1,205,481 0.59
151 to 180.......................................................... 2,074 65,872,833 32.33
181 to 210.......................................................... 4 178,580 0.09
211 to 240.......................................................... 986 33,525,084 16.46
271 to 300.......................................................... 2,214 84,583,448 41.52
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average remaining term
to maturity of the Loans was approximately 231 months.
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
RANGE OF ORIGINAL TERMS TO NUMBER OF PRINCIPAL PRINCIPAL
MATURITY (IN MONTHS) LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
0 to 30.......................................................... 7 $ 15,910 0.01%
31 to 60.......................................................... 206 1,108,963 0.54
61 to 90.......................................................... 66 619,549 0.30
91 to 120.......................................................... 799 16,618,768 8.16
121 to 150.......................................................... 40 1,205,481 0.59
151 to 180.......................................................... 2,074 65,872,833 32.33
181 to 210.......................................................... 4 178,580 0.09
211 to 240.......................................................... 986 33,525,084 16.46
271 to 300.......................................................... 2,214 84,583,448 41.52
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average original term
to maturity of the Loans was approximately 234 months.
CREDIT SCORES
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF CREDIT SCORES LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
620 to 639.......................................................... 351 $ 9,267,250 4.55%
640 to 659.......................................................... 1,474 43,233,486 21.22
660 to 679.......................................................... 1,369 44,322,281 21.76
680 to 699.......................................................... 1,230 41,927,333 20.58
700 to 719.......................................................... 1,004 37,151,679 18.24
720 to 739.......................................................... 522 16,804,270 8.25
740 to 759.......................................................... 261 7,715,798 3.79
760 to 779.......................................................... 120 2,517,169 1.24
780 to 799.......................................................... 47 586,894 0.29
800 to 819.......................................................... 17 195,299 0.10
820 to 839.......................................................... 1 7,158 0.00
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average Credit Score
as determined at origination of the Loans was 684.
S-23
<PAGE>
<PAGE>
DEBT-TO-INCOME RATIO
<TABLE>
<CAPTION>
AGGREGATE % OF STATISTICAL
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF DEBT TO INCOME RATIOS LOANS BALANCE BALANCE
- -------------------------------------------------------------------- --------- ------------ ----------------
<S> <C> <C> <C>
20.00 or less....................................................... 308 $ 7,067,979 3.47%
20.01 to 25.00...................................................... 682 20,486,681 10.06
25.01 to 30.00...................................................... 1,467 47,059,169 23.10
30.01 to 35.00...................................................... 1,289 41,299,955 20.27
35.01 to 40.00...................................................... 1,473 47,170,063 23.15
40.01 to 45.00...................................................... 1,058 36,646,603 17.99
45.01 to 50.00...................................................... 114 3,845,300 1.89
Greater than 50.00.................................................. 5 152,866 0.08
--------- ------------ -------
Total.......................................................... 6,396 $203,728,616 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Statistical Calculation Date, the weighted average debt-to-income
ratio as calculated at origination of the Loans was approximately 33.58%.
S-24
<PAGE>
<PAGE>
EMPIRE FUNDING
GENERAL
Empire Funding Corp. ('Empire Funding' and in such capacity the
'Transferor') will sell the Loans to the Depositor pursuant to a Home Loan
Purchase Agreement (the 'Home Loan Purchase Agreement') between the Depositor
and the Transferor. Empire Funding will service the Loans pursuant to the Sale
and Servicing Agreement (in such capacity, the 'Servicer').
Empire Funding is a mortgage lender that is 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 to originate or
purchase loans in approximately 48 states.
Empire Funding has its principal offices at 9737 Great Hills Trail, Austin,
Texas 78759 (telephone number (800) 261-4898). Empire Funding's loan servicing
and collections department had 195 employees at June 30, 1998, and currently has
approximately 209 employees.
As of September 30, 1998, Empire Funding was servicing a loan portfolio of
approximately $3.2 billion, approximately $478 million of which consisted of
loans partially insured by the Federal Housing Administration under the Title I
program and approximately $2.7 billion of which consisted of conventional high
LTV and home equity loans (i.e., not insured by any governmental agency). The
conventional home loans serviced by Empire Funding consisted of approximately
82,603 loans with an average principal balance of approximately $32,618.
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 high LTV loan portfolio. All references in this Prospectus
Supplement to the 'Servicer' shall mean 'Master Servicer' for purposes of the
accompanying Prospectus. For a description of certain other servicing procedures
applicable to the Loans see 'Description of the Transfer and Servicing
Agreements' in this Prospectus Supplement. In response to changes and
developments in the consumer finance area (including social, economic, legal and
technological developments), as well as the refinement of the Servicer's
servicing and collection procedures, the Servicer's servicing policies and
procedures for certain types of loans, including the Loans, may change from time
to time. The manner in which the Servicer performs its servicing obligations
will affect the amount and timing of principal and interest payments on the
Loans, which in turn will affect payments to the holders of the Notes.
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 interested parties,
collecting delinquent loan payments, evaluating and conducting loss mitigation
efforts, charging off uncollectible loans, and otherwise administering the
loans. The Servicer has developed loss mitigation methodologies for conventional
high LTV loans, which includes short sales with repayment plans, short pay-offs,
substitutions of collateral and modifications that use of borrower-specific
repayment schedules. Servicing operations also include customer complaint
monitoring, maintenance of daily delinquency information, analysis and
monitoring of legal remedies (including collection litigation, and foreclosure
proceedings and dispositions), accounting for principal and interest, contacting
delinquent borrowers, handling borrower defaults, recording mortgages and
assignments, investor and securitization reporting, and management portfolio
reporting.
The Servicer utilizes a computer-based loan servicing system. It provides
payment processing and cashier functions, automated payoff statements, on-line
collection, statement and notice mailing, along with a full range of investor
reporting information. The Servicer has installed a predictive automated dialing
system and computerized telephone loan inquiry system to increase the
productivity of its
S-25
<PAGE>
<PAGE>
collections staff. The Servicer rescores Credit Scores for each borrower
quarterly and integrates the information into its computerized collection
system.
Collection activity usually begins once a loan is 10 to 15 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 approximately 15 to 25 days of
delinquency. If the borrower cannot be contacted 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. The Servicer
generally continues collection calls every other day and the Servicer's
servicing department mails additional delinquency notices. At approximately 90
days of delinquency, the Servicer verifies the status of any senior lien and tax
information and obtains a current credit report to determine if there have been
any additional liens or judgments filed against the borrower. After 120 days of
delinquency, the loan file is prepared for non-performing review. Information
obtained at 90 days of delinquency is updated and referred to a non-performing
loan review committee of the Servicer to determine an appropriate method of
recovery which may include modifying through a settlement or new payment plan,
selling loans, pursuing judgment against the borrower, foreclosing or charging
off uncollectible loans.
Under the Sale and Servicing Agreement, the Servicer may resign from its
duties only in accordance with the terms of the agreement. No removal or
resignation will become effective until the Master Servicer, the Grantor Trustee
or a successor servicer has assumed the Servicer's responsibilities and
obligations under the Sale and Servicing Agreement.
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 to a sub-servicer with
respect to the Loans.
REPURCHASE OF LOANS
The Transferor will have the option after the Closing Date to repurchase
any Loan incident to foreclosure, default or imminent default (a 'Defaulted
Loan'). Each purchase of a Defaulted Loan will be conducted in the same manner
as a repurchase of a Defective Loan as described below. The Transferor will also
be obligated either to repurchase any Defective Loan or to remove such Defective
Loan and substitute a Qualified Substitute Loan. The repurchase of any Loan
(rather than the replacement of the Loan through substitution) will result in
accelerated principal payments on the Notes. See 'Description of the Trust
Property -- Additions, Substitution and Withdrawal of Assets' in the
accompanying Prospectus.
Unless waived by the Securities Insurer, the Transferor is required (a)
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 Grantor Trustee,
the Owner Trustee or the Indenture Trustee or as to which a material document
deficiency exists (each, a 'Defective Loan') or (b) 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 from the Closing Date to but not
including the date of repurchase
S-26
<PAGE>
<PAGE>
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 within two years of the Closing
Date. If the aggregate outstanding principal balance plus all accrued and unpaid
interest of the Qualified Substitute Loan(s) is less than the outstanding
Principal Balance of the Defective Loan(s) plus all accrued and unpaid interest,
the Transferor will also remit for payment 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
in this Prospectus Supplement, a 'Qualified Substitute Loan' means a loan that
(1) 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 and no lower than the interest rate of the Deleted
Loan, (2) matures not more than one year later than, and not more than one year
earlier than, the maturity date of the Deleted Loan, and in any case not later
than October 1, 2023, (3) has a principal balance (after application of all
payments received on or before the date of such substitution) equal to or less
than the principal balance of the Deleted Loan as of such date, (4) has a Credit
Score no lower than the Credit Score of the Deleted Loan, (5) has a lien
priority no lower than the Deleted Loan, (6) 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, and (7) has a
borrower with a debt-to-income ratio no higher than the debt-to-income ratio of
the borrower with respect to the Deleted Loan, provided that with respect to a
substitution of multiple loans, items (1), (2) and (3) above may be considered
on an aggregate or weighted average basis.
At any particular time, the Transferor may not be capable, financially or
otherwise, of repurchasing Defective Loans or substituting Qualified Substitute
Loans for Defective Loans in the manner described above. Events relating to the
Transferor and its operations may occur that would adversely affect the ability
of the Transferor to repurchase or replace Defective Loans, including the
termination of lending arrangements that provide funding for its operations, or
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 will utilize other accepted servicing procedures to realize any
reasonable recovery of net proceeds from such Defective Loan.
S-27
<PAGE>
<PAGE>
DELINQUENCY EXPERIENCE
Certain information concerning the delinquency experience on loans serviced
by Empire Funding is set forth below. The delinquency experience percentages set
forth in this Prospectus Supplement are calculated on the basis of the total
loans serviced by Empire Funding as of the end of the periods indicated. See
'Risk Factors -- Yield, Prepayment and Maturity Considerations -- Limited
Historical Prepayment Experience on High LTV Loans' in this Prospectus
Supplement.
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1996 1997 1997 1997 1997 1998 1998
------------ --------- -------- ------------- ------------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Conventional Servicing
Portfolio(l)(2)
Delinquency Period:(3)
30-59 days
delinquent........... 0.80% 0.55% 0.44% 0.49% 1.29% 0.97% 0.87%
60-89 days
delinquent........... 0.20% 0.14% 0.15% 0.21% 0.29% 0.39% 0.43%
90+ days delinquent.... 0.24% 0.18% 0.09% 0.09% 0.22% 0.21% 0.25%
------------ --------- -------- ------------- ------------ ---------- ----------
Total................ 1.24% 0.87% 0.67% 0.79% 1.80% 1.58% 1.55%
------------ --------- -------- ------------- ------------ ---------- ----------
Conventional Servicing
Portfolio at end of
period..................... $100,369 $172,039 $408,732 $ 771,406 $1,271,779 $1,639,292 $2,159,942
------------ --------- -------- ------------- ------------ ---------- ----------
------------ --------- -------- ------------- ------------ ---------- ----------
Total Servicing
Portfolio(2)(4)(5)
30-59 days delinquent.... 4.98% 4.12% 3.05% 2.91% 3.07% 2.26% 1.84%
60-89 days delinquent.... 1.43% 1.21% 1.07% 1.08% 1.06% 0.85% 0.84%
90+ days delinquent...... 2.19% 1.86% 1.54% 1.37% 1.40% 1.03% 0.86%
------------ --------- -------- ------------- ------------ ---------- ----------
Total.................. 8.60% 7.19% 5.67% 5.37% 5.53% 4.14% 3.54%
------------ --------- -------- ------------- ------------ ---------- ----------
Total Servicing Portfolio at
end of period.............. $562,345 $646,450 $869,874 $ 1,265,870 $1,769,251 $2,131,810 $2,654,482
------------ --------- -------- ------------- ------------ ---------- ----------
------------ --------- -------- ------------- ------------ ---------- ----------
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
Conventional Servicing
Portfolio(l)(2)
Delinquency Period:(3)
30-59 days
delinquent........... 1.09%
60-89 days
delinquent........... 0.48%
90+ days delinquent.... 0.35%
-------------
Total................ 1.93%
-------------
Conventional Servicing
Portfolio at end of
period..................... $ 2,694,338
-------------
-------------
Total Servicing
Portfolio(2)(4)(5)
30-59 days delinquent.... 1.92%
60-89 days delinquent.... 0.82%
90+ days delinquent...... 0.94%
-------------
Total.................. 3.67%
-------------
Total Servicing Portfolio at
end of period.............. $ 3,172,620
-------------
-------------
</TABLE>
- ------------
(1) Empire Funding's Conventional Servicing Portfolio consists primarily of high
LTV Loans and home equity loans, but 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 Loan
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.
------------------------
The preceding table indicates that from December 31, 1996 to September 30,
1998 Empire Funding has experienced, in general, an overall decline in the rates
of delinquency on its total servicing portfolio as a whole. However, from June
30, 1997 to September 30, 1998 Empire Funding has experienced an increase in the
rates of delinquencies on its conventional servicing portfolio, which consists
primarily of high LTV loans and home equity loans. Moreover, if the total
servicing portfolio were analyzed by separating the loans into distinct loan
pools, the rates of delinquencies have actually been increasing with respect to
these individual pools and these rates will likely continue to increase for some
time. THE OVERALL DECLINE IN THE RATE OF DELINQUENCY OF LOANS IN EMPIRE
FUNDING'S TOTAL SERVICING PORTFOLIO DURING SUCH PERIOD IS PRIMARILY A RESULT OF
THE INCREASED VOLUME OF LOANS PRODUCED AND SERVICED BY EMPIRE FUNDING. BECAUSE
EMPIRE FUNDING CALCULATES ITS DELINQUENCY, DEFAULT AND LOSS RATES BY DIVIDING
THE DOLLAR AMOUNT OF DELINQUENT OR DEFAULTED LOANS IN ITS SERVICING PORTFOLIO ON
ANY DATE BY THE TOTAL DOLLAR AMOUNT OF THE SERVICING PORTFOLIO ON SUCH DATE, THE
ADDITION OF MORE RECENTLY PRODUCED LOANS WITH SHORTER PAYMENT HISTORIES HAS THE
EFFECT OF REDUCING THE OVERALL RATES OF DELINQUENCY, DEFAULT AND LOSS.
Because delinquencies, defaults and losses may occur months or years after
a loan is originated, data relating to delinquencies, defaults and losses as a
percentage of the current servicing portfolio can understate the risk of future
delinquencies, defaults or losses. The future delinquency, defaults and loss
experience of the Loans is uncertain and in all likelihood will not conform to
that of the total servicing portfolio of Empire Funding as set forth above. The
actual rates of delinquencies, defaults and losses on the Loans, particularly in
periods during which the value of the related Mortgaged Properties has
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<PAGE>
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declined, could be higher than those historically experienced by the mortgage
and consumer lending industry in general. In addition, the rate of
delinquencies, defaults and losses with respect to the Loans will be affected
by, among other things, interest rate fluctuations and general and regional
economic conditions. See 'Prepayment and Yield Considerations' in this
Prospectus Supplement.
MASTER SERVICER
GENERAL
Norwest Bank Minnesota, National Association ('Norwest'), as the master
servicer (the 'Master Servicer'), will oversee and monitor the Servicer's
performance of the loan servicing functions under the Sale and Servicing
Agreement.
Norwest is a national banking association with executive offices located at
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its loan
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
Norwest is engaged in the business of master servicing single family
residential mortgage loans secured by properties in all 50 states and the
District of Columbia. As of June 30, 1998, Norwest was master servicing more
than 300,000 mortgage loans representing an aggregate outstanding principal
balance of approximately $36.5 billion.
Norwest has provided the foregoing information regarding Norwest, and none
of the Depositor, the Transferor or the Underwriter makes any representation or
warranty as to the accuracy and completeness of such information.
MASTER SERVICER DUTIES
The Master Servicer will be responsible for performing the loan master
servicing functions for the Loans pursuant to the Sale and Servicing Agreement.
All references in the accompanying Prospectus to 'Master Servicer' shall mean
the 'Servicer' with respect to this Prospectus Supplement. As compensation for
performing its duties as the Master Servicer, including its oversight functions,
the Master Servicer will be entitled to a monthly fee (the 'Master Servicer
Fee'). In addition, the Master Servicer is entitled to receive on a monthly
basis additional compensation attributable to investment earnings from amounts
on deposit in the Note Payment Account, which together with the Master Servicer
Fee are referred to as the 'Master Servicer Compensation'.
Under the Sale and Servicing Agreement, the Master Servicer will perform
the following master servicing functions:
(1) The Master Servicer will periodically review the servicing
reports, loan level information and other relevant information as may be
reasonably required by the Master Servicer to ascertain whether the
Servicer is in compliance with the Sale and Servicing Agreement;
(2) If the reports submitted by the Servicer are inaccurate or
incomplete, then the Master Servicer will prepare and submit exception
reports to the Indenture Trustee, Grantor Trustee, the Securities Insurer
and the Rating Agencies and notify the Grantor Trustee, the Indenture
Trustee, the Securities Insurer and the Rating Agencies of any event of
default with respect to the Servicer under the Sale and Servicing
Agreement;
(3) If the Servicer is terminated as Servicer under the Sale and
Servicing Agreement, then the Master Servicer will accept appointment as,
or cause another entity reasonably acceptable to the Securities Insurer to
act as, the successor servicer thereunder; and
(4) The Master Servicer will maintain computer systems and software,
which are compatible with the computer systems of the Servicer so as to
enable the Master Servicer to assume the servicing of the Loans.
Under the Sale and Servicing Agreement, the Servicer will facilitate the
master servicing functions of the Master Servicer as follows:
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(1) the Servicer will comply with the terms of the various agreements
it is entering into in connection with the Loans, including but not limited
to, the Transfer and Servicing Agreements;
(2) the Servicer will provide to the Master Servicer certain
information regarding the Loans and its servicing activities of such Loans;
(3) the Servicer will permit the Master Servicer to inspect the
Servicer's books and records; and
(4) the Servicer will reimburse and indemnify the Master Servicer for
certain losses, liabilities and expenses incurred by it.
In certain limited circumstances, the Master Servicer may resign or be
removed, in which event another third-party master servicer will be sought to
become the successor master servicer. The Master Servicer has the right to
resign under the Sale and Servicing Agreement upon 60 days' notice or any time
on or after one year from the Closing Date. No removal or resignation of the
Master Servicer will become effective until the Indenture Trustee, the Grantor
Trustee or a successor master servicer, reasonably acceptable to the Securities
Insurer, has assumed the Master Servicer's responsibilities and obligations
under the Sale and Servicing Agreement.
Notwithstanding the foregoing, subject to the consent of the Securities
Insurer, the Servicer has the right to terminate the Master Servicer and
eliminate the master servicing functions on or after five years from the Closing
Date, provided, that the Servicer receives the prior consent of the Securities
Insurer.
UNDERWRITING CRITERIA
GENERAL
The Loans have been underwritten in accordance with one of the Transferor's
loan programs which are designed to provide second lien financing for all
qualified applicants in an amount and for a period of time consistent with their
ability to repay. Each application is evaluated on its individual merits,
applying the stated guidelines to ensure that each application is considered
equitably. The Transferor makes its underwriting determinations without regard
to sex, marital status, race, color, religion, age or national origin.
Generally, the underwriting standards of the Transferor for each of its loan
programs place a greater emphasis on the creditworthiness of the borrower,
including credit history and repayment coverage, than on the underlying
collateral in evaluating the likelihood that a borrower will be able to repay a
loan.
The Transferor has implemented a credit policy that provides a number of
guidelines to assist underwriters in the credit decision process. The
creditworthiness characteristics emphasized by the Transferor are the borrower's
Credit Score, Debt-to-Income Ratio and disposable income. The borrowers' credit
score (each a 'Credit Score'), which are obtained from national credit reporting
organizations, are numerical representations of the borrowers' credit risk or
creditworthiness based on a methodology developed by Fair Isaac and Company, and
generally range from a low of 200 to a high of 800. The 'Debt-to-Income Ratio'
for a borrower is calculated by dividing (x) the borrower's total monthly
payment obligations (including payments due under the loan with the Transferor,
but after any debt consolidation from the proceeds of such loan), by (y) such
borrower's monthly gross income. A borrower's 'disposable income' is calculated
by deducting all of the borrower's monthly payment obligations from the total
gross income.
Until October 1998, the Transferor's underwriting activities were
decentralized and conducted at the branch level. The Transferor received loan
applications from its network of correspondent lenders, dealers, brokers and
home improvement contractors and direct applications from borrowers through its
direct marketing program. The loan processing staff prepared an application file
by obtaining credit bureau reports, highlighting any significant credit events
and prioritizing applications that needed immediate attention before submitting
the application to the appropriate loan underwriter. Loan applications have been
analyzed through a combination of reviews of credit bureau reports, borrower
certifications, direct investigations and third party verifications.
A credit bureau report that reflects the applicant's credit history is
obtained from an independent, nationally recognized credit-reporting agency. The
credit report typically contains information reflecting
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delinquencies, repossessions, judgments, foreclosures, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. A loan applicant's credit report must be current at the time of
application and is used to evaluate the borrower's payment record and tendency
to repay debts in a timely manner. A lack of credit payment history will not
necessarily preclude a loan if other favorable borrower characteristics exist,
including sufficient equity in the property or an adequate Debt-to-Income Ratio.
The calculation of the borrower's Debt-to-Income Ratio and disposable
income involves a careful review of all debts listed on the credit report and
the loan application, as well as the verification of gross income. A borrower's
income is verified through various means, including applicant interviews,
written verifications with employers, and the review of pay stubs, tax returns,
W-2's or other acceptable forms of documentation. The Debt-to-Income Ratio and
disposable income are calculated to determine if a borrower demonstrates
sufficient income levels to cover or satisfy all debt repayment requirements.
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, including
loans originated under its Equalizer program described below, have changed from
time to time. Such changes may result in more or less stringent underwriting
requirements. For example, in July 1998 the Transferor increased the general
Credit Score requirement from 620 to 630 for borrowers for its high LTV Loans.
Depending upon when the Loans were originated or purchased by the Transferor,
the Loans may have been originated or purchased by the Transferor under
different underwriting requirements, and accordingly, certain Loans may have a
different credit quality and different characteristics from those of other
Loans. Furthermore, to the extent that certain Loans were, or may be in the
future, 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 other Loans.
CONVENTIONAL HIGH LTV LOANS.
The majority of the Loans have been underwritten by the Transferor pursuant
to its 'Equalizer Program' for conventional high LTV loans. 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.
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 sufficient debt service coverage, and who use the loan proceeds
for home improvements, debt consolidation, borrower cash out or a combination
thereof. Generally, an eligible borrower and any co-borrower under the Equalizer
Program will have a Debt-to-Income Ratio that does not exceed 45% and, on the
basis of the primary wage earner, a Credit Score of 630 or greater. A borrower
with a Credit Score of 700 or higher and acceptable Debt-to-Income Ratio and
disposable income may qualify for the maximum amount of loan offered by the
Transferor, which is currently $100,000.
Loans originated under the Transferor's Equalizer Program generally will
have a principal amount that does not exceed $100,000 and a minimum term of 120
months and a maximum term of 300 months. In general, the loan will be secured by
a second lien on the related mortgaged property. In most instances the mortgaged
property will be improved with an owner-occupied one- or two-family residence.
Other than on an exception basis, the loans originated under the Equalizer
Program will have a combined loan-to-value ratio based upon the combined
indebtedness of all first and second mortgage liens on the property (the
'Combined Loan-to-Value Ratio'), that does not exceed 125%.
The Equalizer Program allows for 'stated value' (i.e., independent
verification of property values are not required) on loans of $35,000 and less.
For loans in excess of $35,000, property values are generally substantiated by
one of the following: (1) a uniform residential appraisal report; (2) an
appraisal dated within 12 months of application; (3) a drive-by inspection with
photos within 3 months of application; (4) a tax bill assessment if the value
has been established within the last 12 months of application; (5) a HUD-1
statement if dated within twelve months of the application; or (6) an electronic
data research (EDR) desk top appraisal, value point from TRW/Experian, MRAC Desk
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Property Evaluation or Priority Value Check within 3 months of application. On a
case by case basis, the Transferor reserves the right to require an appraisal or
other forms of documentation verifying property values.
The Transferor requires a recent title opinion, title search or an abstract
of title (a 'Title Report') by an approved title company or legal firm on all
property securing loans originated under the Equalizer Program. Title Reports
indicate the lien position of any related senior mortgage loans, the status of
real estate taxes and any other recorded encumbrances, including tax liens and
judgments. These underwriting guidelines do not require borrowers to obtain
title insurance in connection with a loan, except for loans that are secured
with a first lien position. The borrower also is not required to provide
documentation that substantiates hazard or flood insurance, except for loans
that are secured with a first lien position at origination.
Generally, the Transferor has established classifications with respect to
the credit profiles of applicants based on Credit Scores, Debt-to-Income Ratios
and disposable income. The criteria currently used under the Equalizer Program
are generally as follows:
SUMMARY OF CREDIT SCORE, LOAN AMOUNT AND DEBT-TO-INCOME
<TABLE>
<S> <C> <C> <C> <C> <C>
Credit Score:............................. 700+ 680-699 660-679 640-659 630-639
Maximum Loan Amount....................... $100,000 $75,000 $65,000 $45,000 $35,000
Debt to Income Ratio:
Loan of $50,000 or more.............. 45% 45% 40% N/A N/A
Loan of $35,000 to $50,000........... 45% 45% 45% 40% N/A
Loan under $35,000................... 50% 45% 45% 45% 40%
</TABLE>
MINIMUM DISPOSABLE INCOME
<TABLE>
<S> <C>
Debt-to-Income Ratio under 40.0%........................................... $1,000
Debt-to-Income Ratio under 40.0% to 45.0%.................................. $1,500
Debt-to-Income Ratio under 45.0% to 50.0%.................................. $2,000
</TABLE>
In addition, the Transferor's Equalizer Program also requires that each
loan applicant generally have an acceptable credit payment history based
primarily on the following:
Existing mortgage credit history -- Required to be current within the
last 3 months preceding the application being submitted, and generally
limiting 30-day delinquencies to one in the past 12 months and two in the
past 24 months and no 60-day delinquencies within the last 60 months. Any
derogatory items reflected on the title of the mortgaged property,
including any judgments or tax liens, must be paid in full, satisfied and
released.
Existing non-mortgage credit history -- 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
in excess of $1,000 must be paid in full, satisfied or released. Non-
mortgage credit histories are generally limited to two 60-day delinquencies
and one 90-day delinquencies within the last 12 months. On a case by case
basis, the Transferor will allow for deviation from these parameters if
satisfactory LOE's are obtained.
Some types of borrowers may be subject to more restrictive qualification
criteria for a loan under the Equalizer Program, which may include a higher
minimum Credit Score, a lower Debt-to-Income Ratio, a lower maximum loan amount
and fewer instances of derogatory payment history. For example, a minimum Credit
Score of 660, a maximum Debt-to-Income Ratio of 40% and a maximum loan amount of
$50,000 are all imposed on (1) a self-employed borrower, and (2) a relocation
borrower (i.e., a borrower with less than 6 months of recent mortgage history,
but who has at least 12 months of mortgage history within the last 18 months).
Also, a maximum Debt-to-Income Ratio of 40% and a maximum loan amount of $25,000
are all imposed on each of the following: (1) a borrower having a minimum Credit
Score of 660, who does not meet the credit history requirements, but has a
minimum of 12 months mortgage history (i.e., a limited credit borrower); (2) a
borrower having a minimum Credit Score of 640, who has less than 6 months of
recent mortgage history (i.e., a first time homebuyer); and (3) a borrower
having a minimum Credit Score of 660, who has had a bankruptcy or consumer
credit
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counseling service within the last 7 years but not within the last 3 years.
Other types of borrowers with certain derogatory credit will not qualify under
any criteria for a loan under the Equalizer Program, which, among other things,
may include a borrower with more than one bankruptcy or a foreclosure on a
previous mortgage.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Because the rate and timing of principal payments on the Notes depends
primarily on the rate and timing of principal payments (i.e., the prepayment
experience) of the Loans and the availability and amount of Excess Spread, the
final payment of principal on the Notes could occur significantly earlier than
the Maturity Date. If significant principal payments are made on the Notes, the
holders of the Notes may not be able to reinvest such payments in a comparable
alternative investment having a comparable yield. 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 prepayments
on the Loans will be borne entirely by the holders of such Notes.
The effective yield to the holders of the Notes will be lower than the
yield otherwise produced by the Note Interest Rate because the payment of the
interest accrued during each Accrual Period (a calendar month consisting of
thirty days) will not be made until the Payment Date occurring in the month
following such Accrual Period. See 'Description of the Notes -- Payments on the
Notes' in this Prospectus Supplement. This delay will result in funds being paid
to the holders of the Notes approximately 24 days after the end of the monthly
accrual period, during which 24-day period no interest will accrue on such
funds.
The rate of principal payments on the Notes, the aggregate amount of each
interest payment on the Notes and the yield to maturity on the Notes will be
directly related to and affected by: (i) the prepayment experience of the Loans;
(ii) the application of Excess Spread to reduce the Note Principal Balance of
the Notes to the extent described in this Prospectus Supplement under
'Description of Credit Enhancement -- Overcollateralization,' and (iii) under
certain circumstances, the rates of delinquencies, defaults or losses
experienced on the Loans. The prepayment experience of the Loans in turn will be
affected by: (1) the scheduled amortization of the Loans; and (2) any
unscheduled principal prepayments or reductions of the Loans, which may include
(a) borrower prepayments and refinancings, (b) liquidations, write-offs and
certain modifications of the Loans due to defaults, casualties, condemnations or
other dispositions, and (c) repurchases of defective and defaulted Loans
pursuant to the Transfer and Servicing Agreements. Subject to the accepted
servicing procedures, the Servicer will have broad discretion (A) to modify
defaulted Loans in a manner that reduces the Principal Balances of such Loans
and thereby increases the principal reductions on the Loans, and (B) to sell or
dispose of defaulted Loans for proceeds that are less than the Principal
Balances of such Loans and thereby increase the principal reductions on the
Loans. However, certain modifications of defaulted Loans by the Servicer may
have the effect of delaying or decreasing principal reductions that would have
otherwise occurred on such defaulted Loans. On or after any Payment Date on
which the Pool Principal Balance declines to 10% or less of the Original Pool
Principal Balance, the Majority Residual Interest Certificateholders may
purchase all of the Loans from the Grantor Trustee at a price equal to or
greater than the Termination Price, thereby resulting in a redemption of the
Notes. Furthermore, to the extent that the Majority Residual Interest
Certificateholders fail to exercise such optional redemption rights, the
Securities Insurer and the Master Servicer may be entitled to exercise a similar
right to effect an optional redemption of the Notes if the Pool Principal
Balance declines to 5% or less of the Original Pool Principal Balance. See
'Description of the Notes -- Optional Termination' in this Prospectus
Supplement.
