<PAGE>
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MAY 22, 1998)
$210,635,500
MASTER FINANCIAL ASSET SECURITIZATION TRUST 1998-2
MASTER FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV [LOGO]
(DEPOSITOR)
HOME LOAN ASSET BACKED NOTES, SERIES 1998-2
The Master Financial Asset Securitization Trust 1998-2 (the 'Owner Trust'
or the 'Issuer') will be formed pursuant to an owner trust
agreement dated as of May 1, 1998 (the 'Owner Trust Agreement') and entered into
by PaineWebber Mortgage Acceptance Corporation IV, as depositor (the
'Depositor'), The Bank of New York, as paying agent (in such capacity, the
'Paying Agent'), Wilmington Trust Company, as owner trustee (the 'Owner
Trustee') and Master Financial, Inc., as Servicer ('Master Financial'). The
Issuer will issue nine classes of Home Loan Asset Backed Notes (the 'Notes') in
the classes set forth below (the 'Offered Notes') and the Class B-2 Notes
(continued on next page)
------------------------
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED NOTES, SEE THE INFORMATION HEREIN UNDER 'RISK FACTORS' BEGINNING ON PAGE
S-19 AND IN THE PROSPECTUS BEGINNING ON PAGE 14.
------------------------
THE OFFERED NOTES REPRESENT INTERESTS IN OR OBLIGATIONS OF THE ISSUER ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, TRANSFEROR,
SERVICER, OWNER TRUSTEE OR INDENTURE TRUSTEE OR ANY AFFILIATE THEREOF, EXCEPT TO
THE EXTENT PROVIDED HEREIN. NEITHER THE LOANS NOR THE OFFERED NOTES ARE INSURED
OR GUARANTEED BY ANY FINANCIAL GUARANTY INSURER OR ANY GOVERNMENTAL AGENCY OR
ANY OTHER PERSON OTHER THAN TO THE EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN.
------------------------
THE OFFERED NOTES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
==================================================================================================================================
Original Class
Principal Interest Price to Underwriting Proceeds to
Balance Rate(1) Public Discount Depositor (2)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A-1 Notes........................ $ 74,260,000 Variable(4) 100.00000% 0.100% 99.90000%
Class A-2 Notes........................ $ 32,072,000 6.34% 99.97327% 0.150% 99.82327%
Class A-3 Notes........................ $ 28,084,000 6.60% 99.97582% 0.175% 99.80082%
Class A-4 Notes........................ $ 17,589,000 7.07% 99.94368% 0.500% 99.44368%
Class A-4 IO Notes..................... (3) 6.32% 12.23253% 0.122% 12.11053%
Class M-1 Notes........................ $ 21,715,000 7.29% 99.97005% 0.500% 99.47005%
Class M-2 Notes........................ $ 19,543,500 7.60% 99.94778% 0.750% 99.19778%
Class B-1 Notes........................ $ 17,372,000 8.73% 99.97544% 1.500% 98.47544%
Total.................................. $210,635,500 $212,740,834 $796,650 $211,944,184
==================================================================================================================================
</TABLE>
(1) If the Issuer does not exercise its option to redeem the Notes when it is
first permitted to do so after the Pool Principal Balance has declined to
10% or less of the Maximum Collateral Amount, as described herein, the Note
Interest Rate will be increased by 0.50% per annum.
(2) Before deducting expenses, estimated to be $450,000.
(3) The Class A-4 IO Notes will have a notional balance that will equal the
Class Principal Balance of the Class A-4 Notes; provided, however, that if
the Class Principal Balance of the Class A-4 Notes is greater than zero
after July 20, 2000, the Class A-4 IO notional balance will be zero for each
Payment Date after July 20, 2000.
(4) Interest will accrue on the Class A-1 Notes with respect to each Payment
Date at a per annum rate equal to LIBOR for the related Accrual Period (each
as defined herein) plus 0.08%, subject to a maximum rate equal to the Net
Weighted Average Rate (as defined herein). The Interest Rate applicable to
the Class A-1 Notes for the initial Accrual Period is expected to be
approximately 5.72844% per annum.
------------------------
The Class A Notes (other than the Class A-4 IO Notes) are offered by
PaineWebber Incorporated, Deutsche Morgan Grenfell Inc. and Residential Funding
Securities Corporation (collectively, the 'Underwriters'), the Class A-4 IO
Notes are offered by PaineWebber Incorporated and the Class M-1, Class M-2 and
Class B-1 Notes are offered by PaineWebber Incorporated and Residential Funding
Securities Corporation, in each case subject to prior sale, when, as and if
delivered to and accepted by the Underwriters and subject to approval of certain
legal matters by counsel. It is expected that delivery of the Offered Notes will
be made in book-entry form only through the facilities of The Depository Trust
Company (the 'Depository') on or about May 28, 1998.
------------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
RESIDENTIAL FUNDING SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS MAY 22, 1998
<PAGE>
<PAGE>
(each, a 'Class') pursuant to an indenture to be dated as of May 1, 1998 (the
'Indenture'), between the Issuer and The Bank of New York, as indenture trustee
(in such capacity, the 'Indenture Trustee'). The Issuer also will issue
certificates evidencing the residual interest in the Issuer (the 'Residual
Interest Certificates'). The Notes and the Residual Interest Certificates are
collectively referred to herein as the 'Securities.' Only the Offered Notes are
offered hereby.
The assets of the Issuer will consist primarily of a certificate (the
'Grantor Trust Certificate') evidencing 100% of the ownership interest in Master
Financial Grantor Trust 1998-2 (the 'Grantor Trust'), the assets of which will
consist primarily of a pool (the 'Pool') of conventional and FHA-insured,
closed-end, fixed-rate home loans (the 'Loans') as described herein under 'The
Pool' which are secured primarily by second lien mortgages, deeds of trust or
other similar security instruments (the 'Mortgages'). In addition, substantially
all of the Loans will be secured by Mortgaged Properties in which the borrowers
have little or no equity at the time of origination (i.e., the related combined
loan-to-value ratios approach or exceed 100%). Approximately 1.84% of the
Mortgage Loans (the 'Title I Loans') will be partially insured by the Federal
Housing Administration ('FHA') pursuant to Title I of the National Housing Act
of 1934, as amended. Loans expected to have an aggregate unpaid principal
balance as of the Cut-Off Date of approximately $163,252,689 (the 'Initial
Loans') will be designated for inclusion in the Pool. On or prior to August 28,
1998, the Issuer may cause the Grantor Trustee to purchase additional loans (the
'Subsequent Loans') having an aggregate unpaid principal balance of
approximately $51,747,311 with amounts on deposit in an account (the 'Pre-
Funding Account') established for such purpose on the Closing Date.
Payments on the Notes will be made on the 20th day of each month or, if
such day is not a Business Day, the next succeeding Business Day (each, a
'Payment Date'), beginning in June 1998. The Notes will be secured by the assets
of the Issuer pursuant to the Indenture. Interest on the Classes of Offered
Notes will accrue at the above-specified fixed interest rates per annum except
that interest will accrue on the Class A-1 Notes with respect to each Payment
Date at a per annum rate equal to LIBOR for the related Accrual Period (each as
defined herein) plus 0.08%, subject to a maximum rate equal to the Net Weighted
Average Rate. The Note Interest Rate applicable to the Class A-1 Notes for the
initial Accrual Period is expected to be approximately 5.72844% per annum. If
the Issuer does not exercise its option to redeem the Notes when first permitted
to do so after the Pool Principal Balance has declined to 10% or less of the
Maximum Collateral Amount, as described herein, the Note Interest Rate on each
Class of Notes will be increased by 0.50% per annum. On each Payment Date, the
holders of the Notes will be entitled to receive, from and to the extent that
funds are available therefor in the Note Payment Account, payments with respect
to interest and/or principal calculated as described herein under 'Description
of the Offered Notes -- Payments on the Offered Notes.' Payments of interest and
principal on the Class M-1 and Class M-2 Notes (the 'Mezzanine Notes') will be
subordinated in priority to payments of interest and principal, respectively, on
the Class A-1, Class A-2, Class A-3 and Class A-4 Notes and payments of interest
on the Class A-4 IO Notes (collectively, the 'Class A Notes' or the 'Senior
Notes') as described herein. Payments on the Class B-1 Notes will be
subordinated in priority to payments due on the Senior Notes and Mezzanine Notes
to the extent described herein. Payments on the Class B-2 Notes and the Residual
Interest Certificates will be subordinated in priority to payments due on the
Senior Notes, Mezzanine Notes and Class B-1 Notes to the extent described
herein. The Class A-4 IO Notes are 'interest only' and will not receive payments
of principal.
The yields to maturity of any Offered Notes may vary from the anticipated
yields to the extent such Offered Notes are purchased at a discount or a premium
and to the extent the rate and timing of payments thereof are sensitive to the
rate and timing of principal payments (including prepayments) of the Loans.
Prospective purchasers of the Offered Notes should consider, in the case of any
Offered Notes to be purchased at a discount, the risk that a lower than
anticipated rate of principal payments could result in an actual yield that is
lower than the anticipated yield and, in the case of any Offered Notes to be
purchased at a premium, the risk that a faster than anticipated rate of
principal payments could result in an actual yield that is lower than the
anticipated yield. THE YIELD TO MATURITY OF THE CLASS A-4 IO NOTES WILL BE
HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL REPAYMENTS (INCLUDING PREPAYMENTS) ON
THE LOANS, TO LOSSES ON THE LOANS AND TO ANY PARTIAL REDEMPTION OF THE CLASS A-4
NOTES RESULTING FROM A DISTRIBUTION OF FUNDS FROM THE PRE-FUNDING ACCOUNT, AS
DESCRIBED HEREIN. INVESTORS SHOULD FULLY CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PAYMENTS AND/OR LOSSES ON
S-2
<PAGE>
<PAGE>
THE LOANS COULD RESULT IN THE FAILURE BY INVESTORS IN THE CLASS A-4 IO NOTES TO
FULLY RECOUP THEIR INITIAL INVESTMENTS. SEE 'PREPAYMENT AND YIELD
CONSIDERATIONS' HEREIN. THEREFORE, AN INVESTMENT IN THE CLASS A-4 IO NOTES IS
APPROPRIATE ONLY FOR AN INVESTOR CAPABLE OF ANALYZING AND ASSESSING LOSS AND
DELINQUENCY EXPERIENCE ON A PORTFOLIO OF HOME LOANS HAVING THE CHARACTERISTICS
DESCRIBED HEREIN AND IN THE PROSPECTUS.
To the extent statements contained herein do not relate to historical or
current information, this Prospectus Supplement may be deemed to consist of
forward-looking statements that involve risks and uncertainties that may
adversely affect the payments to be made on, or the yield of, the Offered Notes,
which risks and uncertainties are discussed under 'Risk Factors' and 'Prepayment
and Yield Considerations' herein. As a consequence, no assurance can be given as
to the actual payments on, or the yield of, any Class of Offered Notes.
There is currently no secondary market for the Offered Notes and there can
be no assurance that such a market will develop or, if it does develop, that it
will continue.
------------------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE OFFERED NOTES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS DATED MAY 22, 1998 (THE 'PROSPECTUS') WHICH ACCOMPANIES THIS
PROSPECTUS SUPPLEMENT AND PROSPECTIVE PURCHASERS ARE URGED TO READ BOTH THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS IN FULL. SALES OF THE OFFERED NOTES MAY
NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH THIS PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS.
UNTIL AUGUST 20, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE OFFERED
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS SUPPLEMENT AND THE PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER THE PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
WHEN ACTING AS UNDERWRITER AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE OFFERED
SECURITIES, INCLUDING STABILIZING AND THE PURCHASE OF OFFERED SECURITIES TO
COVER SYNDICATE SHORT POSITIONS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
'UNDERWRITING' HEREIN.
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN OR THEREIN BY REFERENCE, THE
WORDS 'EXPECTS,' 'INTENDS,' 'ANTICIPATES,' 'ESTIMATES' AND ANALOGOUS EXPRESSIONS
ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ANY SUCH STATEMENTS, WHICH
MAY INCLUDE STATEMENTS CONTAINED IN 'RISK FACTORS,' INHERENTLY ARE SUBJECT TO A
VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG
OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS, COMPETITION, CHANGES IN
FOREIGN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS, REGULATORY INITIATIVES AND
COMPLIANCE WITH GOVERNMENTAL REGULATIONS, CUSTOMER PREFERENCES AND VARIOUS OTHER
MATTERS, MANY OF WHICH ARE BEYOND THE DEPOSITOR'S CONTROL. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS SUPPLEMENT. THE
DEPOSITOR EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY
ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE DEPOSITOR'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.
S-3
<PAGE>
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
There are incorporated herein by reference all documents filed by the
Depositor with the Securities and Exchange Commission (the 'Commission')
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended, on or subsequent to the date of this Prospectus Supplement and
prior to the termination of the offering of the Offered Notes. The Depositor
will provide without charge to each person to whom this Prospectus Supplement
and the Prospectus are delivered, on request of such person, a copy of any or
all of the documents incorporated herein by reference other than the exhibits to
such documents (unless such exhibits are specifically incorporated by reference
in such documents). Requests should be made in writing to Office of General
Counsel of PaineWebber Mortgage Acceptance Corporation IV, at 1285 Avenue of the
Americas, New York, New York 10019, Attention: John Fearey, Esq.
AVAILABLE INFORMATION
In addition to the locations specified under 'Available Information' in the
accompanying Prospectus, the Commission maintains a World Wide Web site at
http://www.sec.gov containing reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
S-4
<PAGE>
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING STATEMENTS............................................................... S-3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE.......................................... S-4
AVAILABLE INFORMATION.................................................................... S-4
SUMMARY.................................................................................. S-7
RISK FACTORS............................................................................. S-19
Yield, Prepayment and Maturity Considerations....................................... S-19
Adequacy of Credit Enhancement...................................................... S-20
FHA Insurance; Limitations on FHA Insurance......................................... S-21
Undercollateralization.............................................................. S-22
Geographic Concentration............................................................ S-22
Subsequent Loans.................................................................... S-22
Underwriting Guidelines............................................................. S-23
Adequacy of the Mortgaged Properties as Security for the Loans...................... S-24
Realization Upon Defaulted Loans.................................................... S-24
Relocation and Reloading of Debt.................................................... S-25
Acquisitions from Third Parties..................................................... S-25
Recent Origination of Loans......................................................... S-25
Limited Historical Delinquency, Loss and Prepayment Information..................... S-25
No Servicer Delinquency Advances.................................................... S-25
Dependence on Servicer for Servicing Loans.......................................... S-26
Economic Conditions................................................................. S-26
Legal Considerations................................................................ S-26
Certain Other Legal Considerations.................................................. S-26
Limitations on Liquidity of Transferor.............................................. S-27
Limitations on Repurchase or Replacement of Defective Loans by Transferor........... S-27
THE POOL................................................................................. S-28
General............................................................................. S-28
Payments on the Loans............................................................... S-28
Characteristics of the Loans........................................................ S-29
Loan Statistics..................................................................... S-29
Conveyance of Subsequent Loans...................................................... S-35
MASTER FINANCIAL......................................................................... S-36
General............................................................................. S-36
Servicing Experience................................................................ S-36
Repurchase or Substitution of Loans................................................. S-37
Description of FHA Insurance under Title I.......................................... S-38
UNDERWRITING CRITERIA.................................................................... S-41
Master Financial.................................................................... S-41
Variations.......................................................................... S-42
PREPAYMENT AND YIELD CONSIDERATIONS...................................................... S-42
General............................................................................. S-42
Subordination....................................................................... S-46
Excess Spread and Reduction of Overcollateralization Amount......................... S-46
Reinvestment Risk................................................................... S-47
Maturity Dates...................................................................... S-47
Weighted Average Lives of the Offered Notes......................................... S-48
Yield Sensitivity of the Class A-4 IO Notes......................................... S-56
THE OWNER TRUST.......................................................................... S-57
General............................................................................. S-57
The Owner Trustee................................................................... S-57
</TABLE>
S-5
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE GRANTOR TRUST........................................................................ S-57
DESCRIPTION OF THE OFFERED NOTES......................................................... S-58
General............................................................................. S-58
Payments on the Offered Notes....................................................... S-58
Priority of Payments................................................................ S-59
Related Definitions................................................................. S-61
Application of Allocable Loss Amounts............................................... S-65
Pre-Funding Account................................................................. S-65
Capitalized Interest Account........................................................ S-65
Optional Termination................................................................ S-66
DESCRIPTION OF CREDIT ENHANCEMENT........................................................ S-67
Subordination and Allocation of Losses.............................................. S-67
Overcollateralization............................................................... S-67
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS..................................... S-68
Sale and Assignment of the Loans and the Grantor Trust Certificate.................. S-68
Representations and Warranties...................................................... S-69
Fees and Expenses................................................................... S-69
Servicing........................................................................... S-69
Collection Account, Note Payment Account and Certificate Distribution Account....... S-70
Income from Accounts................................................................ S-70
Collection and Other Servicing Procedures for Loans................................. S-71
Insurance........................................................................... S-72
Realization upon Defaulted Loans.................................................... S-72
Evidence as to Compliance........................................................... S-72
Certain Matters Regarding the Servicer.............................................. S-72
Rights of Noteholders Upon Occurrence of Event of Default........................... S-73
Servicer Events of Default.......................................................... S-73
The Owner Trustee, Indenture Trustee and Grantor Trustee............................ S-74
Duties of the Owner Trustee and Indenture Trustee................................... S-75
Reports to Noteholders.............................................................. S-76
FEDERAL INCOME TAX CONSEQUENCES.......................................................... S-77
Classification of Investment Arrangement............................................ S-77
Taxation of Holders................................................................. S-77
Backup Withholding and Information Reporting........................................ S-79
ERISA CONSIDERATIONS..................................................................... S-79
General............................................................................. S-79
Prohibited Transactions............................................................. S-79
Review by Plan Fiduciaries.......................................................... S-80
LEGAL INVESTMENT MATTERS................................................................. S-80
USE OF PROCEEDS.......................................................................... S-81
UNDERWRITING............................................................................. S-81
LEGAL MATTERS............................................................................ S-82
RATINGS.................................................................................. S-82
INDEX OF DEFINED TERMS................................................................... S-84
</TABLE>
S-6
<PAGE>
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used herein are defined elsewhere in this Prospectus Supplement or in the
Prospectus.
<TABLE>
<S> <C>
Issuer................................. Master Financial Asset Securitization Trust 1998-2 (the 'Owner Trust' or
the 'Issuer'), a Delaware business trust, will be established pursuant to
a trust agreement dated as of May 1, 1998 (the 'Owner Trust Agreement'),
among the Depositor, the Paying Agent, the Owner Trustee and Master
Financial.
Depositor.............................. PaineWebber Mortgage Acceptance Corporation IV (the 'Depositor'), a
Delaware corporation. See 'The Depositor' in the Prospectus and
'Underwriting' herein. Neither the Depositor nor any of its affiliates or
any other person or entity will insure or guarantee or otherwise be
obligated with respect to the Offered Notes.
Transferor and Servicer................ Master Financial, Inc. ('Master Financial'), a California corporation.
Pursuant to a Home Loan Purchase Agreement dated as of May 1, 1998 (the
'Home Loan Purchase Agreement'), between Master Financial and the
Depositor, Master Financial (in such capacity, the 'Transferor') will sell
the Initial Loans to the Depositor. Pursuant to a Sale and Servicing
Agreement dated as of May 1, 1998 (the 'Sale and Servicing Agreement')
among the Issuer, the Depositor, Master Financial, the Grantor Trustee and
the Indenture Trustee, Master Financial will service the Loans (in such
capacity, the 'Servicer'). All references herein to the 'Servicer' shall
mean 'Master Servicer' for purposes of the Prospectus.
Grantor Trust.......................... Master Financial Grantor Trust 1998-2 (the 'Grantor Trust'), a New York
trust, will be established pursuant to a Grantor Trust Agreement dated as
of May 1, 1998 (the 'Grantor Trust Agreement') among the Depositor, the
Grantor Trustee and Master Financial. Pursuant to the Grantor Trust
Agreement, the Depositor will deposit the Initial Loans into the Grantor
Trust in exchange for a certificate (the 'Grantor Trust Certificate')
evidencing 100% of the ownership interest in the Grantor Trust.
Indenture Trustee, Grantor Trustee,
Paying Agent, Custodian,
Administrator and Contract of
Insurance Holder..................... The Bank of New York, a New York banking corporation ('The Bank of New
York'), as the indenture trustee (in such capacity, the 'Indenture
Trustee') under an Indenture dated as of May 1, 1998 (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 dated as of May 1, 1998 (the 'Custodial
Agreement') between the Custodian and the Depositor, as the administrator
(in such capacity, the 'Administrator') under the
</TABLE>
S-7
<PAGE>
<PAGE>
<TABLE>
<S> <C>
Administration Agreement dated as of May 1, 1998 (the 'Administration
Agreement') among the Issuer, the Administrator and the Servicer.
Owner Trustee.......................... Wilmington Trust Company, a Delaware banking corporation, as owner trustee
under the Owner Trust Agreement (the 'Owner Trustee').
Closing Date........................... May 28, 1998.
Cut-Off Date........................... The close of business on April 30, 1998 with respect to the Initial Loans
and, with respect to the Subsequent Loans, the date specified as the
cut-off date in the applicable Subsequent Transfer Agreement.
Payment Date........................... The 20th day of each month or, if such day is not a Business Day, the next
succeeding Business Day, commencing in June 1998 (each, a 'Payment Date').
Due Period............................. With respect to a Payment Date, the calendar month immediately preceding
such Payment Date (each, a 'Due Period').
Determination Date..................... The fifth Business Day prior to each Payment Date (each, a 'Determination
Date').
Record Date............................ The last Business Day of the month immediately preceding the month in
which each Payment Date occurs (each, a 'Record Date').
Securities Issued:
The Notes......................... The Issuer will issue the Classes of Notes pursuant to the Indenture in
the respective aggregate initial principal amounts or notional amounts
specified on the cover hereof, with respect to the Offered Notes and in
the principal amount of $6,514,500 with respect to the Class B-2 Notes
(each such aggregate principal amount being the 'Original Class Principal
Balance' for the related Class). The Class A-4 IO Notes will not have an
Original Class Principal Balance, and the holders thereof will not be
entitled to any distributions in respect of principal. Solely for purposes
of calculating interest distributions, the Class A-4 IO Notes will have a
Class Notional Balance that will equal the Class Principal Balance of the
Class A-4 Notes; provided, however, that if the Class Principal Balance of
the Class A-4 Notes is greater than zero after July 20, 2000, the Class
Notional Balance of the Class A-4 IO Notes will be zero for each Payment
Date after July 20, 2000. The Notes will be secured by the assets of the
Issuer pursuant to the Indenture and, except as described herein, will be
senior in right of payment to the Residual Interest Certificates. In
addition, as described herein, the Class A-1, Class A-2, Class A-3, Class
A-4 and Class A-4 IO Notes (collectively, the 'Class A Notes' or the
'Senior Notes') will also be senior in right of payment to the Class M-1
and Class M-2 Notes (the 'Mezzanine Notes') and the Class B-1 and Class
B-2 Notes (the 'Class B Notes') and the Mezzanine Notes will be senior in
right of payment to the Class B Notes. The Class B-2 Notes will be
privately placed and will not be offered hereby. Interest will accrue for
the applicable Accrual Period on the Classes of Offered Notes (except the
Class A-1 Notes) at the respective interest rates per
</TABLE>
S-8
<PAGE>
<PAGE>
<TABLE>
<S> <C>
annum set forth on the cover hereof, on the Class A-1 Notes at a rate per
annum equal to LIBOR for the related Accrual Period plus 0.08%, subject to
a maximum rate equal to the Net Weighted Average Rate, and on the Class
B-2 Notes at 10.020% per annum (as to each such Class, the 'Note Interest
Rate'); provided, however, that the Note Interest Rate on each Class of
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. Interest on the Class
A-1 Notes will be calculated on the basis of a 360-day year and the actual
number of days elapsed in each Accrual Period. Interest on the other
Classes of Notes will be calculated on the basis of a 360-day year
consisting of twelve 30-day months. See 'Description of the Offered
Notes -- Payments on the Offered Notes' herein.
Residual Interest Certificates.... The Issuer also will issue certificates evidencing the residual interest
in the assets of the Issuer (the 'Residual Interest Certificates'), which
are not being offered hereby. The Residual Interest Certificates will have
no Class Principal Balance and will be subordinate in right of payment to
the Notes.
Priority of Payments:
Regular Payment Amount............ The Regular Payment Amount will be paid on each Payment Date in the
following order of priority:
(i) to pay accrued and unpaid interest on the Senior Notes pro rata;
(ii) sequentially, to pay accrued and unpaid interest on the Class M-1
Notes, the Class M-2 Notes, the Class B-1 Notes and the Class B-2 Notes,
in that order;
(iii) sequentially, to pay as principal of the Class A-1, Class A-2,
Class A-3 and Class A-4 Notes, in that order, until the respective Class
Principal Balances thereof are reduced to zero, the amount necessary to
reduce the aggregate Class Principal Balance of such Class A Notes to
the Senior Optimal Principal Balance for such Payment Date; provided,
however, that on each Payment Date occurring on or after the reduction
of the Class Principal Balances of the Class M-1 Notes, Class M-2 Notes,
Class B-1 Notes and Class B-2 Notes to zero through the application of
Allocable Loss Amounts, payments shall be made among the then
outstanding Class A Notes (other than the Class A-4 IO Notes) pro rata
and not sequentially;
(iv) sequentially, to pay as principal of the Class M-1 and Class M-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance and Class M-2 Optimal
Principal Balance, respectively;
(v) sequentially, to pay as principal of the Class B-1 and the Class B-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class B-1 Optimal Principal Balance and Class B-2 Optimal
Principal Balance, respectively;
(vi) to the appropriate Classes of Notes, an amount equal to the
Overcollateralization Deficiency Amount, if any, in the priorities and
amounts specified in ' -- Excess Spread' below (after giving
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effect to payments made pursuant to clauses (i) through (v) above), and
thereafter to the Class M-1 Notes, the Class M-2 Notes, the Class B-1
Notes and the Class B-2 Notes, in that order, their respective Loss
Reimbursement Deficiencies, if any;
(vii) to pay the Make Whole Servicing Fee, if applicable; and
(viii) any remaining amount to the Residual Interest Certificates.
The Class A-4 IO Notes are 'interest only' and will receive no payments in
respect of principal.
Excess Spread.......................... The Excess Spread will be paid on each Payment Date in the following order
of priority (after giving effect to all payments specified above under
' -- Regular Payment Amount'): (i) in an amount equal to the
Overcollateralization Deficiency Amount, if any, as follows: (A)
sequentially, as principal of the Class A-1, Class A-2, Class A-3 and
Class A-4 Notes, in that order, until the respective Class Principal
Balances thereof are reduced to zero, the amount necessary to reduce the
aggregate Class Principal Balance of such Class A Notes to the Senior
Optimal Principal Balance; (B) sequentially, as principal of the Class M-1
and Class M-2 Notes, in that order, until the respective Class Principal
Balances thereof are reduced to the Class M-1 Optimal Principal Balance
and Class M-2 Optimal Principal Balance, respectively; and (C)
sequentially, as principal of the Class B-1 and Class B-2 Notes, in that
order, until the respective Class Principal Balances thereof are reduced
to the Class B-1 Optimal Principal Balance and Class B-2 Optimal Principal
Balance, respectively; (ii) sequentially, to the Class M-1 Notes, the
Class M-2 Notes, the Class B-1 Notes and the Class B-2 Notes, in that
order, their respective Loss Reimbursement Deficiencies, if any; and (iii)
any remaining amount to the Residual Interest Certificates.
Maturity Date.......................... The Class Principal Balance of the Class A-1, Class A-2, Class A-3, Class
A-4, Class M-1, Class M-2, and Class B-1 Notes and all accrued and unpaid
interest on each Class of Offered Notes, to the extent not previously
paid, will be payable in full on the applicable maturity date specified
below (as to each such Class, the 'Maturity Date'), although the actual
final Payment Date for each such Class of Notes may occur earlier than the
applicable Maturity Date. See 'Prepayment and Yield
Considerations -- Maturity Dates' herein. With respect to the Class A-4 IO
Notes, the Maturity Date specified below will be the date on which the
Class Notional Balance of such Class of Notes is scheduled to be reduced
to zero.
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<CAPTION>
CLASS MATURITY DATE
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A-1.............................................. September 20, 2009
A-2.............................................. October 20, 2012
A-3.............................................. November 20, 2018
A-4.............................................. September 20, 2024
A-4 IO........................................... July 20, 2000
M-1.............................................. September 20, 2024
M-2.............................................. September 20, 2024
B-1.............................................. September 20, 2024
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Form and Registration of the Offered
Notes................................ The Offered Notes will be issued only in book-entry form. Persons
acquiring beneficial ownership interests in the Offered Notes ('Security
Owners') will hold such Offered Notes through the book-entry facilities of
The Depository Trust Company ('DTC'). Transfers within DTC will be in
accordance with the usual rules and operating procedures of DTC. So long
as each Class of Offered Notes is in book-entry form, each such Class of
Offered Notes will be evidenced by one or more notes registered in the
name of the nominee of DTC. The interests of such Security Owners will be
represented by book entries on the records of DTC and participating
members thereof. No Security Owner will be entitled to receive a
definitive note representing such person's interest, except in the event
that definitive notes are issued under the limited circumstances described
herein. All references in this Prospectus Supplement to any Class of
Offered Notes reflect the rights of the Security Owners of such Class only
as such rights may be exercised through DTC and its participating members
so long as such Class of Offered Notes is held by DTC. See 'Risk
Factors -- Book-Entry Registration' in the Prospectus and 'Description of
the Securities -- Book-Entry Registration of Securities' in the
Prospectus. The Security Owners' interests in each Class of Offered Notes
(other than the Class A-4 IO Notes) will be held only in minimum
denominations of $25,000 initial principal amount and integral multiples
of $1,000 in excess thereof. The Security Owners' interests in the Class
A-4 IO Notes will be held only in minimum denominations of $1,000,000
initial notional amount and integral multiples of $1,000 in excess
thereof.
Assets of the Issuer................... On the Closing Date, the Issuer will purchase the Grantor Trust
Certificate pursuant to the Sale and Servicing Agreement. The Grantor
Trust Certificate represents 100% of the beneficial interest in the assets
of the Grantor Trust, and all amounts distributed thereon. 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, Capitalized Interest
Account and 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. See 'The Owner Trust -- General' herein.
Assets of the Grantor Trust............ On the Closing Date, it is expected that the Depositor will deposit a pool
of conventional or FHA-insured, closed-end, fixed-rate home loans (the
'Initial Loans') expected to have an aggregate unpaid principal balance as
of the Cut-Off Date of approximately $163,252,689 (the 'Original Pool
Principal Balance') into the Grantor Trust pursuant to the Grantor Trust
Agreement in exchange for the Grantor Trust Certificate. Initial Loans
having an Original Pool Principal Balance of greater or less than such
amount may actually constitute the Initial Loans and the Original
Pre-Funding Amount (as defined below) shall be decreased or increased
accordingly; provided that the amount of any such variance in the Original
Pool Principal Balance shall not exceed
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$5,000,000. See 'The Pool -- Characteristics of the Loans' herein. On or
prior to August 28, 1998, the Grantor Trust may purchase additional loans
(the 'Subsequent Loans' and, together with the Initial Loans, the 'Loans')
having an aggregate unpaid principal balance of up to the Original
Pre-Funding Amount. Any such Subsequent Loans will, in turn, be
represented by the Grantor Trust Certificate which, in turn, is an asset
of the Issuer. The sum of the aggregate principal balance of the Initial
Loans and the amount expected to be deposited into the Pre-Funding Account
on the Closing Date is expected to equal approximately $215,000,000.
The assets of the Grantor Trust will consist primarily of a pool (the
'Pool') of Loans which are secured primarily by second lien mortgages,
deeds of trust or other similar security instruments (the 'Mortgages').
The assets of the Grantor Trust also will include (i) payments of
principal and interest received in respect of the Loans after the Cut-Off
Date, less, in the case of the Initial Loans, approximately 50% of the
interest collected thereon during May 1998; (ii) amounts on deposit in the
Collection Account and Pre-Funding Account; (iii) the assignment of all
rights of the Depositor under the Home Loan Purchase Agreement; and (iv)
certain other ancillary or incidental funds, rights and properties related
to the foregoing. See 'The Grantor Trust' herein. The Grantor Trust will
include the unpaid principal balance of each Loan as of the Cut-Off Date
(the 'Cut-Off Date Principal Balance'). The 'Principal Balance' of a Loan
on any day subsequent to the Cut-Off Date is equal to its Cut-Off Date
Principal Balance minus all principal reductions credited against the
Principal Balance of such Loan since the related Cut-Off Date, including
any principal losses reported by the Servicer on account of a modification
of such Loan. With respect to any date, the 'Pool Principal Balance' will
be equal to the aggregate of the Principal Balances of the Loans as of
such date.
The Loans.............................. All of the Loans will be conventional or FHA-insured, closed-end,
fixed-rate home loans which are not insured or guaranteed by any
governmental agency (other than the Title I Loans) and the related
proceeds of which were used to (i) finance property improvements, (ii)
finance debt consolidation, (iii) finance the partial refinancing of
residential properties, (iv) provide cash to the borrower for unspecified
purposes or (v) a combination of the foregoing. The Loans will be secured
by liens on residential properties (i.e., one-to four-family residences,
condominium units and townhouses, including investment properties) (the
'Mortgaged Properties') that are generally junior (i.e., second) in
priority to one or more senior liens on the related Mortgaged Properties.
Other than as described herein with respect to the Title I Loans, the
Loans will not be insured by primary mortgage insurance policies or any
pool insurance policy or any financial guaranty policy. Moreover, the
Loans will not be guaranteed by the Transferor, the Depositor, the
Indenture Trustee, the Grantor Trustee, the Paying Agent, the
Administrator, the Custodian or any of their respective affiliates.
Substantially all of the Loans will be secured by liens on Mortgaged
Properties in which the borrowers have little or no
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equity therein (i.e., the related Combined Loan-to-Value Ratios approach
or exceed 100%) at the time of origination of such Loans. See 'The Pool'
herein and 'The Trust Funds -- Residential Loans' in the Prospectus.
'Combined Loan-to-Value Ratio' means, with respect to any Loan, the
fraction, expressed as a percentage, the numerator of which is the
principal balance of such Loan at origination plus, in the case of a
junior lien Loan, the aggregate outstanding principal balance of the
related senior lien loans on the date of origination of such Loan, and the
denominator of which is the appraised or stated value of the related
Mortgaged Property at the time of origination of such Loan (as such value
is determined in a manner described herein under 'Underwriting Criteria').
The Transferor will be obligated either (i) to repurchase any Loan as to
which a representation or warranty has been breached, which breach remains
uncured for a period of 60 days and has a materially adverse effect on the
value of such Loan or the interests of the Grantor Trustee, the Owner
Trustee or the Indenture Trustee therein (a 'Defective Loan'), or (ii) to
remove such Defective Loan and substitute a Qualified Substitute Loan. The
repurchase of any Loan (rather than the replacement thereof through
substitution) will result in accelerated payments of principal on the
Offered Notes. See 'Master Financial -- Repurchase or Substitution of
Loans' and 'Prepayment and Yield Considerations' herein.
Title I Loans.......................... 144 of the Initial Loans, representing approximately 1.84% of the Mortgage
Pool (the 'Title I Loans'), were originated under a program providing for
partial insurance by the Federal Housing Administration ('FHA') pursuant
to Title I ('Title I') of the National Housing Act of 1934, as amended
(the 'National Housing Act'). See 'Master Financial -- Description of FHA
Insurance under Title I' herein and 'Trust Funds -- Residential
Loans -- FHA Loans and VA Loans' and 'Description of Primary Insurance
Coverage -- FHA Insurance and VA Guarantees' in the Prospectus. See also
'Risk Factors -- FHA Insurance; Limitations on FHA Insurance' herein.
Credit Enhancement..................... Credit enhancement with respect to the Offered Notes will be provided by
(i) the subordination of the right of the Residual Interest Certificates
and of certain Classes of Notes to receive payments with respect to
interest and principal to the extent described below, and (ii) the
overcollateralization feature described below. See 'Risk
Factors -- Adequacy of Credit Enhancement' herein.
Subordination..................... The rights of the holders of the Class M-1 Notes to receive payments of
interest on each Payment Date will generally be subordinated to such
rights of the holders of the Senior Notes, the rights of the holders of
the Class M-2 Notes to receive payments of interest on each Payment Date
will generally be subordinated to such rights of the holders of the Class
M-1 Notes and the Senior Notes, the rights of the holders of the Class B-1
Notes to receive payments of interest on each Payment Date will generally
be subordinated to such rights of the holders of the Senior Notes and
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the Mezzanine Notes and the rights of the holders of the Class B-2 Notes
to receive payments of interest on each Payment Date will generally be
subordinated to such rights of the holders of the Offered Notes. In
addition, the rights of the holders of the Class M-1 Notes to receive
payments of principal on each Payment Date will generally be subordinated
to the rights of the holders of the Senior Notes to receive payments of
interest and/or principal on each Payment Date, and the rights of the
holders of the Class M-2 Notes to receive payments of principal on each
Payment Date will generally be subordinated to the rights of the holders
of the Senior Notes and the Class M-1 Notes to receive payments of
interest and/or principal on each Payment Date. The rights of the holders
of the Class B-1 Notes to receive payments of principal on each Payment
Date will generally be subordinated to the rights of the holders of the
Senior Notes and the Mezzanine Notes to receive payments of interest
and/or principal on each Payment Date. The rights of the holders of the
Class B-2 Notes to receive payments of principal on each Payment Date will
generally be subordinated to the rights of the holders of the Offered
Notes to receive payments of interest and/or principal on each Payment
Date. In addition, the rights of the holders of the Residual Interest
Certificates to receive any payments from amounts available on each
Payment Date will be subordinated to such rights of the holders of the
Notes. The subordination described above is intended to enhance the
likelihood of receipt by the holders of the Offered Notes of the full
amount of interest and/or principal payments due to such holders and to
afford such holders protection against losses on the Loans. The
subordination of the Class B-2 Notes and the Residual Interest
Certificates to the Class B-1 Notes is intended to enhance the likelihood
of receipt by the holders of the Class B-1 Notes of the full amount of
interest and principal payments due to such holders and to afford such
holders protection against losses on the Loans. See 'Description of Credit
Enhancement -- Subordination and Allocation of Losses' herein.