The 'weighted average life' of a 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 Note is repaid. The weighted average life of a Note will be
influenced by, among other factors, the following: (1) the prepayment experience
of the Loans; (2) the rate at which Excess Spread is paid to holders of such
Notes; (3) the extent to which any reduction of the Overcollateralization Amount
is paid to the holders of the
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Residual Interest Certificates; and (4) under certain circumstances, the rates
of delinquencies, defaults or losses experienced on the Loans. If substantial
principal prepayments on the Loans are received from unscheduled prepayments,
liquidations or repurchases, then the payments to the holders of the Notes
resulting from such prepayments may significantly shorten the actual average
lives of such Notes. If the Loans experience delinquencies and certain defaults
in the payment of principal, then the holders of the Notes may similarly
experience a delay in the receipt of principal payments attributable to such
delinquencies and defaults which in certain instances may result in longer
actual average lives of such Notes than would otherwise be the case. However, to
the extent that the Principal Balances of Liquidated Home Loans are included in
the principal payments on the Notes then the holders of such Notes will
experience an acceleration in the receipt of principal payments which in certain
instances may result in shorter actual average lives of such 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
payable on the Notes will be covered only to the extent of amounts available
from the credit enhancement provided for the Notes, including the Guaranty
Policy. See 'Risk Factors -- Adequacy of Credit Enhancement' in this Prospectus
Supplement.
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 significant prepayment data
are generally available with respect to the Loans or similar types of high LTV
loans, and there can be no assurance that the Loans will achieve or fail to
achieve any particular rate of prepayment experience. The prepayment experience
of the Loans will be influenced by a variety of general economic and social
factors, as well as other factors and characteristics that relate specifically
to each Loan.
Factors that relate to the Loans on a micro or specific basis and that may
affect the prepayment rate of the Loans include the following: (1) the
outstanding principal balance of the Loans; (2) the amounts of and interest
rates on the related senior mortgage loans; (3) changes in the value of the
related Mortgaged Properties and the related Combined Loan-to-Value Ratios; (4)
changes in the creditworthiness of the borrowers, including the related Credit
Scores, Debt-to-Income Ratios and disposable income amounts; (5) changes in the
availability of comparable financing to the borrowers on either more or less
favorable terms; (6) changes in the borrowers' housing needs or employment
status; and (7) 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. Additional factors that relate to the Loans on a micro or specific
basis include the seasoning of Loans, the existence and enforceability of
'due-on-sale' clauses, and the existence and enforceability of prepayment
penalties. For example, certain of the Loans contain due-on-sale provisions and
the Servicer intends to enforce such provisions, unless (i) the Servicer, in a
manner consistent with the accepted servicing procedures, permits the purchaser
of the related Mortgaged Property to assume the Loan, or (ii) such enforcement
is not permitted by applicable law. See 'Certain Legal Aspects of Residential
Loans -- Enforceability of Certain Provisions' in the accompanying Prospectus.
In certain cases, if the borrower is selling its Mortgaged Property, the
Servicer, in a manner consistent with the accepted servicing procedures, may
permit a substitution of collateral, short sales, short pay-offs or other
modifications. See 'Description of the Transfer and Servicing
Agreements -- Realization Upon Defaulted Loans' in this Prospectus Supplement.
Certain of the Loans contain prepayment penalty provisions, which generally
obligate the related borrower to pay a penalty in connection with a prepayment
of the borrower'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 borrowers. Any
enforcement by the Servicer of the prepayment penalties contained in the Loans
may have an effect on the decisions of borrowers to prepay their Loans and may
affect the weighted average lives of the Notes.
Several of these 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
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interest rates and maturities. For example, the Principal Balance of the average
Loan is smaller than that of the average conventional first lien mortgage loan.
A smaller principal balance may be easier for a borrower to prepay than a larger
balance and, therefore, a higher prepayment rate may result for the Pool than
for a pool of first lien mortgage loans, irrespective of the relative average
interest rates and the general interest rate environment. In addition, to
refinance a first lien mortgage loan, the borrower may be required to either
repay, or obtain the subordination of, any outstanding junior lien indebtedness.
However, a smaller 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. Furthermore, because at origination a substantial majority
of the Loans (excluding Unsecured Loans) had Combined Loan-to-Value Ratios that
approached or exceeded 100%, the related borrowers 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%.
Other macro or general economic and social factors that may affect the
prepayment rate of the Loans, include, among other matters, the rate of
inflation, unemployment levels, personal bankruptcy levels, prevailing interest
rates, consumer spending and saving habits, competition within the mortgage and
consumer finance industries, and consumer, bankruptcy and tax law developments.
For example, any further 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 prepayments on the Loans. In addition, the rate of
prepayment on a pool of fixed-rate loans is generally 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, depending on
prevailing market interest rates, the future outlook for market interest rates
and economic conditions generally, some borrowers may sell or refinance
mortgaged properties to realize their equity in the Mortgaged Properties, if
any, to meet cash flow needs or to make other investments.
As a result of the foregoing macro or general economic and social factors,
as well as the micro or loan specific factors and characteristics, the
prepayment experience of the Loans (1) cannot be predicted with certainty, (2)
will be likely to fluctuate over the life of the Loans and (3) may differ
significantly from the prepayment rates of first lien, residential mortgage
loans and home equity loans. None of the Transferor, the Servicer, the Master
Servicer, the Securities Insurer, the Depositor, nor the Underwriter makes any
representation 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.
Payments of principal to holders of the Notes at a faster rate than
anticipated will increase the yields on such Notes purchased at discounts but
will decrease the yields on such Notes purchased at premiums, which payments 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 payments of principal to the holders of such 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 such Notes will not be entirely offset by a
subsequent like reduction (or increase) in the rate of such payments 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
prepayment experience of the Loans and, accordingly, the weighted average lives
of the Notes. To the extent that such delinquencies, defaults and losses cause a
reduction in the amount of Excess Spread, then payments of principal to the
holders of the Notes could be delayed and result in a slower rate of principal
amortization of the Notes. See 'Description of Credit
Enhancement -- Overcollateralization' in this Prospectus Supplement. However, to
the extent that such delinquencies, defaults and losses cause an increase in the
Overcollateralization Deficiency Amount, then an increasing amount of Excess
Spread may be applied to the payment of principal to the holders
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of the Notes and result in a faster rate of principal amortization of the Notes.
If the Overcollateralization Amount is reduced to zero, then such defaults and
losses would cause an increase in the payment of principal to the holders of the
Notes to the extent that such defaults or losses are covered by the credit
enhancement available for the Notes, including the Guaranty Policy. Several
factors may influence such delinquencies, defaults and losses, including the
related borrower Credit Scores and Debt-to-Income Ratios, the outstanding Loan
principal amounts, whether such Loans are secured or unsecured, the related
Combined Loan-to-Value Ratios and other underwriting standards for such Loans.
In general, defaults on mortgage loans, including high LTV loans are expected to
occur with greater frequency in 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 defaults and losses 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. See 'Risk Factors -- Realization Upon Defaulted Loans'
and 'Underwriting Guidelines' in this Prospectus Supplement. Furthermore, the
rate and timing of prepayments, delinquencies, defaults, liquidations and losses
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
borrowers are residing. See 'Risk Factors -- Geographic Concentration' and 'The
Pool' in this Prospectus Supplement. The risk of delinquencies, defaults and
losses 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.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of the Notes relative to the principal amortization of
the Loans. If on any Payment Date, the Overcollateralization Target Amount
exceeds the Overcollateralization Amount, Excess Spread, if any, will be paid to
the holders of the Notes in the amounts described under 'Description of the
Notes -- Priority of Payments' in this Prospectus Supplement. If the
Overcollateralization Amount equals or exceeds the Overcollateralization Target
Amount for such Payment Date, Excess Spread otherwise payable to the holders of
the Notes will instead be paid to the holders of the Residual Interest
Certificates. On the Stepdown Date and on each Payment Date thereafter as to
which the Overcollateralization Amount is, or after taking into account all
other payments to be made on such Payment Date, would be at least equal to the
Overcollateralization Target Amount, amounts otherwise payable as principal to
the holders of the Notes on such Payment Date in reduction of their Note
Principal Balance may instead be paid to the holders of the Residual Interest
Certificates, thereby reducing the rate of, and under certain circumstances
delaying the principal amortization of such Notes, until the
Overcollateralization Amount is reduced to the Overcollateralization Target
Amount.
The yield to maturity on Notes purchased at a premium or discount will be
affected by the extent to which any Excess Spread is so applied to holders of
the Notes or is paid to the holders the Residual Interest Certificates, in lieu
of payment to such holders of the Notes. If such Excess Spread payments to the
holders of the Residual Interest Certificates occur sooner than anticipated by
an investor who purchases Notes at a discount, the actual yield to such investor
may be lower than anticipated. If such Excess Spread payments to the holders of
the Residual Interest Certificates occur later than anticipated by an investor
who purchases Notes at a premium, the actual yield to such investor may be lower
than anticipated. In particular, high rates of delinquencies on the Loans during
any Due Period will cause the Excess Spread available on the related Payment
Date to be reduced. Such an occurrence may cause the Note Principal Balance of
the Notes to decrease at a slower rate relative to the Pool Principal Balance,
resulting in a possible reduction of the Overcollateralization Amount.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the 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 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
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comparable to their respective Notes. Conversely, during periods of rising
interest rates, holders of the 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, their respective Notes.
MATURITY DATE
The Maturity Date of the Notes was determined by adding one year to the
Payment Date which occurs in the month following the maturity date of the latest
maturing Loan. The actual maturity of the Notes may be significantly earlier
than the Maturity Date.
WEIGHTED AVERAGE LIVES OF THE NOTES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Notes under
certain stated assumptions and is not a prediction of the prepayment rate that
may actually be experienced by the Loans. Weighted average here 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
on such Notes. The weighted average lives of the 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 paid to holders of the Notes, the extent to which any reduction in
Overcollateralization Amount is paid to the Residual Interest Certificates and
the rate of delinquencies and losses on the Loans from time to time. See
'Description of Credit Enhancement -- Overcollateralization' in this Prospectus
Supplement.
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 0.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate 1.14% (precisely 16/14 multiplied by
1.00%) per annum in each month thereafter until the fifteenth month; beginning
in the fifteenth month and in each month thereafter during the life of the
loans, a CPR of 16.0% per annum each month is assumed. As used in the tables
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. None of the Transferor,
the Depositor or the Underwriter makes any representation 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:
(1) 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
for the Loans commencing on November 1, 1998, and no delinquencies or
losses occur on the Loans;
(2) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (before 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;
(3) all scheduled payments of interest and principal in respect of the
Loans have been made through the Cut-Off Date; provided that with respect
to the first Due Period, the Transferor will retain approximately 13.33% of
all interest collected in November 1998;
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(4) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the 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;
(5) all prepayments in respect of the Loans include 30 days' accrued
interest;
(6) the Closing Date for the Notes is November 5, 1998;
(7) each year will consist of twelve 30-day months;
(8) cash payments are received by the holders of the Notes on the 25th
day of each month, commencing in December 1998;
(9) the Overcollateralization Target Amount will be as defined in this
Prospectus Supplement;
(10) the Note Interest Rate for the Notes is as set forth on the cover
page; provided, however, that the Note Interest Rate on the Notes will be
increased by 0.50% per annum, commencing on the first day of the month in
which the Clean-up Call Date occurs;
(11) all fees assumed to be deducted from the interest collections in
respect of the Loans equal 1.1517% of the Pool Principal Balance;
(12) no reinvestment income from any Account is earned and available
for payment;
(13) the Pool consists of Loans having the following characteristics:
ASSUMED LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
REMAINING ORIGINAL
CUT-OFF DATE TERM TO TERM TO
PRINCIPAL LOAN MATURITY MATURITY
SUB-POOL BALANCE RATE% (MONTHS) (MONTHS)
- --------- ------------- -------- --------- --------
<S> <C> <C> <C> <C>
1 30,209,623.39 13.4920% 168 169
2 37,089,001.28 13.4930% 167 169
3 52,979,427.89 13.8821% 159 164
4 50,146,581.18 13.6581% 237 240
5 43,463,567.98 13.4865% 299 300
6 44,781,146.61 13.4129% 298 300
7 40,940,428.49 13.6365% 296 300
</TABLE>
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The following tables indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average lives of the Notes.
PERCENT OF ORIGINAL NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
NOTES
---------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- --------------------------------------------------------------------- ----- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent...................................................... 100 100 100 100 100 100
November 1999........................................................ 92 87 85 82 80 77
November 2000........................................................ 89 76 70 64 59 53
November 2001........................................................ 87 67 59 51 43 36
November 2002........................................................ 84 59 49 39 33 28
November 2003........................................................ 82 52 40 32 26 20
November 2004........................................................ 79 44 34 26 20 15
November 2005........................................................ 75 38 29 21 15 11
November 2006........................................................ 71 34 24 17 12 8
November 2007........................................................ 66 29 20 13 9 6*
November 2008........................................................ 61 25 16 10 7* 4*
November 2009........................................................ 55 21 13 8 5* 3*
November 2010........................................................ 48 17 10 6* 3* 2*
November 2011........................................................ 40 14 8 4* 2* 1*
November 2012........................................................ 35 11 6* 3* 1* 0
November 2013........................................................ 33 10 5* 2* 1* 0
November 2014........................................................ 30 8 4* 2* 0 0
November 2015........................................................ 27 7* 3* 1* 0 0
November 2016........................................................ 24 6* 2* 0 0 0
November 2017........................................................ 20 4* 2* 0 0 0
November 2018........................................................ 17 3* 1* 0 0 0
November 2019........................................................ 14 2* 0 0 0 0
November 2020........................................................ 11 1* 0 0 0 0
November 2021........................................................ 8* 0 0 0 0 0
November 2022........................................................ 4* 0 0 0 0 0
November 2023........................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)......................... 12.10 6.77 5.39 4.43 3.74 3.23
Weighted Average Life-to-Call (Years)(2)............................. 12.03 6.50 5.12 4.21 3.54 3.05
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life is determined by (a) multiplying the amount of
each payment of principal thereof by the number of years from the date of
issuance to the related Payment Date, (b) summing the results and (c)
dividing the sum by the aggregate payments of principal referred to in
clause (a) and rounding to two decimal places.
* Indicates that the cash flows are contingent on the optional termination
provision not being exercised.
------------------------
This table has 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 pay-down scenarios for the Notes set forth in the foregoing table is
subject to significant uncertainties and contingencies (including those
discussed above under the caption 'Prepayment and Yield Considerations'). As a
result, neither the foregoing pay-down scenarios nor the Modeling Assumptions on
which they were made will likely prove to be accurate. Indeed, the actual
weighted average lives of the Notes will likely vary from those set forth in the
foregoing table, which variations
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may be shorter or longer, and which variations may be greater with respect to
later years. Furthermore, the Loans in all likelihood will not prepay at a
constant rate or at the same rate. Moreover, for the Loans actually included in
the Pool, the payment experience of such Loans and certain other factors
affecting the payments on the 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' in this Prospectus Supplement. 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
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' in this Prospectus Supplement.
In light of the uncertainties inherent in the foregoing pay-down scenarios,
the inclusion of the weighted average lives of the Notes in the foregoing table
should not be regarded as a representation by the Transferor, the Depositor, the
Underwriter or any other person that any of the above pay-down scenarios will be
experienced.
THE OWNER TRUST
GENERAL
Empire Funding Home Loan Owner Trust 1998-3 (the 'Owner Trust' or the
'Issuer'), is a business trust to be formed under the laws of the State of
Delaware pursuant to the Owner Trust Agreement (the 'Owner Trust Agreement')
among the Depositor, the Paying Agent, the Owner Trustee and Empire Funding.
After its formation, the Issuer, as an Owner Trust, will not engage in any
activity other than the activities related to the Notes, which will include:
(i) acquiring and holding the Grantor Trust Certificate and the other assets of
the Issuer and proceeds therefrom, (ii) issuing the Notes and the Residual
Interest Certificates, (iii) making payments on the Notes and distributions on
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 Issuer. The Issuer will initially be capitalized with equity equal
to the Residual Interest Certificates. The Residual Interest Certificates,
together with the Notes, will be transferred by the Issuer to the Depositor as
consideration for the Grantor Trust Certificate pursuant to the Sale and
Servicing Agreement. The Residual Interest Certificate will thereupon be
transferred by the Depositor to the Transferor as partial consideration for the
Loans.
The assets of the Issuer will consist primarily of the Grantor Trust
Certificate and all amounts distributable thereon. The assets of the Issuer also
will include (i) amounts on deposit in the Note Payment Account and the
Certificate Distribution Account; (ii) the assignment of all rights of the
Depositor under the Grantor Trust Agreement; and (iii) certain other ancillary
or incidental funds, rights and properties related to the foregoing. The
Issuer's principal offices will be located in Wilmington, Delaware, in care of
Wilmington Trust Company, (the 'Owner Trustee'), at the address set forth below
under ' -- The Owner Trustee.'
THE OWNER TRUSTEE
Wilmington Trust Company will act as the Owner Trustee under the Owner
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 Owner Trust Agreement and
the Sale and Servicing Agreement will be performed by the Indenture Trustee,
including maintaining the Certificate Distribution Account and making
distributions.
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THE GRANTOR TRUST
On the Closing Date, the Depositor will deposit into Empire Funding Grantor
Trust 1998-3 (the 'Grantor Trust') the Loans pursuant to a Grantor Trust
Agreement (the 'Grantor Trust Agreement') among the Depositor, Empire Funding
and the Grantor Trustee. The Depositor will deposit the Loans into the Grantor
Trust in exchange for a certificate (the 'Grantor Trust Certificate') evidencing
100% of the ownership interest in the Grantor Trust. On the Closing Date, the
Depositor will sell the Grantor Trust Certificate to the Issuer pursuant to a
Sale and Servicing Agreement (the 'Sale and Servicing Agreement'), among the
Issuer, the Depositor, the Transferor, the Servicer, the Master Servicer, the
Grantor Trustee and the Indenture Trustee. U.S. Bank National Association, a
national banking association ('U.S. Bank'), will act as the indenture trustee
(in such capacity, the 'Indenture Trustee') under an Indenture (the 'Indenture')
between the Issuer and the Indenture Trustee, as the grantor trustee under the
Grantor Trust Agreement (in such capacity, the 'Grantor Trustee'), as the paying
agent under the Owner Trust Agreement (in such capacity, the 'Paying Agent'), as
the custodian (in such capacity, the 'Custodian') under the Custodial Agreement
(the 'Custodial Agreement') between the Custodian and the Depositor, and as the
administrator (in such capacity, the 'Administrator') under the Administration
Agreement (the 'Administration Agreement') among the Issuer, the Administrator
and the Servicer.
The assets of the Grantor Trust will consist primarily of the Loans. See
'The Pool' in this Prospectus Supplement. The assets of the Grantor Trust also
will include (i) payments of principal and interest in respect of the Loans
received after the Cut-Off Date (less approximately 13.33% of the interest
collected on the Loans during November 1998); (ii) amounts on deposit in the
Collection Account; (iii) an assignment of the Depositor's rights under the Home
Loan Purchase Agreement; and (iv) certain other ancillary or incidental funds,
rights and related properties.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement and will be compensated for such services. See 'Description of the
Transfer and Servicing Agreements -- Servicing' in this Prospectus Supplement.
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DESCRIPTION OF THE NOTES
GENERAL
The Issuer will issue one class of notes (the 'Notes') pursuant to the
Indenture. The assets of the Issuer will secure the Notes under the Indenture.
The Notes will have an aggregate original principal balance (the 'Original
Note Principal Balance') of $283,580,654 and an interest rate (the 'Note
Interest Rate') of 6.75% per annum.
The Issuer will also issue certificates (the 'Residual Interest
Certificates') evidencing the residual interest in the Issuer pursuant to the
Owner Trust Agreement. The Residual Interest Certificates are not being offered
through this Prospectus Supplement and accompanying Prospectus.
On each Payment Date the Indenture Trustee or its designee will be required
to pay 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 Payment
Date (each such date, a 'Record Date'), the portion of the aggregate payment to
be made to each holder of a Note as described below. Before any termination of
the book-entry provisions, payments on the Notes will be made to persons with
beneficial ownership interests in the Notes (the 'Security Owners') only through
DTC and DTC Participants. See 'Description of the Securities -- Book-Entry
Registration of Securities' in the accompanying Prospectus.
Beneficial ownership interests in the Notes may only be held in minimum
denominations of $25,000 and integral multiples of $1,000 in excess thereof;
provided, however, that one Note may be issued in such denomination as may be
necessary to represent the remainder of the aggregate amount of Notes.
PAYMENTS ON THE NOTES
For the definitions of certain of the defined terms used in the following
subsections, see ' -- Related Definitions' below.
Available Collection Amount. Payments on the Notes on each Payment Date
will be made from the Available Collection Amount. The Servicer will calculate
the Available Collection Amount on the 14th 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 Payment Date, the
'Available Collection Amount' is the sum of (1) 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); (2) any and all income or gain
from investments in the Collection Account and the Certificate Distribution
Account; (3) 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 before the related Determination
Date; and (4) upon the exercise of an optional termination by the Majority
Residual Interest Certificateholders, the Master Servicer or the Securities
Insurer, the Termination Price.
On each Payment Date, the 'Available Payment Amount' will equal the related
Available Collection Amount deposited into the Note Payment Account and
remaining after providing for the payment of all Issuer Fees and Expenses for
such Payment Date. On each Payment Date, interest and principal payments on the
Notes will be made from the Available Payment Amount and any Insured Payments
for such Payment Date. If for any Payment Date a Deficiency Amount exists, the
Indenture Trustee must make a claim for an Insured Payment under the Guaranty
Policy by submitting the required notice no later than 12:00 noon, New York
time, on the third Business Day preceding such date. See 'Description of Credit
Enhancement -- The Guaranty Policy' in this Prospectus Supplement.
Payments of Interest. Interest on the Note Principal Balance will accrue
thereon during each Accrual Period at the Note Interest Rate, and will be
payable to the holders of the Notes monthly on each Payment Date, commencing in
December 1998; provided, however, that the Note Interest Rate
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will be increased by 0.50% per annum, commencing on the first day of the month
in which the Clean-up Call Date occurs.
On each Payment Date, interest payments on the Notes will be made from the
Available Payment Amount and any Insured Payments for such Payment Date. Under
certain circumstances and in the event of a Securities Insurer Default, the
amount available for interest payments could be less than the amount of interest
payable on the Notes on any Payment Date. In such event, each Note will receive
its ratable share (based upon the aggregate amount of interest due to the Notes)
of the remaining amount available to be paid as interest. In addition, any such
interest deficiency will be carried forward as a Noteholders' Interest
Carry-Forward Amount, and will be paid to holders of the Notes on subsequent
Payment 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 and Insured Payments were not timely received under the
Guaranty Policy. No interest will accrue on any Noteholders' Interest
Carry-Forward Amount.
Payments of Principal. Principal payments will be made to the holders of
the Notes on each Payment Date in an amount described under ' -- Priority of
Payments' below. The aggregate payments of principal to the Notes will not
exceed the Original Note Principal Balance.
PRIORITY OF PAYMENTS
A. On each Payment Date, the Regular Payment Amount and any Insured
Payments will be paid in the following order of priority:
(1) first, to the holders of the Notes, pro rata, the applicable
portion of the Noteholders' Interest Payment Amount required to be paid in
respect of the Notes;
(2) second, to pay principal of the Notes, until the Note Principal
Balance is reduced to zero, in an amount up to the sum of the Regular
Principal Payment Amount and the Noteholders' Principal Deficiency Amount,
if any; and
(3) third, any remaining amount to be applied together with Excess
Spread in the manner specified in paragraph B below.
B. On each Payment Date, the Excess Spread, if any, will be applied in the
following order of priority (in each case after giving effect to all payments
specified in paragraph A above):
(1) first, to pay the Securities Insurer the Securities Insurer
Reimbursement Amount, if any;
(2) second, in an amount up to the Overcollateralization Deficiency
Amount, if any, to pay principal of the Notes, until the Note Principal
Balance is reduced to zero; and
(3) third, any remaining amount (A) first, to the Servicer in an
amount needed to reimburse any non-recoverable servicing advances, and (B)
then to the Residual Interest Certificates.
RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
Accrual Period: The calendar month preceding the month in which the related
Payment Date occurs (or, in the case of the first Payment Date, from the Closing
Date to the last day of the month in which the Closing Date occurs). Interest on
the Notes will be calculated on the basis of a 360-day year of twelve 30-day
months.
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 or the Master Servicer's master
servicing operations are primarily located and are authorized or obligated by
law or executive order to be closed.
Excess Spread: With respect to any Payment Date, the excess, if any, of (1)
the Available Payment Amount, over (2) the Regular Payment Amount.
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Insurance Proceeds: With respect to any Payment Date, the proceeds paid to
the Grantor 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 Grantor Trustee or the Servicer in connection with the collection of such
proceeds and not otherwise reimbursed to the Grantor Trustee or the Servicer,
but excluding Guaranty Policy Proceeds, the proceeds of any insurance policy
that are to be applied to the restoration or repair of the Mortgaged Property or
released to the borrower in accordance with the accepted servicing procedures.
Liquidated Home Loan: Any Loan in respect of which a monthly payment is in
excess of 30 days past due 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: (1) the liquidation of the related
Mortgaged Property acquired through foreclosure or similar proceedings, (2) the
Servicer's determination in accordance with the accepted servicing procedures
that there is not a reasonable likelihood of an economically significant
recovery from the borrower or the related Mortgaged Property in excess of the
costs and expenses in obtaining such recovery and in relation to the expected
timing of such recovery or (3) any portion of a scheduled monthly payment of
principal and interest is in excess of 180 days past due.
Net Liquidation Proceeds: With respect to any Payment 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 Mortgaged Properties.
Note Principal Balance: With respect to the Notes and as of any date of
determination, the Original Note Principal Balance of the Notes reduced by all
amounts paid in respect of principal of the Notes on all Payment Dates prior to
such date of determination.
Noteholders' Interest Carry-Forward Amount: With respect to any Payment
Date, the excess, if any, of the Noteholders' Monthly Interest Payment Amount
for the preceding Payment Date plus any outstanding Noteholders' Interest
Carry-Forward Amount on such preceding Payment Date, over the amount in respect
of interest that is actually paid on such preceding Payment Date.
Noteholders' Interest Payment Amount: With respect to any Payment Date, the
sum of the Noteholders' Monthly Interest Payment Amount and the Noteholders'
Interest Carry-Forward Amount.
Noteholders' Monthly Interest Payment Amount: With respect to any Payment
Date, interest accrued for the related Accrual Period on the Notes at the Note
Interest Rate on the Note Principal Balance thereof immediately preceding such
Payment Date (or, in the case of the first Payment Date, on the Closing Date),
after giving effect to all payments of principal to the holders of the Notes on
or before such preceding Payment Date.
Noteholders' Principal Deficiency Amount: (1) With respect to any Payment
Date, the excess, if any, of (a) the Note Principal Balance as of such Payment
Date (after giving effect to all payments of principal on the Notes on such
Payment Date, but without giving effect to payments in respect of this
Noteholders' Principal Deficiency Amount to be made on such Payment Date), over
(b) the Pool Principal Balance as of the end of the related Due Period and (2)
with respect to the Maturity Date of the Notes or any Payment Date upon which
the Securities Insurer has exercised its option to accelerate the Notes, the
excess of (a) the Note Principal Balance (after giving effect to all payments of
principal on the Notes on such date, but without giving effect to payments in
respect of this Noteholders' Principal Deficiency Amount to be made on such
date) over (b) the Available Payment Amount remaining after the payment of the
Noteholders' Interest Payment Amount and Regular Principal Payment Amount for
such date.
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Overcollateralization Amount: With respect to any Payment Date, the amount
equal to the excess, if any, of (i) the Pool Principal Balance as of the end of
the preceding Due Period, over (ii) the Note Principal Balance (after giving
effect to payments on the Notes on such Payment 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 Reduction Amount: With respect to any Payment Date
that occurs on or after the Stepdown Date, the lesser of (1) the excess, if any,
of (a) the Overcollateralization Amount (assuming principal payments of the
Notes on such Payment Date are equal to the Regular Principal Payment Amount),
over (b) the Overcollateralization Target Amount and (2) the Regular Principal
Payment Amount (as determined without the deduction of this
Overcollateralization Reduction Amount therefrom) on such Payment Date. Prior to
the occurrence of a Stepdown Date, the Overcollateralization Reduction Amount
will be zero.
Overcollateralization Target Amount: As defined under the heading
'Description of Credit Enhancement -- Overcollateralization' in this Prospectus
Supplement.
Regular Payment Amount: With respect to any Payment Date, the lesser of (1)
the Available Payment Amount and (2) the sum of (a) the Noteholders' Interest
Payment Amount and (b) the Regular Principal Payment Amount.
Regular Principal Payment Amount: On each Payment Date, an amount (but not
in excess of the Note Principal Balance immediately before such Payment 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 before 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 Payment
Date on which the Issuer and the Grantor Trust are to be terminated pursuant to
the Sale and Servicing Agreement, the Termination Price (net of any accrued and
unpaid interest, due and unpaid Issuer Fees and Expenses, amounts due and owing
the Securities Insurer under the Insurance Agreement and unreimbursed Servicing
Advances). Notwithstanding the foregoing, if such Payment Date occurs on or
after a Stepdown Date, then the Regular Principal Payment Amount will be reduced
(but not less than zero) by the Overcollateralization Reduction Amount, if any,
for such Payment Date.
Released Mortgaged Property Proceeds: With respect to any 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 borrower in accordance with applicable law, accepted
servicing procedures and the Sale and Servicing Agreement.
Stepdown Date: The first Payment Date occurring on the later of: (a)
November 25, 2001; or (b) the Payment Date on which the Pool Principal Balance
as of the end of the related Due Period has been reduced to 50% of the Original
Pool Principal Balance.
SECURITIES INSURER REIMBURSEMENT AMOUNT
On each Payment Date, after the holders of the Notes have been paid all
amounts to which they are entitled and prior to any distributions to the holders
of the Residual Interest Certificates, the Securities Insurer will be entitled
to be reimbursed for any unreimbursed Insured Payments in respect of the Notes
not previously reimbursed and any other amounts owed to the Securities Insurer
under the Insurance Agreement (including legal fees and other expenses incurred
by the Securities Insurer) together with interest thereon at the rate specified
in the Insurance Agreement (the 'Securities Insurer Reimbursement Amount') and
any accrued and unpaid Guaranty Insurance Premiums. The 'Insurance Agreement'
means the Insurance Agreement among the Securities Insurer, the Depositor, the
Transferor, the Master Servicer, the Issuer, the Owner Trustee, and the
Indenture Trustee. In
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connection with each Insured Payment, the Indenture Trustee, as attorney-in-fact
for the holder thereof, will be required to assign to the Securities Insurer the
rights of the Holders of the Notes with respect to the Notes, to the extent of
such Insured Payments, including, without limitation, in respect of any amounts
due to the holders of the Notes as a result of a securities law violation
arising from the offer and sale of the Notes. In the event that any Securities
Insurer Reimbursement Amount is outstanding, the holders of the Residual
Interest Certificates will not be entitled to receive distributions of any
amounts of Excess Spread until the Securities Insurer has been distributed such
Securities Insurer Reimbursement Amount in full.