Overcollateralization............. As of any date of determination, the 'Overcollateralization Amount' will
equal the excess, if any, of the sum of the Pool Principal Balance and the
Pre-Funding Amount over the aggregate of the Class Principal Balances of
the Notes. On the Closing Date, the aggregate Class Principal Balance of
the Notes is expected to exceed the sum of the Original Pool Principal
Balance and the Original Pre-Funding Amount (such sum, the 'Maximum
Collateral Amount') by approximately $2,150,000 (the 'Initial
Undercollateralization Amount'). The application of Excess Spread in
reduction of the Class Principal Balances of the Notes is intended first,
to eliminate such undercollateralization, and then to create
overcollateralization and increase the Overcollateralization Amount over
time until such amount is equal to the Overcollateralization Target
Amount.
Generally, the 'Overcollateralization Target Amount' prior to the
Step-down Date will be equal to the greater of (x) 3.5% of the Maximum
Collateral Amount and (y) the Net Delinquency
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Calculation Amount; on and after the Step-down Date, the
Overcollateralization Target Amount will be equal to the greater of (x) 7%
of the Pool Principal Balance as of the end of the related Due Period and
(y) the Net Delinquency Calculation Amount. The Overcollateralization
Target Amount may be increased above these specified levels if losses on
the Loans exceed a percentage of the Pool Principal Balance specified in
the Sale and Servicing Agreement. The Overcollateralization Target Amount
will not in any event be less than 0.50% of the Maximum Collateral Amount
or greater than the outstanding Class Principal Balances of the Notes.
While the payment of Excess Spread to holders of the Class A-1, Class A-2,
Class A-3, Class A-4, Class M-1, Class M-2, and Class B-1 Notes in
reduction of their respective Class Principal Balances has been designed
to produce and maintain a given level of overcollateralization with
respect to such Offered Notes, there can be no assurance that Excess
Spread will be generated in sufficient amounts to ensure that the Initial
Undercollateralization Amount will be eliminated, or that such
overcollateralization level will be achieved or maintained at all times.
While the Class A-1 Notes are outstanding, any increase in LIBOR will
decrease the amount of Excess Spread for the related Payment Date. See
'Description of Credit Enhancement -- Subordination and Allocation of
Losses' and 'Risk Factors -- Adequacy of Credit Enhancement' herein.
Application of Allocable Loss
Amounts.............................. In the event that on any Payment Date after the Undercollateralization
Amount has been reduced to zero (a) the aggregate of the Class Principal
Balances of all Classes of Notes (other than the Class A-4 IO Notes) on
any Payment Date (after giving effect to all payments on such date)
exceeds (b) the sum of the Pool Principal Balance and the Pre-Funding
Amount, each as of the end of the immediately preceding Due Period (such
excess, an 'Allocable Loss Amount'), such Allocable Loss Amount will be
applied, sequentially, in reduction of the Class Principal Balances of the
Class B-2 Notes, the Class B-1 Notes, the Class M-2 Notes and the Class
M-1 Notes, in that order, until the respective Class Principal Balances
thereof have been reduced to zero. On each Payment Date prior to the
Payment Date on which the Initial Undercollateralization Amount is reduced
to zero, the Allocable Loss Amount will be zero. Allocable Loss Amounts
will not be applied in reduction of the Class Principal Balance or
Notional Balance, as the case may be, of any Class of Senior Notes.
Allocable Loss Amounts applied to any applicable Class of Offered Notes
will entitle such Class to reimbursement (such entitlement, a 'Loss
Reimbursement Deficiency') under the circumstances and to the extent
described herein. See 'Description of the Offered Notes -- Application of
Allocable Loss Amounts' herein.
Fees and Expenses...................... On each Payment Date, prior to payments on the Notes, amounts from the
Available Collection Amount will be distributed to pay the following
periodic fees: (1) the unpaid and accrued fees of the
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Servicer (the 'Servicing Compensation'), (2) the unpaid and accrued fees
of the Indenture Trustee (the 'Indenture Trustee Fee'), (3) the unpaid and
accrued fees of the Owner Trustee (the 'Owner Trustee Fee'), and (4) the
unpaid and accrued fees of the Grantor Trustee (the 'Grantor Trustee Fee')
(collectively the 'Fees and Expenses').
Pre-Funding Account.................... On the Closing Date, approximately $51,747,311 (the 'Original Pre-Funding
Amount') will be deposited in an account (the 'Pre-Funding Account'),
which account is in the name of the Indenture Trustee and is part of the
assets of the Grantor Trust and will be used to acquire Subsequent Loans.
Depending on the Original Pool Principal Balance of the Initial Loans, the
Original Pre-Funding Amount may be decreased or increased accordingly,
provided that the amount of any such variance shall not exceed $5,000,000.
During the Pre-Funding Period, the amount on deposit in the Pre-Funding
Account (net of investment earnings thereon) (the 'Pre-Funding Amount')
will be reduced by the amount thereof used to purchase Subsequent Loans in
accordance with the Grantor Trust Agreement. Any such Subsequent Loans
will, in turn, be represented by the Grantor Trust Certificate which, in
turn, is an asset of the Issuer. The 'Pre-Funding Period' is the period
commencing on the Closing Date and ending generally on the earlier to
occur of (i) the date on which the amount on deposit in the Pre-Funding
Account (net of any investment earnings thereon) is less than $50,000,
(ii) the date on which any Servicer Event of Default occurs and (iii)
August 28, 1998. On the Payment Date following the Due Period in which the
termination of the Pre-Funding Period occurs, if the Pre-Funding Amount at
the end of the Pre-Funding Period is less than $50,000, any such Pre-
Funding Amount will be distributed in respect of the Grantor Trust
Certificate and in turn paid to holders of the Classes of Notes then
entitled to receive principal on such Payment Date in reduction of the
related Class Principal Balances, thus resulting in a partial redemption
of the related Notes on such date. On the Payment Date following the Due
Period in which the termination of the Pre-Funding Period occurs, if the
Pre-Funding Amount at the end of the Pre-Funding Period is greater than or
equal to $50,000 (such event, a 'Pre-Funding Payment Trigger'), such Pre-
Funding Amount will be distributed in respect of the Grantor Trust
Certificate and in turn paid as a partial redemption of all Classes of
Offered Notes (other than the Class A-4 IO Notes) and the Class B-2 Notes
then outstanding, pro rata, based on the respective Original Class
Principal Balances thereof.
Capitalized Interest Account........... On the Closing Date, a portion of the sales proceeds of the Notes will be
deposited in an account (the 'Capitalized Interest Account') for
application by the Indenture Trustee on the Payment Dates occurring in
June 1998, July 1998 and August 1998 to cover shortfalls in interest on
the Notes that may arise due to the utilization of the Pre-Funding Account
as described herein. Any amounts in the Capitalized Interest Account that
are not required to cover such interest shortfalls (and any investment
income on such amounts) will be paid to Master Financial.
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Optional Termination................... The Issuer may, at its option, effect an early redemption of the Notes on
or after any Payment Date on which the Pool Principal Balance declines to
10% or less of the Maximum Collateral Amount (the first such Payment Date,
the 'Clean-up Call Date'). Such redemption may be effected at the
Servicer's election by the Servicer's purchase of all of the Loans from
the Grantor Trustee at a price equal to or greater than the Termination
Price. The proceeds from any such sale will be distributed in respect of
the Grantor Trust Certificate and paid (i) first, to the payment of Fees
and Expenses, (ii) second, to the holders of each Class of Notes in an
amount equal to the then outstanding Class Principal Balance thereof plus
all accrued and unpaid interest thereon, and, in the case of the Class A-4
IO Notes, all accrued and unpaid interest on their Class Notional Balance,
and (iii) third, to the holders of the Residual Interest Certificates, the
amount remaining, if any, after the payments specified in clauses (i) and
(ii) above. See 'Description of the Offered Notes -- Optional Termination'
herein.
Servicing of the Loans................. The Servicer will perform the loan servicing functions with respect to the
Loans pursuant to the Sale and Servicing Agreement and will be entitled to
receive a fee (the 'Servicing Fee') and other servicing compensation
(together with the Servicing Fee, the 'Servicing Compensation'), payable
monthly, as described herein (See 'Description of the Transfer and
Servicing Agreements -- Servicing' herein). The Servicer may subcontract
its servicing obligations and duties with respect to the Loans to
qualified servicers pursuant to a subservicing agreement (each such
servicer, in this capacity, a 'Subservicer'). The Servicer will not be
relieved of its servicing obligations and duties with respect to any
subserviced Loans. In addition, the Servicer will be responsible for
paying the fees of any such Subservicer.
Tax Status............................. In the opinion of Cadwalader, Wickersham & Taft, special counsel to the
Depositor and the Underwriters, for federal income tax purposes, the
Offered Notes will be treated as debt and 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. Each holder of an Offered Note, by the
acceptance of an Offered Note, will agree to treat the Offered Notes as
indebtedness for federal income tax purposes. It is anticipated that the
Offered Notes (other than the Class A-4 IO Notes) will not be issued with
original issue discount for federal income tax purposes. Although not free
from doubt, it is anticipated that the Class A-4 IO Notes will be treated
as issued with original issue discount for federal income tax purposes in
an amount equal to the excess of all payments of interest expected to be
received thereon over their issue price, including accrued interest. The
prepayment assumption that will be used for the purpose of computing the
accrual of original issue discount for federal income tax purposes is 100%
of the Prepayment Assumption. See 'Federal Income Tax Consequences' herein
and 'Certain Federal Income Tax Consequences' in the Prospectus for
additional information concerning the
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application of federal income tax laws to the Issuer and the Offered
Notes.
ERISA.................................. A fiduciary of an employee benefit plan or other retirement plan or
arrangement subject to Title I of the Employee Retirement Income Security
Act of 1974, as amended ('ERISA'), or Section 4975 of the Internal Revenue
Code of 1986, as amended (the 'Code'), should carefully review with its
legal advisors whether the purchase or holding of the Offered Notes could
give rise to a transaction prohibited or not otherwise permissible under
ERISA or Section 4975 of the Code. Subject to the conditions set forth
herein, the Offered Notes may, in general, be purchased by and on behalf
of such plans and arrangements. See 'ERISA Considerations' herein and in
the Prospectus.
Legal Investment....................... The Offered Notes will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended ('SMMEA'), because substantially all of the Loans are secured by
Mortgages that are primarily second liens. The appropriate
characterization of the Offered Notes under various legal investment
restrictions, and thus the ability of investors subject to these
restrictions to purchase the Offered Notes, may be subject to significant
interpretative uncertainties. Accordingly, investors should consult their
own legal advisors to determine whether and to what extent the Offered
Notes constitute legal investments for them. See 'Legal Investment
Matters' herein and 'Legal Investment' in the Prospectus.
Ratings of the Offered Notes........... It is a condition to the issuance of the Offered Notes that each of the
Senior Notes be rated 'Aaa' by Moody's Investors Service, Inc. ('Moody's')
and 'AAA' by each of Fitch IBCA, Inc. ('Fitch') and Duff & Phelps Credit
Rating Co. ('DCR' and together with Moody's and Fitch, the 'Rating
Agencies'), and that the Class M-1 Notes be rated 'Aa2' by Moody's and
'AA' by each of Fitch and DCR, the Class M-2 Notes be rated 'A2' by
Moody's and 'A' by each of Fitch and DCR and the Class B-1 Notes be rated
'Baa3' by Moody's and 'BBB' by each of Fitch and DCR. A security rating
does not address the frequency of principal prepayments on the Loans or
the corresponding effect on yield to holders of the Offered Notes. The
security rating does not address the ability of the Grantor Trust to
acquire Subsequent Loans, any potential redemption with respect thereto or
the effect on yield resulting therefrom. The rating of the Class A-4 IO
Notes does not address the possibility that rapid rates of principal
prepayments could result in the failure of the holders of the Class A-4 IO
Notes to fully recover their initial investment. No person is obligated to
maintain the rating on any Class of Offered Notes.
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RISK FACTORS
Prospective investors in the Offered Notes should consider the following
risk factors (as well as the factors set forth under 'Risk Factors' in the
Prospectus) in connection with the purchase of Offered Notes. These factors are
intended to identify certain significant sources of risk affecting an investment
in the Offered Notes. Unless the context indicates otherwise, any numerical or
statistical information presented is based upon the characteristics of the
Initial Loans proposed to be included in the Pool as of the date of this
Prospectus Supplement.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
The rates of principal payments on the Offered Notes (other than the Class
A-4 IO Notes) and the aggregate amount of payments and yields to maturity of the
Offered Notes will be related to, among other things, the rate and timing of
payments of principal on the Loans and the extent to which amounts remaining in
the Pre-Funding Account at the end of the Pre-Funding Period that are not used
to acquire Subsequent Loans are used to partially redeem the Notes. The rate of
principal payments on the Loans will in turn be affected by the amortization of
the Loans and by the rate of principal prepayments thereon (including for this
purpose, prepayments resulting from (i) refinancing, (ii) liquidations of the
Loans due to defaults, casualties and condemnations, (iii) repurchases by the
Transferor as required pursuant to the Home Loan Purchase Agreement). Generally,
if prevailing interest rates on similar loans fall significantly below the
interest rates on the Loans, the Loans may be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the Loans.
Conversely, if prevailing interest rates rise significantly above the interest
rates on the Loans, the rate of prepayments may decrease. Certain of the Loans
may be prepaid by the obligors thereunder (the 'Obligors') at any time without
penalty. Substantially all of the Loans are subject to the 'due-on-sale'
provisions included therein. Prepayments, liquidations and purchases of the
Loans (including any purchase of the remaining Loans in connection with the
optional redemption of the Offered Notes by the Issuer on or after the Cleanup
Call Date) will, subject to certain conditions, result in payments to holders of
the Offered Notes then entitled to receive principal payments that would
otherwise be paid over the remaining terms of such Loans. In addition, the
overcollateralization provisions will result in a limited acceleration of
principal payments to the holders of the Offered Notes (other than the Class A-4
IO Notes). Similarly, such principal payments on the Class A-4 Notes will cause
the Class Notional Balance of the Class A-4 IO Notes to decline by identical
amounts, thereby reducing amounts payable on the Class A-4 IO Notes. See
'Description of the Offered Notes -- Priority of Payments' herein. Since the
rate of payment of principal on the Loans will depend on future events and a
variety of factors, no assurance can be given as to such rate or the rate of
principal prepayments.
All of the Loans may be prepaid by the Obligors thereunder in whole or in
part at any time. Home loans such as the Loans have been originated in
significant volume only during the past few years and none of the Transferor,
the Depositor or the Servicer is aware of any publicly available studies or
statistics on the rate of prepayment of such loans. The prepayment experience of
the Loans may differ significantly from that of first lien residential mortgage
loans or second lien mortgage loans with combined loan-to-value ratios at or
below 100%. The prepayment experience of the Loans may be affected by a wide
variety of factors, including general economic conditions, interest rates, the
availability of alternative financing, the Combined Loan-to-Value Ratio of the
Loans, the existence and enforceability of prepayment penalties and homeowner
mobility. In addition, substantially all 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 accepted servicing practices, permits the
purchaser of the related Mortgaged Property to assume the Loan or (ii) such
enforcement is not permitted by applicable law. To the extent permitted by
applicable law, such assumption will not release the original borrower from its
obligation under any such Loan. See 'Certain Legal Aspects of Residential
Loans -- Enforceability of Certain Provisions' in the Prospectus.
The extent to which the yield to maturity of an Offered Note may vary from
the anticipated yield will depend upon (i) the degree to which it is purchased
at a premium or a discount, (ii) the degree to which the timing of payments to
holders thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults, delinquencies, substitutions, modifications and repurchases of Loans
and the
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payment of Excess Spread and amounts remaining in the Pre-Funding Account at the
end of the Pre-Funding Period, (iii) the application of Allocable Loss Amounts
to certain Classes of Offered Notes as specified herein, (iv) the prices paid
for the Offered Notes by investors, and (v) in the case of the Class A-1 Notes,
the level of LIBOR from time to time. In the case of any Offered Note purchased
at a discount, an investor should consider the risk that a slower than
anticipated rate of principal payments to the holders of such Offered Note
(including, without limitation, principal prepayments on the Loans) could result
in an actual yield to such investor that is lower than the anticipated yield
and, in the case of any Offered Note purchased at a premium, the risk that a
faster than anticipated rate of principal payments to the holders of such
Offered Note (other than the Class A-4 IO Notes) (including, without limitation,
principal prepayments on the Loans) could result in an actual yield to such
investor that is lower than the anticipated yield. The yield to maturity of the
Class A-4 IO Notes will be extremely sensitive to any such principal payments on
the Class A-4 Notes.
On each Payment Date, until the Overcollateralization Amount is at least
equal to the Overcollateralization Target Amount, the allocation of the Excess
Spread for such Payment Date as an additional payment of principal on one or
more Classes of the Offered Notes (other than the Class A-4 IO Notes) will
accelerate the amortization of such Classes of the Offered Notes relative to the
amortization of the Loans; however, any reduction in the Overcollateralization
Amount which is distributed to the Residual Interest Certificates, as described
herein, can be expected to result in a slower amortization of the Offered Notes
(other than the Class A-4 IO Notes) and may delay principal payments to the
holders of the Offered Notes (other than the Class A-4 IO Notes). Further, in
the event that significant payments of principal are made to holders of the
Offered Notes (other than the Class A-4 IO Notes) as a result of prepayments,
liquidations, repurchases and purchases of the Loans or payments of Excess
Spread or amounts remaining in the Pre-Funding Account at the end of the Pre-
Funding Period, there can be no assurance that holders of such Offered Notes
will be able to reinvest such payments in a comparable alternative investment
having a comparable yield. See 'Prepayment and Yield Considerations' herein.
The yield to investors in the Class A-4 IO Notes will be highly sensitive
to the rate of principal payments (including prepayments) on the Loans, to the
extent such payments reduce the Class Principal Balance of the Class A-4 Notes,
and to any partial redemption of the Class A-4 Notes resulting from a
distribution of funds from the Pre-Funding Account. An investor that purchases
any Class A-4 IO Notes, which have no principal balance, should consider the
risk that a faster than anticipated rate of principal payments on the Loans will
result in an actual yield that is lower than such investor's expected yield and
should consider the risk that a rapid rate of principal payments on the Loans
could result in the failure of such investor to fully recover its initial
investment.
Because each Class of Mezzanine Notes and the Class B-1 Notes are
subordinate in right of payment of interest and principal, respectively, to each
Class of Notes having a higher payment priority, and because Allocable Loss
Amounts will be allocated to the Mezzanine Notes and the Class B-1 Notes in
inverse order of payment priority, the yields to maturity of the Class M-1,
Class M-2 and Class B-1 Notes will be sensitive, in varying degrees, to
delinquencies and losses on the Loans. As a result, holders of such Notes may
incur a loss on their investments.
ADEQUACY OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Notes will be provided by
(i) the subordination of distributions in respect of the Residual Interest
Certificates and payments on the Class B-2 Notes (as well as the subordination
of certain Classes of Offered Notes to other Classes of Offered Notes senior in
priority, as described herein) and (ii) the overcollateralization feature which
results from the limited acceleration of the principal amortization of one or
more Classes of the Offered Notes relative to the amortization of the Loans by
the application of Excess Spread, as described herein. If the Loans experience
higher rates of delinquencies, defaults and losses than initially anticipated in
connection with the ratings of the Offered Notes, the amounts available from the
credit enhancement may not be adequate to cover the delays or shortfalls in
payments to the holders of the Offered Notes that result from such higher
delinquencies, defaults and losses. If the amounts available from the credit
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enhancement are inadequate, the holders of the Offered Notes will bear the risk
of any losses and delays in payments.
The rights of the holders of the Class M-1 Notes to receive payments of
interest on each Payment Date will generally be subordinated to such rights of
the holders of the Senior Notes, the rights of the holders of the Class M-2
Notes to receive payments of interest on each Payment Date will generally be
subordinated to such rights of the holders of the Class M-1 Notes and the Senior
Notes, the rights of the holders of the Class B-1 Notes to receive payments of
interest on each Payment Date will generally be subordinated to such rights of
the holders of the Senior Notes and the Mezzanine Notes and the rights of the
holders of the Class B-2 Notes to receive payments of interest on each Payment
Date will generally be subordinated to such rights of the holders of the Senior
Notes, the Mezzanine Notes and the Class B-1 Notes. In addition, the rights of
the holders of the Class M-1 Notes to receive payments of principal on each
Payment Date will generally be subordinated to the rights of the holders of the
Senior Notes to receive payments of interest and/or principal on each Payment
Date, the rights of the holders of the Class M-2 Notes to receive payments of
principal on each Payment Date will generally be subordinated to the rights of
the holders of the Senior Notes and the Class M-1 Notes to receive payments of
interest and/or principal on each Payment Date, the rights of the holders of the
Class B-1 Notes to receive payments of principal on each Payment Date will
generally be subordinated to the rights of the Senior Notes and the Mezzanine
Notes to receive payments of interest and/or principal on each Payment Date and
the rights of the holders of the Class B-2 Notes to receive payments of
principal on each Payment Date will generally be subordinated to the rights of
the Senior Notes, the Mezzanine Notes and the Class B-1 Notes to receive
payments of interest and/or principal on each Payment Date. Consequently, the
holders of the Class B-1 Notes may receive no payments of interest on a Payment
Date until all amounts due on the Senior Notes and the Mezzanine Notes on
account of interest have been paid, and may receive no payments of principal on
a Payment Date until all amounts due on the Senior Notes and the Mezzanine Notes
on account of interest and principal have been paid. See 'Description of Credit
Enhancement -- Subordination and Allocation of Losses' herein.
The payment of Excess Spread to the holders of certain of the Notes in the
manner specified herein is intended, first, to eliminate the 1%
undercollateralization that will exist on the Closing Date, and then to produce
and maintain a particular level of overcollateralization. However, there can be
no assurance that Excess Spread will be generated in sufficient amounts to
ensure that such overcollateralization level will be achieved or maintained at
all times. In particular, as a result of delinquencies on the Loans during any
Due Period, the Excess Spread that will be available on the related Payment Date
will be reduced. Such an occurrence will cause the Class Principal Balances or
Notional Balance, as the case may be, of the Offered Notes to decrease at a
slower rate relative to the Pool Principal Balance, resulting in a reduction of
the Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount.
The holders of the Class B-2 Notes and the Residual Interest Certificates
will not be required to refund any amounts previously paid to such holders
pursuant to the Transfer and Servicing Agreements, including any payments of
Excess Spread, regardless of whether there are sufficient funds on a subsequent
Payment Date to pay all amounts then payable to holders of the Offered Notes.
FHA INSURANCE; LIMITATIONS ON FHA INSURANCE
The availability of FHA Insurance following a default on a Title I Loan is
subject to a number of conditions as further described under 'Master
Financial -- Description of FHA Insurance under Title I' herein and 'Description
of Primary Insurance Coverage -- FHA Insurance and VA Guarantees' in the
Prospectus. FHA Insurance that is expected to be initially available to the
Title I Contract Holder in respect of the Title I Loans is $299,590. Such amount
of insurance represents an amount which is equal to approximately 10% of the
Cut-Off Date Balance of the Title I Loans. Any FHA Reserves (as defined herein)
relating to the Title I Loans included in the Pool will consist of FHA Reserves
that cover not only the Title I Loans but may also cover other loans insured
pursuant to Title I not included in the Pool, which other Title I Loans may be
owned by the Title I Contract Holder or an affiliate thereof or by Master
Financial, or may be included in a Related Series Trust (as defined herein). In
the event that the FHA Reserves are applied to such other Title I loans in a
Related Series Trust or otherwise, there
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may be insufficient FHA Reserves to cover losses on Title I Loans included in
the Pool. See 'Master Financial -- Description of FHA Insurance under Title I'
herein and 'The Trust Funds -- Residential Loans -- FHA Loans and VA Loans' and
'Description of Primary Insurance Coverage -- FHA Insurance and VA Guarantees'
in the Prospectus regarding certain other limitations on FHA Insurance.
In addition, subject to the then remaining FHA Insurance Amount applicable
to the Title I Loans, each Title I Loan will be insured by the FHA in an amount
equal to 90% of the sum of the following: (i) the unpaid principal and
uncollected interest earned to the date of default, calculated on the actuarial
method, reduced by certain amounts received in connection with enforcing a lien
on the Mortgaged Property prior to the lien of the related Title I Loan; (ii)
the unpaid amount of interest on the unpaid principal from the date of default
to the date of the claim's initial submission to the FHA for payment plus 15
calendar days, but not for any period greater than nine months from the date of
default, calculated at 7% per annum (except for the first month, in which
interest is calculated at the Mortgage Rate); and (iii) the amount of certain
uncollected court costs, attorneys' fees, and expenses for recording the
assignment of the related Title I Loan to the United States of America. Since
the remaining FHA Insurance Amount is dependent upon future events, including
reductions for the payment of claims, no assurance can be given that the FHA
Insurance Amount applicable to the Title I Loans will be adequate to cover 90%
of the losses on the Title I Loans.
UNDERCOLLATERALIZATION
At the Closing Date, the aggregate principal balance of the Class A-1,
Class A-2, Class A-3, Class A-4, Class M-1, Class M-2, Class B-1 and Class B-2
Notes is expected to exceed the Maximum Collateral Amount by the Initial
Undercollateralization Amount. The Initial Undercollateralization Amount is
expected to be eliminated by the application of Excess Spread, which will then
be applied to produce overcollateralization as described herein. There can be no
assurance, however, that Excess Spread will be generated in sufficient amounts
to eliminate such undercollateralization, or to do so within the period of time
anticipated by investors. See ' -- Adequacy of Credit Enhancement' above.
GEOGRAPHIC CONCENTRATION
Approximately 26.72% of the Original Pool Principal Balance consists of
Loans that are secured by Mortgaged Properties located in the State of
California. Because of the relative geographic concentration of Mortgaged
Properties within California, delinquencies and losses on the Loans may be
higher than would be the case if the Loans were more geographically diversified.
Adverse economic conditions, including a recession, in California (which may or
may not affect real property values) may affect the ability of the related
borrowers to make timely payments of their scheduled monthly payments of
principal and interest and, accordingly, the actual rates of delinquencies,
defaults and losses on such Loans could be higher than those currently
experienced in the home lending and consumer finance industry for similar types
of loans. In addition, with respect to the Loans secured by Mortgaged Properties
located in California, certain of such Mortgaged Properties may be more
susceptible to certain types of special hazards that are not covered by any
casualty insurance, such as earthquakes, floods and other natural disasters and
major civil disturbances, than residential properties located in other parts of
the country. In general, declines in the California residential real estate
market may adversely affect the values of the Mortgaged Properties located in
California such that the outstanding principal balance of such Loans, together
with the outstanding principal amount of any senior liens on such Mortgaged
Properties, will further increase relative to the value of such Mortgaged
Properties. Accordingly, the actual rates of defaults and losses on such Loans
secured by Mortgaged Properties located in California could be higher than those
currently experienced in the home lending and consumer finance industry in
general.
SUBSEQUENT LOANS
The ability of Master Financial to acquire or originate loans subsequent to
the date hereof and on or prior to August 28, 1998 that meet the requirements
for transfer during the Pre-Funding Period
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under the Grantor Trust Agreement is affected by a variety of factors, including
interest rates, employment levels, the rate of inflation and consumer perception
of economic conditions generally. Although Master Financial expects that
substantially all of the Pre-Funding Amount will be used to acquire Subsequent
Loans, so that there will be no material distributions in respect of the Grantor
Trust Certificate and, in turn, principal payments to holders of the Offered
Notes from the amount remaining in the Pre-Funding Account at the end of the
Pre-Funding Period, no assurances can be given that this will occur. On the
Payment Date following the Due Period in which the termination of the
Pre-Funding Period occurs, if the Pre-Funding Amount at the end of the
Pre-Funding Period is less than $50,000, any such Pre-Funding Amount will be
distributed in respect of the Grantor Trust Certificate and, in turn, paid to
the holders of the Classes of Notes then entitled to receive principal on such
Payment Date in reduction of the related Class Principal Balances, thus
resulting in a partial redemption of the related Notes on such date. On the
Payment Date following the Due Period in which the termination of the
Pre-Funding Period occurs, if the Pre-Funding Amount at the end of the
Pre-Funding Period is greater than or equal to $50,000 (such event, a
'Pre-Funding Payment Trigger'), such Pre-Funding Amount will be paid to the
holders of all Classes of Offered Notes (other than the Class A-4 IO Notes) and
the Class B-2 Notes then outstanding, pro rata, based on the respective Original
Class Principal Balances thereof. In the event that such amount remaining in the
Pre-Funding Account is substantial, holders of the Offered Notes (other than the
Class A-4 IO Notes) and the Class B-2 Notes will receive a significant
unanticipated payment of principal in September 1998.
Any conveyance of Subsequent Loans is subject to the conditions set forth
in the Sale and Servicing Agreement, which include, among others: (i) each
Subsequent Loan must satisfy the representations and warranties applicable to
the Initial Loans; (ii) the Transferor will not select Subsequent Loans in a
manner that it believes is adverse to the interests of the holders of the Notes,
and (iii) as of the applicable Cut-Off Date, all of the Loans must satisfy
certain statistical criteria set forth in the Sale and Servicing Agreement. The
Subsequent Loans may have been originated or purchased by the Transferor using
credit criteria different from those applied to the Initial Loans and may be of
different credit quality and have different loan characteristics than the
Initial Loans.
UNDERWRITING GUIDELINES
Pursuant to the underwriting guidelines of the Transferor, the assessment
of the creditworthiness of the related Obligor is the primary consideration in
underwriting the Loans, and the evaluation of the adequacy of the value of the
related Mortgaged Properties or other secured properties in relation to the
Loans, together with the amount of all liens senior to the lien of the Loans, is
given less consideration in underwriting the Loans. See 'Underwriting Criteria'
herein. The credit quality of some of the borrowers under the Loans is lower
than that of borrowers under mortgage loans conforming to the FNMA or FHLMC
underwriting guidelines for first-lien, single-family mortgage loans. See 'The
Pool -- Characteristics of Initial Loans' herein. Consequently, the Loans are
likely to experience higher rates of delinquencies, defaults and losses (which
rates could be substantially higher) than those that would be experienced by
loans underwritten in conformity with the FNMA or FHLMC underwriting guidelines
for first-lien, single-family mortgage loans. In addition, the losses sustained
from defaulted Loans are likely to be more severe (and will frequently be total
losses) because the costs incurred in the collection and liquidation of
defaulted Loans in relation to the smaller principal balances thereof are
proportionately higher than for first-lien, single-family mortgage loans, and
because substantially all of the Loans are secured by junior liens on Mortgaged
Properties in which the Obligors had little or no equity at the time of
origination of such Loans. See ' -- Adequacy of Credit Enhancement' above.
Although the creditworthiness of the related Obligor is the primary
consideration in the underwriting of the Loans, no assurance can be given that
the creditworthiness of such Obligors will not deteriorate as a result of future
economic and social factors, which deterioration may result in a delinquency or
default by such Obligors on the related Loan. Furthermore, because the adequacy
of the value of the related Mortgaged Property is given less consideration in
underwriting a Loan, no assurance can be given that any proceeds will be
recovered from the foreclosure or liquidation of the Mortgaged Property for a
defaulted Loan. See ' -- Realization Upon Defaulted Loans' below.
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The Transferor's underwriting requirements for certain types of home loans
may change from time to time, which in certain instances may result in less
stringent underwriting requirements. Depending upon the date on which the Loans
were originated or purchased by the Transferor, such Loans may have been
originated or purchased by the Transferor pursuant to different underwriting
requirements, and accordingly, certain Loans included in the Pool may be of a
different credit quality and have different loan characteristics than other
Loans. To the extent that certain Loans were originated or purchased by the
Transferor under less stringent underwriting requirements, such Loans may be
more likely to experience higher rates of delinquencies, defaults and losses
than those Loans originated or purchased pursuant to more stringent underwriting
requirements.
ADEQUACY OF THE MORTGAGED PROPERTIES AS SECURITY FOR THE LOANS
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio
of the Initial Loans was approximately 113.73%. In addition, the Subsequent
Loans are expected to have the same or possibly higher Combined Loan-to-Value
Ratios. Because the weighted average remaining term to maturity of the Initial
Loans as of the initial Cut-Off Date was approximately 232 months, the borrowers
will not build equity in the related Mortgaged Properties through amortization
of their Loans for a substantial period of time. As a result of the level of
Combined Loan-to-Value Ratios, the Mortgaged Properties are highly unlikely to
provide adequate security for the Loans. Even assuming that a Mortgaged Property
provides adequate security for the related Loan, substantial delays could be
encountered in connection with the liquidation of a Loan that would result in
current shortfalls in payments to the holders of the Offered Notes to the extent
such shortfalls are not covered by the credit enhancement described herein. In
addition, liquidation expenses relating to any defaulted Loan (such as legal
fees, real estate taxes and maintenance and preservation expenses) would reduce
the liquidation proceeds otherwise payable to the holders of the Offered Notes.
In the event that any Mortgaged Property fails to provide adequate security for
the related Loan, any losses in connection with such Loan will be borne by
holders of the Offered Notes as described herein to the extent that the credit
enhancement described herein is insufficient to absorb all such losses. See
' -- Realization Upon Defaulted Loans' below.
REALIZATION UPON DEFAULTED LOANS
The Loans are expected to be secured primarily by second liens for which
the related senior liens are not included in the Pool. The primary risk to
holders of Loans secured by junior liens is the very high likelihood that
adequate funds will not be received in connection with a foreclosure of the
related Mortgaged Property to satisfy fully both the senior lien(s) and the
Loan. See 'Risk Factors -- Nature of Mortgages' in the Prospectus. In accordance
with the loan servicing practices of the Servicer for home loans secured by
junior liens in its portfolio and based upon a determination that the
foreclosure of a defaulted junior lien Loan may not be an economically viable
alternative, it is expected that the Servicer will not (i) pursue the
foreclosure of the defaulted Loan, (ii) satisfy the related senior mortgage(s)
at or prior to the foreclosure sale of the Mortgaged Property, or (iii) advance
funds to keep the related senior mortgage(s) current. The Issuer will have no
source of funds to satisfy the senior mortgage(s) or make payments due thereon
and, therefore, holders of the Offered Notes should not expect that any senior
mortgage(s) will be kept current by the Issuer for the purpose of protecting any
junior lien Loan. As a result, the Servicer may pursue alternative methods of
servicing defaulted Loans to maximize proceeds therefrom, including, without
limitation, accepting short pay-offs, short sales, assumptions and the
modification of such Loans, which, among other things, may include the abatement
of accrued interest or the reduction of a portion of the outstanding principal
balance of such Loans. Because substantially all of the Loans had or are
expected to have Combined Loan-to-Value Ratios at the time of origination in
excess of 100%, losses sustained from defaulted Loans are likely to be more
severe (and are expected to be total losses) in relation to the outstanding
principal balance of such defaulted Loans. In fact, no assurance can be given
that any proceeds, or a significant amount of proceeds, will be recovered from
the liquidation of defaulted Loans. See 'Certain Legal Aspects of Residential
Mortgage Loans -- Foreclosure on Mortgages' and ' -- Junior Mortgages' in the
Prospectus.
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RELOCATION AND RELOADING OF DEBT
With respect to Loans which have Combined Loan-to-Value Ratios in excess of
100%, there is a risk that if the related borrowers relocate, such borrowers
will be unable to discharge the Loans in full from the sale proceeds of the
related Mortgaged Properties and any other funds available to these borrowers,
in which case the Loans could experience higher rates of delinquencies, defaults
and losses. With respect to any Loans, the proceeds of which were used in whole
or in part for debt consolidation, there can be no assurance that, following the
debt consolidation, the related borrower will not incur further consumer debt to
third party lenders. This reloading of debt could impair the ability of such
borrowers to service their debts, which in turn could result in higher rates of
delinquencies, defaults and losses on the Loans.
ACQUISITIONS FROM THIRD PARTIES
A significant portion of the Loans will have been acquired by the
Transferor through purchases from a network of correspondent lenders or through
a portfolio acquisition program. See 'The Pool -- General' herein. All of such
Loans will have been reviewed for compliance with the Transferor's underwriting
guidelines and if not underwritten by the Transferor, then re-underwritten or
audited by the Transferor. The Transferor may have acquired certain Loans from
an originator that, at the time of origination, was not an approved FHA lender
or an approved FNMA or FHLMC seller/servicer, and therefore did not have an
internal quality control program substantially similar to the FNMA or FHLMC
required quality control programs. Such Loans may be subject to a higher
incidence of delinquency or default.