OPTIONAL TERMINATION
The holders of an aggregate percentage interest in the Residual Interest
Certificates in excess of 50% (the 'Majority Residual Interest
Certificateholders') may, at their option, effect an early termination of the
Notes on or after any Payment Date on which the Pool Principal Balance declines
to 10% or less of the Original Pool Principal Balance, by purchasing all of the
Loans from the Grantor Trustee at a price equal to or greater than the
Termination Price. The 'Termination Price' shall be an amount equal to the
greater of (a) the sum of (i) the then outstanding Note Principal Balance and
all accrued and unpaid interest on the Notes through the last day of the Accrual
Period relating to such Payment Date; (ii) any Issuer Fees and Expenses due and
unpaid on such date; (iii) any unreimbursed Servicing Advances including such
Servicing Advances deemed to be nonrecoverable; and (iv) the Securities Insurer
Reimbursement Amount and (b) the sum of (i) the Principal Balance of each Loan
included in the Grantor Trust as of the last day of the month immediately
preceding such Payment Date; (ii) all unpaid interest accrued on the Principal
Balance of each such Loan at the related interest rate to such date; (iii) the
aggregate fair market value of each foreclosure property included in the Grantor
Trust on such date, as determined by an independent appraiser acceptable to the
Indenture Trustee as of a date not more than 30 days before such date
nonrecoverable; and (iv) to the Securities Insurer Reimbursement Amount. The
proceeds from such sale will be distributed in respect of the Grantor Trust
Certificate and paid (1) first, to the outstanding Issuer Fees and Expenses,
(2) second, to the Servicer for unreimbursed Servicing Advances including such
Servicing Advances deemed to be nonrecoverable, (3) third, to the holders of
Notes in an amount equal to the then outstanding Note Principal Balance of the
Notes plus all accrued and unpaid interest thereon, (4) fourth, to the
Securities Insurer the Securities Insurer Reimbursement Amount, if any, and (5)
fifth, to the holders of the Residual Interest Certificates, in an amount equal
to the amount of proceeds remaining, if any, after the payments specified in
clauses (1) through (4) above.
On or after any Payment Date the Pool Principal Balance declines to 5% or
less of the Original Pool Principal Balance, the Securities Insurer or the
Master Servicer may, at each one's option, effect an early termination of the
Notes if the Majority Residual Interestholders fail to exercise their option to
effect an early termination.
In addition, if certain events of default of the Issuer occur as set forth
in the Indenture, including (a) a default in payment of any interest or
principal amounts due the holders of the Notes, (b) the failure by the Issuer to
observe or perform in any material respect any of its covenants or agreements in
the Indenture, which failure continues unremedied for 30 days, and (c) certain
events of bankruptcy, insolvency or other similar proceedings relating to the
Issuer, then the Securities Insurer may, at its option, effect an early
termination of the Notes, by purchasing all of the Loans from the Grantor
Trustee at a price equal to the Termination Price.
DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Notes will be provided by the
Guaranty Policy. Additional credit enhancement with respect to the Notes that
will be utilized before the Guaranty Policy will be provided by (i) the
overcollateralization feature described below under ' -- Overcollateralization,'
and (ii) the subordination of the right of the Residual Interest Certificates to
receive payments of any remaining amounts as described below under
' -- Subordination.'
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The information set forth below under 'The Guaranty Policy' and 'The
Securities Insurer' has been supplied by MBIA Insurance Corporation, as the
Securities Insurer, for inclusion in this Prospectus Supplement and has not been
reviewed or verified by Empire Funding, the Servicer, the Depositor, the
Indenture Trustee, the Owner Trustee, the Underwriter or any of their respective
affiliates.
THE GUARANTY POLICY
The Securities Insurer, in consideration of the payment of the premium and
subject to the terms of the Guaranty Policy, thereby unconditionally and
irrevocably guarantees, to any Owner (as defined below) that an amount equal to
each full and complete Insured Payment will be received by the Indenture
Trustee, or its successor, as trustee for the Owners, on behalf of the Owners
from the Securities Insurer, for distribution by the Indenture Trustee, to each
Owner of each Owner's proportionate share of the Insured Payment. The Securities
Insurer's obligations under the Guaranty Policy with respect to a particular
Insured Payment will be discharged to the extent funds equal to the applicable
Insured Payment are received by the Indenture Trustee, whether or not such funds
are properly applied by the Indenture Trustee. Insured Payments will be made
only at the time set forth in the Guaranty Policy and no accelerated Insured
Payments will be made regardless of any acceleration of the Notes, unless such
acceleration is at the sole option of the Securities Insurer.
Notwithstanding the foregoing paragraph, the Guaranty Policy does not cover
shortfalls, if any, attributable to the liability of the Issuer or the Indenture
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Securities Insurer will pay any Insured Payment that is a Preference
Amount (as defined below) on the Business Day following receipt on a Business
Day by the Fiscal Agent (as defined below) of (i) a certified copy of the order
requiring the return of a preference payment, (ii) an opinion of counsel
satisfactory to the Securities Insurer that such order is final and not subject
to appeal, (iii) an assignment in such form as is reasonably required by the
Securities Insurer, irrevocably assigning to the Securities Insurer all rights
and claims of each Owner relating to or arising under the Notes against the
debtor which made such preference payment or otherwise with respect to such
preference payment and (iv) appropriate instruments to effect the appointment of
the Securities Insurer as agent for such Owner in any legal proceeding related
to such preference payment, such instruments being in a form satisfactory to the
Securities Insurer, provided that if such documents are received after 12:00
noon New York City time on such Business Day, they will be deemed to be received
on the following Business Day. Such payments will be disbursed to the receiver
or trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Owner and not to any Owner directly unless such
Owner has returned principal or interest paid on such Securities to such
receiver or trustee in bankruptcy, in which case such payment will be disbursed
to such Owner.
The Securities Insurer will pay any other amount payable under the Guaranty
Policy no later than 12:00 noon, New York City time on the later of the Payment
Date on which the related Deficiency Amount is due or the third Business Day
following receipt in New York, New York on a Business Day by State Street Bank
and Trust Company, N.A., as Fiscal Agent for the Securities Insurer or any
successor fiscal agent appointed by the Securities Insurer (the 'Fiscal Agent'),
of a Notice (as defined below); provided that if such Notice is received after
12:00 noon, New York City time on such Business Day, it will be deemed to be
received on the following Business Day. If any such Notice received by the
Fiscal Agent is not in proper form or is otherwise insufficient for the purpose
of making a claim under the Guaranty Policy it will be deemed not to have been
received by the Fiscal Agent for the purposes of this paragraph, and the
Securities Insurer or the Fiscal Agent, as the case may be, will promptly so
advise the Indenture Trustee and the Indenture Trustee may submit an amended
Notice.
Insured Payments due under the Guaranty Policy, unless otherwise stated
therein, will be disbursed by the Fiscal Agent to the Indenture Trustee on
behalf of the Owners by wire transfer of immediately available funds in the
amount of the Insured Payment less, in respect of Insured Payments related to
Preference Amounts, any amount held by the Indenture Trustee for the payment of
such Insured Payment and legally available therefor.
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The Fiscal Agent is the agent of the Securities Insurer only and the Fiscal
Agent will in no event be liable to Owners for any acts of the Fiscal Agent or
any failure of the Securities Insurer to deposit or cause to be deposited
sufficient funds to make payments due under the Guaranty Policy.
Subject to the terms of the Agreement, the Securities Insurer shall be
subrogated to the rights of each Owner to receive payments under the Notes to
the extent of any payment by the Securities Insurer under the Guaranty Policy.
As used in the Guaranty Policy, the following terms will have the following
meanings:
'Agreement' means the Sale and Servicing Agreement dated as of November 1,
1998 among the Owner Trust, the Indenture Trustee and Grantor Trustee, the
Depositor, the Transferor and Servicer without regard to any amendment or
supplement thereto.
'Business Day' means any day other than a Saturday, a Sunday or a day on
which the Securities Insurer and banking institutions in New York, New York, or
the city in which the corporate trust office of the Indenture Trustee under the
Indenture is located are authorized or obligated by law or executive order to
close.
'Deficiency Amount' means as of any Payment Date, the sum of (i) the amount
by which the Noteholders' Interest Payment Amount for the Notes on such Payment
Date exceeds the Available Payment Amount for such Payment Date and (ii) the
Noteholders' Principal Deficiency Amount for such Payment Date.
'Indenture' means the Indenture dated as of November 1, 1998 between the
Owner Trust and the Indenture Trustee.
'Insured Payment' means, (i) as of any Payment Date any Deficiency Amount
and (ii) any Preference Amount.
'Notice' means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the
Guaranty Policy, the original of which is subsequently delivered by registered
or certified mail, from the Indenture Trustee specifying the Insured Payment
which will be due and owing on the applicable Payment Date.
'Owner' means (i) each Note Owner (as defined in the Indenture) who, on the
applicable Payment Date is entitled under the terms of the related Note to
payments thereunder.
'Preference Amount' means any amount previously distributed to an Owner in
respect of the Notes that is recoverable and sought to be recovered as a
voidable preference by a trustee in bankruptcy pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance with a
final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Guaranty Policy and not otherwise defined in
the Guaranty Policy will have the respective meanings set forth in the Agreement
or the Indenture as of the date of execution of the Guaranty Policy, without
giving effect to any subsequent amendment or modification to the or the
Indenture, unless such amendment or modification has been approved in writing by
the Securities Insurer.
Any notice under the Guaranty Policy or service of process on the Fiscal
Agent of the Securities Insurer may be made at the address listed below for the
Fiscal Agent of the Securities Insurer or such other address as the Securities
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agent, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
The Guaranty Policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of law principles thereof.
The insurance provided by the Guaranty Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
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The Guaranty Policy is not cancelable for any reason. The premium on the
Guaranty Policy is not refundable for any reason including payment, or provision
being made for payment, prior to the maturity of the Notes.
THE SECURITIES INSURER
The Securities Insurer is the principal operating subsidiary of MBIA Inc.,
a New York Stock Exchange listed company ('MBIA Inc.'). MBIA Inc. is not
obligated to pay the debts of or claims against the Securities Insurer. The
Securities Insurer is domiciled in the State of New York and is licensed to do
business in and is subject to regulation under the laws of all 50 states, the
District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of
Northern Marina Islands, the Virgin Islands of the Untied States and the
Territory of Guam. The Securities Insurer has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by the Securities Insurer, changes in control
and transactions among affiliates. Additionally, the Securities Insurer is
required to maintain contingency reserves on its liabilities in certain amounts
and for certain periods of time.
Effective February 17, 1998, MBIA Inc. acquired all of the outstanding
stock of Capital Markets Assurance Corporation ('CMAC') through a merger with
its parent CapMAC Holdings Inc. Pursuant to a reinsurance agreement, CMAC has
ceded all of its net insured risks (including any amounts due but unpaid from
third party reinsurers), as well as its unearned premiums and contingency
reserves, to the Securities Insurer. MBIA Inc. is not obligated to pay the debts
of or claims against CMAC.
The consolidated financial statements of the Securities Insurer, a wholly
owned subsidiary of MBIA Inc., and its subsidiaries as of December 31, 1997 and
December 31, 1996 and for each of the three years in the period ended December
31, 1997, prepared in accordance with generally accepted accounting principles,
included in the Annual Report on Form 10-K of MBIA Inc. for the year ended
December 31, 1997 and the consolidated financial statements of the Securities
Insurer and its subsidiaries as of June 30, 1998 and for the six-month periods
ending June 30, 1998 and June 30, 1997 included in the Quarterly Report on Form
10-Q of MBIA Inc. for the period ending June 30, 1998, are hereby incorporated
by reference into this Prospectus Supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this Prospectus Supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus
Supplement.
All financial statements of the Securities Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this Prospectus Supplement and prior to the termination of the offering of
the Notes shall be deemed to be incorporated by reference into this Prospectus
Supplement and to be a part hereof from the respective dates of filing such
documents.
The tables below present selected financial information of the Securities
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities ('SAP') and generally accepted
accounting principles ('GAAP').
<TABLE>
<CAPTION>
SAP
----------------------------
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets........................................................... $5,256 $6,048
Liabilities............................................................... 3,496 3,962
Capital and Surplus....................................................... 1,760 2,086
</TABLE>
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<TABLE>
<CAPTION>
GAAP
----------------------------
DECEMBER 31, JUNE 30,
1997 1998
------------ ------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets.................................................................... $5,988 $6,794
Liabilities............................................................... 2,624 2,977
Shareholder's Equity...................................................... 3,364 3,817
</TABLE>
Copies of the financial statements of the Securities Insurer incorporated
by reference herein and copies of the Securities Insurer's 1997 year-end audited
financial statements prepared in accordance with statutory accounting practices
are available, without charge, from the Securities Insurer. The Securities
Insurer's address is: 113 King Street, Armonk, New York 10504; and telephone
number is: (914) 273-4545.
The Securities Insurer does not accept any responsibility for the accuracy
or completeness of this Prospectus Supplement or any information or disclosure
contained herein, or omitted herefrom, other than with respect to the accuracy
of the information regarding the Guaranty Policy and the Securities Insurer set
forth under the heading 'Description of Credit Enhancement -- The Guaranty
Policy' and ' -- The Securities Insurer.' Additionally, the Securities Insurer
makes no representation regarding the Notes or the advisability of investing in
the Notes.
Moody's Investors Service, Inc. rates the claims paying ability of the
Securities Insurer 'Aaa.'
Standard & Poor's Ratings Services, a division of the McGraw-Hill
Companies, Inc., rates the claims paying ability of the Securities Insurer
'AAA.'
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P) rates the
claims paying ability of the Securities Insurer 'AAA.'
Each rating of the Securities Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
creditworthiness of the Securities Insurer and its ability to pay claims on its
policies of insurance. Any further explanation of the significance of the above
ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the Notes,
and such ratings may be subject to revision or withdrawal at any time by the
rating agencies. Any downward revision or withdrawal of any of the above ratings
may have an adverse effect on the market price of the Notes. The Securities
Insurer does not guaranty the market price of the Notes nor does it guaranty
that the ratings on any Notes will not be reversed or withdrawn.
OVERCOLLATERALIZATION
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 payments of
principal to the holders of the Notes from the payment of Excess Spread until
the Overcollateralization Amount is equal to the Overcollateralization Target
Amount.
If on any Payment Date there exists an Overcollateralization Deficiency
Amount, payments of Excess Spread, if any, will be made as an additional payment
of principal to the holders of the Notes as set forth under 'Description of the
Notes -- Priority of Payments' in this Prospectus Supplement. Such payments of
Excess Spread are intended to accelerate the amortization of the Note Principal
Balance relative to the amortization of the Loans, thereby increasing the
Overcollateralization Amount. The relative percentage of the Note Principal
Balance to the Pool Principal Balance will decrease as a result of the
application of Excess Spread to reduce the Note Principal Balance.
On any Payment 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 Certificates as described in
this Prospectus Supplement rather than being paid as principal to the holders of
the applicable Notes. This would have the effect of ceasing the acceleration of
principal amortization of such Notes in relation to the principal amortization
of the Pool until such time as the
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Overcollateralization Deficiency Amount is greater than zero (i.e., due to a
reduction in the Overcollateralization Amount as a result of Realized Losses or
delinquencies or due to an increase in the Overcollateralization Target Amount
as a result of the failure to satisfy certain delinquency or loss criteria).
On any Payment Date occurring on or after a Stepdown Date, the holders of
the Residual Interest Certificates may receive payments, to the extent of the
Overcollateralization Reduction Amount, attributable to all or a portion of the
Regular Principal Payment Amount that would otherwise be paid to the holders of
the Notes.
The Overcollateralization Target Amount may decrease or 'stepdown' (1) as a
result of the performance of the Loans with respect to the principal
amortization of the Loans declining to certain levels and the delinquency and
default experience of the Loans staying lower than certain levels established by
the Securities Insurer, and (2) if following an increase in the rates of
delinquencies and defaults on the Loans, such rates improve in relation to the
levels established by the Securities Insurer. Pursuant to the Sale and Servicing
Agreement, the Securities Insurer may modify, without the requirement of an
amendment to the Sale and Servicing Agreement, the manner in which the
Overcollateralization Target Amount is determined such that the
Overcollateralization Target Amount is decreased at any time in the discretion
of the Securities Insurer; provided that such modification does not result in
the downgrade, withdrawal or qualification of the internal ratings then assigned
to the Notes by the Rating Agencies without respect to the Securities Insurer.
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 payable on
the Notes on the related Payment Date. In such a case, the Note Principal
Balance could decrease at a slower rate relative to the Pool Principal Balance,
resulting in a possible reduction of the Overcollateralization Amount. In
addition, Realized Losses from Liquidated Loans and Defaulted Loans will reduce
the Pool Principal Balance, which in turn will reduce the Overcollateralization
Amount. See 'Risk Factors -- Adequacy of Credit Enhancement' in this Prospectus
Supplement.
RELATED DEFINITIONS. For purposes of this prospectus supplement, the
following terms shall have the following meanings:
'Overcollateralization Target Amount': With respect to any Payment Date, an
amount determined as follows:
(1) with respect to any Payment Date occurring prior to the Stepdown
Date, the amount equal to 12.65% of the Original Pool Principal Balance;
(2) with respect to any other Payment Date occurring on or after the
Stepdown Date, an amount equal to the greater of (a) 25.30% of the Pool
Principal Balance as of the end of the related Due Period, and (b) 1.0% of
the Original Pool Principal Balance;
(3) with respect to any Payment Date occurring on or after an Insured
Payment is made, notwithstanding the preceding clause (2), an amount equal
to 12.65% of the Original Pool Principal Balance; and
(4) with respect to any Payment Date occurring on or after an OC
Trigger Increase Event, notwithstanding any of the preceding clauses (1)
through (3), an amount equal to 16.00% of the Original Pool Principal
Balance; provided, however, that with respect to any Payment Date occurring
on or after an OC Trigger Reversal Event, an amount determined pursuant to
clause (1) or (2) above, as applicable;
provided, however, with respect to any Payment Date, notwithstanding any of
the preceding clauses (1) through (4), the Overcollateralization Target
Amount shall not exceed the Note Principal Balance.
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'OC Trigger Increase Event': With respect to any Payment Date, the
occurrence of any of the following: (1) the Six-Month Average Delinquency equals
or exceeds 4%; (2) Three-Month Average Annualized Losses exceed 4%; or (3)
cumulative Realized Losses (as a percentage of the Original Pool Principal
Balance) equal or exceed the following percentages during the following full
calendar month periods after the Closing Date: (i) 2.0% during months 0 to 18;
(ii) 5.0% during months 19 to 32;
(iii) 8.0% during months 33 to 42; (iv) 11.0% during months 43 to 54; and (v)
12.5% on or after month 55.
'OC Trigger Reversal Event': With respect to any Payment Date, the
occurrence for six consecutive months of each of the following: (1) the
Six-Month Average Delinquency is less than 4%; (2) Three-Month Average
Annualized Losses are less than 4%; and (3) cumulative Realized Losses (as a
percentage of the Original Pool Principal Balance) are less than the percentages
during the applicable periods set forth in the definition of OC Trigger Increase
Event above.
'Realized Losses': As of any Payment Date, the sum of (1) with respect to
each Loan that has become a Liquidated Loan during the related Due Period, the
excess of (a) the aggregate of the Principal Balances of such Liquidated Loans
and accrued and unpaid interest thereon, over (b) the aggregate of the Net
Liquidation Proceeds collected during the related Due Period and (2) with
respect to all Defaulted Loans, the aggregate Net Loan Losses that occurred
during the related Due Period.
'Six-Month Average Delinquency': With respect to any Payment Date, the
average for such Payment Date and the five preceding Payment Dates of the
respective ratios, expressed as a percentage, equal to (x) the aggregate of the
Principal Balances of all Loans that are 60 days or more delinquent (excluding
any Liquidated Loans) as of the end of each of the related Due Periods, divided
by (y) the Pool Principal Balance as of the end of the applicable Due Period.
'Three-Month Average Annualized Losses': With respect to any Payment Date,
the average for this Payment Date and the two preceding Payment Dates of the
respective ratios, expressed as a percentage, equal to (x) the Realized Losses
for each of the related Due Periods (net of any Net Liquidation Proceeds,
Insurance Proceeds and Released Mortgaged Property Proceeds), divided by (y) the
Pool Principal Balance as of the beginning of the applicable Due Period, and
multiplied by (z) twelve.
SUBORDINATION
Payments of interest will be made first to the Notes. The rights of the
holders of the Residual Interest Certificate to receive any payments on any
Payment Date will be subordinated to the rights of the holders of the Notes.
This subordination of the Residual Interest Certificates is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of the Notes and to afford such holders protection against losses on the
Loans. See 'Risk Factors -- Adequacy of Credit Enhancement' in this Prospectus
Supplement.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes certain terms of the Indenture, Sale and
Servicing Agreement, the Administration Agreement, the Owner Trust Agreement and
the Grantor 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 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
accompanying Prospectus, to which description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS AND THE GRANTOR TRUST CERTIFICATE
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 Grantor Trustee.
On the Closing Date, all of the Depositor's right, title and interest in and to
the
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Grantor Trust Certificate will be sold, conveyed, transferred and assigned from
the Depositor to the Issuer. The Issuer, concurrently with the sale, conveyance,
transfer and assignment of the Grantor Trust Certificate, will cause the Notes
and the Residual Interest Certificates to be delivered to the Depositor in
exchange for the Grantor Trust Certificate. The Issuer will pledge and assign
the Grantor Trust Certificate to the Indenture Trustee in exchange for the
Notes.
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 Grantor Trustee without recourse, any assumption and modification
agreements and the second lien mortgage, deed of trust, or other similar
security instruments (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
Grantor Trustee in recordable form, and any intervening assignments of the
Mortgage (collectively, as to each Loan, the 'Grantor Trustee's Loan File').
Subject to the confirmation by the Rating Agencies and to the approval of the
Securities Insurer, with respect to the Loans secured by Mortgaged Properties
located in certain states, the Transferor and the Depositor will not be required
to record assignments of the Mortgages to the Grantor Trustee in the real
property records of such states. In such circumstances, the Transferor and the
Depositor will deliver to the Custodian the assignments of the Mortgages in the
name of the Grantor Trustee and in recordable form, and the Transferor, in its
capacity as the Servicer, will retain the record title to such Mortgages under
the applicable real property records, on behalf of the Grantor Trust, the
Grantor Trustee and the Security Owners. In all other circumstances, pursuant to
the direction of the Rating Agencies or the Securities Insurer, assignments of
the Mortgages to the Grantor Trustee will be recorded in the real property
records for those states in which such recording is deemed necessary to protect
the Grantor Trust and the Grantor's Trustee's interest in the Loans against the
claims of certain creditors of the Transferor or subsequent purchasers. In these
circumstances, the Transferor will deliver to the Custodian after recordation
the assignments of the Mortgages in the name of the Grantor Trustee. The
Custodian will agree, for the benefit of the holders of the Notes, to review (or
cause to be reviewed) each Grantor Trustee's Loan File delivered to it within 45
days after the conveyance of the related Loan to the Grantor Trustee 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.
Although the recordation of the assignments of the Mortgages in favor of
the Grantor Trustee is not necessary to effect a transfer of the Loans to the
Grantor Trustee, if the Transferor or the Depositor were to sell, assign,
satisfy or discharge any Loan prior to recording the related assignment in favor
of the Grantor Trustee, the other parties to such sale, assignment, satisfaction
or discharge may have rights superior to those of the Grantor Trustee. In some
states, in the absence of such recordation of the assignments of the Mortgages,
the transfer to the Grantor Trustee of the Loans may not be effective against
certain creditors or purchasers from the Transferor or a trustee in bankruptcy
of the Transferor. If such other parties, creditors or purchasers have rights to
the Loans that are superior to those of the Grantor Trustee, the holders of the
Notes could lose the right to future payments of principal and interest from
such Loans and could suffer a loss of principal and interest to the extent that
such loss is not otherwise covered by the applicable credit enhancement. See
'Risk Factors -- Adequacy of Credit Enhancement' in this Prospectus Supplement.
REPRESENTATIONS AND WARRANTIES
In the Grantor Trust Agreement, the Transferor will represent and warrant
to the Grantor Trustee, among other things, that: (i) the information with
respect to each Loan set forth in the schedule appearing as an exhibit to the
Grantor Trust Agreement delivered to the Grantor Trustee (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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FEES AND EXPENSES
The fees and expenses for the Series 1998-3 (the 'Issuer Fees and
Expenses') consist of the following:
(a) as compensation for its services pursuant to the Sale and
Servicing Agreement, (1) the Servicer is entitled to the Servicing
Compensation and reimbursement as described under ' -- Servicing' below,
and (2) the Master Servicer is entitled to the Master Servicer Compensation
as described under the 'Master Servicer' above;
(b) as compensation for their services pursuant to the applicable
Transfer and Servicing Agreements, (1) the Indenture Trustee and Grantor
Trustee are entitled to their unpaid and accrued fees (collectively, the
'Indenture Trustee Fees'), and (2) the Owner Trustee is entitled to its
unpaid and accrued fees (the 'Owner Trustee Fee'); and
(c) as compensation for issuing the Guaranty Policy, the Security
Insurer is entitled to a premium (the 'Guaranty Insurance Premium') to be
determined based on the outstanding Note Principal Balance.
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). If a Servicer Termination
Event occurs, then the Servicing Fee payable to the Servicer will be temporarily
reduced by an amount used to fund an escrow account. See ' -- Servicer
Determinations and Events of Defaults' below. The Servicer may subcontract its
servicing pursuant to a subservicing agreement (each such servicer, in this
capacity, a 'Subservicer'); provided, however, the Servicer will not be relieved
of its servicing obligations and duties with respect to any subserviced Loans.
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 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 accepted servicing procedures. 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, or for any collection, enforcement or judicial
proceedings. The Servicer need not make such advance if it determines there is
no reasonable likelihood of (i) recovering such Servicing Advance, together with
any prior or expected future Servicing Advances for such Loan, and (ii)
recovering an economically significant amount from the interest and principal
owing on such Loan in excess of the costs and expenses to obtain such recovery.
The Servicer will be entitled to receive reimbursement for such Servicing
Advances from the related borrower or any proceeds realized from the liquidation
of the related Loan or Mortgaged Property. Any Servicing Advances previously
made and determined by the Servicer in accordance with accepted servicing
procedures to be nonrecoverable will be reimbursable from amounts in the Note
Payment Account after to holders of the Notes.
COLLECTION ACCOUNT, NOTE PAYMENT 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 (less
approximately 13.33% of amounts collected in respect of interest in November
1998), all Net
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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 and any amount
required to be deposited in the Collection Account in connection with the
termination of the 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 in respect of
distributions on the Grantor Trust Certificate and any proceeds from the
Guaranty Policy for payment to the holders of Notes will be deposited and from
which all payments to the holders of Notes will be made (the 'Note Payment
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 or Note Payment Account for distribution to the Residual
Interest Certificates will be deposited and from which all distributions to the
Residual Interest Certificates will be made (the 'Certificate Distribution
Account' and, together with the Note Payment Account, the 'Payment Accounts').
On the seventh Business Day before each Payment Date, the Indenture Trustee
will deposit into the Note Payment Account the applicable portions of the
Available Collection Amount by making the appropriate withdrawals from the
Collection Account in respect of distributions on the Grantor Trust Certificate.
On each Payment Date, the Indenture Trustee will make withdrawals from the Note
Payment Account for application of the amounts specified under 'Description of
the Notes -- Payments on the Notes' in this Prospectus Supplement and for
deposit to the Certificate Distribution Account.
INCOME FROM ACCOUNTS
So long as no Event of Default will have occurred and be continuing,
amounts on deposit in the Payment Accounts and the Collection Account
(collectively, the 'Accounts') will be invested by the Indenture Trustee, as
directed by the Transferor in the case of the Collection Account, the Master
Servicer, in the case of the Note Payment Account, in one or more investments
permitted under 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 Payment Date. All income or other gain from
investments in the Collection Account will be deposited in such Collection
Account, immediately on receipt and shall comprise a portion of the Available
Collection Amount. Investment earnings from amounts on deposit in the Note
Payment Account will be paid to the Master Servicer as part of the Master
Servicer Compensation. The Master Servicer will be obligated to reimburse the
Note Payment Account for any realized investment losses that are incurred in
respect of investments of amounts in the Note Payment Account.
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 its accepted servicing procedures. Under the Sale and
Servicing Agreement, the Servicer's 'accepted servicing procedures' shall mean
those servicing procedures that (1) meet at least the same standards the
Servicer would follow in exercising reasonable care in servicing mortgage and
consumer loans such as the Loans held for its own account, (2) comply with
applicable state and federal law, (3) comply with the provisions of the related
notes and Mortgages, and (d) give due consideration to the accepted standards of
practice of prudent consumer loan servicers that service
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comparable loans and the reliance placed by the holders of the Notes, the
holders of the Residual Interest Certificates and the Securities Insurer on the
Servicer for the servicing of the Loans.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related borrower fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace
period, the Servicer, in accordance with the accepted servicing procedures, must
take such action as it shall deem to be in the best interest of the Grantor
Trust and the Security Owners. In determining whether to undertake certain
servicing actions with respect to one or more delinquent or defaulted Loans, the
Servicer is expected to consider the reasonable likelihood of (A) recovering an
economically significant amount attributable to the unpaid principal and
interest owing on such Loan as a result of such actions, in excess of (B) the
costs and expenses to obtain such recovery (including without limitation any
Servicing Advances and, if applicable, the outstanding indebtedness of all
senior liens), and in relation to (C) the expected timing of such recovery
therefrom.
INSURANCE
The Servicer is not required to cause to be maintained any fire and hazard
insurance with respect to any Mortgaged Property acquired by the Grantor Trustee
in foreclosure.
REALIZATION UPON DEFAULTED LOANS
Subject to certain limitations in the Sale and Servicing Agreement, 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 if a payment default with respect to such Loan is
reasonably foreseeable by the Servicer. For example, the Servicer must obtain
the prior consent of the Securities Insurer to effect modifications,
substitutions of collateral, or dispositions of Loans through short sales or
short pay-offs, if the aggregate of the principal balances of such modified
Loans exceeds 1% of the Original Pool Principal Balance.