RECENT ORIGINATION OF LOANS
As of the Cut-Off Date, 99.84% of the Initial Loans were not more than 30
days delinquent in their scheduled monthly payments of principal and interest
and 100% of the Initial Loans were not more than 60 days or more delinquent in
their scheduled monthly payments of principal and interest. See ' -- Limited
Historical Delinquency, Loss and Prepayment Information' below.
LIMITED HISTORICAL DELINQUENCY, LOSS AND PREPAYMENT INFORMATION
Since January 1995, Master Financial has substantially increased the volume
of its originations, purchases, sales and servicing of conventional home loans,
including additional types of home loans (e.g., debt consolidation loans and
high Combined Loan-to-Value Ratio home equity loans) and thus it has limited
historical experience with respect to the performance, including the delinquency
and loss experience and the rate of prepayments, of these various types of
conventional home loans vis-a-vis its entire portfolio of loans. Accordingly,
neither the delinquency experience and loan loss and liquidation experience set
forth under 'Master Financial -- Delinquency Experience,' herein nor the
prepayment scenarios set forth under 'Prepayment and Yield
Considerations -- Weighted Average Lives of the Offered Notes' herein may be
indicative of the performance of the Loans included in the Pool. There can be no
assurance that the performance of the Loans will be consistent with industry
experience for similar types of loans. Prospective investors should make their
investment determination based on the Loan underwriting criteria, the
availability of the credit enhancement described herein, the characteristics of
the Loans and other information provided herein, and not based on any prior
delinquency experience and loan loss and liquidation experience information set
forth herein or on any rate of prepayments assumed herein. For a description of
the underwriting criteria applicable to the Loans, see 'Underwriting Criteria'
herein.
NO SERVICER DELINQUENCY ADVANCES
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. As a result of the foregoing,
the Excess Spread that will be available on the related Payment Date will be
reduced. Such an occurrence could cause the Class Principal Balances of the
Class A-1, Class A-2, Class A-3, Class A-4, Class M-1, Class M-2 and Class B-1
Notes to decrease at a slower rate relative to
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the Pool Principal Balance, resulting in a possible reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. Further, the Servicer will not be required to make advances for the
preservation, restoration or protection of any Mortgaged Property. See
'Description of the Transfer and Servicing Agreements -- Servicing' herein.
DEPENDENCE ON SERVICER FOR SERVICING LOANS
Upon the Servicer's failure to remedy a Servicer Event of Default under the
Sale and Servicing Agreement, a majority of the holders of the Notes, the
Indenture Trustee, the Grantor Trustee or the Owner Trustee may remove the
Servicer and appoint a successor servicer. Absent such a replacement, the
holders of the Notes will be dependent upon the Servicer to adequately and
timely perform its servicing obligations and remit to the Indenture Trustee the
funds from the payments of principal and interest received on the Loans. The
manner in which the Servicer performs its servicing obligations will affect the
amount and timing of the principal and interest payments received on the Loans.
Such principal and interest payments are the only source of funds for the
payments due to the holders of the Notes. See 'Master Financial -- Servicing
Experience' herein.
ECONOMIC CONDITIONS
For the limited period of time during which loans in the nature of the
Loans have been originated, economic conditions nationally and in most regions
of the country have been generally favorable. A deterioration in economic
conditions could be expected to adversely affect the ability and willingness of
borrowers to repay their Loans; however, because of lenders' limited experience
with loans similar to the Loans, no prediction can be made as to the severity of
the effect of a general economic downturn on the rate of delinquencies and
defaults on the Loans. Because borrowers under the Loans generally have little
or no equity in the related Mortgaged Properties, any significant increase in
the rate of delinquencies and defaults could result in substantial losses to the
holders of the Notes, in particular the Class B-1 Notes. See ' -- Adequacy of
the Mortgaged Properties as Security for the Loans' above and 'Prepayment and
Yield Considerations' herein.
LEGAL CONSIDERATIONS
The sale of the Loans from the Transferor to the Depositor pursuant to the
Home Loan Purchase Agreement will be treated by the Transferor and the Depositor
as a sale of the Loans. The Transferor will warrant that such transfer is a sale
of the Transferor's interest in the Loans. In the event of an insolvency of the
Transferor, the receiver or bankruptcy trustee of the Transferor may attempt to
recharacterize the sale of the Loans as a borrowing by the Transferor secured by
a pledge of the Loans. If the receiver or bankruptcy trustee decided to
challenge such transfer, delays in payments on the Offered Notes and possible
reductions in the amount thereof could occur.
CERTAIN OTHER LEGAL CONSIDERATIONS
The underwriting, origination, servicing and collection of the Loans are
subject to a variety of state and federal laws, public policies and principles
of equity. Depending on the provisions of applicable law and the specific facts
and circumstances involved, violations of these laws, policies or principles may
limit the ability of the Servicer to collect all or part of the principal or
interest on the Loans, may entitle the Obligors to a refund of amounts
previously paid, and, in addition, could subject the Servicer or the Transferor
to damages and administrative sanctions. If the Servicer is unable to collect
all or part of the principal or interest on any Loans because of a violation of
the aforementioned laws, public policies or general principles of equity, then
the Issuer may be delayed in making, or be unable to make, all payments owed to
the holders of the Offered Notes to the extent any related losses are not
otherwise covered by amounts available from the credit enhancement provided for
the Offered Notes. Furthermore, depending upon whether damages and sanctions are
assessed against the Servicer or the Transferor, such violations may materially
impact (i) the financial ability of the Servicer to continue to act in such
capacity or (ii) the ability of the Transferor to repurchase or replace
Defective Loans, if such violation constitutes a breach of a representation or
warranty under the Home Loan Purchase
S-26
<PAGE>
<PAGE>
Agreement. See 'Risk Factors -- Certain Other Legal Considerations Regarding
Residential Loans' in the Prospectus. The Transferor will be required to
repurchase or replace any Loan which did not comply with applicable state and
federal laws and regulations as of the Closing Date. See ' -- Limitations on
Repurchase or Replacement of Defective Loans by Transferor' below.
The National Bankruptcy Review Commission (the 'Bankruptcy Commission'), an
independent commission established under the Bankruptcy Reform Act of 1994 to
study issues and make recommendations relating to the United States Bankruptcy
Code (the 'Bankruptcy Code'), has delivered a report to the President and
Congress. The Bankruptcy Commission recommends in its report that the Bankruptcy
Code be amended to treat any claim secured only by a junior lien on a borrower's
principal residence as unsecured to the extent that the amount of such claim
exceeds the value of the mortgaged property at the date of origination. If such
a change in the Bankruptcy Code were to be enacted, and if such change were to
apply to loans originated prior to enactment, a substantial majority of the
Loans would likely be treated as unsecured debt in a case under Chapter 13 of
the Bankruptcy Code. As a consequence, borrowers who become Chapter 13 debtors
would have substantially less incentive to make arrangements for repayment of
their Loans, and the likelihood that the Issuer would recover any amounts in
respect of the related Loans would be remote.
LIMITATIONS ON LIQUIDITY OF TRANSFEROR
As a result of the Transferor's increasing volume of loan originations and
purchases, and its expanding securitization activities, the Transferor requires
substantial capital to fund its operations and has operated, and expects to
continue to operate, on a negative operating cash flow basis. Currently, the
Transferor funds substantially all of its operations, including its loan
originations and purchases, from borrowings under the Transferor's lending
arrangements with certain third parties (including an affiliate of Residential
Funding Securities Corporation), including warehouse and residual financing
facilities. There can be no assurance that, as the Transferor's existing lending
arrangements mature, the Transferor will have access to the financing necessary
for its operations or that such financing will be available to the Transferor on
favorable terms. To the extent that the Transferor is unable to arrange new or
alternative methods of financing on favorable terms, the Transferor may have to
curtail its loan origination and purchasing activities, which could have a
material adverse effect on the Transferor's financial condition and, in turn,
its ability to service the Loans and to repurchase or replace any Defective
Loans.
LIMITATIONS ON REPURCHASE OR REPLACEMENT OF DEFECTIVE LOANS BY TRANSFEROR
Pursuant to the Home Loan Purchase Agreement, the Transferor has agreed to
cure in all material respects any breach of the Transferor's representations and
warranties set forth in the Home Loan Purchase Agreement with respect to
Defective Loans. If the Transferor cannot cure such breach within a specified
period of time, the Transferor is required to repurchase such Defective Loans
from the Grantor Trustee or substitute other loans for such Defective Loans. For
a summary description of the Transferor's representations and warranties, see
'Description of the Transfer and Servicing Agreements -- Representations and
Warranties' herein.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing or replacing any Defective
Loan(s) in the manner described above. If the Transferor repurchases, or is
obligated to repurchase, any defective home loan(s) from any other series of
asset backed securities, the financial ability of the Transferor to repurchase
any Defective Loan(s) from the Grantor Trustee may be adversely affected. In
addition, other events relating to the Transferor and its lending activities can
occur that would adversely affect the financial ability of the Transferor to
repurchase or replace Defective Loans from the Grantor Trust, including, without
limitation, the sale or other disposition of all or any significant portion of
its assets. If the Transferor is unable to repurchase or replace a Defective
Loan, then the Servicer, on behalf of the Grantor Trust, will utilize customary
servicing practices to recover the maximum amount possible with respect to such
Defective Loan and any resulting loss will be borne by the holders of the
Offered Notes to the extent that such loss is not otherwise covered by amounts
available from the credit enhancement provided for the Offered Notes. See
'Master Financial' and 'Description of Credit Enhancement' herein.
S-27
<PAGE>
<PAGE>
THE POOL
GENERAL
The Pool will initially consist of the Initial Loans conveyed to the
Grantor Trustee on the Closing Date. On or prior to August 28, 1998, the Issuer
may cause the Grantor Trustee to purchase Subsequent Loans having an unpaid
principal balance equal to the Original Pre-Funding Amount. All of the Loans
will be conventional and FHA-insured, closed-end, fixed-rate Loans which are not
insured or guaranteed by any governmental agency (other than the Title I Loans)
and the related proceeds of which were used to (i) finance property
improvements, (ii) finance debt consolidation, (iii) finance the partial
refinancing of residential properties, (iv) provide cash to the borrower for
unspecified purposes or (v) a combination of the foregoing. The Loans will be
secured by mortgages, deeds of trust and security deeds on residences (i.e.,
one- to four-family residences, condominium units and townhouses, including
investment properties) (the 'Mortgaged Properties') that are generally junior
(i.e., second) in priority to one or more senior liens on the related Mortgaged
Properties.
As of the Cut-Off Date, approximately 88.60% of the Loans (by Original Pool
Principal Balance) will be secured by liens on Mortgaged Properties in which the
borrowers have no equity therein (i.e., the related Combined Loan-to-Value
Ratios exceed 100%) at the time of origination of such Loans.
144 Mortgage Loans, representing 1.84% of the Mortgage Pool, were
originated under a program providing for partial insurance by the FHA pursuant
to Title I of the National Housing Act. See 'Master Financial -- Description of
FHA Insurance under Title I' herein and 'Description of Primary Insurance
Coverage -- FHA Insurance and VA Guarantees' in the Prospectus.
Generally, the Loans will have been originated or acquired by the
Transferor in one of three ways: (i) the wholesale purchase of loans, on a flow
basis, originated by unaffiliated lenders, as correspondents ('correspondent
originations'), including delegated underwriting correspondents; (ii) the
origination of loans directly to consumers, including but not limited to
solicitations through advertising and telemarketing ('direct originations'); or
(iii) the purchase, on a bulk basis, of loan portfolios originated by other
unaffiliated lenders ('portfolio acquisitions'). All of the Loans will have been
underwritten, re-underwritten or audited to determine whether such Loans comply
with the underwriting standards of the Transferor.
All of the Loans will be sold by the Transferor to the Depositor, which
will then transfer the Loans to the Grantor Trustee pursuant to the Grantor
Trust Agreement. The Grantor Trust will be entitled to all payments of principal
and interest in respect of the Loans received after the Cut-Off Date.
PAYMENTS ON THE LOANS
The Initial Loans will, and the Subsequent Loans are expected to, have
scheduled monthly payment dates that occur throughout a month. Each Loan bears
interest at a fixed rate (the 'Loan Rate'). Interest on the Initial Loans will,
and interest on the Subsequent Loans is expected to, accrue on either an
'actuarial interest' method or a 'simple interest' method. No Loan will provide
for deferred interest or negative amortization.
The actuarial interest method provides that interest is charged and
payments are due as of a scheduled day each month that is fixed at the time of
origination, and payments received after a grace period following such scheduled
day are subject to late charges. A scheduled payment on such a Loan received
either earlier or later than the scheduled due date thereof will not affect the
amortization schedule or the relative application of such payment to principal
and interest in respect of such Loan.
The simple interest method provides for the amortization of the amount of a
Loan over a series of equal scheduled payments. However, unlike the monthly
actuarial interest method, each scheduled payment will be applied to interest
calculated on the basis of the outstanding principal balance of the related
Loan, the Loan Rate and the period elapsed since the preceding payment of
principal was made. As payments are received on the Loan, the amount received is
applied first to interest accrued to the date of payment and the balance, if
any, is applied to reduce the unpaid principal balance. Accordingly, if a
borrower pays a fixed monthly installment on such a Loan less than one month
after the previous payment, the portion of the payment allocable to interest for
the period since the preceding payment
S-28
<PAGE>
<PAGE>
was made will be less than it would have been had the payment been made as
scheduled, and the portion of the payment applied to reduce the unpaid principal
balance will be correspondingly greater. Conversely, if a borrower pays a fixed
monthly installment on such a Loan more than one month after the previous
payment, the portion of the payment allocable to interest for the period since
the preceding payment was made will be greater than it would be had the payment
been made as scheduled, and the portion of the payment applied to reduce the
unpaid principal balance will be correspondingly less. In addition, in certain
states a late charge may be imposed with respect to the past due amount.
With respect to a Loan on which interest accrues pursuant to the simple
interest method, if a payment is received on such Loan less than one month after
the previous payment, more of such payment will be used on the related Payment
Date to pay principal on the Notes than if such payment was received as
scheduled. If a payment is received on such Loan more than one month after the
previous payment, less of such payment will be used on the related Payment Date
to pay principal on the Notes than if such payment was received as scheduled.
This allocation will not affect the total amount of principal due over the life
of a Loan, but it may affect the weighted average lives of the Notes. See
'Prepayment and Yield Considerations' herein.
Substantially all of the Loans are expected to provide for a schedule of
payments that will be, if paid, sufficient to fully amortize the principal
balance of the related Loan on or before its maturity date. However, it is
expected that for a de minimis amount of the Loans, during a temporary period
the monthly payments received thereon were applied in a manner that reduced the
rate of principal amortization. As a result, each such Loan may have an unpaid
principal amount on its scheduled maturity date (assuming no prepayments) of
greater than 1 time and not more than 6 times the related monthly payment.
CHARACTERISTICS OF THE LOANS
Set forth below is certain statistical information regarding
characteristics of the Initial Loans expected to be included in the Pool as of
the date of this Prospectus Supplement. This description does not take into
account any Subsequent Loans that may be added to the Pool during the
Pre-Funding Period. Prior to the Closing Date, the Transferor may remove any of
the Initial Loans intended for inclusion in the Pool, substitute comparable
loans therefor, or add comparable loans thereto; provided, however, that the
aggregate principal balance of Initial Loans so removed, replaced or added will
not exceed 5% of the Original Pool Principal Balance. As a result, the
statistical information presented below regarding the characteristics of the
Initial Loans expected to be included in the Pool may vary in certain respects
from comparable information based on the actual composition of the Initial Loans
included in the Pool at the Closing Date. In addition, after the Cut-Off Date,
the characteristics of the actual Pool may vary from the information below due
to a number of factors, particularly the purchase of Subsequent Loans after the
Closing Date. See ' -- Conveyance of Subsequent Loans' below. A schedule of the
Initial Loans included in the Pool as of the Closing Date will be attached to
the Sale and Servicing Agreement. A current report on Form 8-K containing a
description of the Loans included in the final Pool as of the end of the Funding
Period will be filed with the Commission.
LOAN STATISTICS
As of the Cut-Off Date, the Initial Loans consisted of 5,026 Loans with an
aggregate Principal Balance totaling $163,252,689 (the 'Original Pool Principal
Balance'). As of the Cut-Off Date, the Initial Loans bear interest at fixed Loan
Rates which range from 8.79% per annum to 18.49% per annum and have a weighted
average Loan Rate of approximately 13.7% per annum. As of the Cut-Off Date, the
Principal Balances of the Initial Loans range from $1,137 to $100,000 and
average $32,482. As of the Cut-Off Date, the weighted average remaining term to
stated maturity of the Initial Loans was approximately 232 months and the
weighted average number of months that have elapsed since origination was 4
months. As of the Cut-Off Date, the weighted average Combined Loan-to-Value
Ratio of the Initial Loans was approximately 113.73%. As of the Cut-Off Date,
4,017 of the Initial Loans (representing approximately 88.60% of the Original
Pool Principal Balance of such Initial Loans) had a Combined Loan-to-Value Ratio
in excess of 100%. As of the Cut-Off Date, all of the Initial
S-29
<PAGE>
<PAGE>
Loans have original stated maturities of not more than 25 years. As of the
Cut-Off Date, no Initial Loan was scheduled to mature later than May 28, 2023.
As of the Cut-Off Date, all of the Initial Loans were secured by Mortgaged
Properties located in 47 states, the District of Columbia and Puerto Rico. As of
the Cut-Off Date, substantially all of the Initial Loans were secured by
Mortgaged Properties represented by the related Obligors to be owner-occupied.
As of the Cut-Off Date, 99.84% of the Initial Loans were not more than 30
days past due and 100% of the Initial Loans were not more than 60 days past due.
The weighted average Credit Score for the Initial Loans as of the Cut-Off Date
was 680. See 'Underwriting Criteria' herein.
The sum of the dollar amounts and percentages in the following tables may
not equal the totals due to rounding.
S-30
<PAGE>
<PAGE>
GEOGRAPHIC DISTRIBUTION OF INITIAL LOANS
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
STATE LOANS BALANCE BALANCE
- ----- ----- ------- -------
<S> <C> <C> <C>
Alaska............................................................... 32 $ 1,406,342 0.86%
Arizona.............................................................. 133 5,308,183 3.25
Arkansas............................................................. 16 499,548 0.31
California........................................................... 985 43,622,276 26.72
Colorado............................................................. 94 3,823,988 2.34
Connecticut.......................................................... 61 2,573,471 1.58
Delaware............................................................. 30 492,914 0.30
District of Columbia................................................. 21 391,493 0.24
Florida.............................................................. 162 6,107,170 3.74
Georgia.............................................................. 1 24,963 0.02
Hawaii............................................................... 14 652,195 0.40
Idaho................................................................ 39 1,349,014 0.83
Illinois............................................................. 4 162,610 0.10
Indiana.............................................................. 138 3,288,177 2.01
Iowa................................................................. 26 958,522 0.59
Kansas............................................................... 69 2,460,529 1.51
Kentucky............................................................. 31 1,034,974 0.63
Louisiana............................................................ 31 1,123,757 0.69
Maine................................................................ 5 180,425 0.11
Maryland............................................................. 797 16,010,875 9.81
Massachusetts........................................................ 34 1,475,349 0.90
Michigan............................................................. 199 7,676,657 4.70
Minnesota............................................................ 54 2,041,362 1.25
Mississippi.......................................................... 5 168,709 0.10
Missouri............................................................. 77 2,578,788 1.58
Montana.............................................................. 15 470,511 0.29
Nebraska............................................................. 14 461,740 0.28
Nevada............................................................... 105 4,178,032 2.56
New Hampshire........................................................ 18 680,696 0.42
New Jersey........................................................... 2 49,681 0.03
New Mexico........................................................... 24 870,830 0.53
New York............................................................. 94 3,785,283 2.32
North Carolina....................................................... 96 3,756,511 2.30
North Dakota......................................................... 1 6,873 0.00
Ohio................................................................. 118 4,485,180 2.75
Oklahoma............................................................. 58 2,061,640 1.26
Oregon............................................................... 77 3,075,928 1.88
Pennsylvania......................................................... 483 10,624,172 6.51
Puerto Rico.......................................................... 1 6,135 0.00
Rhode Island......................................................... 16 530,326 0.32
South Carolina....................................................... 40 1,256,157 0.77
Tennessee............................................................ 69 2,336,090 1.43
Texas................................................................ 11 172,728 0.11
Utah................................................................. 35 1,570,305 0.96
Virginia............................................................. 472 8,292,663 5.08
Washington........................................................... 169 7,039,186 4.31
West Virginia........................................................ 1 41,418 0.03
Wisconsin............................................................ 45 1,854,425 1.14
Wyoming.............................................................. 4 233,892 0.14
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
S-31
<PAGE>
<PAGE>
PRINCIPAL BALANCES
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF PRINCIPAL BALANCES LOANS BALANCE BALANCE
- --------------------------- ----- ------- -------
<S> <C> <C> <C>
$10,000 or less...................................................... 919 $ 5,863,302 3.59%
$10,000.01 - $ 20,000................................................ 662 9,696,043 5.94
$20,000.01 - $ 30,000................................................ 921 23,805,558 14.58
$30,000.01 - $ 40,000................................................ 916 32,290,752 19.78
$40,000.01 - $ 50,000................................................ 786 36,770,302 22.52
$50,000.01 - $ 60,000................................................ 308 17,139,784 10.50
$60,000.01 - $ 70,000................................................ 238 15,535,699 9.52
$70,000.01 - $ 80,000................................................ 190 14,147,383 8.67
$80,000.01 - $ 90,000................................................ 32 2,718,901 1.67
$90,000.01 - $100,000................................................ 54 5,284,964 3.24
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the average Cut-Off Date Principal Balance of the
Initial Loans was approximately $32,482.
LOAN RATES
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF LOAN RATES LOANS BALANCE BALANCE
- ------------------- ----- ------- -------
<S> <C> <C> <C>
8.001% - 9.000%.................................................... 4 $ 54,863 0.03%
9.001% - 10.000%.................................................... 36 895,884 0.55
10.001% - 11.000%.................................................... 84 1,596,435 0.98
11.001% - 12.000%.................................................... 484 15,330,083 9.39
12.001% - 13.000%.................................................... 1,733 47,392,552 29.03
13.001% - 14.000%.................................................... 1,217 44,374,022 27.18
14.001% - 15.000%.................................................... 854 32,608,298 19.97
15.001% - 16.000%.................................................... 469 16,474,783 10.09
16.001% - 17.000%.................................................... 128 3,973,996 2.43
17.001% - 18.000%.................................................... 13 434,703 0.27
18.001% - 19.000%.................................................... 4 117,073 0.07
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average Loan Rate of the Initial Loans
was approximately 13.70% per annum.
LIEN PRIORITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
LIEN PRIORITY LOANS BALANCE BALANCE
- ------------- ----- ------- -------
<S> <C> <C> <C>
First Lien........................................................... 10 $ 408,970 0.25%
Second Lien.......................................................... 4,986 162,223,991 99.37
Third Lien........................................................... 30 619,728 0.38
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
S-32
<PAGE>
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF COMBINED LOAN-TO-VALUE RATIOS LOANS BALANCE BALANCE
- -------------------------------------- ----- ------- -------
<S> <C> <C> <C>
30.01% - 35.00%.................................................... 3 $ 86,451 0.05%
35.01% - 40.00%.................................................... 3 54,241 0.03
40.01% - 45.00%.................................................... 3 80,371 0.05
45.01% - 50.00%.................................................... 3 93,966 0.06
50.01% - 55.00%.................................................... 8 185,923 0.11
55.01% - 60.00%.................................................... 6 174,894 0.11
60.01% - 65.00%.................................................... 5 112,925 0.07
65.01% - 70.00%.................................................... 12 177,753 0.11
70.01% - 75.00%.................................................... 16 326,477 0.20
75.01% - 80.00%.................................................... 38 872,396 0.53
80.01% - 85.00%.................................................... 68 1,171,034 0.72
85.01% - 90.00%.................................................... 151 2,616,196 1.60
90.01% - 95.00%.................................................... 267 4,488,311 2.75
95.01% - 100.00%.................................................... 426 8,168,245 5.00
100.01% - 105.00%.................................................... 560 13,345,573 8.17
105.01% - 110.00%.................................................... 595 17,514,091 10.73
110.01% - 115.00%.................................................... 662 22,953,755 14.06
115.01% - 120.00%.................................................... 758 29,524,120 18.08
120.01% - 125.00%.................................................... 1,374 59,305,849 36.33
125.01% or greater................................................... 68 2,000,117 1.23
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average Combined Loan-to-Value Ratio
of the Initial Loans was approximately 113.73%.
MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
LOAN AGE (IN MONTHS) LOANS BALANCE BALANCE
- -------------------- ----- ------- -------
<S> <C> <C> <C>
less than 1.......................................................... 1,656 $ 68,650,379 42.05%
2 - 12.............................................................. 2,180 85,041,817 52.09
13 - 24.............................................................. 290 3,342,278 2.05
25 - 36.............................................................. 478 4,070,978 2.49
37 - 48.............................................................. 383 2,003,216 1.23
49 - 60.............................................................. 37 113,086 0.07
61 - 72.............................................................. 2 30,936 0.02
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average number of months since
origination of the Initial Loans was approximately 4 months.
S-33
<PAGE>
<PAGE>
REMAINING TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF REMAINING TERMS TO MATURITY (IN MONTHS) LOANS BALANCE BALANCE
- ------------------------------------------------ ----- ------- -------
<S> <C> <C> <C>
1 - 30............................................................ 688 $ 4,060,858 2.49%
31 - 60............................................................ 539 5,852,727 3.59
61 - 90............................................................ 17 336,781 0.21
91 - 120............................................................ 204 6,336,945 3.88
121 - 150............................................................ 5 167,273 0.10
151 - 180............................................................ 1,168 41,911,331 25.67
181 - 210............................................................ 3 71,807 0.04
211 - 240............................................................ 821 32,580,207 19.96
271 - 300............................................................ 1,581 71,934,761 44.06
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average remaining term to maturity of
the Initial Loans was approximately 232 months.
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
ORIGINAL TERM TO MATURITY (IN MONTHS) LOANS BALANCE BALANCE
- ------------------------------------- ----- ------- -------
<S> <C> <C> <C>
1 - 119............................................................ 1,245 $ 10,326,234 6.33%
120 - 179............................................................ 207 6,399,057 3.92
180 - 239............................................................ 1,168 41,974,556 25.71
240 - 299............................................................ 825 32,618,081 19.98
300 - 360............................................................ 1,581 71,934,761 44.06
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average original term to maturity of
the Initial Loans was approximately 235 months.
CREDIT SCORE
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF CREDIT SCORES LOANS BALANCE BALANCE
- ---------------------- ----- ------- -------
<S> <C> <C> <C>
Less than 620........................................................ 29 $ 605,412 0.37%
620 to 639........................................................... 591 15,842,806 9.70
640 to 659........................................................... 939 31,282,989 19.16
660 to 679........................................................... 1,013 37,568,939 23.01
680 to 699........................................................... 907 33,700,111 20.64
700 to 719........................................................... 702 24,037,058 14.72
720 to 739........................................................... 413 11,643,260 7.13
740 to 759........................................................... 226 5,265,913 3.23
760 to 779........................................................... 150 2,192,785 1.34
780 to 799........................................................... 38 856,435 0.52
800 and greater...................................................... 18 256,980 0.16
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average Credit Score of the Initial
Loans was approximately 680.
S-34
<PAGE>
<PAGE>
DEBT-TO-INCOME RATIO
<TABLE>
<CAPTION>
AGGREGATE % OF ORIGINAL
NUMBER OF PRINCIPAL POOL PRINCIPAL
RANGE OF DEBT-TO-INCOME RATIOS LOANS BALANCE BALANCE
- ------------------------------ ----- ------- -------
<S> <C> <C> <C>
20.00 or less........................................................ 75 $ 1,936,664 1.19%
20.01 to 25.00....................................................... 192 5,802,248 3.55
25.01 to 30.00....................................................... 473 14,595,863 8.94
30.01 to 35.00....................................................... 884 26,292,276 16.11
35.01 to 40.00....................................................... 1,238 36,143,553 22.14
40.01 to 45.00....................................................... 1,390 45,575,413 27.92
45.01 to 50.00....................................................... 664 27,794,861 17.03
50.01 to 55.00....................................................... 97 4,528,077 2.77
Greater than 55.00................................................... 13 583,734 0.36
--------- ------------ -------
Total........................................................... 5,026 $163,252,689 100.00%
--------- ------------ -------
--------- ------------ -------
</TABLE>
As of the Cut-Off Date, the weighted average debt-to-income ratio of the
Initial Loans was approximately 38.70.
CONVEYANCE OF SUBSEQUENT LOANS
The Grantor Trust Agreement permits the Issuer to cause the Grantor Trustee
to purchase from the Transferor, subsequent to the Closing Date and prior to
August 28, 1998, Subsequent Loans in an amount not to exceed the Original
Pre-Funding Amount for inclusion in the Grantor Trust. Accordingly, the
statistical characteristics of the Pool after giving effect to the acquisition
of any Subsequent Loans will likely differ from the information specified above
(which is based exclusively on the Initial Loans). See 'Risk
Factors -- Subsequent Loans' herein. The inclusion of Subsequent Loans in the
Grantor Trust during the Pre-Funding Period is subject to certain requirements
including: (i) such Subsequent Loans may not be 30 more days contractually
delinquent as of the related Cut-Off Date; (ii) the original term to stated
maturity of such Subsequent Loans may not exceed 25 years, and the scheduled
maturity may not be later than August 28, 2023; (iii) each such Subsequent Loan
will have an interest rate of not less than 9.99%; (iv) such Subsequent Loans
will be underwritten, re-underwritten or audited, as applicable, in accordance
with the underwriting guidelines of the Transferor in effect at such time (see
'Underwriting Criteria' herein) or originated in a manner similar to the Initial
Loans; (v) the lien securing any such Subsequent Loan must not be lower than
third priority; (vi) such Subsequent Loan must have an outstanding Principal
Balance of at least $2,500 as of the applicable Cut-Off Date; (vii) the first
payment on such Subsequent Loan must be due no later than the last day of the
Due Period immediately succeeding the Due Period in which it is transferred,
unless the Transferor deposits into the Collection Account 30 days' interest on
such Subsequent Loan at the Loan Rate less the applicable Servicing Fee rate, in
which event the first payment on such Subsequent Loan must be due no later than
the last day of the second Due Period following the Due Period in which the
transfer occurs; (viii) such Subsequent Loan is a fully amortizing loan (with
certain exceptions for Loans calculated on a 'simple interest' basis) with level
payments over the remaining term of no fewer than 10 years and no more than 25
years; (ix) any such Subsequent Loan must have an original Combined
Loan-to-Value Ratio of no more than 125%; (x) following the purchase of such
Subsequent Loans by the Grantor Trustee, the Loans included in the Pool are
expected to have a weighted average interest rate, a weighted average remaining
term to maturity, a weighted average credit score, a weighted average Combined
Loan-to-Value Ratio and geographical concentration as of each respective Cut-Off
Date comparable to those of the Initial Loans included in the initial Pool; and
(xi) no Subsequent Loan may be purchased by the Grantor Trustee unless the
Rating Agencies shall consent thereto.
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<PAGE>
<PAGE>
MASTER FINANCIAL
GENERAL
Master Financial, Inc. ('Master Financial'), the Transferor and the
Servicer under the Sale and Servicing Agreement, is a California corporation
that is a mortgage lender engaged in the business of originating, purchasing,
selling and servicing home loans generally secured by one- to four-family
residential properties, with an emphasis on non-conforming junior lien loans.
Master Financial was incorporated in California in 1981 and currently is
licensed as a mortgage lender or registered as required to originate or purchase
loans in 43 states.
Master Financial has its principal offices at 333 South Anita Drive,
Orange, California 92868 (telephone number (714) 456-1000). It currently has
approximately 261 employees including professionals and support staff.
As of March 31, 1998, Master Financial was servicing a loan portfolio
having an aggregate outstanding principal balance of approximately
$1,200,373,529.
SERVICING EXPERIENCE
Since May 1996, the Servicer has substantially increased the volume of
conventional home loans that it has originated, purchased, sold and/or serviced.
The Servicer has limited historical data with respect to the performance,
including the delinquency and loss experience and the rate of prepayments, of
the conventional loans included in its portfolio of loans. See 'Prepayment and
Yield Considerations' herein. Accordingly, the delinquency experience and loan
default and loss experience set forth below is unlikely to be indicative of the
performance of the Loans included in the Pool.
DELINQUENCY EXPERIENCE
<TABLE>
<CAPTION>
AS OF AS OF AS OF
MARCH 31, DECEMBER 31, DECEMBER 31,
DELINQUENCY DATA 1998 1997 1996
---------------- ---- ---- ----
<S> <C> <C> <C>
Delinquencies in Serviced Loan Portfolio(1):
31-60 days............................................. 0.64% 0.84% 1.14%
61-90 days............................................. 0.38% 0.43% 0.54%
91 days and over....................................... 1.77% 1.18% 1.03%
Total Delinquencies.................................... 2.79% 2.45% 2.71%
Title I Claims Pending/In Process........................... 0.12% 0.38% 0.82%
Grand Total............................................ 2.91% 2.83% 3.53%
Serviced Loan Portfolio..................................... $1,200,373,529 $1,001,011,322 $274,209,481
</TABLE>
- ------------
(1) As a percentage of the total loans serviced (by Principal Balance).
Although the preceding table indicates that from December 31, 1996 to
December 31, 1997 Master Financial has experienced declining rates of
delinquency on its serviced loan portfolio as a whole, such rates have actually
been increasing on a pool-by-pool basis. There can be no assurance that such
rates will not continue to increase. THE OVERALL DECLINE IN THE RATE OF
DELINQUENCY OF LOANS IN MASTER FINANCIAL'S SERVICING PORTFOLIO DURING SUCH
PERIOD IS PRIMARILY A RESULT OF THE INCREASED VOLUME OF LOANS ORIGINATED AND
SERVICED BY MASTER FINANCIAL. BECAUSE MASTER FINANCIAL 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
ORIGINATED LOANS WITH SHORTER PAYMENT HISTORIES HAS THE EFFECT OF REDUCING THE
OVERALL RATES OF DELINQUENCY, DEFAULT AND LOSS.
Because delinquencies and losses may occur months or years after a loan is
originated, data relating to delinquencies and losses as a percentage of the
current servicing portfolio can understate the risk of future delinquencies,
losses or foreclosures. There is no assurance that the delinquency, foreclosure
and loss experience with respect to the Loans will be comparable to the
experience reflected above for
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<PAGE>
<PAGE>
assets originated and serviced by Master Financial or its affiliates. The actual
rates of delinquencies, foreclosures and losses on the Loans, particularly in
periods during which the value of the related mortgaged properties has declined,
could be higher than those historically experienced by the mortgage lending
industry in general. In addition, the rate of delinquencies, foreclosures and
losses with respect to the Loans will be affected by, among other things,
interest rate fluctuations and general and regional economic conditions. See
'Risk Factors -- Yield, Prepayment and Maturity Considerations' herein.
REPURCHASE OR SUBSTITUTION OF LOANS
The Transferor is required (i) within 60 days after discovery or notice
thereof to cure in all material respects any breach of the representations or
warranties with respect to any Loan or as to which a material document
deficiency exists (each, a 'Defective Loan') which in either case materially and
adversely affects the value of a Loan or the interests of the Grantor Trustee,
the Owner Trustee or the Indenture Trustee therein or (ii) on or before the
Determination Date next succeeding the end of such 60-day period, to repurchase
such Defective Loan at a price (the 'Purchase Price') equal to the Principal
Balance of such Defective Loan as of the date of repurchase, plus all accrued
and unpaid interest on such Defective Loan to but not including the date of
repurchase computed at the Loan Rate. 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 of the Qualified Substitute Loan(s) is less than
the outstanding Principal Balance of the Defective Loan(s), 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 herein, a
'Qualified Substitute Loan' is a home loan that (i) has an interest rate that
differs from the Loan Rate for the Defective Loan it replaces (each, a 'Deleted
Loan') by no more than one percentage point, (ii) matures not more than one year
later than and not more than one year earlier than the Deleted Loan, (iii) has a
principal balance (after application of all payments received on or prior to the
date of such substitution) equal to or less than the Principal Balance of the
Deleted Loan as of such date, (iv) has a lien priority no lower than the Deleted
Loan, (v) 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 30 days delinquent as of the date of substitution for such
Deleted Loan and (vi) has a borrower with a comparable credit grade
classification to that of the borrower under the Deleted Loan; provided, that
with respect to a substitution of multiple loans, items (i), (ii), (iii) and
(vi) above may be considered on an aggregate or weighted average basis.