With respect to any Loan in default and subject to the prior written
consent of the Securities Insurer, the Servicer may, among other things, accept
short pay-offs or short sales, enter into assumptions and modifications, refer
to a collection agency or attorney, pursue collection litigation or alternative
court proceedings to foreclosure actions, sell such Loan to another person,
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. The Servicer will be acting in the best interests of the holders of
the Notes, when the Servicer, in accordance with the accepted servicing
procedures, undertakes actions to collect a defaulted Loan that have a higher
likelihood of a reasonable recovery within a shorter time period, and foregoes
taking actions that have a lower likelihood of a larger recovery over a longer
time period. See 'Risk Factors -- Realization Upon Defaulted Loans' in this
Prospectus Supplement. Subject to the prior consent of the Securities Insurer,
the Servicer may, in a manner consistent with the accepted servicing procedures,
permit a borrower who is selling his principal residence and relocating to
another location, to substitute as collateral for the related Loan the
borrower's new single family residence in place of the Mortgaged Property being
sold or any other real or personal property of the borrower, which may include
an interim substitution of personal property pending the borrower's acquisition
of a new residence. Under certain circumstances, if such borrower has received
net proceeds from the sale of the prior residence that will not be applied to
the purchase of the new residence, then the Servicer, in its discretion, may
require that such borrower either (i) make a partial prepayment in reduction of
the principal balance of the Loan, or (ii) place such funds into a depository
account or certificate of deposit as collateral for the related Loan. If a
borrower is selling its Mortgaged Property in a distressed situation or a
situation involving compensating factors, then the Servicer, in a manner
consistent with the accepted servicing procedures, may (i) accept a partial
payment for the release of the lien on the Mortgaged Property, which will leave
the related Loan unsecured (i.e., a short sale), or (ii) accept a settlement
involving a partial payment for the release of the lien on the Mortgaged
Property and the cancellation of the Loan, which will result in a net loan loss
from any unpaid principal shortfall (i.e., a short payoff).
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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, including the
requirement that the Servicer follow the accepted servicing procedures for
foreclosure and operation of foreclosed property.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides that the Servicer shall deliver
to the Master Servicer, Indenture Trustee, the Grantor Trustee, the Depositor,
the Securities Insurer and the Rating Agencies an annual statement signed by an
officer of the Servicer stating 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 1999, the Servicer will furnish to the Master Servicer, Grantor
Trustee, the Securities Insurer and 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
Master Servicer, Grantor Trustee, the Securities Insurer and 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 Grantor Trustee, the
Securities Insurer and Indenture Trustee. No resignation of the Servicer shall
become effective until the Master Servicer, Grantor Trustee or a successor
servicer acceptable to the Securities Insurer shall have assumed the Servicer's
servicing responsibilities and obligations.
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
Grantor Trust, the Issuer 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.
SERVICER DETERMINATIONS AND EVENTS OF DEFAULT
Under the Sale and Servicing Agreement, the term of the Servicer shall be
extendable for successive 60 day terms until the Notes are paid in full,
provided that prior to the expiration of each term the Master Servicer,
Indenture Trustee or the Security Insurer delivers written notice of renewal to
the Servicer (each such notice a 'Servicer Extension Notice'). If a Servicer
Extension Notice is not delivered on or before the last day of the servicing
term, the Servicer's term will be terminated;
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provided, however, the Servicer shall continue to fulfill the servicing
obligations until a successor servicer, acceptable to the Securities Insurer,
assumes the servicing obligations.
'Servicer Events of Default' will consist of, among other things: (i) (1)
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 and (2) any failure of the Servicer
to pay when due any amount required under the Sale and Servicing Agreement and
such failure results in a draw under the Guaranty Policy; (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 days after notice; (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 in
part, in any material respect; or (iv) events established by the Securities
Insurer which continue unremedied for five Business Days after notice, such as
(1) the occurrence of certain events which have a material adverse effect on the
Servicer's business, financial condition, operations or prospects, which may
include the payment of a claim by the Securities Insurer under another guarantee
policy for another series of asset-backed securities serviced by Empire Funding;
(2) a default by the Servicer on any of its material obligations; (3) a
significant change in the ownership interest of ContiFinancial Corporation in
the parent of Empire Funding; (4) the failure by the parent of Empire Funding to
achieve a specified net worth test; (5) the failure of Empire Funding to
maintain a specified warehouse financing capacity; (6) a default by Empire
Funding with respect to certain other specified indebtedness; and (7) certain
other events of default established by the Securities Insurer as further
described in the Sale and Servicing Agreement. Certain events of default may be
eliminated upon Servicer raising additional capital and consent of the
Securities Insurer.
If a Servicer Event of Default shall occur and be continuing, the
Securities Insurer, the Master Servicer, the Grantor Trustee or the Indenture
Trustee, with the prior written consent of the Securities Insurer, or the
holders of Notes representing more than 50% of the aggregate voting interests of
the Note, with prior written consent of the Securities Insurer, 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, in which event the Master
Servicer will either become, or cause another entity acceptable to the
Securities Insurer to become, the successor servicer. See 'Empire Funding
Corporation -- Servicing Procedures' and 'Master Servicer' in this Prospectus
Supplement. 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, either a loan servicer selected by the
Master Servicer and acceptable to the Securities Insurer or, if a successor is
not selected and accepted, the Master Servicer will be the successor in all
respects to the Servicer in its capacity as servicer under the Sale and
Servicing Agreement.
Upon the occurrence and continuation of a Servicer Event of Default, a
portion of the Servicing Fee will be used to fund an escrow or expense account
to cover the costs associated with the transfer of servicing. During the time
between the occurrence of the Servicer Event of Default and the transfer of
servicing obligations to a successor servicer, the Servicing Fee will be paid as
follows: (1) first, to the Servicer an amount equal to the portion of the
Servicing Fee as calculated based on 0.50% (50 basis points); (2) second, to the
Indenture Trustee any remaining amount for the deposit into an escrow account up
to an aggregate amount of $75,000, which is available to cover the costs of
transferring the servicing; and (3) third, to the Servicer, any remaining
amount.
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, if the expenses exceed the
funds available in the escrow account established to cover the costs of
transferring servicing, then the Servicer being terminated will be obligated to
pay any successor Servicer for any
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reasonable transition expenses incurred in acting as successor servicer as a
result of a termination of the Servicer that have not been reimbursed from such
escrow account.
RIGHTS OF NOTEHOLDERS UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the portion of the
Noteholders' Interest Payment Amount payable to the Notes within five days of
the Payment Date on which such payment is due or the full amount of principal
thereon on the related Maturity Date (without regard to the amount of the
Available Collection Amount) will constitute an Event of Default (an 'Event of
Default').
Upon the occurrence of an Event of Default, the Securities Insurer or
holders of Notes representing more than 50% of the aggregate of the voting
interests of the Notes then outstanding, with the prior written consent of the
Securities Insurer, may exercise their remedies under the Indenture.
RESTRICTIONS ON NOTEHOLDERS' RIGHTS
So long as (i) there does not exist a continuing failure by the Securities
Insurer to make a required payment under the Guaranty Policy and (ii) certain
bankruptcy-related events specified in the Sale and Servicing Agreement have not
occurred with respect to the Securities Insurer (any of the events described in
(i) and (ii), a 'Securities Insurer Default'), the Securities Insurer will have
the right to exercise all rights, including voting rights, which the Security
Owners are entitled to exercise pursuant to the Indenture and Owner Trust
Agreement ('Security Owner Rights'), without any consent of such Security
Owners; provided however, that without the consent of each holder of the Notes
affected thereby, the Securities Insurer shall not exercise such Security Owner
Rights to amend the indenture in any manner that would (i) reduce the amount of,
or delay the timing of, collections of payments on the Loans or distributions
which are required to be made on any Note, (ii) adversely affect in any material
respect the interests of the holders of the Notes or (iii) alter the rights of
any Security Owner to consent to any such amendment.
THE OWNER TRUSTEE, INDENTURE TRUSTEE AND GRANTOR TRUSTEE
The Owner Trustee, the Indenture Trustee and Grantor Trustee (collectively,
the 'Trustees') and any of their respective affiliates may hold 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 Issuer. 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 Owner Trust Agreement and upon the Indenture Trustee
by the Sale and Servicing Agreement and the Indenture will be conferred or
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 may resign at any time, in which event the Administrator
will be obligated to appoint a successor thereto acceptable to the Securities
Insurer. The Administrator may remove the Owner Trustee if any of them ceases to
be eligible to continue as such under the Owner 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 acceptable
to the Securities Insurer. Any resignation or removal of the Owner Trustee and
appointment of a successor thereto will not become effective until acceptance of
the appointment by such successor.
The Indenture Trustee or Grantor Trustee may resign at any time, in which
event Empire Funding will be obligated to appoint a successor thereto acceptable
to the Securities Insurer. The holders of a majority in outstanding amount of
the Notes with the prior written consent of the Securities Insurer,
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may remove the Indenture Trustee or Grantor Trustee and may appoint a successor
thereto acceptable to the Securities Insurer. Empire Funding, with the prior
written consent of the Securities Insurer, will be obligated to remove the
Indenture Trustee or Grantor Trustee if the Indenture Trustee or Grantor Trustee
ceases to be eligible to continue as such under the Indenture or Grant Trust
Agreement, as the case may be, or becomes legally unable to act or becomes
insolvent. In such circumstances, Empire Funding will be obligated to appoint a
successor acceptable to the Securities Insurer. Any such resignation or removal
and appointment of a successor will not become effective until acceptance of the
appointment by such successor and approval by the Securities Insurer.
The Owner Trust Agreement, Indenture and Grantor Trust Agreement will
provide that the applicable Trustee will be entitled to indemnification by the
Transferor, and will be held harmless against, any loss, liability or expense
incurred by them 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 Owner Trust Agreement or Indenture, as the
case may be).
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The Owner Trustee will make no representations as to the validity or
sufficiency of the Owner 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 will be required to perform only
those duties specifically required of it under the Owner 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 under the Owner 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 Owner Trust Agreement. The Owner
Trustee will not be charged with knowledge of a failure by the Servicer to
perform its duties under the Owner Trust Agreement or the Sale and Servicing
Agreement which failure constitutes a Servicer Event of Default, unless the
Owner Trustee obtains such actual knowledge of such failure as specified in the
Owner Trust Agreement.
The Owner Trustee will be under no obligation to exercise any of the rights
or powers vested in it by the Owner 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 reasonable security or indemnity against the costs,
expenses and liabilities that may be incurred therein or thereby. Subject to the
rights or consent of the holders of Notes, the Securities Insurer and the
Indenture Trustee, no holder of a Residual Interest Certificate will have any
right under the Owner Trust Agreement to institute any proceeding with respect
to the Owner Trust Agreement, unless such holder previously has given to the
Owner Trustee written notice of the occurrence of a Servicer Event of Default
and the Servicer Event of Default arises from the Servicer's failure to remit
payments when due.
Neither the Indenture Trustee nor the Grantor Trustee will make any
representations as to the validity or sufficiency of the Indenture, the Grantor
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 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 and to the making of
monthly distributions to the Security Owners and the filing of claims under the
Guaranty Policy. The Indenture Trustee will not be charged with knowledge of a
failure by the Servicer to perform its duties under the Owner Trust
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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 has obtained the prior written consent of the Securities
Insurer and 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 representing more than 25% of the aggregate voting interests of
the Notes then outstanding 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.
REPORTS TO NOTEHOLDERS
On each Payment Date, the Indenture Trustee shall distribute, based on
information provided by the Servicer, a monthly statement (the 'Distribution
Statement') to the Depositor, the holders of Notes, the Securities Insurer, and
the Rating Agencies, stating the date of original issuance of the Notes and such
other information, including the following:
(1) the Available Collection Amount and Available Payment Amount, the
Regular Payment Amount, the Insured Payment and the Excess Spread for the
related Payment Date;
(2) the Note Principal Balance, as applicable, of the Notes before and
after giving effect to payments made to the holders of such Notes on such
Payment Date, and the Pool Principal Balance as of the first and last day
of the related Due Period;
(3) the Note Factor with respect to the Notes then outstanding ('Note
Factor') means with respect to the Notes and any date of determination, the
then applicable Note Principal Balance divided by the Original Note
Principal Balance thereof);
(4) the amount of principal, if any, and interest to be paid to the
Notes on the related Payment Date;
(5) as of such Payment Date, the Overcollateralization Amount, the
Overcollateralization Target Amount and any Overcollateralization
Deficiency Amount, or any Overcollateralization Reduction Amount, and any
such amount to be paid to the holders of the Notes or paid to the holders
of the Residual Interest Certificates on such Payment Date;
(6) the Servicing Compensation, the Master Servicing Compensation, the
Indenture Trustee Fee, the Grantor Trustee Fee and the Owner Trustee Fee,
if any, for such Payment Date and the Guaranty Insurance Premium;
(7) the Overcollateralization Amount on such Payment Date and the
Overcollateralization Target Amount as of such Payment Date;
(8) the weighted average maturity of the Loans and the weighted
average Loan Rate of the Loans;
(9) certain performance information with respect to the related Due
Period, including, without limitation, delinquency and foreclosure
information with respect to the Loans and the Six Month Average
Delinquency, the Three-Month Average Annualized Losses, and the cumulative
Realized Losses;
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<PAGE>
(10) the number of and aggregate Principal Balance of all Loans in
foreclosure proceedings and the percent of the aggregate Principal Balances
of such Loans to the aggregate Principal Balances of all Loans, all as of
the close of business on the last day of the related Due Period;
(11) the number of and the aggregate Principal Balance of the Loans in
bankruptcy proceedings and the percent of the aggregate Principal Balances
of such Loans to the aggregate Principal Balances of all Loans, all as of
the close of business on the last day of the related Due Period;
(12) the number of foreclosure properties, the aggregate Principal
Balance of the related Loans, the book value of such foreclosure properties
and the percent of the aggregate Principal Balances of such Loans to the
aggregate Principal Balances of all Loans, all as of the close of business
on the last day of the related Due Period;
(13) during the related Due Period (and cumulatively, from the Closing
Date through the most current Due Period), the number and aggregate
Principal Balance of Loans for each of the following: (a) that became
defaulted Loans, (b) that became Liquidated Home Loans, (c) that became
Deleted Loans as a result of such Deleted Loans being Defective Loans, and
(d) that became Deleted Loans as a result of such Deleted Loans being a
Loan in default or imminent default;
(14) the scheduled principal payments and the principal prepayments
received with respect to the Loans during the Due Period; and
(15) the number and aggregate Principal Balance of Loans that were 30,
60 or 90 days delinquent as of the close of business on the last day of the
related Due Period.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary of certain United States federal income tax
considerations relevant to the beneficial owner of a Note that holds the Note as
a capital asset and, unless otherwise indicated below, is a United States person
(as defined in the accompanying Prospectus). This summary does not address
special tax rules that may apply to certain types of investors (such as banks,
insurance companies and securities dealers), and investors that hold Notes as
part of an integrated investment. This summary supplements the discussion
contained in the accompanying Prospectus under the heading 'Certain Federal
Income Tax Consequences,' and supersedes that discussion to the extent that it
is inconsistent therewith. The authorities on which this discussion is based are
subject to change or differing interpretations, and any such change or
interpretation could apply retroactively. This discussion reflects the
applicable provisions of the Code, as well as regulations promulgated by the
U.S. Department of the Treasury. Investors should consult their own tax advisors
in determining the federal, state, local and any other tax consequences to them
of the purchase, ownership and disposition of the Notes.
CLASSIFICATION OF INVESTMENT ARRANGEMENT
In the opinion of Cadwalader, Wickersham & Taft, special counsel to the
Depositor, neither the Grantor Trust nor the Issuer will be treated as an
association or a publicly traded partnership taxable as a corporation or a
taxable mortgage pool for federal income tax purposes, but rather (i) the
Grantor Trust will be treated as a grantor trust pursuant to Subpart E, Part I
of Subchapter J of the Code, and (ii) the Issuer will be ignored and treated as
a mere security device when there is a single beneficial owner of the Issuer, or
will be treated as a domestic partnership when there are two or more beneficial
owners of the Issuer.
TAXATION OF HOLDERS
Characterization of the 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 Notes. A basic premise of United States federal income tax law is that the
economic substance of a transaction generally will determine the United States
federal income
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tax consequences of such transaction. The determination of whether the economic
substance of a loan secured by an interest in property is instead a sale of a
beneficial ownership interest in such property has been made by the Internal
Revenue Service and the courts on the basis of numerous factors designed to
determine whether the issuer has relinquished (and the investor has obtained)
substantial incidents of ownership in such property. Among those factors, the
primary factors examined are whether the investor has the opportunity to gain if
the property increases in value, and has the risk of loss if the property
decreases in value. Based on an assessment of these factors, in the opinion of
Cadwalader, Wickersham & Taft, special counsel to the Depositor, the 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 Issuer.
Interest and Original Issue Discount. Interest on the 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 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 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 accompanying
Prospectus. The prepayment assumption that will be used for accruing original
issue discount, 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 a Note, a beneficial owner who holds the Note
as a capital asset 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 Note. Any such
capital gain of an investor who is an individual 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, payable to beneficial owners of 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
Issuer and (ii) provides the Owner 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 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 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 (except to the extent provided in applicable
Treasury regulations) 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 such U.S.
Persons have the authority to control all substantial decisions of the trust
(or, to the extent provided in applicable Treasury regulations, certain trusts
in existence on August 20, 1996 which are eligible to elect to be treated as
U.S. Persons).
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments made on the Notes and proceeds from the sale of Notes to or
through certain brokers may be subject to a 'backup' withholding tax of 31% of
'reportable payments' (including interest
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accruals, original issue discount, and, under certain circumstances, payments in
respect of principal amount) unless, in general, the beneficial owner complies
with certain procedures or is an exempt recipient. Any amounts so withheld from
payments on the Notes would be refunded by the Internal Revenue Service or
allowed as a credit against the beneficial owner's federal income tax.
Reports of interest, original issue discount and certain information needed
to compute accrued market discount will be made annually to the Internal Revenue
Service and to beneficial owners that are not excepted from the reporting
requirements.
See 'Certain Federal Income Tax Consequences -- Partnership Trust
Funds -- Treatment of Debt Securityholders' in the accompanying 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 retirement plans and other employee
benefits 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 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 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 Notes. See 'ERISA
Considerations' in the accompanying 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 'substantial equity
features.' If the Notes are not treated as equity interests in the Issuer for
purposes of the Plan Asset Regulation, a Plan's investment in such Notes would
not cause the assets of the Issuer 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 Notes, the
purchase of Notes using
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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, 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 Issuer 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 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 Notes are deemed to be equity interests in the Issuer, the Issuer
could be considered to hold Plan assets by reason of a Plan's investment in the
Notes. In such an event, the Servicer and other persons exercising management or
discretionary control over the assets of the Issuer 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 Issuer'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 Issuer by a Plan.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any 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 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
No representation is made as to the proper characterization of the Notes
for legal investment purposes, financial institution regulatory purposes, or
other purposes, or as to the ability of particular investors to purchase the
Notes under applicable legal investment restrictions. These uncertainties may
adversely affect the liquidity of the 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 Notes constitute a legal investment or are subject to investment, capital or
other restrictions. See 'Legal Investment' in the Prospectus.
USE OF PROCEEDS
The Transferor intends to use the net proceeds to be received from the sale
of the 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. Certain affiliates of the
Underwriter provide warehouse financing to the Transferor and will indirectly
receive a material
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portion of the net proceeds from the sale of the Notes in connection with a
repayment under such warehouse financing.
UNDERWRITING
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
Notes. The Depositor has been advised by the Underwriter that the Underwriter
proposes initially to offer the Notes to the public at a price equal to
99.97742% of the initial Note Principal Balance of the Notes. The Underwriter
will receive an underwriting discount equal to 0.50% of initial principal amount
of the Notes. In connection with the sale of the Notes, the Underwriter will be
deemed to have received compensation from the Depositor in the form of
underwriting discounts equal to 99.47742% of the initial Note Principal Balance
of the Notes.
Until the distribution of the Notes is completed, rules of the Commission
may limit the ability of the Underwriter and certain selling group members to
bid for and purchase the Notes. As an exception to these rules, the Underwriter
is permitted to engage in certain transactions that stabilize the price of the
Notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Notes.
If the Underwriter creates a short position in the Notes in connection with
the offering, i.e., if they sell more Notes than are set forth on the cover page
of this Prospectus Supplement, the Underwriter may reduce that short position by
purchasing Notes in the open market.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Notes. In addition, neither the
Depositor nor the Underwriter makes any representation that the Underwriter will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
There is currently no secondary market for the Notes. There can be no
assurance that a secondary market for the 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 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 Certificates
retained by it.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1997 and December 31, 1996 and the related
consolidated statements of income, changes in shareholder's equity and cash
flows for each of the three years in the period ended December 31, 1997,
incorporated by reference into this Prospectus Supplement, have been
incorporated herein in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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LEGAL MATTERS
The validity of the 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 Notes that the Notes be rated
'Aaa' by Moody's Investors Service, Inc. and 'AAA' by Standard & Poor's Ratings
Services and 'AAA' by Fitch IBCA, Inc. The ratings on the Notes address the
likelihood of the receipt by the holders of the Notes of all payments on the
Loans to which they are entitled. The ratings on the Notes also address the
structural, legal and issuer-related aspects of the Notes, including the nature
of the Loans. In general, the ratings on the Notes address credit risk and not
prepayment risk. The ratings on the 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 Notes
do not address the possibility that holders of the Notes might suffer a lower
than anticipated yield in the event of principal payments on the Notes resulting
from rapid prepayments of the Loans or the application of Excess Spread as
described in this Prospectus Supplement, or if the Owner Trust is terminated
before the final Maturity Date of the Notes.
The Depositor has not solicited ratings on the 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 Notes or, if it does, what rating would be
assigned by any such other rating agency. Any rating on the Notes by another
rating agency, if assigned at all, may be lower than the ratings assigned to the
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. If the ratings initially assigned to any of the 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 Notes.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
PAGE
-----------------------
-A-
accepted servicing procedures......................................................... S-55
Accounts.............................................................................. S-55
Accrual Period........................................................................ S-6, S-43
actuarial interest.................................................................... S-18
Administration Agreement.............................................................. S-41
Administrator......................................................................... S-41
Affiliated Special Servicer........................................................... S-15
Agreement............................................................................. S-48
Available Collection Amount........................................................... S-42
Available Payment Amount.............................................................. S-9, S-42
-B-
broker originations................................................................... S-18
Business Day.......................................................................... S-43
-C-
Certificate Distribution Account...................................................... S-55
Clean-up Call Date.................................................................... S-10
Closing Date.......................................................................... S-18
CMAC.................................................................................. S-49
Code.................................................................................. S-64
Collection Account.................................................................... S-54
Combined Loan-to-Value Ratio.......................................................... S-31
correspondent originations............................................................ S-18
CPR................................................................................... S-37
Credit Score.......................................................................... S-30
Custodial Agreement................................................................... S-41
Custodian............................................................................. S-41
Cut-Off Date.......................................................................... S-18
-D-
Debt-to-Income Ratio.................................................................. S-30
Defaulted Loan........................................................................ S-26
Defective Loan........................................................................ S-26
Deficiency Amount..................................................................... S-48
Deleted Loan.......................................................................... S-27
Depositor............................................................................. S-5
Determination Date.................................................................... S-42
direct originations................................................................... S-18
disposable income..................................................................... S-30
Distribution Statement................................................................ S-61
DOL................................................................................... S-64
DTC................................................................................... S-11
Due Period............................................................................ S-9
-E-
Empire Funding........................................................................ S-25
equity interest....................................................................... S-64
ERISA................................................................................. S-64
Event of Default...................................................................... S-59
Excess Spread......................................................................... S-9, S-43
</TABLE>
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<TABLE>
<S> <C>
PAGE
-----------------------
-F-
FHLMC................................................................................. S-14
Fiscal Agent.......................................................................... S-47
FNMA.................................................................................. S-14
-G-
GAAP.................................................................................. S-49
Grantor Trust......................................................................... S-41
Grantor Trust Agreement............................................................... S-41
Grantor Trust Certificate............................................................. S-41
Grantor Trustee....................................................................... S-41
Grantor Trustee's Loan File........................................................... S-53
Guaranty Insurance Premium............................................................ S-54
Guaranty Policy....................................................................... S-7
-H-
Home Loan Purchase Agreement.......................................................... S-25
-I-
Indenture............................................................................. S-41
Indenture Trustee..................................................................... S-41
Indenture Trustee Fees................................................................ S-54
Insolvency Event...................................................................... S-58
Insurance Agreement................................................................... S-45
Insurance Proceeds.................................................................... S-44
Insured Payment....................................................................... S-9, S-48
Issuer................................................................................ S-40
Issuer Fees and Expenses.............................................................. S-54
-L-
Liquidated Home Loan.................................................................. S-44
Loan Rate............................................................................. S-18
Loan Schedule......................................................................... S-53
Loans................................................................................. S-18
LOE's................................................................................. S-32
-M-
Majority Residual Interest Certificateholders......................................... S-46
Master Servicer....................................................................... S-25, S-29
Master Servicer Compensation.......................................................... S-29
Master Servicer Fee................................................................... S-29
Maturity Date......................................................................... S-6
MBIA Inc.............................................................................. S-49
Modeling Assumptions.................................................................. S-37
Mortgage.............................................................................. S-53
Mortgaged Properties.................................................................. S-18
-N-
Net Liquidation Proceeds.............................................................. S-44
Norwest............................................................................... S-29
Note Factor........................................................................... S-61
Note Interest Rate.................................................................... S-42
Note Payment Account.................................................................. S-55
Note Principal Balance................................................................ S-44
Noteholder Rights..................................................................... S-14
Noteholders' Interest Carry-Forward Amount............................................ S-44
Noteholders' Interest Payment Amount.................................................. S-44
</TABLE>
S-69
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<TABLE>
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PAGE
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Noteholders' Monthly Interest Payment Amount.......................................... S-44
Noteholders' Principal Deficiency Amount.............................................. S-44
Notes................................................................................. S-42
Notice................................................................................ S-48
-O-
OC Trigger Increase Event............................................................. S-52
OC Trigger Reversal Event............................................................. S-52
Original Note Principal Balance....................................................... S-42
Original Pool Principal Balance....................................................... S-18
Overcollateralization Amount.......................................................... S-8, S-45
Overcollateralization Deficiency Amount............................................... S-45
Overcollateralization Reduction Amount................................................ S-45
Overcollateralization Target Amount................................................... S-45, S-51
Owner................................................................................. S-48
Owner Trust........................................................................... S-40
Owner Trust Agreement................................................................. S-40
Owner Trustee......................................................................... S-40
Owner Trustee Fee..................................................................... S-54
-P-
Parties in Interest................................................................... S-64
Paying Agent.......................................................................... S-41
Payment Accounts...................................................................... S-55
Payment Date.......................................................................... S-5
Plan Asset Regulation................................................................. S-64
plan assets........................................................................... S-64
Plans................................................................................. S-64
Pool.................................................................................. S-18
Pool Principal Balance................................................................ S-18
Preference Amount..................................................................... S-48
prepayment............................................................................ S-37
Prepayment Assumption................................................................. S-37
Principal Balance..................................................................... S-18
PTCE.................................................................................. S-65
Purchase Price........................................................................ S-26
-Q-
Qualified Substitute Loan............................................................. S-27
-R-
Rating Agencies....................................................................... S-12
Realized Losses....................................................................... S-52
Record Date........................................................................... S-42
Regular Payment Amount................................................................ S-9, S-45
Regular Principal Payment Amount...................................................... S-45
Released Mortgaged Property Proceeds.................................................. S-45
Residual Interest Certificates........................................................ S-42
-S-
Sale and Servicing Agreement.......................................................... S-41
SAP................................................................................... S-49
Securities Insurer.................................................................... S-7
Securities Insurer Default............................................................ S-59
Securities Insurer Reimbursement Amount............................................... S-45
Security Owner Rights................................................................. S-59
Security Owners....................................................................... S-42
</TABLE>
S-70
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PAGE
-----------------------
Servicer.............................................................................. S-25
Servicer Events of Default............................................................ S-58
Servicer Extension Notice............................................................. S-57
Servicing Advance..................................................................... S-54
Servicing Compensation................................................................ S-54
Servicing Fee......................................................................... S-54
Servicing Fee Rate.................................................................... S-54
Six-Month Average Delinquency......................................................... S-52
SMMEA................................................................................. S-12
Statistical Calculation Date.......................................................... S-19
Statistical Principal Balance......................................................... S-19
Stepdown Date......................................................................... S-45
Subservicer........................................................................... S-54
Substitution Adjustment............................................................... S-27
-T-
Termination Price..................................................................... S-46
Three-Month Average Annualized Losses................................................. S-52
Title Report.......................................................................... S-32
Transfer and Servicing Agreements..................................................... S-52
Transferor............................................................................ S-25
Trustees.............................................................................. S-59
-U-
U.S. Bank............................................................................. S-41
U.S. Person........................................................................... S-63
Underwriter........................................................................... S-66
Unsecured Loans....................................................................... S-18
-W-
weighted average life................................................................. S-33
</TABLE>
S-71
<PAGE>
<PAGE>
PROSPECTUS
NOVEMBER 3, 1998
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 14.
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
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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.
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
2
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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 SECURITYHOLDERS
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.'
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
3
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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
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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>
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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 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.
</TABLE>
5
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<TABLE>
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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, 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
</TABLE>
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<TABLE>
<S> <C>
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.
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.
</TABLE>
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<TABLE>
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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 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 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.'
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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 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 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
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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, 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
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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 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'). 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
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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 a retirement plan or other employee benefit plan or
arrangement, including an individual retirement account or annuity or a
Keogh plan and any bank collective investment fund or insurance company
general or separate account in which such plans, accounts, annuities or
arrangements are invested, that is subject to Title I of 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 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 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, as amended ('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
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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, 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
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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
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
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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 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
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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.
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
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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.'
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.
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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.'
TRUST FUND ASSETS MAY INCLUDE DELINQUENT AND SUB-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 or
sub-performing. Credit enhancement provided with respect to a particular Series
of Certificates may not cover all losses related to such delinquent or
sub-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
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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.
RISKS ASSOCIATED WITH YEAR 2000 COMPLIANCE
The Depositor is aware of the issues associated with the programming code
in existing computer systems as the millennium (year 2000) approaches, the 'year
2000 problem' is pervasive and complex; virtually every computer operation will
be affected in some way by the rollover of the two digit year value to 00. The
issue is whether computer systems will properly recognize date-sensitive
information when the year changes to 2000. Systems that do not properly
recognize such information could generate erroneous data or cause a system to
fail. In the event that the computer systems of the Master Servicer or any
Special Servicer, with respect to any Series of Securities, are not fully year
2000 compliant, the resulting disruptions in the collection or distribution of
receipts on the related Mortgage Loans could materially adversely affect the
holders of the Securities.
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 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
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(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 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. If the
Mortgage Securities have been issued by an entity other than the Depositor or
its affiliates, such Mortgage Securities will have been (a) acquired in bona
fide secondary market transactions from persons other than the issuer thereof or
its affiliates and (b)(i) offered and distributed to the public pursuant to an
effective registration statement or (ii) purchased in a transaction not
involving any public offering from a person who is not an affiliate of the
issuer of such
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securities at the time of sale (nor an affiliate thereof at any time during the
preceding three months); provided, a period of two years elapsed since the later
of the date the securities were acquired from such issuer or from an affiliate
of the issuer. 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 or
sub-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 minimus 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 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
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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.'