No assurance can be given that, at any particular time, the Transferor will
be capable, financially or otherwise, of repurchasing Defective Loans or
substituting Qualified Substitute Loans for Defective Loans in the manner
described above. If the Transferor repurchases, or is obligated to repurchase,
Defective Loans from any additional series of asset backed securities, the
financial ability of the Transferor to repurchase Defective Loans from the
Grantor Trustee may be adversely affected. In addition, other events relating to
the Transferor and its mortgage lending and consumer finance operations can
occur that would adversely affect the financial ability of the Transferor to
repurchase or replace Defective Loans from the Grantor Trust, including without
limitation the termination of borrowing 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, on behalf of the Grantor Trust, will pursue other
customary and reasonable efforts, if any, to recover the maximum amount possible
with respect to such Defective Loan. If the Servicer is unable to collect all
amounts due to the Grantor Trust with respect to such Defective Loan, any
resulting loss will be borne by the holders of the Offered Notes to the extent
that such loss is not otherwise covered by amounts available from the applicable
credit enhancement. See 'Risk Factors -- Adequacy of Credit Enhancement,'
' -- Limitations on Liquidity of Transferor' and ' -- Limitations on Repurchase
or Replacement of Defective Loans by Transferor' herein.
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<PAGE>
<PAGE>
DESCRIPTION OF FHA INSURANCE UNDER TITLE I
General. 1.84% of the Initial Loans are partially insured under the Title I
program and have been originated thereunder. Under the Title I program the FHA
is authorized and empowered to insure qualified lending institutions (the 'Title
I Lenders') against losses on eligible loans. The Title I program operates as a
coinsurance program in which the FHA insures up to 90% of certain losses
incurred on an individual insured loan, including the unpaid Principal Balance
of the loan, but only to the extent of the insurance coverage available in the
lender's FHA insurance coverage reserve account (an 'FHA Reserve'). Under the
Title I program, the FHA maintains an FHA Reserve for each Title I Lender and
the amount of insurance therein is limited to a maximum of 10% of the amount
disbursed, advanced or expended by the Title I Lender in originating or
purchasing each eligible loan registered with the FHA for Title I insurance,
with certain adjustments permitted or required by the FHA Regulations (as
defined herein). The owner of the loan bears the uninsured loss on each loan.
The FHA will not recognize the Depositor, the Grantor Trust, the Owner Trust or
the Noteholders as the owners of the Title I Loans, or any portion thereof, and
none of the Depositor, the Grantor Trustee, the Owner Trustee or the Noteholders
will be entitled to submit claims to the FHA with respect to the Title I Loans.
The Grantor Trust, the Owner Trust and the Noteholders will be dependent on the
Title I Contract Holder (as defined herein) to hold the FHA Reserve and the FHA
Claims Administrator (as defined herein) to submit, process and administer
claims to the FHA with respect to the Title I Loans.
Title I Loans are required to have fixed interest rates and, generally,
provide for equal installment payments due weekly, biweekly, semi-monthly, or
monthly, except that a loan may be payable quarterly or semi-annually in certain
circumstances in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than two months from the date the loan is funded. Multiple payment
schedules may not be used in connection with any loan. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the Title I Lender and must
be fixed for the term of the loan and recited in the note. Interest on a Title I
Loan must accrue from the date of the loan and be calculated according to the
actuarial method. The Title I Lender must assure that the note and all other
documents evidencing the loan are in compliance with applicable Federal, state
and local laws.
The Title I program requires each lender to use prudent lending standards
in underwriting loans and to satisfy the applicable loan underwriting
requirements under the Title I program, prior to its approval of the loan.
Generally, the Title I Lender must exercise prudence and diligence to determine
whether the borrower and any co-maker is solvent and an acceptable credit risk,
with a reasonable ability to make payments on the loan. The Title I Lender's
credit application and review must determine whether the borrower's income will
be adequate to meet the periodic payments required by the loan, as well as the
borrower's other housing and recurring expenses, which determination must be
made in accordance with the expense-to-income ratios published by the Secretary
of HUD unless the lender determines and documents in the loan file the existence
of compensating factors concerning the borrower's creditworthiness which support
approval of the loan.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF APPROVAL
BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER FEDERAL LOAN
INSURANCE PROGRAMS). If, after a loan has been made and reported for insurance
under Title I, the Title I Lender discovers any material misstatement of fact or
that the loan proceeds have been misused by the borrower, dealer or any other
party, the Title I Lender is required promptly to report this to the FHA. In
such case, provided that the validity of any lien on the property has not been
impaired, the insurance of the loan under Title I will not be affected unless
such material misstatement of fact or misuse of loan proceeds was caused by (or
was knowingly sanctioned by) the lender or its employees.
Requirements for Title I Loans. The maximum principal amounts for home
improvement loans insured under Title I must not exceed the actual cost of the
project plus any applicable fees and charges allowed under the Title I program.
The maximum loan amount for a single-family property improvement loan is
$25,000. Any Title I home improvement loan to a single borrower in excess of
$25,000 requires the prior approval of the Secretary of HUD. Generally, the term
of a Title I home
S-38
<PAGE>
<PAGE>
improvement loan may not be less than six months nor greater than 20 years and
32 days. A borrower may obtain multiple Title I home improvement loans with
respect to multiple properties, and a borrower may obtain more than one Title I
home improvement loan with respect to a single property, as long as the total
outstanding balance of all Title I home improvement loans on the same property
does not exceed the maximum loan amount for the type of Title I home improvement
loan thereon.
Borrower eligibility for a Title I home improvement loan requires that the
borrower have at least a one-half interest in either fee simple title to the
real property, a lease thereof for a fixed term expiring at least six months
after the final maturity of the Title I home improvement loan or a properly
recorded land installment contract for the purchase of the real property. Any
Title I home improvement loan in excess of $7,500 must be secured by a recorded
lien on the improved property which is evidenced by a mortgage or deed of trust
executed by the borrower and all other owners in fee simple. A Title I home
improvement loan in excess of $15,000 secured by non-owner occupied property
must have an appraised loan-to-value ratio not in excess of 100%.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the basic
livability or utility of the property as disclosed in the loan application. The
Secretary of HUD has published a list of items and activities which cannot be
financed with proceeds from any Title I home improvement loans and from time to
time the Secretary of HUD may amend such list of items and activities. The Title
I Lender is required to conduct an on-site inspection on any Title I home
improvement loan where the original principal balance is $7,500 or more.
FHA Insurance Coverage. Under the Title I program, the FHA establishes an
FHA Reserve for each Title I Lender which has been granted a Title I insurance
contract. The amount of insurance coverage in this account is a maximum of 10%
of the amount disbursed, advanced or expended by the lender in originating or
purchasing eligible loans registered with the FHA for Title I insurance, with
certain adjustments. The balance in the FHA Reserve is the maximum amount of
insurance claims the FHA is required to pay to the Title I Lender. Loans to be
insured under the Title I program will be registered for insurance by the FHA
and the insurance coverage attributable to such loans will be included in the
FHA Reserve for the originating or purchasing lender following the receipt and
acknowledgment by the FHA of a loan report on the prescribed form pursuant to
the regulations promulgated by the FHA under Title I (the 'Title I
Regulations'). For each eligible loan reported and acknowledged for insurance,
the FHA charges a fee (the 'Insurance Premium'). For loans having a maturity of
25 months or less, the FHA bills the lender for the entire Insurance Premium in
an amount equal to the product of 0.50% of the original loan amount and the loan
term. For home improvement loans with a maturity greater than 25 months, each
year that a loan is outstanding the FHA bills the lender for an Insurance
Premium in an amount equal to 0.50% of the original loan amount. If a loan is
prepaid during the year, the FHA will not refund the Insurance Premium paid for
such year. In the Sale and Servicing Agreement, the Servicer will agree to pay
all Insurance Premiums required by FHA Regulations.
Under the Title I program, the FHA will reduce the insurance coverage
available in a Title I Lender's FHA Reserve with respect to loans insured under
such Title I Lender's contract of insurance (the 'Title I Contract') by (i) the
amount of FHA insurance claims approved for payment related to such loans and
(ii) the amount of reduction of the Title I Lender's FHA Reserve by reason of
the sale, assignment or transfer of loans registered under the Title I Lender's
Title I Contract. Such insurance coverage also may be reduced for any FHA
insurance claims previously disbursed to the Title I Lender that are
subsequently rejected by the FHA.
Originations and acquisitions of new eligible loans will continue to
increase a Title I Lender's insurance coverage reserve account balance by the
lesser of (a) the amount of the FHA Insurance available for transfer at the time
of transfer to another qualified lender and (b) 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans registered
with the FHA for insurance under the Title I program. The Secretary of HUD may
transfer insurance coverage between FHA Reserves by earmarking with respect to a
particular insured loan or group of insured loans when a determination is made
that it is in the Secretary's interest to do so. As described below
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<PAGE>
<PAGE>
under the caption ' -- Contract of Insurance,' the insurance coverage reserve
funds will not be earmarked by the Secretary of HUD solely for the Trust Fund.
The Title I Lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
Title I Lender under a valid Title I Contract. Unless an insured loan is
transferred with recourse or with a guarantee or repurchase agreement, the FHA,
upon receipt of written notification of the transfer of such loan in accordance
with the Title I Regulations, will transfer from the transferor's FHA Reserve to
the transferee's FHA Reserve an amount, if available, equal to 10% of the actual
purchase price or the net unpaid principal balance of such loan (whichever is
less). However, under the Title I program not more than $5,000 in insurance
coverage shall be transferred to or from a lender's insurance coverage reserve
account during any October 1 to September 30 fiscal year without the prior
approval of the Secretary of HUD.
Claims for Procedures under Title I. Under the Title I program, the lender
may accelerate an insured loan following a default on such loan only after the
lender or its agent has contacted the borrower in a face-to-face meeting or by
telephone to discuss the reasons for the default and to seek its cure. If the
borrower does not cure the default or agree to a modification agreement or
repayment plan, the lender will notify the borrower in writing that, unless
within 30 days the default is cured or the borrower enters into a modification
agreement or repayment plan, the loan will be accelerated and full payment of
all amounts due under the loan is required and that, if the default persists,
the lender will report the default to an appropriate credit agency. The Title I
Lender may rescind the acceleration of maturity after full payment is due and
reinstate the loan only if the borrower brings the loan current, executes a
modification agreement or agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I Loan, the Title I
Lender may either (a) proceed against the related property under any security
instrument, or (b) make a claim under the Title I Lender's Title I Contract.
Generally Title I Lenders make a claim under their Title I Contract. The
availability of FHA Insurance following a default on a Title I Loan is subject
to a number of conditions, including strict compliance with FHA regulations in
origination and servicing the Title I Loan. If the Title I Lender chooses to
proceed against the property under a security instrument (or if it accepts a
voluntary conveyance or surrender of the property), the Title I Lender can later
file an insurance claim only with the prior approval of the Secretary of HUD.
When a Title I Lender files an insurance claim with the FHA under the Title
I program, the FHA reviews the claim, the complete loan file certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession, and where the borrower is in bankruptcy or deceased, evidence
that the Title I Lender has properly filed proofs of claims. Generally, for any
eligible home improvement loan, a claim for reimbursement for loss must be filed
with the FHA no later than 9 months after the date of default, except in certain
circumstances pursuant to the Title I Regulations. Concurrently with filing the
insurance claim, the Title I Lender shall assign to the United States the Title
I Lender's entire interest in the loan note (or a judgment in lieu of the note),
in any security held and in any claim filed in any legal proceedings. If, at the
time the note is assigned to the United States, the Secretary of HUD has reason
to believe that the note is not valid or enforceable against the borrower, the
FHA may deny the claim and reassign the note to the Title I Lender. If either
such defect is discovered after the FHA has paid a claim, the FHA may require
the Title I Lender to repurchase the paid claim and to accept a reassignment of
the loan note. If the Title I Lender subsequently obtains a valid and
enforceable judgment against the borrower, the Title I Lender may resubmit a new
insurance claim with an assignment of the judgment. Although regulations permit
the FHA to contest any insurance claim and make a demand for repurchase of the
loan at any time up to two years from the date the claim was certified for
payment (and may do so thereafter in the event of fraud or misrepresentation on
the part of the lender), the FHA has expressed an intention to take such action
within one year from the date the claim was certified for payment.
Under the Title I program the amount of an FHA insurance claim payment,
when made, is equal to the Claimable Amount, up to the amount of insurance
coverage in the Title I Lender's FHA Reserve established by HUD. The 'Claimable
Amount' for home improvement loans is equal to 90% of the sum of: (a) the unpaid
loan obligation (net of unpaid principal and the uncollected interest earned to
the date of default) with adjustments thereto if the Title I Lender has
proceeded against property
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<PAGE>
security for such loan; (b) the interest on the unpaid amount of the loan
obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the
uncollected court costs; (d) the attorneys' fees not to exceed $500; and (e) the
expenses for recording the assignment of the security to the United States.
Contract of Insurance. On the Closing Date, The Bank of New York (the
'Title I Contract Holder') is expected to hold or request for transfer in the
name of the Title I Contract Holder for the benefit of the Grantor Trust, the
FHA Reserves in an amount that is equal to $299,590 (the 'Initial FHA Insurance
Amount'), which is equal to approximately 10% of the outstanding Cut-Off Date
Balance of the Title I Loans. With respect to those Title I Loans for which FHA
Insurance coverage reserves have not been transferred to the Title I Contract
Holder FHA Reserve by the Closing Date, Master Financial will be required to
take appropriate steps to cause the FHA to transfer the appropriate amounts in
FHA Reserves of Master Financial to that of the Title I Contract Holder. To
accomplish this transfer, on or after the date on which Master Financial
received the FHA Title I case numbers for such Title I Loans, Master Financial
will be required to submit a transfer of note report to the Secretary of HUD
regarding the conveyance of such Title I Loans to the Owner Trustee. THERE CAN
BE NO ASSURANCE THAT SUCH TRANSFER WILL BE COMPLETED, OR THAT THE AMOUNT OF FHA
RESERVES TRANSFERRED WILL EQUAL THE AMOUNT SPECIFIED IN THE REPORT. The 'FHA
Insurance Amount' shall mean on any day of determination the Initial FHA
Insurance Amount plus all amounts subsequently transferred by the Secretary of
HUD to the Title I Contract Holder's FHA Reserve account less the amount of FHA
Insurance proceeds previously received under the Title I Contract with respect
to the Title I Loans and any loans in Related Series Trusts (as described below)
since the related transfer date. The FHA Claims Administrator (as defined
herein) shall not submit any claim to the FHA if the amount of such claim would
exceed the FHA Insurance Amount applicable to the Title I Loans. All proceeds
received in respect of such claims with respect to the Title I Loans under the
Title I Contract shall be deposited into the Collection Account.
The FHA Reserves will be held by the Title I Contract Holder in respect of
the Title I Loans included in the Pool, as well as other Title I Loans related
to any subsequent series of trusts or otherwise to which loans are sold directly
or indirectly to The Bank of New York (collectively, the 'Related Series
Trusts'). The Secretary of HUD will not earmark the insurance reserves held for
the Title I Contract Holder for the benefit of any particular series. In the
event the FHA Insurance is applied to loans in a Related Series Trust other than
the Trust, there may be insufficient FHA Insurance to cover defaults on the
Title I Loans.
The FHA Claims Administrator. Master Financial will serve as the
Administrator for FHA claims (the 'FHA Claims Administrator') pursuant to the
Sale and Servicing Agreement. The FHA Claims Administrator will be responsible
for administering, processing and submitting FHA claims with respect to the
Contracts of Insurance. The holders of the Offered Notes will be dependent on
the FHA Claims Administrator to (i) make claims on the Title I Contracts in
accordance with FHA Regulations and (ii) remit all FHA insurance proceeds
received from the FHA in accordance with the related agreement. Such holders'
rights relating to the receipt of payment from, and the administration,
processing and submission of FHA claims by, any FHA Claims Administrator is
limited and governed by the Sale and Servicing Agreement. These functions are
obligations of the FHA Claims Administrator but not of the FHA or any other
person.
UNDERWRITING CRITERIA
The following is a brief description of the various underwriting standards
and procedures applicable to the Loans originated by Master Financial.
MASTER FINANCIAL
Generally, the underwriting standards of Master Financial with respect to
the mortgage loans originated or purchased by it place a greater emphasis on the
creditworthiness and debt service capacity
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<PAGE>
of the borrower than on the underlying collateral in evaluating the likelihood
that a borrower will be able to repay the related mortgage loan.
In many cases, Loans will have been made to borrowers that typically have
limited access to mortgage financing because of insufficient home equity value.
In addition, in some cases, Loans will have been made to borrowers that
typically have limited access to mortgage financing because of high ratios of
debt to income and unfavorable credit experience. With respect to home loans
originated or purchased by Master Financial, the collection of loan payments
from the related borrowers is subject to various risks from these borrowers,
including without limitation the risk that a borrower will not satisfy its debt
service payments, including payments of interest and principal on the related
loan, and that the realizable value of the related mortgaged property will not
be sufficient to repay the outstanding interest and principal owed on the loan.
Master Financial uses its own credit evaluation criteria to classify the
borrowers of mortgage loans by risk class as 'A+' through 'B' grade credits.
These criteria include, as a significant component, the credit score of the
prospective borrower (as determined based on a credit scoring model utilized by
Master Financial). Additional criteria include the borrower's debt-to-income
ratio, mortgage credit history and consumer credit history. Under Master
Financial's underwriting standards, the most important credit characteristic is
the borrower's overall credit performance, including the borrower's credit score
and debt-to-income ratio.
Master Financial relies on a number of guidelines to assist underwriters in
the credit review and decision process. Such underwriting criteria provide for
the evaluation of a loan applicant's creditworthiness through the use of a
consumer credit report, verification of employment and a review of the
debt-to-income ratio of the applicant. Income is verified through various means,
including without limitation applicant interviews, written and oral
verifications with employers, and review of pay stubs or tax returns. The
borrower must demonstrate sufficient levels of disposable income to satisfy debt
repayment requirements.
The underwriting standards require the mortgage loans originated or
purchased by Master Financial to have been fully documented. A prospective
borrower is required to fill out a detailed application providing pertinent
credit information.
In determining the adequacy of the mortgaged property as collateral for a
mortgage loan originated or purchased by the Transferor, Master Financial
requires a FNMA drive-by appraisal, a uniform residential appraisal report
completed within the last 12 months, a statistical property valuation based on
comparative properties, a HUD-1/HUD-1A on the purchase transaction of the
mortgaged property completed within the last 12 months or a tax assessment
provided by the title company. The Loans originated or purchased by Master
Financial and included in the Pool generally were originated subject to a
maximum Combined Loan-to-Value Ratio of 125%, and the related borrowers may have
been permitted to retain a limited amount of the proceeds of such Loans. There
can be no assurance that the Combined Loan-to-Value Ratio or the debt-to-income
ratio for any Loan will not increase from the levels established at origination.
VARIATIONS
The underwriting standards of Master Financial with respect to mortgage
loans originated or purchased by it may be varied in appropriate cases. There
can be no assurance that every Loan in the Pool was originated in conformity
with the applicable underwriting standards in all material respects, or that the
quality or performance of the Loans will be equivalent under all circumstances.