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.
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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 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
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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.
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
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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 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.
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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.
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
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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 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
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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 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
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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 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
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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.
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
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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 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 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
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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 or
sub-performing Residential Loans in the Trust Fund Assets, the relative tax
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.
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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
'Prepayment 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
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
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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 (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
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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, 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
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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 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
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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 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.
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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.
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
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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 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 -- REMICs -- Taxes that may be Imposed on the REMIC
Pool -- Prohibited Transactions.'
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
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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 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
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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 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
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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.
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
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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
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
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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,
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
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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 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 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
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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;
(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
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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 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
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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 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
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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 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
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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 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
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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;
(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
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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.
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
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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 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
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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' herein. Because DTC can only act on behalf of 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
reregistration, 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.
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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 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
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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 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.'
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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.
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
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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.
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,
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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, 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
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Depositor 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 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 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
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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 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.
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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 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.
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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 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
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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.
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,
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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
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.
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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 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)
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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.
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
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(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 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
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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.
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 --
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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 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
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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 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
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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 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.
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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 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 United States Bankruptcy Code, 11 U.S.C. Sections 101 et
seq. (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
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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.
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.
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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.'
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
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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.
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.
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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 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 the perfection of security interests
in 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. 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 takes action under the wrong law (for example, under a motor
vehicle title statute rather than under the UCC), the Trustee likely will not
have a perfected 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, including a trustee in bankruptcy claiming an interest in the
home under applicable state real estate law, notwithstanding compliance with the
requirements described above. 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
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certificate of title or the filing of a UCC financing statement will be
effective to perfect the security interest in the Manufactured Home. If,
however, a Manufactured Home is permanently attached to its site, other parties,
including a trustee in bankruptcy, 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.
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, therefore, 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 (and continuation
statements before the end of each five year period) 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, holders of perfected
security interests, and a trustee in bankruptcy. 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, if the Depositor holds the certificate of title to such
Manufactured Home, it must surrender possession of such certificate. 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 could 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, statutory liens, such as liens for repairs
performed on a Manufactured Home and liens for personal property taxes take
priority even over a perfected security interest. In addition, certain liens
arising as a matter of federal law, such as federal tax liens, also take
priority 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
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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.
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 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
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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
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 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.' The Supreme Court decision, however,
may not be controlling as to whether a non-collusive, regularly conducted
foreclosure can be avoided as a fraudulent conveyance under applicable state
law, if a court determines that the sale was for less than 'fair consideration'
under applicable state law. 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 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.
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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.
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
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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 similar parties 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. 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. 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 few states where the debtor must receive notice of
his right to cure his default (typically 30 days to bring the account
current), 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, upon notice to the debtor,
and the method, manner, time, place and terms of the sale must be
commercially reasonable. The UCC and 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 deficiency 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
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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.
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
exercising 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, parties
having an interest which is subordinate to that of the foreclosing mortgagee 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. Parties 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.
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, including the notice requirements, of the UCC.
ANTI-DEFICIENCY LEGISLATION, BANKRUPTCY LAWS 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
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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 anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code and state
laws affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions (including foreclosure actions and
deficiency judgment proceedings) are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the bankruptcy court
may be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences thereof caused by such automatic stay
can be significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a junior lienor (a subordinate lender secured by a
mortgage on the property) may stay the senior lender from taking action to
foreclose out such junior lien.
A homeowner may file for relief under the Bankruptcy Code under any of
three different chapters of the Bankruptcy Code. Under Chapter 7, the assets of
the debtor are liquidated and a lender secured by a lien may 'bid in' (i.e., bid
up to the amount of the debt) at the sale of the asset. (See ' -- Foreclosure on
Mortgages.') A homeowner may also file for relief under Chapter 11 of the
Bankruptcy Code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner may file for relief under
Chapter 13 of the Bankruptcy Code and address his or her debts in a
rehabilitation plan. (Chapter 13 is often referred to as the 'wage earner
chapter' or 'consumer chapter' because most individuals seeking to restructure
their debts file for relief under Chapter 13 rather than under Chapter 11.)
A reorganzation plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on such debtor's residence by paying arrearages
within a reasonable time period and to deaccelerate and reinstate the original
mortgage loan payment schedule, even though the lender accelerated the loan and
a final judgment of foreclosure had been entered in state court (provided no
sale of the property had yet occurred) prior to the filing of the debtor's
petition under the Bankruptcy Code. Courts have approved Chapter 11 plans that
have allowed curing of defaults over a number of years. In certain
circumstances, defaults may be cured over a number of years even if the full
amount due under the original loan is never repaid, notwithstanding objection by
the mortgagee. Under a Chapter 13 plan, curing of defaults must be accomplished
within the five year maximum term permitted for repayment plans.
Generally, a repayment plan filed in a case under Chapter 13 may not modify
the claim of a mortgage lender 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. Notwithstanding the forgoing restrictions, if the last
payment on the original payment schedule of a mortgage loan secured only by the
debtor's principal residence is due before the final date for payment under such
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy), under a case recently decided by an intermediate
appellate court, the debtor's rehabilitation plan could modify the terms of the
loan by bifurcating an undersecured lender's claim into a secured and an
unsecured component in the same manner as if the debtor were a debtor in a case
under Chapter 11 (see the following paragraph). While this decision is contrary
to a prior decision of a more senior appellate court in another jurisdiction, it
is possible that the intermediate court's decision will become the accepted
interpretation in view of the language of the applicable statutory provision. If
this interpretation is adopted by a court considering the treatment in a
Chapter 13 repayment plan of a home equity loan, the home equity loan could be
restructured as if the bankrupcy case were under Chapter 11 if the final payment
is due within five years of the debtor's emergence from bankruptcy.
In a case under Chapter 11, provided certain substantive and procedural
safeguards are met, the amount and terms of a mortgage loan secured by property
of the debtor, including the debtor's principal
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residence, may be modified. Under the Bankruptcy Code, the outstanding amount of
a loan secured by the real property may be reduced to the then-current value of
the property as determined by the court (with a corresponding partial reduction
of the amount of the lender's security interest) if the value is less than the
amount due on the loan, leaving the lender a general unsecured creditor for the
difference between such value of the collateral and the outstanding balance of
the loan. A borrower's unsecured indebtedness will typically be discharged in
full upon payment of a substantially reduced amount. Other modifications may
include a reduction in the amount of each scheduled payment, which reduction may
result from a reduction in the rate of interest and/or the alteration of the
repayment schedule (with or without affecting the unpaid principal balance of
the loan), and/or an extension (or reduction) of the final maturity date. State
statutes and general principles of equity may also provide a mortgagor with
means to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Because many of the
Mortgage Loans will have loan-to-value ratios in excess of 100% at origination
(or such loan-to-value ratios otherwise may exceed 100% in cases where the
market value declined subsequent to origination), a potentially significant
portion of the unpaid principal amount of the related Mortgage Loan would likely
be treated as unsecured indebtedness in a case under Chapter 11.
In a bankruptcy or similar proceeding of a mortgagor, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the mortgagor under the related mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business or if the value of the collateral exceeds the debt
at the time of payment. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its
costs and expenses in preserving or selling the mortgaged property ahead of
payment to the lender. In certain circumstances, subject to the court's
approval, a debtor in a case under Chapter 11 of the Bankruptcy Code may have
the power to grant liens senior to the lien of a mortgage. Moreover, the laws of
certain states also give priority to certain tax and mechanics liens over the
lien of a mortgage. Under the Bankruptcy Code, if the court finds that actions
of the mortgagee have been unreasonable and inequitable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the Mortgage Loans have been considered by Congress, and
more such proposed legislation may be considered in the future. No assurance can
be given that any particular proposal will or will not be enacted into law, or
that any provision so enacted will not differ materially from the proposals
described above.
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, (and Regulation Z), Real Estate Settlement Procedures Act (and Regulation
X), Equal Credit Opportunity Act (and Regulation B), Fair Credit Billing Act,
Fair Credit Reporting Act, Fair Housing Act, Housing and Community Development
Act, Home Mortgage Disclosure Act, Federal Trade Commission Act, Fair Debt
Collection Practices Act, Uniform Consumer Credit Code, Consumer Credit
Protection Act, Riegle 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.
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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.
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 (and Regulation Z), Real Estate Settlement
Procedures Act (and Regulation X), Equal Credit Opportunity Act (and Regulation
B), Fair Credit Billing Act, Fair Credit Reporting Act, Fair Housing Act,
Housing and Community Development Act, Home Mortgage Disclosure Act, Federal
Trade Commission Act, Fair Debt Collection Practices Act, Uniform Consumer
Credit Code, Consumer Credit Protection Act, Riegle Act, and related statutes
and regulations. 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 (subject to any applicable limitations imposed
by the Riegle Act) of subjecting a seller (and certain related creditors and
their assignees (to the extent the liability of such parties is not limited by
the provisions of the Riegle Act)) 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.
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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 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 three 'window period states' identified below. Due-on-sale
clauses contained in
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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 nine
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, the creation of
a junior encumbrance and other instances where regulations promulgated by the
Director of the Office of Thrift Supervision (successor to the Federal Home Loan
Bank Board) prohibit such enforcement. To date no such regulations have been
issued. Regulations promulgated under the Garn-St. Germain Act 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.
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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 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.
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
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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
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.
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 protection to lenders by defining certain activities in
which a lender can engage and still have the benefit of the secured creditor
exemption. A lender will be deemed to have participated in the management of a
mortgaged property, and will lose the secured creditor exemption, if it actually
participates 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
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 may 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.
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.
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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.'
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.
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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, as amended (the 'Code'), and
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. 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
Securities offered hereunder.
The following discussion addresses securities of four general types: (i)
securities ('REMIC Securities') representing interests in a Trust Fund, or a
portion thereof, that the Trustee will elect to have treated as a real estate
mortgage investment conduit (the 'REMIC') under Sections 860A through 860G (the
'REMIC Provisions') of the Code, (ii) securities ('Grantor Trust Securities')
representing interests in a Trust Fund ('Grantor Trust Fund') as to which no
such election will be made, (iii) securities ('Partnership Securities')
representing interests in a Trust Fund ('Partnership Trust Fund') which is
treated as a partnership or, if owned by a single beneficial owner, ignored for
federal income tax purposes, and (iv) securities ('Debt Securities')
representing indebtedness of a Partnership Trust Fund for federal income tax
purposes. The Prospectus Supplement for each Series of Securities will indicate
which of the foregoing treatments will apply to such Series and, if a REMIC
election (or elections) will be made for the related Trust Fund, will identify
all 'regular interests' and 'residual interests' in the REMIC. For purposes of
this tax discussion, (i) references to a 'Securityholder' or a 'holder' are to
the beneficial owner of a Security, (ii) references to 'REMIC Pool' are to an
entity or portion thereof as to which a REMIC election will be made and (iii)
unless indicated otherwise in the applicable Prospectus Supplement, references
to 'Mortgage Loans' include Agency Securities and Private Mortgage-Backed
Securities.
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 Securities.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each Series of REMIC Securities, Cadwalader,
Wickersham & Taft, special 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) will qualify as a REMIC and the REMIC Securities
offered with respect thereto will be considered to evidence ownership of
'regular interests' ('Regular Securities') or 'residual interests' ('Residual
Securities') in that REMIC within the meaning of the REMIC Provisions.
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis portion of the assets of the REMIC Pool, as of the close of
the third calendar month beginning after the 'Startup Day' (which for purposes
of this
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discussion is the date of issuance of the REMIC Securities) and at all times
thereafter, may consist of assets other than 'qualified mortgages' and
'permitted investments.' The REMIC Regulations provide a safe harbor pursuant to
which the de minimis requirement will be met if at all times the aggregate
adjusted basis of the nonqualified assets is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets. An entity that fails to meet the
safe harbor may nevertheless demonstrate that it holds no more than a de minimis
amount of nonqualified assets. A REMIC Pool also must provide 'reasonable
arrangements' to prevent its residual interests from being held by 'disqualified
organizations' or agents thereof and must furnish applicable tax information to
transferors or agents that violate this requirement. The Pooling and Servicing
Agreement with respect to each Series of REMIC Securities will contain
provisions meeting these requirements. See 'Taxation of Owners of Residual
Securities -- Tax-Related Restrictions on Transfer of Residual
Securities -- Disqualified Organizations.'
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
thereafter pursuant to a fixed price contact in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, such as the Mortgage Loans,
and, generally, certificates of beneficial interest in a grantor trust that
holds mortgage loans and regular interests in another REMIC, such as lower-tier
regular interests in a tiered REMIC. The REMIC Regulations specify that loans
secured by timeshare interests and shares held by a tenant stockholder in a
cooperative housing corporation can be qualified mortgages. A qualified mortgage
includes a qualified replacement mortgage, which is any property that would have
been treated as a qualified mortgage if it were transferred to the REMIC Pool on
the Startup Day and that is received either (i) in exchange for any qualified
mortgage within a three-month period thereafter or (ii) in exchange for a
'defective obligation' within a two-year period thereafter. A 'defective
obligation' includes (i) a mortgage in default or as to which default is
reasonably foreseeable, (ii) a mortgage as to which a customary representation
or warranty made at the time of transfer to the REMIC Pool has been breached,
(iii) a mortgage that was fraudulently procured by the mortgagor, and (iv) a
mortgage that was not in fact principally secured by real property (but only if
such mortgage is disposed of within 90 days of discovery). A Mortgage Loan that
is 'defective' as described in clause (iv) that is not sold or, if within two
years of the Startup Day, exchanged, within 90 days of discovery, ceases to be a
qualified mortgage after such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The reserve fund will be
disqualified if more than 30% of the gross income from the assets in such fund
for the year is derived from the sale or other disposition of property held for
less than three months, unless required to prevent a default on the regular
interests caused by a default on one or more qualified mortgages. A reserve fund
must be reduced 'promptly and appropriately' as payments on the Mortgage Loans
are received. Foreclosure property is real property acquired by the REMIC Pool
in connection with the default or imminent default of a qualified mortgage and
generally not held beyond the close of the third calendar year following the
year of acquisition, with one extension available from the Internal Revenue
Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following: (i) one or more classes of regular interests or
(ii) a single class of residual interests on which distributions, if any, are
made pro rata. A regular interest is an interest in a REMIC Pool that is issued
on the Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount (or
other similar amount), and provides that interest payments (or other similar
amounts), if any, at or before maturity either are payable based on a fixed rate
or a qualified
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variable rate, or consist of a specified, nonvarying portion of the interest
payments on qualified mortgages. Such a specified portion may consist of a fixed
number of basis points, a fixed percentage of the total interest, or a qualified
variable rate, inverse variable rate or difference between two fixed or
qualified variable rates on some or all of the qualified mortgages. The
specified principal amount of a regular interest that provides for interest
payments consisting of a specified, nonvarying portion of interest payments on
qualified mortgages may be zero. A residual interest is an interest in a REMIC
Pool other than a regular interest that is issued on the Startup Day and that is
designated as a residual interest. An interest in a REMIC Pool may be treated as
a regular interest even if payments of principal with respect to such interest
are subordinated to payments on other regular interests or the residual interest
in the REMIC Pool, and are dependent on the absence of defaults or delinquencies
on qualified mortgages or permitted investments, lower than reasonably expected
returns on permitted investments, unanticipated expenses incurred by the REMIC
Pool or prepayment interest shortfalls. Accordingly, the Regular Securities of a
Series will constitute one or more classes of regular interests, and the
Residual Securities with respect to that Series will constitute a single class
of residual interests with respect to each REMIC Pool.
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 Securities 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 Pool 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 SECURITIES
In general, the REMIC Securities will be treated as 'real estate assets'
within the meaning of Section 856(c)(4)(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 Pool underlying such Securities would be so treated. Moreover, if 95% or
more of the assets of the REMIC Pool qualify for either of the foregoing
treatments at all times during a calendar year, the REMIC Securities will
qualify for the corresponding status in their entirety for that calendar year.
If the assets of the REMIC Pool include Buydown Loans, it is possible that the
percentage of such assets constituting 'loans . . . secured by an interest in
real property which is . . . residential real property' for purposes of Code
Section 7701(a)(19)(C)(v) may be required to be reduced by the amount of the
related funds paid thereon (the 'Buydown Funds'). Interest (including original
issue discount) on the Regular Securities and income allocated to the class of
Residual Securities will be interest described in Section 856(c)(3)(B) of the
Code to the extent that such Securities are treated as 'real estate assets'
within the meaning of Section 856(c)(4)(A) of the Code. In addition, the Regular
Securities will be 'qualified mortgages' within the meaning of Section
860G(a)(3) of the Code if transferred to another REMIC on its Startup Day in
exchange for regular or residual interests therein, and will be 'permitted
assets' within the meaning of Section 860L(c) for a fianancial asset
securitization investment trust. The determination as to the percentage of the
REMIC Pool'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 Pool
during such calendar quarter. The REMIC will report those determinations to
Securityholders in the manner and at the times required by applicable Treasury
regulations. The Small Business Job Protection Act of 1996 (the 'SBJPA of 1996')
repealed the reserve method of bad debts of domestic building and loan
associations and mutual savings banks, and thus has eliminated the asset
category of 'qualifying real property loans' in former Code Section 593(d) for
taxable years beginning after December 31, 1995. The requirements in the SBJPA
of 1996 that such institutions must 'recapture' a portion of their existing bad
debt reserves is suspended if a certain portion of their assets
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are maintained in 'residential loans' under Code Section 7701(a)(19)(C)(v), but
only if such loans were made to acquire, construct or improve the related real
property and not for the purpose of refinancing. However, no effort will be made
to identify the portion of the Mortgage Loans of any Series meeting this
requirement, and no representation is made in this regard.
The assets of the REMIC Pool will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Securities 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 Mortgage 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 Mortgage Loans for purposes of all of the foregoing sections. The REMIC
Regulations do provide, however, that payments on Mortgage Loans held pending
distribution are considered part of the Mortgage Loans for purposes of Section
856(c)(4)(A) of the Code. Furthermore, foreclosure property will qualify as
'real estate assets' under Section 856(c)(4)(A) of the Code.
TIERED REMIC STRUCTURES
For certain Series of REMIC Securities, 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 Securities, Cadwalader, Wickersham & Taft will deliver its
opinion generally to the effect that, assuming compliance with all provisions of
the related Pooling and Servicing Agreement, the Tiered REMICs will each qualify
as a REMIC and the REMIC Securities issued by the Tiered REMICs, respectively,
will be considered to evidence ownership of Regular Securities or Residual
Securities in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be
'real estate assets' within the meaning of Section 856(c)(4)(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 Securities 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 REGULAR SECURITIES
GENERAL
In general, interest, original issue discount, and market discount on a
Regular Security will be treated as ordinary income to a holder of the Regular
Security (the 'Regular Securityholder'), and principal payments on a Regular
Security will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholder.
ORIGINAL ISSUE DISCOUNT
Regular Securities may be issued with 'original issue discount' within the
meaning of Code Section 1273(a). Holders of any Class or Subclass of Regular
Securities having original issue discount generally must include original issue
discount in ordinary income for federal income tax purpose as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, in advance of the receipt of the cash attributable to such income.
The following discussion is based in part on temporary and final Treasury
regulations issued on February 2, 1994, as amended on June 14, 1996, (the 'OID
Regulations') under Code Section 1271 through 1273 and 1275 and in part on the
provisions of the 1986 Act. Regular Securityholders should be aware, however,
that the OID Regulations do not adequately address certain issues relevant to
prepayable securities, such as the Regular Securities. To the extent such issues
are not addressed in such regulations, it is anticipated that the Trustee will
apply the methodology described in the Conference Committee Report to the 1986
Act. No assurance can be
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provided that the Internal Revenue Service will not take a different position as
to those matters not currently addressed by the OID Regulations. Moreover, the
OID Regulations include an anti-abuse rule allowing the Internal Revenue Service
to apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion therein and the appropriate method for reporting interest and
original issue discount with respect to the Regular Securities.
Each Regular Security (except to the extent described below with respect to
a Regular Security on which principal is distributed in a single installment or
by lots of specified principal amounts upon the request of a Securityholder or
by random lot (a 'Non-Pro Rata Security')) will be treated as a single
installment obligation for purposes of determining the original issue discount
includible in a Regular Securityholder's income. The total amount of original
issue discount on a Regular Security is the excess of the 'stated redemption
price at maturity' of the Regular Security over its 'issue price.' The issue
price of a Class of Regular Securities offered pursuant to this Prospectus
generally is the first price at which a substantial amount of such Class is sold
to the public (excluding bond houses, brokers and underwriters). Although
unclear under the OID Regulations, it is anticipated that the Trustee will treat
the issue price of a Class as to which there is no substantial sale as of the
issue date or that is retained by the Depositor as the fair market value of the
Class as of the issue date. The issue price of a Regular Security also includes
any amount paid by an initial Regular Securityholder for accrued interest that
relates to a period prior to the issue date of the Regular Security, unless the
Regular Securityholder elects on its federal income tax return to exclude such
amount from the issue price and to recover it on the first Distribution Date.
The stated redemption price at maturity of a Regular Security always includes
the original principal amount of the Regular Security, but generally will not
include distributions of interest if such distributions constitute 'qualified
stated interest.' Under the OID Regulations, qualified stated interest generally
means interest payable at a single fixed rate or a qualified variable rate (as
described below) provided that such interest payments are unconditionally
payable at intervals of one year or less during the entire term of the Regular
Security. Because there is no penalty or default remedy in the case of
nonpayment of interest with respect to a Regular Security, it is possible that
no interest on any Class of Regular Securities will be treated as qualified
stated interest. However, except as provided in the following three sentences or
in the applicable Prospectus Supplement, because the underlying Mortgage Loans
provide for remedies in the event of default, it is anticipated that the Trustee
will treat interest with respect to the Regular Securities as qualified stated
interest. Distributions of interest on Regular Securities with respect to which
deferred interest will accrue, will not constitute qualified stated interest, in
which case the stated redemption price at maturity of such Regular Securities
includes all distributions of interest as well as principal thereon. Likewise,
it is anticipated that the Trustee will treat an interest-only Class or a Class
on which interest is substantially disproportionate to its principal amount (a
so-called 'super-premium' Class) as having no qualified stated interest. Where
the interval between the issue date and the first Distribution Date on a Regular
Security is shorter than the interval between subsequent Distribution Dates, the
interest attributable to the additional days will be included in the stated
redemption price at maturity.
Under a de minimis rule, original issue discount on a Regular Security will
be considered to be zero if such original issue discount is less than 0.25% of
the stated redemption price at maturity of the Regular Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted average maturity of the Regular Security is computed as the sum of the
amounts determined by multiplying the number of full years (i.e., rounding down
partial years) from the issue date until each distribution in reduction of
stated redemption price at maturity is scheduled to be made by a fraction, the
numerator of which is the amount of each distribution included in the stated
redemption price at maturity of the Regular Security and the denominator of
which is the stated redemption price at maturity of the Regular Security. The
Conference Committee Report to the 1986 Act provides that the schedule of such
distributions should be determined in accordance with the assumed rate of
prepayment of the Mortgage Loans (the 'Prepayment Assumption') and the
anticipated reinvestment rate, if any, relating to the Regular Securities. The
Prepayment Assumption with respect to a Series of Regular Securities will be set
forth in the applicable Prospectus Supplement.
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Holders generally must report de minimis original issue discount pro rata as
principal payments are received, and such income will be capital gain if the
Regular Security is held as a capital asset. Under the OID Regulations, however,
Regular Securityholders may elect to accrue all de minimis original issue
discount as well as market discount and market premium, under the constant yield
method. See 'Election to Treat All Interest Under the Constant Yield Method.'
A Regular Securityholder generally must include in gross income for any
taxable year the sum of the 'daily portions', as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The Trustee will treat the monthly period
ending on the day before each Distribution Date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period (or
shorter period from the date of original issue) that ends on the day before the
related Distribution Date on the Regular Security. The Conference Committee
Report to the 1986 Act states that the rate of accrual of original issue
discount is intended to be based on the Prepayment Assumption. The original
issue discount accruing in a full accrual period would be the excess, if any, of
(i) the sum of (a) the present value of all of the remaining distributions to be
made on the Regular Security as of the end of that accrual period, and (b) the
distributions made on the Regular Security during the accrual period that are
included in the Regular Security's stated redemption price at maturity, over
(ii) the adjusted issue price of the Regular Security at the beginning of the
accrual period. The present value of the remaining distributions referred to in
the preceding sentence is calculated based on (i) the yield to maturity of the
Regular Security at the issue date, (ii) events (including actual prepayments)
that have occurred prior to the end of the accrual period, and (iii) the
Prepayment Assumption. For these purposes, the adjusted issue price of a Regular
Security at the beginning of any accrual period equals the issue price of the
Regular Security, increased by the aggregate amount of original issue discount
with respect to the Regular Security that accrued in all prior accrual periods
and reduced by the amount of distributions included in the Regular Security's
stated redemption price at maturity that were made on the Regular Security in
such prior periods. The original issue discount accruing during any accrual
period (as determined in this paragraph) will then be divided by the number of
days in the period to determine the daily portion of original issue discount for
each day in the period. With respect to an initial accrual period shorter than a
full accrual period, the daily portions of original issue discount must be
determined according to an appropriate allocation under any reasonable method.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Loans that exceed the Prepayment
Assumption, and generally will decrease (but not below zero for any period) if
the prepayments are slower than the Prepayment Assumption. As increase in
prepayments on the Mortgage Loans with respect to a Series of Regular Securities
can result in both a change in the priority of principal payments with respect
to certain Classes of Regular Securities and either an increase or decrease in
the daily portions of original issue discount with respect to such Regular
Securities.
In the case of a Non-Pro Rata Security, it is anticipated that the Trustee
will determine the yield to maturity of such Security based upon the anticipated
payment characteristics of the Class as a whole under the Prepayment Assumption.
In general, the original issue discount accruing on each Non-Pro Rata Security
in a full accrual period would be its allocable share of the original issue
discount with respect to the entire Class, as determined in accordance with the
preceding paragraph. However, in the case of a distribution in retirement of the
entire unpaid principal balance of any Non-Pro Rata Security (or portion of such
unpaid principal balance), (a) the remaining unaccrued original issue discount
allocable to such Security (or to such portion) will accrue at the time of such
distribution, and (b) the accrual of original issue discount allocable to each
remaining Security of such Class (or the received) will be adjusted by reducing
the present value of the remaining payments on such Class and the adjusted issue
price of such Class to the extent attributable to the portion of the unpaid
principal balance thereof that was distributed. The Depositor believes that the
foregoing treatment is consistent with the 'pro rata prepayment' rules of the
OID Regulations, but with the rate of accrual of original
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issue discount determined based on the Prepayment Assumption for the Class as a
whole. Investors are advised to consult their tax advisors as to this treatment.
ACQUISITION PREMIUM
A purchaser of a Regular Security at a price greater than its adjusted
issue price but less than its stated redemption price at maturity will be
required to include in gross income the daily portions of the original issue
discount on the Regular Security reduced pro rata by a fraction, the numerator
of which is the excess of its purchase price over such adjusted issue price and
the denominator of which is the excess of the remaining stated redemption price
at maturity over the adjusted issue price. Alternatively, such a subsequent
purchaser may elect to treat all such acquisition premium under the constant
yield method, as described below under the heading 'Election to Treat All
Interest Under the Constant Yield Method.'
VARIABLE RATE REGULAR SECURITIES
Regular Securities may provide for interest based on a variable rate. Under
the OID Regulations, interest is treated as payable at a variable rate if,
generally, (i) the issue price does not exceed the original principal balance by
more than a specified amount and (ii) the interest compounds or is payable at
least annually at current values of (a) one or more 'qualified floating rates',
(b) a single fixed rate and one or more qualified floating rates, (c) a single
'objective rate', or (d) a single fixed rate and a single objective rate that is
a 'qualified inverse floating rate.' A floating rate is a qualified floating
rate if variations can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds, where such rate is subject to a
fixed multiple that is greater that 0.65 but not more than 1.35. Such rate may
also be increased or decreased by a fixed spread or subject to a fixed cap or
floor, or a cap or floor that is not reasonably expected as of the issue date to
affect the yield of the instrument significantly. An objective rate is any rate
(other than a qualified floating rate) that is determined using a single fixed
formula and that is based on objective financial or economic information,
provided that such information is not (i) within the control of the issuer or a
related party or (ii) unique to the circumstances of the issuer or a related
party. A qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds; an inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate. A Class
of Regular Securities may be issued under this Prospectus that does not have a
variable rate under the foregoing rules, for example, a Class that bears
different rates at different times during the period it is outstanding such that
it is considered significantly 'front-loaded' or 'back-loaded' within the
meaning of the OID Regulations. It is possible that such a Class may be
considered to bear 'contingent interest' within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to Regular Securities. However, if
final regulations dealing with contingent interest with respect to Regular
Securities apply the same principles as the OID Regulations, such regulations
may lead to different timing of income inclusion that would be the case under
the OID Regulations. Furthermore, application of such principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should consult their tax advisors
regarding the appropriate treatment of any Regular Security that does not pay
interest at a fixed rate or variable rate as described in this paragraph.
Under the REMIC Regulations, a Regular Security (i) bearing a rate that
qualifies as a variable rate under the OID Regulations that is tied to current
values of a variable rate (or the highest, lowest or average of two or more
variable rates, including a rate based on the average cost of funds of one or
more financial institutions), or a positive or negative multiple of such a rate
(plus or minus a specified number of basis points), or that represents a
weighted average of rates on some or all of the Mortgage Loans, including such a
rate that is subject to one or more caps or floors, or (ii) bearing one or more
such variable rates for one or more periods, or one or more fixed rates for one
or more periods, and a different variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. Accordingly, unless otherwise
indicated in the applicable Prospectus Supplement, it is anticipated that
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the Trustee will treat Regular Securities that qualify as regular interests
under this rule in the same manner as obligations bearing a variable rate for
original issue discount reporting purposes.
The amount of original issue discount with respect to a Regular Security
bearing a variable rate of interest will accrue in the manner described above
under 'Original Issue Discount', with the yield to maturity and future payments
on such Regular Security generally to be determined by assuming that interest
will be payable for the life of the Regular Security based on the initial rate
(or, if different, the value of the applicable variable rate as of the pricing
date) for the relevant Class. Unless required otherwise by applicable final
regulations, it is anticipated that the Trustee will treat such variable
interest as qualified stated interest, other than variable interest on an
interest-only or super-premium Class, which will be treated as non-qualified
stated interest includible in the stated redemption price at maturity. Ordinary
income reportable for any period will be adjusted based on subsequent changes in
the applicable interest rate index.
Although unclear under the OID Regulations, unless required otherwise by
applicable final regulations, it is anticipated that the Trustee will treat
Regular Securities bearing an interest rate that is a weighted average of the
net interest rates on Mortgage Loans as having qualified stated interest, except
to the extent that initial 'teaser' rates cause sufficiently 'back-loaded'
interest to create more than de minimis original issue discount. The yield on
such Regular Securities for purposes of accruing original issue discount will be
a hypothetical fixed rate based on the fixed rates, in the case of fixed rate
Mortgage Loans, and initial 'teaser rates' followed by fully indexed rates, in
the case of adjustable rate Mortgage Loans. In the case of adjustable rate
Mortgage Loans, the applicable index used to compute interest on the Mortgage
Loans in effect on the pricing date (or possibly the issue date) will be deemed
to be in effect beginning with the period in which the first weighted average
adjustment date occurring after the issue date occurs. Adjustments will be made
in each accrual period either increasing or decreasing the amount of ordinary
income reportable to reflect the actual Pass-Through Rate on the Regular
Securities.
MARKET DISCOUNT
A purchaser of a Regular Security also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and the
principles applied by the OID Regulations in the context of original issue
discount, 'market discount' is the amount by which the purchaser's original
basis in the Regular Security (i) is exceeded by the then-current principal
amount of the Regular Security, or (ii) in the case of a Regular Security having
original issue discount, is exceeded by the adjusted issue price of such Regular
Security at the time of purchase. Such purchaser generally will be required to
recognize ordinary income to the extent of accrued market discount on such
Regular Security as distributions includible in the stated redemption price at
maturity thereof are received, in an amount not exceeding any such distribution.
Such market discount would accrue in a manner to be provided in Treasury
regulations and should take into account the Prepayment Assumption. The
Conference Committee Report to the 1986 Act provides that until such regulations
are issued, such market discount would accrue either (i) on the basis of a
constant interest rate, or (ii) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for such period plus the remaining
interest as of the end of such period, or in the case of a Regular Security
issued with original issue discount, in the ratio of original issue discount
accrued for the relevant period to the sum of the original issue discount
accrued for such period plus the remaining original issue as of the end of such
period. Such purchaser also generally will be required to treat a portion of any
gain on a sale or exchange of the Regular Security 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 as partial distributions in reduction of the stated redemption
price at maturity were received. Such purchaser will be required to defer
deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security over the interest
distributable thereon. The deferred portion of such interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for such year. Any such deferred interest expense is, in
general, allowed as a deduction not later than the year in which the related
market discount income is recognized or the Regular Security is disposed of. As
an alternative
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to the inclusion of market discount in income on the foregoing basis, the
Regular Securityholder may elect to include market discount in income currently
as it accrues on all market discount instruments acquired by such Regular
Securityholder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. See 'Election to Treat All Interest Under the
Constant Yield Method' below regarding an alternative manner in which such
election may be deemed to be made.
By analogy to the OID Regulations, market discount with respect to a
Regular Security will be considered to be zero if such market discount is less
than 0.25% of the remaining stated redemption price at maturity of such Regular
Security multiplied by the weighted average maturity of the Regular Security
(determined as described above in the third paragraph under 'Original Issue
Discount') remaining after the date of purchase. It appears that de minimis
market discount would be reported in a manner similar to de minimis original
issue discount. See 'Original Issue Discount' above. Treasury regulations
implementing the market discount rules have not yet been issued, and therefore
investors should consult their own tax advisors regarding the application of
these rules. Investors should also consult Revenue Procedure 92-67 concerning
the elections to include market discount in income currently and to accrue
market discount on the basis of the constant yield method.
PREMIUM
A Regular Security purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds such Regular Security as a 'capital
asset' within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize such premium under the constant yield
method. Such election will apply to all debt obligations acquired by the Regular
Securityholder at a premium held in that taxable year or thereafter, unless
revoked with the permission of the Internal Revenue Service. Final Treasury
regulations with respect to amortization of bond premiums do not by their terms
apply to obligations, such as the Regular Securities, which are prepayable as
described in Code Secion 1272(a)(6). However, the Conference Committee Report to
the 1986 Act indicates a Congressional intent that the same rules that apply to
the accrual of market discount on installment obligations will also apply to
amortizing bond premium under Code Section 171 on installment obligations such
as the Regular Securities, although it is unclear whether the alternatives to
the constant interest method described above under 'Market Discount' are
available. Amortizable bond premium will be treated as an offset to interest
income on a Regular Security, rather than as a separate deductible item. See
'Election to Treat All Interest Under the Constant Yield Method' below regarding
an alternative manner in which the Code Section 171 election may be deemed to be
made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD
A holder of a debt instrument such as a Regular Security may elect to treat
all interest that accrues on the instrument using the constant yield method,
with none of the interest being treated as qualified stated interest. For
purposes of applying the constant yield method to a debt instrument subject to
such an election, (i) 'interest' includes stated interest, original issue
discount, de minimis original issue discount, market discount and de minimis
market discount, as adjusted by any amortizable bond premium or acquisition
premium and (ii) the debt instrument is treated as if the instrument were issued
on the holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make such an election on an instrument by instrument basis or for
a class or group of debt instruments. However, if the holder makes such an
election with respect to a debt instrument with amortizable bond premium or with
market discount, the holder is deemed to have made elections to amortize bond
premium or to report market discount income currently as it accrues under the
constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the Internal Revenue Service. Investors should consult their own tax
advisors regarding the advisability of making such an election.
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TREATMENT OF LOSSES
Regular Securityholders will be required to report income with respect to
Regular Securities on the accrual method of accounting, without giving effect to
delays or reductions in distributions attributable to defaults or delinquencies
on the Mortgage Loans, except to the extent it can be established that such
losses are uncollectible. Accordingly, the holder of a Regular Security,
particularly a Subordinate Security, may have income, or may incur a diminution
in cash flow as a result of a default or delinquency, but may not be able to
take a deduction (subject to the discussion below) for the corresponding loss
until a subsequent taxable year. In this regard, investors are cautioned that
while they may generally cease to accrue interest income if it reasonably
appears that the interest will be uncollectible, the Internal Revenue Service
may take the position that original issue discount must continue to be accrued
in spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of Code
Section 166. To the extent the rules of Code Section 166 regarding bad debts are
applicable, it appears that Regular Securityholders that are corporations or
that otherwise hold the Regular Securities in connection with a trade or
business should in general be allowed to deduct as an ordinary loss such loss
with respect to principal sustained during the taxable year on account of any
such Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at such time as
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated Mortgage Loans. The Internal Revenue Service,
however, could take the position that non-corporate holders will be allowed a
bad debt deduction to reflect such losses only after all the Mortgage Loans
remaining in the Trust Estate have been liquidated or the applicable Class of
Regular Securities has been otherwise retired. The Internal Revenue Service
could also assert that losses on the Regular Securities are deductible based on
some other method that may defer such deductions for all holders, such as
reducing future cashflow for purposes of computing original issue discount. This
may have the effect of creating 'negative' original issue discount which would
be deductible only against future positive original issue discount or otherwise
upon termination of the Class. Regular Securityholders are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to such Regular Securities. While losses
attributable to interest previously reported as income should be deductible as
ordinary losses by both corporate and non-corporate holders, the Internal
Revenue Service may take the position that losses attributable to accrued
original issue discount may only be deducted as capital losses in the case of
non-corporate holders who do not hold the Regular Securities in connection with
a trade or business. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts. Such taxpayers
are advised to consult their tax advisors regarding the treatment of losses on
Regular Securities.
SALE OR EXCHANGE OF REGULAR SECURITIES
If a Regular Securityholder sells or exchanges a Regular Security, the
Regular Securityholder will recognize gain or loss equal to the difference, if
any, between the amount received and its adjusted basis in the Regular Security.
The adjusted basis of a Regular Security generally will equal the cost of the
Regular Security to the seller, increased by any original issue discount or
market discount previously included in the seller's gross income with respect to
the Regular Security and reduced by amounts included in the stated redemption
price at maturity of the Regular Security that were previously received by the
seller, by any amortized premium and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the applicable
holding period (described below). Such gain will be treated as ordinary income
(i) if a Regular Security is held as part of a 'conversion transaction' as
defined in Code Section 1258(c), up to the amount of interest that
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would have accrued on the Regular Securityholder's net investment in the
conversion transaction at 120% of the appropriate applicable Federal rate under
Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) to the extent that such
gain does not exceed the excess, if any, of (a) the amount that would have been
includible in the gross income of the holder if its yield on such Regular
Security were 110% of the applicable Federal rate as of the date of purchase,
over (b) the amount of income actually includible in the gross income of such
holder with respect to such Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). Capital gains of non-corporate taxpayers generally are subject to a
lower maximum tax rate (20%) than ordinary income of such taxpayers (39.6%) for
capital assets held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
TAXATION OF REMIC INCOME
Generally, the 'daily portions' of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable income
of holders of Residual Securities ('Residual Holders'), and will not be taxed
separately to the REMIC Pool. The daily portions of REMIC taxable income or net
loss of a Residual Holder are determined by allocating the REMIC Pool's taxable
income or net loss for each calendar quarter ratably to each day in such quarter
and by allocating such daily portion among the Residual Holders in proportion to
their respective holdings of Residual Securities in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using the accrual method of accounting, except that (i)
the limitations on deductibility of investment interest expense and expenses for
the production of income do not apply, (ii)all bad loans will be deductible as
business bad debts, and (iii) the limitation on the deductibility of interest
and expenses related to tax-exempt income will apply. The REMIC Pool's gross
income includes interest, original issue discount income and market discount
income, if any, on the Mortgage Loans, reduced by amortization of any premium on
the Mortgage Loans, plus income from amortization of issue premium, if any, on
the Regular Securities, plus income on reinvestment of cash flows and reserve
assets, plus any cancellation of indebtedness income upon allocation of realized
losses to the Regular Securities. The REMIC Pool's deductions include interest
and original issue discount expense on the Regular Securities, servicing fees on
the Mortgage Loans, other administrative expenses of the REMIC Pool and realized
losses on the Mortgage Loans. The requirement that Residual Holders report their
pro rata share of taxable income or net loss of the REMIC Pool will continue
until there are no Securities of any class of the related Series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the Mortgage Loans, on the one hand, and
the timing of deductions for interest (including original issue discount) or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the Mortgage Loans is acquired by
the REMIC Pool at a discount, and one or more of such Mortgage Loans is prepaid,
the prepayment may be used in whole or in part to make distributions in
reduction of principal on the Regular Securities, and (ii) the discount on the
Mortgage Loans which is includible in income may exceed the deduction allowed
upon such distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When there is more
than one Class of Regular Securities that distribute principal sequentially,
this mismatching of income and deductions is particularly likely to occur in the
early years following issuance of the Regular Securities when distributions in
reduction of principal are being made in respect of earlier Classes of Regular
Securities to the extent that such Classes are not issued with substantial
discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in
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general, losses would be allowed in later years as distributions on the later
maturing Classes of Regular Securities are made. Taxable income may also be
greater in earlier years than in later years as a result of the fact that
interest expense deductions, expressed as a percentage of the outstanding
principal amount of such a Series of Regular Securities, may increase over time
as distributions in reduction of principal are made on the lower yielding
Classes of Regular Securities, whereas, to the extent the REMIC Pool consists of
fixed rate Mortgage Loans, interest income with respect to any given Mortgage
Loan will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Holders must have sufficient other
sources of cash to pay any federal, state, or local income taxes due as a result
of such mismatching or unrelated deductions against which to offset such income,
subject to the discussion of 'excess inclusions' below under ' -- Limitations on
Offset or Exemption of REMIC Income.' The timing of such mismatching of income
and deductions described in this paragraph, if present with respect to a Series
of Securities, may have a significant adverse effect upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holders for
such periods in accordance with generally accepted accounting principles.
Investors should consult their own accountants concerning the accounting
treatment of their investment in Residual Securities.
BASIS AND LOSSES
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Holder is limited to the adjusted basis of the Residual Security
as of the close of the quarter (or time of disposition of the Residual Security,
if earlier), determined without taking into account the net loss for the
quarter. The initial adjusted basis of a purchaser of a Residual Security is the
amount paid for such Residual Security. Such adjusted basis will be increased by
the amount of taxable income of the REMIC Pool reportable by the Residual Holder
and will be decreased (but not below zero), first, by a cash distribution from
the REMIC Pool and, second, by the amount of loss of the REMIC Pool reportable
by the Residual Holder. Any loss that is disallowed on account of this
limitation may be carried over indefinitely with respect to the Residual Holder
as to whom such loss was disallowed and may be used by such Residual Holder only
to offset any income generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of
its Residual Security as an offset to its share of the taxable income of the
related REMIC Pool. However, the taxable income will not include cash received
by the REMIC Pool that represents a recovery of the REMIC Pool's basis in its
assets. Such recovery of basis by the REMIC Pool will have the effect of
amortization of the issue price of the Residual Securities over their life.
However, in view of the possible acceleration of the income of Residual Holders
described above under 'Taxation of REMIC Income', the period of time over which
such issue price is effectively amortized may be longer than the economic life
of the Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of such a residual
interest as zero rather than such negative amount for purposes of determining
the REMIC Pool's basis in its assets. The preamble to the REMIC Regulations
states that the Internal Revenue Service may provide future guidance on the
proper tax treatment of payments made by a transferor of such a residual
interest to induce the transferee to acquire the interest, and Residual Holders
should consult their own tax advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder
(other than an original holder) in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the Mortgage Loans, the
Residual Holder will not recover a portion of such basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by such holder. The REMIC
Regulations currently in effect do not so provide. See ' -- Treatment of Certain
Items of REMIC Income and Expense -- Market Discount' below regarding the basis
of Mortgage Loans to the REMIC Pool and 'Sale or Exchange of a Residual
Security' below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
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TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE
Although it is anticipated that the Trustee will compute REMIC income and
expense in accordance with the Code and applicable regulations, the authorities
regarding the determination of specific items of income and expense are subject
to differing interpretations. The Depositor makes no representation as to the
specific method that will be used for reporting income with respect to the
Mortgage Loans and expenses with respect to the Regular Securities, and
different methods could result in different timing or reporting of taxable
income or net loss to Residual Holders or differences in capital gain versus
ordinary income.
Original Issue Discount and Premium. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Securities as described above under 'Taxation of Owners of Regular
Securities -- Original Issue Discount' and ' -- Variable Rate Regular
Securities', without regard to the de minimis rule described therein, and
' -- Premium.'
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
such Mortgage Loans is generally the fair market value of the Mortgage Loans
immediately after the transfer thereof to the REMIC Pool. The REMIC Regulations
provide that such basis is equal in the aggregate to the issue prices of all
regular and residual interests in the REMIC Pool. The accrued portion of such
market discount would be recognized currently as an item of ordinary income in a
manner similar to original issue discount. Market discount income generally
should accrue in the manner described above under 'Taxation of Owners of Regular
Securities -- Market Discount.'
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Loans at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in Mortgage Loans is the fair
market value of the Mortgage Loans, based on the aggregate of the issue prices
of the regular and residual interests in the REMIC Pool immediately after the
transfer thereof to the REMIC Pool. In a manner analogous to the discussion
above under 'Taxation of Owners of Regular Securities -- Premium,' a person that
holds a Mortgage Loan as a capital asset under Code Section 1221 may elect under
Code Section 171 to amortize premium on Mortgage Loans originated after
September 27, 1985 under the constant yield method. Amortizable bond premium
will be treated as an offset to interest income on the Mortgage Loans, rather
than as a separate deduction item. Because substantially all of the mortgagors
on the Mortgage Loans are expected to be individuals, Code Section 171 will not
be available for premium on Mortgage Loans originated on or prior to September
27, 1985. Premium with respect to such Mortgage Loans may be deductible in
accordance with a reasonable method regularly employed by the holder thereof.
The allocation of such premium pro rata among principal payments should be
considered a reasonable method; however, the Internal Revenue Service may argue
that such premium should be allocated in a different manner, such as allocating
such premium entirely to the final payment of principal.
LIMITATIONS ON OFFSET OR EXEMPTION OF REMIC INCOME
A portion (or all) of the REMIC taxable income includible in determining
the federal income tax liability of a Residual Holder will be subject to special
treatment. That portion, referred to as the 'excess inclusion,' is equal to the
excess of REMIC taxable income for the calendar quarter allocable to a Residual
Security over the daily accruals for such quarterly period of (i) 120% of the
long-term applicable Federal rate that would have applied to the Residual
Security (if it were a debt instrument) on the Startup Day under Code Section
1274(d), multiplied by (ii) the adjusted issue price of such Residual Security
at the beginning of such quarterly period. For this purpose, the adjusted issue
price of a Residual Security at the beginning of a quarter is the issue price of
the Residual Security, plus the amount of such daily accruals of REMIC income
described in this paragraph for all prior quarters, decreased by any
distributions made with respect to such Residual Security prior to the beginning
of such quarterly period. Accordingly, the portion of the REMIC Pool's taxable
income that will be treated
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as excess inclusions will be a larger portion of such income as the adjusted
issue price of the Residual Securities diminishes.
The portion of a Residual Holder's REMIC taxable income consisting of the
excess inclusions generally may not be offset by other deductions, including net
operating loss carryforwards, on such Residual Holder's return. However, net
operating loss carryovers are determined without regard to excess inclusion
income. Further, if the Residual Holder is an organization subject to the tax on
unrelated business income imposed by Code Section 511, the Residual Holder's
excess inclusions will be treated as unrelated business taxable income of such
Residual Holder for purposes of Code Section 511. In addition, REMIC taxable
income is subject to 30% withholding tax with respect to certain persons who are
not U.S. Persons (as defined below under 'Tax-Related Restrictions on Transfer
of Residual Securities -- Foreign Investors'), and the portion thereof
attributable to excess inclusions is not eligible for any reduction in the rate
of withholding tax (by treaty or otherwise). See 'Taxation of Certain Foreign
Investors -- Residual Securities' below. Finally, if a real estate investment
trust or a regulated investment company owns a Residual Security, a portion
(allocated under Treasury regulations yet to be issued) of dividends paid by the
real estate investment trust or regulated investment company could not be offset
by net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions
('thrift institutions') to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have 'significant value' within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual Securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after
December 31, 1986, unless a Residual Holder elects to have such rules apply only
to taxable years beginning after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Security for periods after the transfer and (ii) the highest marginal
federal income tax rate applicable to corporations. The REMIC Regulations
provide that the anticipated excess inclusions are based on actual prepayment
experience to the date of the transfer and projected payments based on the
Prepayment Assumption. The present value rate equals the applicable Federal rate
under Code Section 1274(d) as of the date of the transfer for a term ending with
the last calendar quarter in which excess inclusions are expected to accrue.
Such rate is applied to the anticipated excess inclusions from the end of the
remaining calendar quarters in which they arise to the date of the transfer.
Such a tax generally would be imposed on the transferor of the Residual
Security, except that where such transfer is through an agent (including a
broker, nominee, or other middleman) for a Disqualified Organization, the tax
would instead be imposed on such agent. However, a transferor of a Residual
Security would in no event be liable for such tax with respect to a transfer if
the transferee furnished to the transferor an affidavit stating 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. The tax also may be waived by the Internal Revenue Service if the
Disqualified Organization promptly disposes of the Residual Security and the
transferor pays income tax at the highest corporate rate on the excess inclusion
for the period the Residual Security is actually held by the Disqualified
Organization.
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In addition, if a 'Pass-Through Entity' (as defined below) has excess
inclusion income with respect to a Residual Security during a taxable year and a
Disqualified Organization is the record holder of an equity interest in such
entity, then a tax is imposed on such entity equal to the product of (i) the
amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such Disqualified
Organization, and (ii) the highest marginal federal corporate income tax rate.
Such tax would be deductible from the ordinary gross income of the Pass-Through
Entity for the taxable year. The Pass-Through Entity would not be liable for
such tax if it has received an affidavit from such record holder that it is not
a Disqualified Organization or stating such holder's taxpayer identification
number and, during the period such person is the record holder of the Residual
Security, the Pass-Through Entity does not have actual knowledge that such
affidavit is false.
For taxable years beginning on or after January 1, 1998, if an 'electing
large partnership' holds a Residual Security, all interests in the electing
large partnership are treated as held by Disqualified Organizations for purposes
of the tax imposed upon a Pass-Through Entity by Section 860E(c) of the Code. An
exception to this tax, otherwise available to a Pass-Through Entity that is
furnished certain affidavits by record holders of interests in the entity and
that does not know such affidavits are false, is not available to an electing
large partnership.
For these purposes, (i) 'Disqualified Organization' means the United
States, any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors is
not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service or persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 531) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, (ii) 'Pass-Through
Entity' means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations, any person holding an interest in a Pass-Through Entity as a
nominee for another will, with respect to such interest, be treated as a
Pass-Through Entity, and (iii) an 'electing large partnership' means any
partnership having more than 100 members during the preceding tax year (other
than certain service partnerships and commodity pools), which elects to apply
certain simplified reporting provisions under the Code.
The Pooling and Servicing Agreement with respect to a Series will provide
that no legal or beneficial interest in a Residual Security may be transferred
or registered unless (i) the proposed transferee furnished to the transferor and
the Trustee an affidavit providing its taxpayer identification number and
stating that such transferee is the beneficial owner of the Residual Security
and is not a Disqualified Organization and is not purchasing such Residual
Security on behalf of a Disqualified Organization (i.e., as a broker, nominee or
middleman thereof) and (ii) the transferor provides a statement in writing to
the Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Pooling and Servicing Agreement will provide that any attempted or
purported transfer in violation of these transfer restrictions will be null and
void and will vest no rights in any purported transferee. Each Residual Security
with respect to a Series will bear a legend referring to such restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, to any amendments to the related Pooling and Servicing
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Seller or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The REMIC Regulations would disregard
certain transfers of Residual Securities, in which case the transferor would
continue to be treated as the owner of the Residual Securities and thus would
continue to be subject to tax on its allocable portion of the net income of the
REMIC Pool. Under the REMIC Regulations, a transfer of a 'noneconomic residual
interest' (as defined below) to a Residual Holder (other than a Residual Holder
who is not a U.S. Person as defined below under 'Foreign Investors') is
disregarded for all federal income tax purposes if
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a significant purpose of the transferor is to impede the assessment or
collection of tax. A residual interest in a REMIC (including a residual interest
with a positive value at issuance) is a 'noneconomic residual interest' unless,
at the time of the transfer, (i) the present value of the expected future
distributions on the residual interest at least equals the product of the
present value of the anticipated excess inclusions and the highest corporate
income tax rate in effect for the year in which the transfer occurs, and (ii)
the transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes on each
excess inclusion. The anticipated excess inclusions and the present value rate
are determined in the same manner as set forth above under 'Disqualified
Organizations.' The REMIC Regulations explain that a significant purpose to
impede the assessment or collection of tax exists if the transferor, at the time
of the transfer, either knew or should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of the
REMIC. A safe harbor is provided if (i) the transferor conducted, at the time of
the transfer, a reasonable investigation of the financial condition of the
transferee and found that the transferee historically had paid its debts as they
came due and found no significant evidence to indicate that the transferee would
not continue to pay its debts as they came due in the future, and (ii) the
transferee represents to the transferor that it understands that, as the holder
of the non-economic residual interest, the transferee may incur liabilities in
excess of any cash flows generated by the interest and that the transferee
intends to pay taxes associated with holding the residual interest as they
become due. The Pooling and Servicing Agreement with respect to each Series of
Certificates will require the transferee of a Residual Security to certify to
the matters in the preceding sentence as part of the affidavit described above
under the heading 'Disqualified Organizations.'
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security that has 'tax avoidance potential' to a 'foreign person' will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a 'U.S. Person' (as defined below), unless such
transferee's income is effectively connected with the conduct of a trade or
business within the United States. A Residual Security is deemed to have tax
avoidance potential unless, at the time of the transfer, (i) the future value of
expected distributions equals at least 30% of the anticipated excess inclusions
after the transfer, and (ii) the transferor reasonably expects that the
transferee will receive sufficient distributions from the REMIC Pool at or after
the time at which the excess inclusions accrue and prior to the end of the next
succeeding taxable year for the accumulated withholding tax liability to be
paid. If the non-U.S. Person transfers the Residual Security back to a U.S.
Person, the transfer will be disregarded and the foreign transferor will
continue to be treated as the owner unless arrangements are made so that the
transfer does not have the effect of allowing the transferor to avoid tax on
accrued excess inclusions.
The Prospectus Supplement relating to the Certificates of a Series may
provide that a Residual Security may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term 'U.S.
Person' means a citizen or resident of the United States, a corporation,
partnership (except as provided in Treasury regulations that may be issued) 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, generally, a trust if a
court within the United States is able to exercise primary supervision over the
administration of such trust, and one or more U.S. Persons have the authority to
control all substantial decisions of such trust (or, to the extent provided in
applicable Treasury regulations, certain trusts in existence on August 20, 1996,
which are eligible to elect to be treated as U.S. Persons).
SALE OR EXCHANGE OF A RESIDUAL SECURITY
Upon the sale or exchange of a Residual Security, the Residual Holder will
recognize gain or loss equal to the excess, if any, of the amount realized over
the adjusted basis (as described above under 'Taxation of Owners of Residual
Securities -- Basis and Losses') of such Residual Holder in such Residual
Security at the time of the sale or exchange. In addition to reporting the
taxable income of the REMIC Pool, a Residual Holder will have taxable income to
the extent that any cash distribution to it
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from the REMIC Pool exceeds such adjusted basis on that Distribution Date. Such
income will be treated as gain from the sale or exchange of the Residual
Holder's Residual Security, in which case, if the Residual Holder has an
adjusted basis in its Residual Security remaining when its interest in the REMIC
Pool terminates, and if it holds such Residual Security as a capital asset under
Code Section 1221, then it will recognize a capital loss at that time in the
amount of such remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income (i) if a Residual Security is held as part of a 'conversion transaction'
as defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of such transaction or (ii) in the case of a non-corporate taxpayer,
to the extent such taxpayer has made an election under Code Section 163(d)(4) to
have net capital gains taxed as investment income at ordinary income rates. In
addition, gain or loss recognized from the sale of a Residual Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities where the seller
of the Residual Security, during the period beginning six months before the sale
or disposition of the Residual Security and ending six months after such sale or
disposition, acquires (or enters into any other transaction that results in the
application of Code Section 1091) any residual interest in any REMIC or any
interest in a 'taxable mortgage pool' (such as a non-REMIC owner trust) that is
economically comparable to a Residual Security.
MARK TO MARKET REGULATIONS
On December 24, 1996, the Internal Revenue Service issued final regulations
(the 'Mark to Market Regulations') under Code Section 475 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 of 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 Residual Security is not
treated as a security and thus may not be marked to market. The Mark to Market
Regulations apply to all Residual Securities acquired on or after January 4,
1995.
TAXES THAT MAY BE IMPOSED ON THE REMIC POOL
PROHIBITED TRANSACTIONS
Income from certain transactions by the REMIC Pool, called prohibited
transactions, will not be part of the calculation of income or loss includible
in the federal income tax returns of Residual Holders, but rather will be taxed
directly to the REMIC Pool at a 100% rate. Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default, or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC Pool,
or (d) a qualified (complete) liquidation, (ii) the receipt of income from
assets that are not the type of mortgages or investments that the REMIC Pool is
permitted to hold, (iii) the receipt of compensation for services, or (iv) the
receipt of gain from disposition of cash flow investments other than pursuant to
a qualified liquidation. Notwithstanding (i) and (iv), it is not a prohibited
transaction to sell REMIC Pool property to prevent a default on Regular
Securities as a result of a default on qualified mortgages or to facilitate a
clean-up call (generally, an optional termination to save administrative costs
when no more than a small percentage of the Securities is outstanding). The
REMIC Regulations indicate that the modification of a Mortgage Loan
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generally will not be treated as a disposition if it is occasioned by a default
or reasonably foreseeable default, an assumption of the Mortgage Loan, the
waiver of a due-on-sale or due-on-encumbrance clause, or the conversion of an
interest rate by a mortgagor pursuant to the terms of a convertible adjustable
rate Mortgage Loan.
CONTRIBUTIONS TO THE REMIC POOL AFTER THE STARTUP DAY
In general, the REMIC Pool will be subject to a tax at a 100% rate on the
value of any property contributed to the REMIC Pool after the Startup Day.
Exceptions are provided for cash contributions to the REMIC Pool (i) during the
three months following the Startup Day, (ii) made to a qualified reserve fund by
a Residual Holder, (iii) in the nature of a guarantee, (iv) made to facilitate a
qualified liquidation or clean-up call, and (v) as otherwise permitted in
Treasury regulations yet to be issued. It is not anticipated that there will be
any contributions to the REMIC Pool after the Startup Day.
NET INCOME FROM FORECLOSURE PROPERTY
The REMIC Pool will be subject of 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. Generally,
property acquired by deed in lieu of foreclosure would be treated as
'foreclosure property' until the close of the third calendar year following the
year of acquisition, with a possible extension. 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.
It is not anticipated that the REMIC Pool will have any taxable net income from
foreclosure property.
LIQUIDATION OF THE REMIC POOL
If a REMIC Pool adopts a plan of complete liquidation, within the meaning
of Code Section 860F(a)(4)(A)(i), which may be accomplished by designating in
the REMIC Pool's final tax return a date on which such adoption is deemed to
occur, and sells all of its assets (other than cash) within a 90-day period
beginning on such date, the REMIC Pool will not be subject to the prohibited
transaction rules on the sale of its assets, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims) to holders of Regular Securities
and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes in
a manner similar to a partnership. The form for such income tax return is Form
1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return. The
Trustee will be required to sign the REMIC Pool's returns. Treasury regulations
provide that, except where there is a single Residual Holder for an entire
taxable year, the REMIC Pool will be subject to the procedural and
administrative rules of the Code applicable to partnerships, including the
determination by the Internal Revenue Service of any adjustments to, among other
things, items of REMIC income, gain, loss, deduction, or credit in a unified
administrative proceeding. The Master Servicer will be obligated to act as 'tax
matters person', as defined in applicable Treasury regulations, with respect to
the REMIC Pool as agent of the Residual Holder holding the largest percentage
interest in the Residual Securities. If the Code or applicable Treasury
regulations do not permit the Master Servicer to act as tax matters person in
its capacity as agent of such Residual Holder, such Residual Holder or such
other person specified pursuant to Treasury regulations will be required to act
as tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate, or trust will be subject to
limitation with respect to certain itemized deductions described in Code Section
67, to the extent that such itemized deductions, in the
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aggregate, do not exceed 2% of the investor's adjusted gross income. In
addition, Code Section 68 provides that itemized deductions otherwise allowable
for a taxable year of an individual taxpayer will be reduced by the lesser of
(i) 3% of the excess, if any, of adjusted gross income over $124,500 for 1998
($62,250 in the case of a married individual filing a separate return) (as
adjusted for inflation for subsequent years), or (ii) 80% of the amount of
itemized deductions otherwise allowable for such year. In the case of a REMIC
Pool, such deductions may include deductions under Code Section 212 for the
Servicing Fee and all administrative and other expenses relating to the REMIC
Pool, or any similar expenses allocated to the REMIC Pool with respect to a
regular interest it holds in another REMIC. Such investors who hold REMIC
Securities either directly or indirectly through certain pass-through entities
may have their pro rata share of such expenses allocated to them as additional
gross income, but may be subject to such limitation on deductions. In addition,
such expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. However, such additional gross income and
limitation on deductions will apply to the allocable portion of such expenses to
holders of Regular Securities, as well as holders of Residual Securities, where
such Regular Securities are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. Unless indicated otherwise in the
applicable Prospectus Supplement, all such expenses will be allocable to the
Residual Securities. In general, such allocable portion will be determined based
on the ratio that a REMIC Securityholder's income, determined on a daily basis,
bears to the income of all holders of Regular Securities and Residual Securities
with respect to a REMIC Pool. As a result, individuals, estates or trusts
holding REMIC Securities (either directly or indirectly through a grantor trust,
partnership, S corporation, REMIC, or certain other pass-through entities
described in the foregoing temporary Treasury regulations) may have taxable
income in excess of the interest income at the pass-through rate on Regular
Securities that are issued in a single class or otherwise consistently with
fixed investment trust status or in excess of cash distributions for the related
period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR SECURITIES
Interest, including original issue discount, distributable to Regular
Securityholders who are non-resident aliens, foreign corporations, or other
non-U.S. Persons (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) 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 Regular Security 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 Regular Security 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 a Regular Security. The term 'Non-U.S.
Person' means any person who is not a U.S. Person.
The IRS recently issued final regulations (the 'New Regulations') which
would provide alternative methods of satisfying the beneficial ownership
certification requirement described above. The New Regulations are effective
January 1, 2000, although valid witholding certificates that are held on
December 31, 1999, remain valid until the earlier of December 31, 2000, or the
due date of expiration of the certificate under the rules as currently in
effect. The New Regulations would require, in the case of Regular Securities
held by a foreign partnership, that (x) the certification described above be
provided by the partners rather than by the foreign partnership and (y) the
partnership provide certain
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information, including a United States taxpayer identification number. A
look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
RESIDUAL SECURITIES
The Conference Committee Report to the 1986 Act indicates that amounts paid
to Residual Holders who are Non-U.S. Persons generally should be treated as
interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Treasury regulations provide that amount distributed to
Residual Holders may qualify as 'portfolio interest', subject to the conditions
described in 'Regular Securities' above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust Estate or
segregated pool of assets therein (as to which a separate REMIC election will be
made), to which the Residual Security relates, consists of obligations issued in
'registered form' within the meaning of Code Section 163(f)(1). Generally,
Mortgage Loans will not be, but regular interests in another REMIC Pool will be,
considered obligations issued in registered form. Furthermore, Residual Holders
will not be entitled to any exemption from the 30% withholding tax (or lower
treaty rate) to the extent of that portion of REMIC taxable income that
constitutes an 'excess inclusion.' See 'Taxation of Owners of Residual
Securities -- Limitations on Offset or Exemption of REMIC Income.' If the
amounts paid to Residual Holders who are Non-U.S. Persons are effectively
connected with the conduct of a trade or business within the United States by
such Non-U.S. Persons, 30% (or lower treaty rate) withholding will not apply.
Instead, the amounts paid to such Non-U.S. Persons will be subject to United
States federal income tax at regular rates. If 30% (or lower treaty rate)
withholding is applicable, such amounts generally will be taken into account for
purposes of withholding only when paid or otherwise distributed (or when the
Residual Security is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See
'Tax-Related Restrictions on Transfer of Residual Securities -- Foreign
Investors' above concerning the disregard of certain transfers having 'tax
avoidance potential.' Investors who are Non-U.S. Persons should consult their
own tax advisors regarding the specific tax consequences to them of owning
Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities to or through certain brokers, may be subject to a
'backup' withholding tax under Code Section 3406 of 31% on 'reportable payments'
(including interest distributions, original issue discount, and, under certain
circumstances, principal distributions) unless the Regular Holder complies with
certain reporting and/or certification procedures, including the provision of
its taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Regular Security, or such Holder is otherwise an exempt
recipient under applicable provisions of the Code. Any amounts to be withheld
from distribution on the Regular Securities would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Holder's federal
income tax liability. The New Regulations change certain of the rules relating
to certain presumptions currently available relating to information reporting
and backup withholding. Non-U.S. Persons are urged to contact their own tax
advisors regarding the application to them of backup withholding and information
reporting.
REPORTING REQUIREMENTS
Reports of accrued interest, original issue discount and information
necessary to compute the accrual of market discount will be made annually to the
Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in Internal Revenue
Service Publication 938 with respect to a particular Series of Regular
Securities. Holders through nominees must request such information from the
nominee.
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The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Holder by the end of the month following the
close of each calendar quarter (41 days after the end of a quarter under
proposed Treasury regulations) in which the REMIC Pool is in existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual Holders,
furnished annually, if applicable, to holders of Regular Securities, and filed
annually with the Internal Revenue Service concerning Code Section 67 expenses
(see 'Limitations on Deduction of Certain Expenses' above) allocable to such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under 'Characterization of Investments in REMIC Securities.'
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each Series of Grantor Trust Securities, Cadwalader,
Wickersham & Taft 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, an
association taxable as a corporation, or a 'taxable mortgage pool' within the
meaning of Code Section 7701(i). Accordingly, each holder of a Grantor Trust
Security generally will be treated as the beneficial owner of an undivided
interest in the Mortgage Loans included in the Grantor Trust Fund.
STANDARD SECURITIES
GENERAL
Where there is no Retained Interest with respect to the Mortgage Loans
underlying the Securities of a Series, and where such Securities are not
designated as 'Stripped Securities', the holder of each such Security in such
Series (referred to herein as 'Standard Securities') will be treated as the
owner of a pro rata undivided interest in the ordinary income and corpus
portions of the Grantor Trust Fund represented by its Standard Security and will
be considered the beneficial owner of a pro rata undivided interest in each of
the Mortgage Loans, subject to the discussion below under 'Recharacterization of
Servicing Fees.' Accordingly, the holder of a Standard Security of a particular
Series will be required to report on its federal income tax return its pro rata
share of the entire income from the Mortgage Loans represented by its Standard
Security, including interest at the coupon rate on such Mortgage Loans, original
issue discount (if any), prepayment fees, assumption fees, and late payment
charges received by the Servicer, in accordance with such Securityholder's
method of accounting. A Securityholder generally will be able to deduct its
share of the Servicing Fee and all administrative and other expenses of the
Trust Estate in accordance with its method of accounting, provided that such
amounts are reasonable compensation for services rendered to that Grantor Trust
Fund. However, investors who are individuals, estates or trusts who own
Securities, either directly or indirectly through certain pass-through entities,
will be subject to limitation with respect to certain itemized deductions
described in Code Section 67, including deductions under Code Section 212 for
the Servicing Fee and all such administrative and other expenses of the Grantor
Trust Fund, to the extent that such deductions, in the aggregate, do not exceed
two percent of an investor's adjusted gross income. In addition, Code Section 68
provides that itemized deductions otherwise allowable for a taxable year of an
individual taxpayer will be reduced by the lesser of (i) 3% of the excess, if
any, of adjusted gross income over $124,500 for 1998 ($62,250 in the case of a
married individual filing a separate return) (in each case, as adjusted for
inflation in subsequent years), or (ii) 80% of the amount of itemized deductions
otherwise allowable for such year. As a result, such investors holding Standard
Securities, directly or indirectly through a pass-through entity, may have
aggregate taxable income in excess of the aggregate amount of cash received on
such Standard
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Securities with respect to interest at the pass-through rate or as discount
income on such Standard Securities. In addition, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the Mortgage Loans
underlying a Series of Securities or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the 'stripped bond' and 'stripped coupon' rules of the Code, as
described below under 'Stripped Securities' and 'Recharacterization of Servicing
Fees', respectively.
TAX STATUS
Cadwalader, Wickersham & Taft has advised the Depositor that:
1. A Standard Security owned by a 'domestic building and loan
association' within the meaning of Code Section 7701(a)(19) will be
considered to represent 'loans. . . secured by an interest in real property
which is. . . residential real property' within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the Mortgage
Loans represented by that Standard Security is of the type described in
such section of the Code.
2. A Standard Security owned by a real estate investment trust will be
considered to represent 'real estate assets' within the meaning of Code
Section 856(c)(4)(A) to the extent that the assets of the related Grantor
Trust Fund consist of qualified assets, and interest income on such assets
will be considered 'interest on obligations secured by mortgages on real
property' to such extent within the meaning of Code Section 856(c)(3)(B).
3. A Standard Security owned by a REMIC will be considered to
represent an 'obligation (including any participation or certificate of
beneficial ownership therein) which is principally secured by an interest
in real property' within the meaning of Code Section 860G(a)(3)(A) to the
extent that the assets of the related Grantor Trust Fund consist of
'qualified mortgages' within the meaning of Code Section 860G(a)(3).
4. A Standard Security owned by a 'financial asset securitization
investment trust' within the meaning of Code Section 860L(a) will be
considered to represent 'permitted assets' within the meaning of Code
Section 860L(c) to the extent that the assets of related Grantor Trust Fund
consist of 'debt instruments' or other permitted assets within the meaning
of Code Section 860L(c).
An issue arises as to whether Buydown Loans may be characterized in
their entirety under the Code provisions cited in clauses 1 and 2 of the
immediately preceding paragraph or whether the amount qualifying for such
treatment must be reduced by the amount of the Buydown Funds. There is
indirect authority supporting treatment of an investment in a Buydown Loan
as entirely secured by real property if the fair market value of the real
property securing the loan exceeds the principal amount of the loan at the
time of issuance or acquisition, as the case may be. There is no assurance
that the treatment described above is proper. Accordingly, Securityholders
are urged to consult their own tax advisors concerning the effects of such
arrangements on the characterization of such Securityholder's investment
for federal income tax purposes.
PREMIUM AND DISCOUNT
Securityholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon initial
acquisition of Standard Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Standard
Security will be determined generally as described above under
'REMICs -- Taxation of Owners of Residual Securities -- Premium.'
Original Issue Discount. The original issue discount rules of Code Section
1271 through 1275 will be applicable to a Securityholder's interest in those
Mortgage Loans as to which the conditions for the application of those sections
are met. Rules regarding periodic inclusion of original issue discount income
are applicable to mortgages of corporations originated after May 27, 1969,
mortgages of noncorporate mortgagors (other than individuals) originated after
July 1, 1982, and mortgages of
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individuals originated after March 2, 1984. Under the OID Regulations, such
original issue discount could arise by the charging of points by the originator
of the mortgages in an amount greater than the statutory de minimis exception,
including a payment of points that is currently deductible by the borrower under
applicable Code provisions or, under certain circumstances, by the presence of
'teaser' rates on the Mortgage Loans. See 'Stripped Securities' below regarding
original issue discount on Stripped Securities.
Original issue discount generally must be reported as ordinary gross income
as it accrues under a constant interest method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
Unless indicated otherwise in the applicable Prospectus Supplement, no
prepayment assumption will be assumed for purposes of such accrual. However,
Code Section 1272 provides for a reduction in the amount of original issue
discount includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue discount, less
prior payments of principal. Accordingly, if such Mortgage Loans acquired by a
Securityholder are purchased at a price equal to the then unpaid principal
amount of such Mortgage Loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of such
Mortgage Loans (i.e., points) will be includible by such holder.
Market Discount. Securityholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under 'REMICs -- Taxation of Owners of Regular Securities -- Market Discount,'
except that the ratable accrual methods described therein will not apply.
Rather, the holder will accrue market discount pro rata over the life of the
Mortgage Loans, unless the constant yield method is elected. Unless indicated
otherwise in the applicable Prospectus Supplement, no prepayment assumption will
be assumed for purposes of such accrual.
RECHARACTERIZATION OF SERVICING FEES
If the servicing fees paid to a Servicer were deemed to exceed reasonable
servicing compensation, the amount of such excess would represent neither income
nor a deduction to Securityholders. In this regard, there are no authoritative
guidelines for federal income tax purposes as to either the maximum amount of
servicing compensation that may be considered reasonable in the context of this
or similar transactions or whether, in the case of Standard Securities, the
reasonableness of servicing compensation should be determined on a weighted
average or loan-by-loan basis. If a loan-by-loan basis is appropriate, the
likelihood that such amount would exceed reasonable servicing compensation as to
some of the Mortgage Loans would be increased. Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ('excess
servicing') will cause the Mortgage Loans to be treated under the 'stripped
bond' rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
Servicer who receives a servicing fee in excess of such amounts would be viewed
as retaining an ownership interest in a portion of the interest payments on the
Mortgage Loans. Under the rules of Code Section 1286, the separation of
ownership of the right to receive some or all of the interest payments on an
obligation from the right to receive some or all of the principal payments on
the obligation would result in treatment of such Mortgage Loans as 'stripped
coupons' and 'stripped bonds.' Subject to the de minimis rule discussed below
under 'Stripped Securities', each stripped bond or stripped coupon could be
considered for this purpose as a non-interest bearing obligation issued on the
date of issue of the Standard Securities, and the original issue discount rules
of the Code would apply to the holder thereof. While Securityholders would still
be treated as owners of beneficial interests in a grantor trust for federal
income tax purposes, the corpus of such trust could be viewed as excluding the
portion of the Mortgage Loans the ownership of which is attributed to the
Servicer, or as including such portion as a second class of equitable interest.
Applicable Treasury regulations treat such an arrangement as a fixed investment
trust, since the multiple classes of trust interests should be treated as merely
facilitating direct investments in the trust
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assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
Securityholder, except that the income reported by a cash method holder may be
slightly accelerated. See 'Stripped Securities' below for a further description
of the federal income tax treatment of stripped bonds and stripped coupons.
SALE OR EXCHANGE OF STANDARD SECURITIES
Upon sale or exchange of a Standard Security, a Securityholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Security. In general, the aggregate adjusted basis will equal
the Securityholder's cost for the Standard Security, exclusive of accrued
interest, increased by the amount of any income previously reported with respect
to the Standard Security and decreased by the amount of any losses previously
reported with respect to the Standard Security and the amount of any
distributions (other than accrued interest) received thereon. Except as provided
above with respect to market discount on any Mortgage Loans, and except for
certain financial institutions subject to the provisions of Code Section 582(c),
any such gain or loss generally would be capital gain or loss if the Standard
Security was held as a capital asset. However, gain on the sale of a Standard
Security will be treated as ordinary income (i) if a Standard Security is held
as part of a 'conversion transaction' as defined in Code Section 1258(c), up to
the amount of interest that would have accrued on the Securityholder's net
investment in the conversion transaction at 120% of the appropriate applicable
Federal rate in effect at the time the taxpayer entered into the transaction
minus any amount previously treated as ordinary income with respect to any prior
disposition of property that was held as part of such transaction or (ii) in the
case of a non-corporate taxpayer, to the extent such taxpayer has made an
election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. Capital gains of noncorporate
taxpayers generally are subject to a lower maximum tax rate (20%) than ordinary
income of such taxpayers (39.6%) for capital assets held for more than one year.
The maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
STRIPPED SECURITIES
GENERAL
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership of
the right to receive some or all of the interest payments results in the
creation of 'stripped bonds' with respect to principal payments and 'stripped
coupons' with respect to interest payments. For purposes of this discussion,
Securities that are subject to those rules will be referred to as 'Stripped
Securities.' The Securities will be subject to those rules if (i) the Depositor
or any of its affiliates retains (for its own account or for purposes of
resale), in the form of Retained Interest or otherwise, an ownership interest in
a portion of the payments on the Mortgage Loans, (ii) the Depositor or any of
its affiliates is treated as having an ownership interest in the Mortgage Loans
to the extent it is paid (or retains) servicing compensation in an amount
greater than reasonable consideration for servicing the Mortgage Loans (see
'Standard Securities -- Recharacterization of Servicing Fees' above), and (iii)
a Class of Securities are issued in two or more Classes or Subclasses
representing the right to non-pro-rata percentages of the interest and principal
payments on the Mortgage Loans.
In general, a holder of a Stripped Security will be considered to own
'stripped bonds' with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or 'stripped coupons' with respect
to its pro rata share of all or a portion of the interest payments on each
Mortgage Loan, including the Stripped Security's allocable share of the
servicing fees paid to a Servicer, to the extent that such fees represent
reasonable compensation for services rendered. See the discussion above under
'Standard Securities -- Recharacterization of Servicing Fees.' Although not free
from doubt, for purposes of reporting to Stripped Securityholders, the servicing
fees will be allocated to the classes of Stripped Securities in proportion to
the distributions to such Classes for the related period or
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periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
'Standard Securities -- General,' subject to the limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
an obligation issued on the date that such stripped interest is purchased.
Although the treatment of Stripped Securities for federal income tax purposes is
not clear in certain respects, particularly where such Stripped Securities are
issued with respect to a Mortgage Pool containing variable-rate Mortgage Loans,
the Depositor has been advised by counsel that (i) the Grantor Trust Fund will
be treated as a grantor trust under subpart E, Part I of subchapter J of the
Code and not as an association taxable as a corporation or a 'taxable mortgage
pool' within the meaning of Code Section 7701(i), and (ii) each Stripped
Security should be treated as a single installment obligation for purposes of
calculating original issue discount and gain or loss on disposition. This
treatment is based on the interrelationship of Code Section 1286, Code Sections
1272 through 1275, and the OID Regulations. Although it is possible that
computations with respect to Stripped Securities could be made in one of the
ways described below under 'Possible Alternative Characterizations,' the OID
Regulations state, in general, that two or more debt instruments issued by a
single issuer to a single investor in a single transaction should be treated as
a single debt instrument. Accordingly, for original issue discount purposes, all
payments on any Stripped Securities should be aggregated and treated as though
they were made on a single debt instrument. The Pooling and Servicing Agreement
will require that the Trustee make and report all computations described below
using this aggregate approach, unless substantial legal authority requires
otherwise.
Furthermore, Treasury regulations provide for treatment of a Stripped
Security as a single debt instrument issued on the date it is purchased for
purposes of calculating any original issue discount. In addition, under such
regulations, a Stripped Security that represents a right to payments of both
interest and principal may be viewed either as issued with original issue
discount or market discount (as described below), at a de minimis original issue
discount, or, presumably, at a premium. This treatment indicates that the
interest component of such a Stripped Security would be treated as qualified
stated interest under the OID Regulations, assuming it is not an interest-only
or super-premium Stripped Security. Further, these regulations provide that the
purchaser of such a Stripped Security will be required to account for any
discount as market discount rather than original issue discount if either (i)
the initial discount with respect to the Stripped Security was treated as zero
under the de minimis rule, or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such market
discount would be reportable as described above under 'REMICs -- Taxation of
Owners of Regular Securities -- Market Discount,' without regard to the de
minimis rule therein, assuming that a prepayment assumption is employed in such
computation.
STATUS OF STRIPPED SECURITIES
No specific legal authority exists as to whether the character of the
Stripped Securities, for federal income tax purposes, will be the same as that
of the Mortgage Loans. Although the issue is not free from doubt, counsel has
advised the Depositor that Stripped Securities owned by applicable holders
should be considered to represent 'real estate assets' within the meaning of
Code Section 856(c)(4)(A), 'obligation[s]. . . principally secured by an
interest in real property' within the meaning of Code Section 860G(a)(3)(A), and
'loans. . . secured by an interest in real property' within the meaning of Code
Section 7701(a)(19)(C)(v), and interest (including original issue discount)
income attributable to Stripped Securities should be considered to represent
'interest on obligations secured by mortgages on real property' within the
meaning of Code Section 856(c)(3)(B), provided that in each case the Mortgage
Loans and interest on such Mortgage Loans qualify for such treatment. The
application of such Code provisions to Buydown Loans is uncertain. See 'Standard
Securities -- Tax Status' above.
TAXATION OF STRIPPED SECURITIES
Original Issue Discount. Except as described above under 'General,' each
Stripped Security will be considered to have been issued at an original issue
discount for federal income tax purposes. Original issue discount with respect
to a Stripped Security must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the compounding
of interest, which
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may be prior to the receipt of the cash attributable to such income. Based in
part on the issue discount required to be included in the income of a holder of
a Stripped Security (referred to in this discussion as a 'Stripped
Securityholder') in any taxable year likely will be computed generally as
described above under 'REMICs -- Taxation of Owner of Regular
Securities -- Original Issue Discount' and ' -- Variable Rate Regular
Securities.' However, with the apparent exception of a Stripped Security
qualifying as a market discount obligation as described above under
' -- General,' the issue price of a Stripped Security will be the purchase price
paid by each holder thereof, and the stated redemption price at maturity will
include the aggregate amount of the payments to be made on the Stripped Security
to such Securityholder, presumably under the Prepayment Assumption, other than
qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Securityholder's recognition of original
issue discount will be either accelerated or decelerated and the amount of such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each Mortgage Loan represented
by such Securityholder's Stripped Security. While the matter is not free from
doubt, the holder of a Stripped Security should be entitled in the year that it
becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize a
loss (which may be a capital loss) equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all
of the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Loans are prepaid could lead to the interpretation that
such interest payments are 'contingent' within the meaning of the OID
Regulations. The OID Regulations, as they relate to the treatment of contingent
interest, are by their terms not applicable to prepayable securities such as the
Stripped Securities. However, if final regulations dealing with contingent
interest with respect to the Stripped Securities apply the same principles as
the OID Regulations, such regulations may lead to different timing of income
inclusion that would be the case under the OID Regulations. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Stripped Securities as ordinary income. Investors
should consult their tax advisors regarding the appropriate tax treatment of
Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Securityholder's
adjusted basis in such Stripped Security, as described above under 'REMICs --
Taxation of Owners of Regular Securities -- Sale or Exchange of Regular
Securities.' To the extent that a subsequent purchaser's purchase price is
exceeded by the remaining payments on the Stripped Securities, such subsequent
purchaser will be required for federal income tax purposes to accrue and report
such excess as if it were original issue discount in the manner described above.
It is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Securityholder other than an original Securityholder
should be the Prepayment Assumption or a new rate based on the circumstances at
the date of subsequent purchase.
Purchase of More Than One Class of Stripped Securities. When an investor
purchases more than one Class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such Classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Possible Alternative Characterization. The characterizations of the
Stripped Securities discussed above are not the only possible interpretations of
the applicable Code provisions. For example, the Securityholder may be treated
as the owner of (i) one installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to principal on each
Mortgage Loan and a second installment obligation consisting of such Stripped
Security's pro rata share of the payments attributable to interest on each
Mortgage Loan, (ii) as many stripped bonds or stripped coupons as there are
scheduled payments of principal and/or interest on each Mortgage Loan, or (iii)
a separate installment obligation for each Mortgage Loan, representing the
Stripped Security's pro rata share of payments of principal and/or interest to
be made with respect thereto. Alternatively, the holder of one or more Classes
of Stripped Securities may be treated as the owner of a pro rata fractional
undivided interest in each Mortgage Loan to the extent that such Stripped
Security, or Classes of Stripped Securities in the
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aggregate, represent the same pro rata portion of principal and interest on each
such Mortgage Loan, and a stripped bond or stripped coupon (as the case may be),
treated as an installment obligation or contingent payment obligation, as to the
remainder. Treasury regulations regarding original issue discount on stripped
obligations make the foregoing interpretations less likely to be applicable. The
preamble to such regulations states that they are premised on the assumption
that an aggregation approach is appropriate for determining whether original
issue discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Securityholders are
urged to consult their own tax advisors regarding the proper treatment of
Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder at any time during such year, such
information (prepared on the basis described above) as is necessary to enable
such Securityholder to prepare its federal income tax returns. Such information
will include the amount of original issue discount accrued on Securities held by
persons other than Securityholders exempted from the reporting requirements.
However, the amount required to be reported by the Trustee may not be equal to
the proper amount of original issue discount required to be reported as taxable
income by a Securityholder, other than an original Securityholder that purchased
at the issue price. In particular, in the case of Stripped Securities, unless
provided otherwise in the applicable Prospectus Supplement, such reporting will
be based upon a representative initial offering price of each Class of Stripped
Securities. The Trustee will also file such original issue discount information
with the Internal Revenue Service. If a Securityholder fails to supply an
accurate taxpayer identification number or if the Secretary of the Treasury
determines that a Securityholder has not reported all interest and dividend
income required to be shown on his federal income tax return, 31% backup
withholding may be required in respect of any reportable payments, as described
above under 'REMICs -- Backup Withholding.'
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount paid
by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. persons generally
will be subject to 30% United States withholding tax, or such lower rate as may
be provided for interest by an applicable tax treaty. Accrued original issue
discount recognized by the Securityholder on the sale or exchange of such a
Security also will be subject to federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
'portfolio interest' and will be treated in the manner, and such persons will be
subject to the same certification requirements, described above under
'REMICs -- Taxation of Certain Foreign Investors -- Regular Securities.'
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS
With respect to each Series of Partnership Securities or Debt Securities,
Cadwalader, Wickersham & Taft will deliver its opinion that the Trust Fund will
not be a taxable mortgage pool or an association (or publicly traded
partnership) taxable as a corporation for federal income tax purposes. This
opinion will be based on the assumption that the terms of the related Pooling
and Servicing Agreement and related documents will be complied with, and on
counsel's conclusion that the nature of the income of the Trust Fund will exempt
it from the rule that certain publicly traded partnerships are taxable as
corporations.
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CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT SECURITIES
For federal income tax purposes, (i) Partnership Securities and Debt
Securities held by a thrift institution taxed as a domestic building and loan
association will not constitute 'loans . . . secured by an interest in real
property which is. . . residential real property' within the meaning of Code
Section 7701(a)(19)(C)(v) and (ii) interest on Debt Securities held by a real
estate investment trust will not be treated as 'interest on obligations secured
by mortgages on real property or on interests in real property' within the
meaning of Code Section 856(c)(3)(B), and Debt Securities held by a real estate
investment trust will not constitute 'real estate assets' within the meaning of
Code Section 856(c)(4)(A), but Partnership Securities held by a real estate
investment trust will qualify under those sections based on the real estate
investments trust's proportionate interest in the assets of the Partnership
Trust Fund based on capital accounts.
TAXATION OF DEBT SECURITYHOLDERS
TREATMENT OF THE DEBT SECURITIES AS INDEBTEDNESS
The Depositor will agree, and the Securityholders will agree by their
purchase of Debt Securities, to treat the Debt Securities as debt for federal
income tax purposes. No regulations, published rulings, or judicial decisions
exist that discuss the characterization for federal income tax purposes of
securities with terms substantially the same as the Debt Securities. However,
with respect to each Series of Debt Securities, Cadwalader, Wickersham & Taft
will deliver its opinion that the Debt Securities will be classified as
indebtedness for federal income tax purposes. The discussion below assumes this
characterization of the Debt Securities is correct.
If, contrary to the opinion of counsel, the IRS successfully asserted that
the Debt Securities were not debt for federal income tax purposes, the Debt
Securities might be treated as equity interests in the Partnership Trust, and
the timing and amount of income allocable to holders of such Debt Securities may
be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that (i) income
reportable on Debt Securities is not required to be reported under the accrual
method unless the holder otherwise uses the accrual method and (ii) the special
rule treating a portion of the gain on sale or exchange of a Regular Security as
ordinary income is inapplicable to Debt Securities. See 'REMICs -- Taxation of
Owners of Regular Securities' and ' -- Sale or Exchange of Regular Securities.'
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP
If so specified in the applicable Prospectus Supplement, the Depositor will
agree, and the Securityholders will agree by their purchase of Securities, to
treat the Partnership Trust Fund (i) as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
Partnership Trust Fund, the partners of the partnership being the
Securityholders (including the Depositor), and the Debt Securities (if any)
being debt of the partnership or (ii) if a single beneficial owner owns all of
the Partnership Securities in a Trust Fund, the Trust Fund will be ignored for
federal income tax purposes and the assets and Debt Securities of the Trust Fund
will be treated as assets and indebtedness of such owner.
A variety of alternative characterizations are possible. For example,
because one or more of the classes of Partnership Securities have certain
features characteristic of debt, the Partnership Securities might be considered
debt of the Depositor or the Partnership Trust Fund. Any such characterization
would not result in materially adverse tax consequences to Securityholders as
compared to the consequences from treatment of the Partnership Securities as
equity in a partnership, described below. The following discussion assumes that
the Partnership Securities represent equity interests in a partnership.
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PARTNERSHIP TAXATION
As a partnership, the Partnership Trust Fund will not be subject to federal
income tax. Rather, each Securityholder will be required to separately take into
account such holder's allocated share of income, gains, losses, deductions and
credits of the Partnership Trust Fund. It is anticipated that the Partnership
Trust Fund's income will consist primarily of interest earned on the Mortgage
Loans (including appropriate adjustments for market discount, original issue
discount and bond premium) as described above under ' -- Grantor Trust
Funds -- Standard Securities -- General,' and ' -- Premium and Discount') and
any gain upon collection or disposition of Mortgage Loans. The Partnership Trust
Fund's deductions will consist primarily of interest accruing with respect to
the Debt Securities, servicing and other fees, and losses or deductions upon
collection or disposition of Debt Securities.
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Pooling and Servicing Agreement and related documents). The Pooling and
Servicing Agreement will provide, in general, that the Securityholders will be
allocated taxable income of the Partnership Trust Fund for each Due Period equal
to the sum of (i) the interest that accrues on the Partnership Securities in
accordance with their terms for such Due Period, including interest accruing at
the applicable pass-through rate for such Due Period and interest on amounts
previously due on the Partnership Securities but not yet distributed; (ii) any
Partnership Trust Fund income attributable to discount on the Mortgage Loans
that corresponds to any excess of the principal amount of the Partnership
Securities over their initial issue price; and (iii) any other amounts of income
payable to the Securityholders for such Due Period. Such allocation will be
reduced by any amortization by the Partnership Trust Fund of premium on Mortgage
Loans that corresponds to any excess of the issue price of Partnership
Securities over their principal amount. All remaining taxable income or net loss
of the Partnership Trust Fund will be allocated to the Depositor. Based on the
economic arrangement of the parties, this approach for allocating Partnership
Trust Fund income should be permissible under applicable Treasury regulations,
although no assurance can be given that the IRS would not require a greater
amount of income to be allocated to Securityholders. Moreover, even under the
foregoing method of allocation, Securityholders may be allocated income equal to
the entire pass-through rate plus the other items described above even though
the Trust Fund might not have sufficient cash to make current cash distributions
of such amount. Thus, cash basis holders will in effect be required to report
income from the Partnership Securities on the accrual basis and Securityholders
may become liable for taxes on Partnership Trust Fund income even if they have
not received cash from the Partnership Trust Fund to pay such taxes.
All of the taxable income allocated to a Securityholder that is a pension,
profit-sharing or employee benefit plan or other tax-exempt entity (including an
individual retirement account) will constitute 'unrelated business taxable
income' generally taxable to such a holder under the Code.
A share of expenses of the Partnership Trust Fund (including fees of the
Master Servicer but not interest expense) allocable to an individual, estate or
trust Securityholder would be miscellaneous itemized deductions subject to the
limitations described above under ' -- Grantor Trust Funds -- Standard
Securities -- General.' Accordingly, such deductions might be disallowed to the
individual in whole or in part and might result in such holder being taxed on an
amount of income that exceeds the amount of cash actually distributed to such
holder over the life of the Partnership Trust Fund.
Discount income or premium amortization with respect to each Mortgage Loan
would be calculated in a manner similar to the description above under
' -- Grantor Trust Funds -- Standard Securities -- General' and ' -- Premium and
Discount.' Notwithstanding such description, it is intended that the Partnership
Trust Fund will make all tax calculations relating to income and allocations to
Securityholders on an aggregate basis with respect to all Mortgage Loans held by
the Partnership Trust Fund rather than on a Mortgage Loan-by-Mortgage Loan
basis. If the IRS were to require that such calculations be made separately for
each Mortgage Loan, the Partnership Trust Fund might be required to incur
additional expense, but it is believed that there would not be a material
adverse effect on Securityholders.
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DISCOUNT AND PREMIUM
Unless indicated otherwise in the applicable Prospectus Supplement, it is
not anticipated that the Mortgage Loans will have been issued with original
issue discount and, therefore, the Partnership Trust Fund should not have
original issue discount income. However, the purchase price paid by the
Partnership Trust Fund for the Mortgage Loans may be greater or less than the
remaining principal balance of the Mortgage Loans at the time of purchase. If
so, the Mortgage Loans will have been acquired at a premium or discount, as the
case may be. See 'Grantor Trust Funds -- Standard Securities -- Premium and
Discount.' (As indicated above, the Partnership Trust Fund will make this
calculation on an aggregate basis, but might be required to recompute it on a
Mortgage Loan-by-Mortgage Loan basis).
If the Partnership Trust Fund acquires the Mortgage Loans at a market
discount or premium, the Partnership Trust Fund will elect to include any such
discount in income currently as it accrues over the life of the Mortgage Loans
or to offset any such premium against interest income on the Mortgage Loans. As
indicated above, a portion of such market discount income or premium deduction
may be allocated to Securityholders.
SECTION 708 TERMINATION
Under Section 708 of the Code, the Partnership Trust Fund will be deemed to
terminate for federal income tax purposes if 50% or more of the capital and
profits interests in the Partnership Trust Fund are sold or exchanged within a
12-month period. Such a termination would cause a deemed contribution of the
assets of a Partnership Trust Fund (the 'old partnership') to a new Partnership
Trust Fund (the 'new partnership') in exchange for interests in the new
partnership. Such interests would be deemed distributed to the partners of the
old partnership in liquidation thereof, which would not constitute a sale or
exchange. The Partnership Trust Fund will not comply with certain technical
requirements that might apply when such a constructive termination occurs. As a
result, the Partnership Trust Fund may be subject to certain tax penalties and
may incur additional expenses if it is required to comply with those
requirements. Furthermore, the Partnership Trust Fund might not be able to
comply due to lack of data.
DISPOSITION OF SECURITIES
Generally, capital gain or loss will be recognized on a sale of Partnership
Securities in an amount equal to the difference between the amount realized and
the seller's tax basis in the Partnership Securities sold. A Securityholder's
tax basis in a Partnership Security will generally equal the holder's cost
increased by the holder's share of Partnership Trust Fund income (includible in
income) and decreased by any distributions received with respect to such
Partnership Security. In addition, both the tax basis in the Partnership
Securities and the amount realized on a sale of a Partnership Security would
include the holder's share of the Debt Securities and other liabilities of the
Partnership Trust Fund. A holder acquiring Partnership Securities at different
prices may be required to maintain a single aggregate adjusted tax basis in such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, allocate a portion of such aggregate tax basis to the
Partnership Securities sold (rather than maintaining a separate tax basis in
each Partnership Security for purposes of computing gain or loss on a sale of
that Partnership Security).
Any gain on the sale of a Partnership Security attributable to the holder's
share of unrecognized accrued market discount on the Mortgage Loans would
generally be treated as ordinary income to the holder and would give rise to
special tax reporting requirements. The Partnership Trust Fund does not expect
to have any other assets that would give rise to such special reporting
considerations. Thus, to avoid those special reporting requirements, the
Partnership Trust Fund will elect to include market discount in income as it
accrues.
If a Securityholder is required to recognize an aggregate amount of income
(not including income attributable to disallowed itemized deductions described
above) over the life of the Partnership Securities that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Partnership Securities.
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ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership Trust Fund's taxable income and losses will be
determined each Due Period and the tax items for a particular Due Period will be
apportioned among the Securityholders in proportion to the principal amount of
Partnership Securities owned by them as of the close of the last day of such Due
Period. As a result, a holder purchasing Partnership Securities may be allocated
tax items (which will affect its tax liability and tax basis) attributable to
periods before the actual transaction.
The use of such a Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Partnership Trust Fund might be reallocated among the Securityholders.
The Depositor will be authorized to revise the Partnership Trust Fund's method
of allocation between transferors and transferees to conform to a method
permitted by future regulations.
SECTION 731 DISTRIBUTIONS
In the case of any distribution to a Securityholder, no gain will be
recognized to that Securityholder to the extent that the amount of any money
distributed with respect to such Security exceeds the adjusted basis of such
Securityholder's interest in the Security. To the extent that the amount of
money distributed exceeds such Securityholder's adjusted basis, gain will be
currently recognized. In the case of any distribution to a Securityholder, no
loss will be recognized except upon a distribution in liquidation of a
Securityholder's interest. Any gain or loss recognized by a Securityholder will
be capital gain or loss.
SECTION 754 ELECTION
In the event that a Securityholder sells its Partnership Securities at a
profit (loss), the purchasing Securityholder will have a higher (lower) basis in
the Partnership Securities than the selling Securityholder had. The tax basis of
the Partnership Trust Fund's assets would not be adjusted to reflect that higher
(or lower) basis unless the Partnership Trust Fund were to file an election
under Section 754 of the Code. In order to avoid the administrative complexities
that would be involved in keeping accurate accounting records, as well as
potentially onerous information reporting requirements, the Partnership Trust
Fund will not make such election. As a result, Securityholders might be
allocated a greater or lesser amount of Partnership Trust Fund income than would
be appropriate based on their own purchase price for Partnership Securities.
ADMINISTRATIVE MATTERS
The Trustee is required to keep or have kept complete and accurate books of
the Partnership Trust Fund. Such books will be maintained for financial
reporting and tax purposes on an accrual basis and the fiscal year of the
Partnership Trust Fund will be the calendar year. The Trustee will file a
partnership information return (IRS Form 1065) with the IRS for each taxable
year of the Partnership Trust Fund and will report each Securityholder's
allocable share of items of Partnership Trust Fund income and expense to holders
and the IRS on Schedule K-1. The Trustee will provide the Schedule K-1
information to nominees that fail to provide the Partnership Trust Fund with the
information statement described below and such nominees will be required to
forward such information to the beneficial owners of the Partnership Securities.
Generally, holders must file tax returns that are consistent with the
information return filed by the Partnership Trust Fund or be subject to
penalties unless the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership
Securities as a nominee at any time during a calendar year is required to
furnish the Partnership Trust Fund with a statement containing certain
information on the nominee, the beneficial owners and the Partnership Securities
so held. Such information includes (i) the name, address and taxpayer
identification number of the nominee and (ii) as to each beneficial owner (x)
the name, address and identification number of such person, (y) whether such
person is a United States person, a tax-exempt entity or a foreign government,
an international organization, or any wholly-owned agency or instrumentality of
either of the foregoing,
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and (z) certain information on Partnership Securities that were held, bought or
sold on behalf of such person throughout the year. In addition, brokers and
financial institutions that hold Partnership Securities through a nominee are
required to furnish directly to the Trustee information as to themselves and
their ownership of Partnership Securities. A clearing agency registered under
Section 17A of the Exchange Act is not required to furnish any such information
statement to the Partnership Trust Fund. The information referred to above for
any calendar year must be furnished to the Partnership Trust Fund on or before
the following January 31. Nominees, brokers and financial institutions that fail
to provide the Partnership Trust Fund with the information described above may
be subject to penalties.
The Depositor will be designated as the tax matters partner in the Pooling
and Servicing Agreement and, as such, will be responsible for representing the
Securityholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire until three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Partnership Trust Fund by the appropriate taxing
authorities could result in an adjustment of the returns of the Securityholders,
and, under certain circumstances, a Securityholder may be precluded from
separately litigating a proposed adjustment to the items of the Partnership
Trust Fund. An adjustment could also result in an audit of a Securityholder's
returns and adjustments of items not related to the income and losses of the
Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN SECURITYHOLDERS
It is not clear whether the Partnership Trust Fund would be considered to
be engaged in a trade or business in the United States for purposes of federal
withholding taxes with respect to Non-U.S. Persons, because there is no clear
authority dealing with that issue under facts substantially similar to those
described herein. However, for taxable years of a Partnership Trust Fund
commencing on or after January 1, 1998, securityholders who are Non-U.S. Persons
would in any event not be treated as engaged in a trade or business in the
United States if holding such Security (or other investing or trading in stock
or securities for the Holder's own account) is the only activity of the
securityholder within the United States and the securityholder is not a dealer
in securities. Accordingly, such securityholders will not be subject to
withholding tax pursuant to Section 1446 of the Code, at a rate of 35% for
Non-U.S. Persons that are taxable as corporations and 39.6% for all other
foreign holders. The Prospectus Supplement for an applicable Series will
describe whether an exception to the 30% United States withholding tax on
interest may apply to securityholders.
BACKUP WITHHOLDING
Distributions made on the Partnership Securities and proceeds from the sale
of the Partnership Securities will be subject to a 'backup' withholding tax of
31% if, in general, the Securityholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
THE FEDERAL TAX DISCUSSIONS SET FORTH ABOVE ARE INCLUDED FOR GENERAL
INFORMATION ONLY AND MAY NOT BE APPLICABLE DEPENDING UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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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 the discussion above 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
Title I of the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), and Section 4975 of the Code impose certain requirements on
retirement plans and on certain other employee benefit plans and arrangements
(including for this purpose individual retirement accounts and annuities and
Keogh plans) which are subject thereto and on bank collective investment funds
and insurance company general and separate accounts in which such plans,
accounts or arrangements are invested (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 Securities 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.
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 that participate in 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 Section 4975 of the Code with respect to
a Plan that purchases 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. 'SS'2510.3-101 (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 (such as a Trust Fund), 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) of 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. Because of the factual nature of certain of the rules set forth therein,
neither Plans nor persons investing plan assets should acquire or hold
Securities in reliance upon the availability of any exception under the DOL
Regulations.
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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 or holding of Notes by or on behalf of a Plan could be
considered to result in a prohibited transaction if the Issuer, the holder of an
Equity Certificate or any of their respective affiliates is or becomes a Party
in Interest with respect to such Plan, or if the Depositor, the Master Servicer,
the Indenture Trustee or the Owner Trustee has investment authority with respect
to the assets of 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 assets included in a Trust Fund constitute plan assets, the
purchase or holding 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 25, 1990 to PaineWebber Incorporated, which generally exempts from the
application of the prohibited transaction provisions of Section 406 of ERISA,
and the excise taxes and civil penalties 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 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 Ratings Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch Investors Service, L.P. (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 obligor 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
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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) certificates 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 Certificates by or on behalf of a Plan or
with plan assets; and (iii) certificates evidencing interests in such other
investment pools must have been purchased by investors other than Plans for at
least one year prior to any acquisition of Certificates 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 extent that Certificates are
subordinate, the Exemption will not apply to an investment by a Plan. In
addition, the Exemption will not apply to an investment by a Plan during a
Funding Period unless certain additional conditions specified in the related
Prospectus Supplement are satisfied. Furthermore, 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) an obligor 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 related Trust
Fund. 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 related Trust Fund, 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 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.
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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 and other applicable
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 investor using plan
assets 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 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, including the prohibited transaction provisions
thereof, and Section 4975 of 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. The DOL proposed such
regulations on December 22, 1997, but they have not yet been finalized.
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 Section 4975 of 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 Securities offered thereby.
LEGAL INVESTMENT
The Prospectus Supplement 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
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Mortgage Market Enhancement Act of 1984, as amended ('SMMEA'). 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 securities' for
purposes of SMMEA. The appropriate characterization of those Securities not
qualifying as 'mortgage related securities' ('Non-SMMEA Securities') under
various legal investment restrictions, and thus the ability of investors subject
to these restrictions to purchase such Securities, may be subject to significant
interpretive uncertainties. Accordingly, investors whose investment authority is
subject to legal restrictions should consult their own legal advisors to
determine whether and to what extent the Non-SMMEA Securities constitute legal
investments for them.
Classes of Securities qualifying as 'mortgage related securities' will
constitute legal investments for persons, trusts, corporations, partnerships,
associations, business trusts and business entities (including, but not limited
to, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems) created pursuant to or existing under the laws of
the United States or of any state (including the District of Columbia and Puerto
Rico) whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality
thereof constitute legal investments for such entities. Pursuant to SMMEA, a
number of states enacted legislation, on or before the October 3, 1991 cutoff
for such enactments, limiting to varying extents the ability of certain entities
(in particular, insurance companies) to invest in 'mortgage related securities'
secured by liens on residential, or mixed residential and commercial properties,
in most cases by requiring the affected investors to rely solely upon existing
state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in Securities qualifying as 'mortgage
related securities' only to the extent provided in such legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks may invest in, sell or otherwise deal in 'mortgage related
securities' without limitation as to the percentage of their assets represented
thereby, federal credit unions may invest in such securities, and national banks
may purchase such securities for their own account without regard to the
limitations generally applicable to investment securities set forth in 12
U.S.C. 'SS' 24 (Seventh), subject in each case to such regulations as the
applicable federal regulatory authority may prescribe. In this connection, the
Office of the Comptroller of the Currency (the 'OCC') amended 12 C.F.R. Part 1
to authorize national banks to purchase and sell for their own account, without
limitation as to a percentage of the bank's capital and surplus (but subject to
compliance with certain general standards in 12 C.F.R. 'SS' 1.5 concerning
'safety and soundness' and retention of credit information), certain 'Type IV
securities,' defined in 12 C.F.R. 'SS' 1.2(l) to include certain 'residential
mortgage-related securities.' As so defined, 'residential mortgage-related
security' means, in relevant part, 'mortgage related security' within the
meaning of SMMEA. The National Credit Union Administration ('NCUA') has adopted
rules, codified at 12 C.F.R. Part 703, which permit federal credit unions to
invest in 'mortgage related securities' under certain limited circumstances,
other than stripped mortgage related securities and residual interests in
mortgage related securities, unless the credit union has obtained written
approval from the NCUA to participate in the 'investment pilot program'
described in 12 C.F.R. 'SS' 703.140.
All depository institutions considering an investment in the Securities
should review the 'Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities' (the '1998 Policy Statement') of the Federal
Financial Institutions Examination Council ('FFIEC') which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the OCC and the Office of Thrift Supervision effective
May 26, 1998, and by the NUCA, effective October 1, 1998. The 1998 Policy
statement sets forth general guidelines which depository institutions must
follow in managing risks (including market, credit, liquidity, operational
(transaction), and legal risks) applicable to all securities (including mortgage
pass-through securities and mortgage-derivative products) used for investment
purposes. Until October 1, 1998, federal credit unions will still be subject to
the FFIEC's now-superseded 'Supervisory Policy Statement on Securities
Activities' dated January 28, 1992, as adopted by NCUA with certain
modifications, which prohibited
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depository institutions from investing in certain 'high-risk mortgage
securities' except under limited circumstances, and set forth certain investment
practices deemed to be unsuitable for regulated institutions.
Institutions whose investment activities are subject to regulation by
federal or state authorities should review rules, policies and guidelines
adopted from time to time by such authorities before purchasing any Securities,
as certain Series or classes may be deemed unsuitable investments, or may
otherwise be restricted, under such rules, policies or guidelines (in certain
instances irrespective of SMMEA).
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to, 'prudent investor' provisions, percentage-of-assets limits, provisions which
may restrict or prohibit investment in securities which are not 'interest
bearing' or 'income paying,' and, with regard to any Securities issued in
book-entry form, provisions which may restrict or prohibit investments in
securities which are issued in book-entry form.
Except as to the status of certain classes of Securities as 'mortgage
related securities,' no representation is made as to the proper characterization
of the Securities for legal investment purposes, financial institution
regulatory purposes, or other purposes, or as to the ability of particular
investors to purchase Securities under applicable legal investment restrictions.
The uncertainties described above (and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the Securities) may adversely affect the liquidity of the Securities.
Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult their own legal advisors in determining
whether and to what extent the Securities 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.
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.
131
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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 Cadwalader, Wickersham & Taft, New York, New York.
FINANCIAL INFORMATION
A new Trust Fund will be formed with respect to each Series of Securities
and no Trust Fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related Series of Securities.
Accordingly, no financial statements with respect to any Trust Fund will be
included in this Prospectus or in the related Prospectus Supplement.
RATING
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 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.
132
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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 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 Security of the related Series.
133
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INDEX OF DEFINED TERMS
<TABLE>
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<S> <C>
-1-
1998 Policy Statement.......................................................................130
-4-
401(c) Regulations ........................................................................ 129
-A-
Accrual Securities ...................................................................... 7, 40
Accrued Security Interest .................................................................. 47
Administration Fee Rate .................................................................... 59
Advance ................................................................................ 11, 51
Agency Securities ........................................................................... 1
Agreement ............................................................................... 5, 39
ARM Loans .................................................................................. 21
Assumed Reinvestment Rate .................................................................. 47
Available Distribution Amount .............................................................. 48
Available Subordination Amount ............................................................. 50
-B-
Bankruptcy Code..............................................................................75
BIF ........................................................................................ 36
Book-Entry Securities ...................................................................... 54
Buydown Funds .............................................................................. 96
Buydown Loans .............................................................................. 24
Buydown Period ............................................................................. 24
-C-
Cash Flow Value ............................................................................ 47
CEDEL Participants ......................................................................... 55
CERCLA ................................................................................. 17, 92
Certificates ............................................................................. 1, 5
Charter Act ................................................................................ 27
Class Exemptions .......................................................................... 129
Code .................................................................................... 7, 94
Collateral Value ........................................................................... 25
Commission .................................................................................. 2
Conservation Act ........................................................................... 92
Cooperative ............................................................................. 9, 20
Cooperative Housing Corp. .................................................................. 79
Cooperative Loans ....................................................................... 9, 20
Cooperative Notes .......................................................................... 23
Cooperative Unit ........................................................................... 20
Corporate Trust Office ..................................................................... 39
Credit Insurance Instrument ................................................................ 57
Cumulative Subordination Payments .......................................................... 50
Cut-off Date ................................................................................ 8
-D-
Debt Securities............................................................................. 94
Defective Obligation ....................................................................... 95
Deficiency Event ........................................................................... 63
Definitive Security ........................................................................ 54
Deposit Period ............................................................................. 51
</TABLE>
134
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<S> <C>
Depositor ................................................................................... 5
Disqualified Organization ................................................................. 108
Disqualified Persons.........................................................................26
Distribution Date ....................................................................... 7, 45
DOL ....................................................................................... 126
DOL Regulations ........................................................................... 126
DTC .................................................................................... 18, 54
Due Period ................................................................................. 48
due-on-sale provision clause ........................................................... 33, 82
due-on-encumbrance clause .................................................................. 33
-E-
EDGAR ....................................................................................... 3
Environmental Lien ......................................................................... 92
Equity Certificates ..................................................................... 5, 39
equity interest ........................................................................... 127
equity of redemption ....................................................................... 85
ERISA ................................................................................. 12, 126
Euroclear Cooperative ...................................................................... 55
Euroclear Participants ..................................................................... 55
European Depositaries ...................................................................... 54
Events of Default .......................................................................... 64
excess inclusion .......................................................................... 106
excess servicing .......................................................................... 116
Excluded Plan ............................................................................. 128
Exemption ................................................................................. 127
Exemption Rating Agencies ................................................................. 127
-F-
FDIC ....................................................................................... 36
FFIEC ..................................................................................... 130
FHA ........................................................................................ 10
FHA Loans .................................................................................. 22
FHLMC ................................................................................... 1, 10
FHLMC Act .................................................................................. 28
FHLMC Certificate Group .................................................................... 28
FHLMC Certificates ..................................................................... 10, 26
Final Distribution Date .................................................................... 46
Financial Intermediary ..................................................................... 54
FNMA .................................................................................... 1, 10
FNMA Certificates ...................................................................... 10, 26
FTC Rule ................................................................................... 88
Funding Period ............................................................................. 20
-G-
Garn-St. Germain Act ....................................................................... 89
GNMA .................................................................................... 1, 10
GNMA Certificates ...................................................................... 10, 26
Grantor Trust Certificates ................................................................. 12
Grantor Trust Fund ......................................................................... 94
Grantor Trust Securities ................................................................... 94
</TABLE>
135
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<TABLE>
<CAPTION>
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<S> <C>
-H-
Hazard Insurance Instrument ................................................................ 57
holder ..................................................................................... 94
Holder in Due Course Rules ............................................................. 17, 88
Home Equity Loans ........................................................................... 9
Home Improvement Contracts .............................................................. 9, 20
Housing Act ................................................................................ 24
HUD ........................................................................................ 69
-I-
Indenture ................................................................................... 5
Initial Deposit ............................................................................ 50
insurability representation ................................................................ 43
Insurance Instrument ....................................................................... 57
Insurance Proceeds ......................................................................... 45
Interest Rate ........................................................................... 9, 21
issue price ................................................................................ 98
Issuer ...................................................................................... 5
-L-
L/C Bank ................................................................................... 76
Land Contracts .......................................................................... 9, 20
Liquidation Proceeds ....................................................................... 45
Loan-to-Value Ratio ........................................................................ 25
Lockout Period ............................................................................. 22
-M-
Manager ................................................................................ 22, 56
manufactured home .......................................................................... 24
Manufactured Housing Contracts .......................................................... 9, 20
Manufacturer's Invoice Price ............................................................... 25
Mark to Market Regulations ................................................................ 110
market discount ........................................................................... 101
Master Servicer ............................................................................. 5
Maximum Subordination Amount ............................................................... 50
Morgan ..................................................................................... 54
Mortgage Loans ...................................................................... 9, 20, 94
Mortgage Notes ............................................................................. 22
mortgage related securities ........................................................... 12, 129
Mortgage Securities .................................................................... 10, 21
Mortgaged Properties .................................................................... 9, 20
Mortgaged Property .............................................................. 9, 20, 21, 77
Mortgages .................................................................................. 22
Multifamily Loans ....................................................................... 9, 20
-N-
NCUA ...................................................................................... 130
Net Interest Rate .......................................................................... 40
new partnership ........................................................................... 123
New Regulations ........................................................................... 112
non-conforming credit .................................................................. 19, 35
Non-Pro Rata Security ...................................................................... 98
Nonrecoverable Advance ..................................................................... 52
Non-SMMEA Securities ...................................................................... 130
</TABLE>
136
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<S> <C>
Notes .................................................................................... 1, 5
-O-
Obligor .................................................................................... 19
OCC ....................................................................................... 130
OID Regulations ........................................................................ 94, 97
old partnership ........................................................................... 123
Optional Termination ....................................................................... 12
Owner Trust Agreement ................................................................... 5, 39
Owner Trustee ............................................................................... 5
-P-
PaineWebber ............................................................................... 131
Participants ........................................................................... 18, 54
Parties in Interest ....................................................................... 126
Partnership Securities ..................................................................... 94
Partnership Trust Fund ..................................................................... 94
Pass-Through Entity ....................................................................... 108
Percentage Interest ........................................................................ 39
Permitted Instruments ...................................................................... 44
Plans ..................................................................................... 126
Pooling and Servicing Agreement ............................................................. 5
Pre-Funded Amount .......................................................................... 19
Pre-Funding Account ......................................................................... 8
Prepayment Assumption ...................................................................... 98
Prepayment Period .......................................................................... 32
Primary Hazard Insurance Policy ............................................................ 70
PTCE ...................................................................................... 129
Purchase Price ............................................................................. 36
-Q-
Qualifed Mortgage .......................................................................... 95
-R-
Rating Agency...............................................................................132
real estate assets .................................................................... 96, 115
real estate mortgage investment conduit .............................................. 1, 7, 40
Realized Loss .............................................................................. 49
Record Date ................................................................................ 45
regular interests .................................................................. 12, 40, 94
Regular Securities .................................................................... 94, 113
Regular Securityholder ..................................................................... 97
Relevant Depositary ........................................................................ 54
Relief Act ................................................................................. 93
REMIC ............................................................................ 1, 7, 40, 94
REMIC Pool ................................................................................. 94
REMIC Provisions ........................................................................... 94
REMIC Regular Certificates ................................................................. 12
REMIC Regulations .......................................................................... 94
REMIC Residual Certificates ................................................................ 12
REMIC Securities ........................................................................... 94
Reserve Fund ........................................................................... 50, 75
Residential Loans ....................................................................... 1, 21
Residential Properties .................................................................. 9, 20
Residual Holders .......................................................................... 104
</TABLE>
137
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<S> <C>
residual interests .................................................................. 7, 12, 94
Residual Securities ........................................................................ 94
Restricted Group .......................................................................... 127
Retained Interest .......................................................................... 39
Retained Interest Rate ..................................................................... 40
Riegle Act ................................................................................. 17
Rules ...................................................................................... 54
-S-
SAIF ....................................................................................... 36
SBJPA of 1996 .............................................................................. 96
Scheduled Principal Balance ................................................................ 50
Securities ............................................................................... 1, 5
Security Interest Rate ...................................................................... 6
Security Owners ............................................................................ 54
Security Principal Balance .............................................................. 6, 47
Securityholder ............................................................. 44, 50, 53, 63, 94
Securityholders ............................................................................ 51
Senior Liens ............................................................................ 22,54
Senior Percentage .......................................................................... 50
Senior Securities ....................................................................... 6, 39
Senior/Subordinate Series .................................................................. 39
Series ...................................................................................... 1
Servicemen's Readjustment Act .............................................................. 25
Servicing Agreement ........................................................................ 30
SMMEA ................................................................................. 12, 130
Servicing Default .......................................................................... 65
Special Hazard Amount ...................................................................... 74
Special Hazard Insurer ..................................................................... 73
Special Hazard Losses ...................................................................... 49
Special Hazard Subordination Amount ........................................................ 49
Specified Reserve Fund Balance ............................................................. 51
Standard Securities ....................................................................... 114
Startup Day ................................................................................ 94
Stated Principal Balance ................................................................... 37
Strip Securities ........................................................................ 6, 40
Stripped Agency Securities ................................................................. 29
Stripped Interest .......................................................................... 31
Stripped Securities ............................................................. 113, 117, 118
Stripped Securityholder ................................................................... 119
Subordinate Securities .................................................................. 6, 39
Subordination .............................................................................. 49
Subsequent Loans ........................................................................... 19
Sub-Servicer ............................................................................... 30
Sub-Servicing Account ...................................................................... 44
Sub-Servicing Agreement .................................................................... 37
-T-
Terms and Conditions.........................................................................56
thrift institutions ....................................................................... 107
Tiered REMICs .............................................................................. 97
Title V .................................................................................... 91
Title VIII ................................................................................. 91
Trust Account .............................................................................. 10
Trust Agreement ......................................................................... 5, 39
</TABLE>
138
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<S> <C>
Trust Fund .................................................................................. 6
Trust Fund Asset ............................................................................ 6
Trustee ..................................................................................... 5
-U-
U.S. Person ............................................................................... 109
Unaffiliated Sellers ....................................................................... 20
Underwriter ............................................................................... 127
Unrecovered Senior Portion ................................................................. 49
-V-
VA ......................................................................................... 10
VA Guaranty Policy ......................................................................... 69
VA Loans ................................................................................... 22
-W-
Window Period Loans ........................................................................ 89
</TABLE>
139
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<PAGE>
_____________________________
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED 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>
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary.................................................................................................... S-5
Risk Factors............................................................................................... S-13
The Pool................................................................................................... S-18
Empire Funding............................................................................................. S-25
Master Servicer............................................................................................ S-29
Underwriting Criteria...................................................................................... S-30
Prepayment and Yield Considerations........................................................................ S-33
The Owner Trust............................................................................................ S-40
The Grantor Trust.......................................................................................... S-41
Description of the Notes................................................................................... S-42
Description of Credit Enhancement.......................................................................... S-46
Description of the Transfer and Servicing Agreements....................................................... S-52
Federal Income Tax Consequences............................................................................ S-62
ERISA Considerations....................................................................................... S-64
Legal Investment Matters................................................................................... S-65
Use of Proceeds............................................................................................ S-65
Underwriting............................................................................................... S-66
Experts.................................................................................................... S-66
Legal Matters.............................................................................................. S-67
Ratings.................................................................................................... S-67
Index of Defined Terms..................................................................................... S-68
PROSPECTUS
Available Information...................................................................................... 2
Reports to Securityholders................................................................................. 3
Incorporation of Certain Information by Reference.......................................................... 3
Prospectus Supplement or Current Report on Form 8-K........................................................ 3
Summary of Terms........................................................................................... 5
Risk Factors............................................................................................... 14
The Trust Funds............................................................................................ 20
Use of Proceeds............................................................................................ 31
Yield Considerations....................................................................................... 31
Maturity and Prepayment Considerations..................................................................... 32
The Depositor.............................................................................................. 34
Residential Loan Program................................................................................... 34
Description of the Securities.............................................................................. 39
Description of Primary Insurance Coverage.................................................................. 68
Description of Credit Support.............................................................................. 71
Certain Legal Aspects of Residential Loans................................................................. 77
Certain Federal Income Tax Consequences.................................................................... 94
State and Other Tax Consequences........................................................................... 126
ERISA Considerations....................................................................................... 126
Legal Investment........................................................................................... 129
Plans of Distribution...................................................................................... 131
Legal Matters.............................................................................................. 132
Financial Information...................................................................................... 132
Rating..................................................................................................... 132
Index of Defined Terms..................................................................................... 134
</TABLE>
------------------------
DEALERS WILL DELIVER A PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS WHEN ACTING AS UNDERWRITERS OF THE NOTES AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THE NOTES
WILL DELIVER A PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS UNTIL
FEBRUARY 2, 1999.
_____________________________
<PAGE>
_____________________________
[LOGO OF EMPIRE FUNDING]
HOME LOAN ASSET
BACKED NOTES,
SERIES 1998-3
EMPIRE FUNDING
HOME LOAN
OWNER TRUST 1998-3
(ISSUER)
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
(DEPOSITOR)
EMPIRE FUNDING CORP.
(TRANSFEROR AND SERVICER)
NORWEST BANK OF MINNESOTA,
NATIONAL ASSOCIATION
(MASTER SERVICER)
[LOGO of MBIA]
-----------------------
PROSPECTUS SUPPLEMENT
-----------------------
PAINEWEBBER INCORPORATED
NOVEMBER 3, 1998
_____________________________
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as...................... 'SS'