See 'Risk Factors -- Underwriting Guidelines' herein.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
Except in the limited circumstances described herein, no principal payments
will be made on any of the Class A-2, Class A-3 or Class A-4 Notes until the
Class Principal Balance of each Class of Class A Notes having a lower numerical
designation has been reduced to zero, no principal payments will be made on the
Mezzanine Notes until all required principal payments have been made in respect
of the
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Senior Notes (other than the Class A-4 IO Notes), no principal payments will be
made on the Class B-1 Notes until all required principal payments have been made
in respect of the Senior Notes (other than the Class A-4 IO Notes) and the
Mezzanine Notes and no principal payments will be made on the Class B-2 Notes
until all required principal payments have been made in respect of the Senior
Notes (other than the Class A-4 IO Notes), the Mezzanine Notes and the Class B-1
Notes. See 'Description of the Offered Notes -- Payments on the Offered Notes'
herein. As the rate of payment of principal of each Class of Notes (other than
the Class A-4 IO Notes) depends primarily on the rate of payment (including
prepayments) of the Loans and the availability and amount of Excess Spread,
final payment of any such Class of Notes could occur significantly earlier than
their respective Maturity Dates. Holders of the Offered Notes (other than the
Class A-4 IO Notes) will bear the risk that they may not be able to reinvest
principal payments on such Offered Notes at yields at least equal to the yield
on their respective Offered Notes. No prediction can be made as to the rate of
prepayments on the Loans in either stable or changing interest rate
environments. Any reinvestment risk resulting from the rate of prepayment of the
Loans will be borne entirely by the holders of such Offered Notes.
The subordination of the Residual Interest Certificates and Class B-2 Notes
to each Class of Mezzanine Notes and the Class B-1 Notes will provide limited
protection to such holders against losses on the Loans. Each Class of Mezzanine
Notes and the Class B-1 Notes are subordinate in right of payment of interest
and principal, respectively, to each Class of Notes having a higher payment
priority, and because Allocable Loss Amounts will be allocated to the Mezzanine
Notes in inverse order of payment priority, the yields to maturity on the Class
M-1, Class M-2 and Class B-1 Notes will be particularly sensitive, in varying
degrees, to delinquencies and losses on the Loans and the timing of any such
losses. If the actual rate and amount of losses experienced on the Loans exceed
the rate and amount of such losses anticipated by an investor, the yields to
maturity on Class M-1, Class M-2 and Class B-1 Notes may be lower than
anticipated.
Each Loan is either a (i) 'simple interest' or (ii) 'actuarial method'
loan. With respect to a Loan that is a 'simple interest' loan, if a payment is
received more than one month after the previous payment, a smaller portion of
such payment will be applied to principal and a greater portion will be applied
to interest than would have been the case had the payment been received
precisely one month after the previous payment, resulting in such Loan having a
longer weighted average life than would have been the case had each payment been
made as scheduled. Conversely, if a payment on a Loan is received less than one
month after the previous payment, more of such payment will be applied to
principal and less to interest than would have been the case had the payment
been received precisely one month after the previous payment, resulting in such
Loan having a shorter weighted average life than would have been the case had
each payment been made as scheduled. See 'The Pool -- Payments on the Loans'
herein.
Other than with respect to the Class A-1 Notes, the effective yield to the
holders of any Class of Offered Notes will be lower than the yield otherwise
produced by the applicable Note Interest Rate, because the payment of the
interest accrued during each Due Period (a calendar month consisting of thirty
days) will not be made until the Payment Date occurring in the month following
such Due Period. See 'Description of the Offered Notes -- Payments on the
Offered Notes' herein. This delay will result in funds being passed through to
the holders of the Offered Notes approximately 20 days after the end of the
monthly accrual period, during which 20-day period no interest will accrue on
such funds.
The yield to maturity of the Class A-1 Notes will be affected by the level
of LIBOR from time to time, and will be subject to a maximum rate equal to the
Net Weighted Average Rate. To the extent that Loans bearing relatively high Loan
Rates experience a more rapid rate of prepayment than Loans with relatively low
rates, the maximum rate applicable to the Class A-1 Notes would be reduced.
The rate of principal payments on the Offered Notes (other than the Class
A-4 IO Notes), the aggregate amount of each interest payment on the Offered
Notes and the yield to maturity on the Offered Notes will be directly related to
and affected by the rate and timing of principal reductions on the Loans, the
application of Excess Spread and amounts on deposit in the Pre-Funding Account
at the end of the Pre-Funding Period that are not used to acquire Subsequent
Loans to reduce the Class Principal Balances of the Offered Notes (other than
the Class A-4 IO Notes) to the extent described herein under 'Description of
Credit Enhancement -- Overcollateralization,' and, under certain
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circumstances, the delinquency rate experienced by the Loans. The principal
reductions on such Loans may be in the form of scheduled amortization payments
or unscheduled payments or reductions, which may include prepayments,
repurchases and liquidations or write-offs due to default, casualty, insurance
or other dispositions. On or after any Payment Date on which the Pool Principal
Balance declines to 10% or less of the Maximum Collateral Amount, the Servicer
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. See 'Description of the Offered Notes -- Optional Termination' herein.
The 'weighted average life' of an Offered Note refers to the average amount
of time that will elapse from the Closing Date to the date each dollar in
respect of principal of such Offered Note (other than the Class A-4 IO Note) is
repaid. The weighted average life of an Offered Note will be influenced by,
among other factors, the rate at which principal reductions occur on the Loans,
the extent to which high rates of delinquencies on the Loans during any Due
Period result in interest collections on the Loans in amounts less than the
amount of interest payable on such Offered Notes, and the rate at which Excess
Spread is paid to holders of such Offered Notes (other than the Class A-4 IO
Notes) as described herein, and the extent to which any reduction of the
Overcollateralization Amount is paid to the holders of the Residual Interest as
described herein. If substantial principal prepayments on the Loans are received
from unscheduled prepayments, liquidations or repurchases, then the payments to
the holders of the Offered Notes (other than the Class A-4 IO Notes) resulting
from such prepayments may significantly shorten the actual average lives of such
Offered Notes. If the Loans experience delinquencies and certain defaults in the
payment of principal, then the holders of the Offered Notes (other than the
Class A-4 IO 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 Offered Notes than
would otherwise be the case. However, to the extent that the Principal Balances
of Liquidated Home Loans are included in the principal payments on the Offered
Notes (other than the Class A-4 IO Notes), then the holders of such Offered
Notes will experience an acceleration in the receipt of principal payments which
in certain instances may result in shorter actual average lives of such Offered
Notes than would otherwise be the case. Interest shortfalls on the Loans due to
principal prepayments in full and curtailments and any resulting shortfalls in
amounts payable on the Offered Notes will be covered only to the extent of
amounts available from the credit enhancement provided for the Offered Notes as
described herein. See 'Risk Factors -- Adequacy of Credit Enhancement' herein.
The rate and timing of principal payments on the Loans will be influenced
by a variety of economic, geographic, social and other factors. These factors
may include changes in Obligors' housing needs, job transfers, unemployment,
Obligors' net equity, if any, in the Mortgaged Properties, servicing decisions,
homeowner mobility, the existence and enforceability of 'due-on-sale' clauses,
the existence and enforceability of prepayment penalties, seasoning of Loans,
market interest rates for similar types of loans and the availability of funds
for such loans. Substantially all 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 its servicing practices, permits the purchaser of the
related Mortgaged Property to assume the Loan, or (ii) such enforcement is not
permitted by applicable law. In certain cases, the Servicer may, in a manner
consistent with its servicing practices, permit a borrower who is selling his
principal residence and purchasing a new one to substitute the new Mortgaged
Property as collateral for the related Loan, or may simply release its lien on
the existing collateral, leaving the related Loan unsecured. In such event, the
Servicer will generally require the borrower to make a partial prepayment in
reduction of the principal balance of the Loan to the extent that the borrower
has received proceeds from the sale of the prior residence that will not be
applied to the purchase of the new residence. Each of the Loans may be assumed,
with the Servicer's consent, upon the sale of the Mortgaged Property. Certain of
the Loans contain prepayment penalty provisions which generally obligate the
related Obligor to pay a penalty in connection with a prepayment of the
Obligor's Loan. The Servicer, in its discretion, may elect to enforce or abstain
from enforcing any prepayment penalty. The Servicer has no obligation to enforce
prepayment penalties and will exercise its rights to enforce them to the extent
it deems appropriate. The Servicer is entitled to retain all prepayment
penalties to the extent it collects the penalties from Obligors. Any enforcement
by the Servicer of the prepayment penalties contained in
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the Loans may have an effect on the decisions of Obligors to prepay their Loans
and may affect the weighted average lives of the Notes.
Generally, the rate of prepayment on a pool of fixed-rate loans is affected
by prevailing market interest rates for similar types of loans of a comparable
term and risk level. If prevailing interest rates were to fall significantly
below the respective Loan Rates on the Loans, the rate of prepayment (and
refinancing) would be expected to increase. Conversely, if prevailing interest
rates were to rise significantly above the respective Loan Rates on the Loans,
the rate of prepayment on the Loans would be expected to decrease. In addition,
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 in order to realize their equity in the Mortgaged
Properties, if any, to meet cash flow needs or to make other investments. In
addition, any future limitations on the rights of borrowers to deduct interest
payments on mortgage loans for federal income tax purposes may result in a
higher rate of prepayment on the Loans. Neither the Transferor, the Depositor,
nor the Underwriters make any representations as to the particular factors that
will affect the prepayment of the Loans, as to the relative importance of such
factors, or as to the percentage of the Principal Balances of the Loans that
will be paid as of any date.
Payments of principal to holders of the Offered Notes (other than the Class
A-4 IO Notes) at a faster rate than anticipated will increase the yields on such
Offered Notes purchased at discounts but will decrease the yields on such
Offered 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 Offered Notes (including, without
limitation, prepayments on the Loans) occurring at a rate that is faster (or
slower) than the rate anticipated by the investor during any period following
the issuance of such Offered 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 rate and
timing of principal payments on the Loans and, accordingly, the weighted average
lives of the Offered Notes, and could cause a delay in the payment of principal
or a slower rate of principal amortization to the holders of Offered Notes.
Certain factors may influence such delinquencies and defaults, including
origination and underwriting standards and Combined Loan-to-Value Ratios. In
general, defaults on home loans are expected to occur with greater frequency in
their early years, although few data are available with respect to the rate of
default on home loans similar to the Loans. In general, the rate of default on
junior lien loans with high Combined Loan-to-Value Ratios may be higher than
that of junior lien home loans with lower Combined Loan-to-Value Ratios, or
first lien loans, secured by comparable properties. Furthermore, the rate and
timing of prepayments, defaults and liquidations on the Loans will be affected
by the general economic condition of the region of the country in which the
related Mortgaged Properties are located or the related Obligors are residing.
See 'Risk Factors -- Geographic Concentration' and 'The Pool' herein. The risk
of delinquencies and loss is greater and voluntary principal prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values.
The Class Notional Balance of the Class A-4 IO Notes will be reduced in an
amount equal to each such reduction applicable to the Class Principal Balance of
the Class A-4 Notes. As a result, the Class A-4 IO Notes will be highly
sensitive to the rate of principal payments and losses on the Loans, to the
extent such payments reduce the Class Principal Balance of the Class A-4 Notes,
and to any partial redemptions of the Class A-4 Notes resulting from a
distribution of funds from the Pre-Funding Account. See 'Yield Sensitivity of
the Class A-4 IO Notes' herein.
Because principal payments generally are paid to holders of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes and Mezzanine Notes before the Class
B-1 Notes, holders of the Class B-1 Notes bear a greater risk of losses from
delinquencies and defaults on the Loans than holders of the Classes of Notes
having earlier priorities for payment of principal. See 'Description of Credit
Enhancement -- Subordination and Allocation of Losses' herein.
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Although certain data has 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
history is generally available with respect to the Loans or similar types of
loans, and there can be no assurance that the Loans will achieve or fail to
achieve any particular rate of principal prepayment. Several factors suggest
that the prepayment experience of the Pool may be significantly different from
that of a pool of conventional first lien, single family mortgage loans with
equivalent interest rates and maturities. One such factor is that the Principal
Balance of the average Loan is substantially smaller than that of the average
conventional first lien mortgage loan. A smaller principal balance may be easier
for a borrower to prepay than a larger balance and, therefore, a higher
prepayment rate may result for the Pool than for a pool of first lien mortgage
loans, irrespective of the relative average interest rates and the general
interest rate environment. In addition, in order to refinance a first lien
mortgage loan, the borrower must generally repay any junior liens. However, a
small principal balance may make the refinancing of a loan at a lower interest
rate less attractive to the borrower as the perceived impact to the borrower of
such lower interest rate on the size of the monthly payment may not be
significant. Other factors that might be expected to affect the prepayment rate
of the Pool include general economic conditions, the amounts of and interest
rates on the related senior mortgage loans, and the tendency of borrowers to use
first lien mortgage loans as long-term financing for home purchase and junior
liens as shorter-term financing for a variety of purposes, which may include the
direct or indirect financing of home improvement, education expenses, debt
consolidation, purchases of consumer durables such as automobiles, appliances
and furnishings and other consumer purposes. Furthermore, because at origination
a substantial majority of the Loans had Combined Loan-to-Value Ratios that
approached or exceeded 100%, the related Obligors will generally have
significantly less opportunity to refinance the indebtedness and, therefore, a
lower prepayment rate may be experienced by the Pool than by a pool of first or
junior lien mortgage loans that have Combined Loan-to-Value Ratios less than
100%. In addition, 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. Given these characteristics, the
Loans may experience a higher or lower rate of prepayment than first lien
mortgage loans.
SUBORDINATION
As described under 'Description of the Offered Notes -- Priority of
Payments' herein, on each Payment Date, the holders of any Class of Notes having
a higher payment priority will have a preferential right to receive amounts of
interest and/or principal, respectively, due to them on such Payment Date before
any payments of interest or principal, respectively, are made on any Class of
Notes subordinate to such Class. As a result, the yields to maturity and the
aggregate amount of payments on the Class M-1, Class M-2 and Class B-1 Notes
will be more sensitive than the yields of higher ranking Offered Notes to the
rate of delinquencies and defaults on the Loans.
As more fully described herein, Allocable Loss Amounts will be allocated
first to the Class B-2 Certificates, until the Class Principal Balance thereof
has been reduced to zero, then to the Class B-1 Certificates and the Class M-2
and Class M-1 Notes, in that order, until the Class Principal Balances thereof
have been reduced to zero. Any Deferred Amounts will be paid first to the Class
M-1 Notes, second to the Class M-2 Notes, third to the Class B-1 Notes and then
to the Class B-2 Notes.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of the Offered Notes relative to the principal
amortization of the Loans. If on any Payment Date, the Overcollateralization
Target Amount exceeds the Overcollateralization Amount, Excess Spread, if any,
will be paid to the holders of the Classes of Offered Notes (other than the
Class A-4 IO Notes) in the order and amounts specified herein under 'Description
of the Offered Notes -- Priority of Payments.' If the Overcollateralization
Amount equals or exceeds the Overcollateralization Target Amount for such
Payment Date, Excess Spread otherwise payable to the holders of the Offered
Notes as described above will instead be paid in respect of Loss Reimbursement
Deficiencies, if any, and then to the holders of
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the Residual Interest Certificates. On the Step-down 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 Offered Notes (other than the Class
A-4 IO Notes) on such Payment Date in reduction of their Class Principal
Balances may instead be paid in respect of the applicable Classes in payment of
their respective Loss Reimbursement Deficiencies and then to the holders of the
Residual Interest Certificates, thereby reducing the rate of, and under certain
circumstances delaying, the principal amortization of such Offered Notes, until
the Overcollateralization Amount is reduced to the Overcollateralization Target
Amount. As described herein, the yield to maturity on Offered Notes purchased at
a premium or discount will be affected by the extent to which any Excess Spread
is so applied, or is distributed to the holders of the Residual Interest
Certificates, in lieu of payment to such holders. If such Excess Spread
distributions to the holders of the Residual Interest Certificates occur sooner
than anticipated by an investor who purchases Offered Notes at a discount, the
actual yield to such investor may be lower than anticipated. If such Excess
Spread distributions to the holders of the Residual Interest Certificates occur
later than anticipated by an investor who purchases Offered 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 Class Principal Balances or Notional Balances, as
applicable, of the Offered Notes to decrease at a slower rate relative to the
Pool Principal Balance, resulting in a possible reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. The amount payable to the holders of the Residual Interest Certificates
that would otherwise be applied in reduction of the Overcollateralization Amount
or in payment of Loss Reimbursement Deficiencies on any Payment Date will be
affected by the Overcollateralization Target Amount as well as by the actual
default and delinquency experience of the Pool and the principal amortization of
the Pool.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the Offered Notes
(other than the Class A-4 IO Notes) will be affected by the rate and timing of
principal payments (including prepayments) in relation to the prevailing
interest rates at the time of receipt of such principal payments. For example,
during periods of falling interest rates, holders of the Offered Notes (other
than the Class A-4 IO Notes) may receive an increased amount of principal
payments from the Loans at a time when such holders may be unable to reinvest
such payments in investments having a yield and rating comparable to their
respective Offered Notes. Conversely, during periods of rising interest rates,
holders of the Offered Notes (other than the Class A-4 IO 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 Offered Notes.
MATURITY DATES
The Maturity Date of each Class of Offered Notes is as set forth under
'Summary -- Maturity Date' herein. The Maturity Dates of the Class A-1, Class
A-2 and Class A-3 Notes were determined by calculating the final Payment Date
with respect to each such Class on the basis of the Modeling Assumptions (except
it is assumed that no Excess Spread is applied to reduce the Class Principal
Balances of the Notes) and an assumed constant prepayment rate of 0% of the
Prepayment Assumption, and adding one year thereto. The Maturity Dates of the
Class A-4, Class M-1, Class M-2 Notes and Class B-1 Notes were determined by
adding one year to the maturity date of the latest maturing Loan (including
Subsequent Loans). The maturity date of the Class A-4 IO Notes is fixed at
approximately 26 months from the Closing Date. The actual maturity of any Class
of Offered Notes may be significantly earlier than the applicable Maturity Date.
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WEIGHTED AVERAGE LIVES OF THE OFFERED NOTES
The following information is given solely to illustrate the effect of
prepayments of the Loans on the weighted average lives of the Offered Notes
under certain stated assumptions and is not a prediction of the prepayment rate
that may actually be experienced by the Loans. Weighted average 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 Class of Notes (other than the Class A-4 IO Notes). The
weighted average lives of the Offered Notes will be influenced by the rate at
which principal of the Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term 'prepayment' includes
reductions of principal, including, without limitation, those resulting from
unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions and substitutions
and repurchases by or on behalf of the Transferor), the rate at which Excess
Spread is paid to holders of the Class A-1, Class A-2, Class A-3, Class A-4,
Class M-1, Class M-2 and Class B-1 Notes as described herein, the extent to
which amounts remain in the Pre-Funding Account at the end of the Pre-Funding
Period are paid to holders of the Class A-1, Class A-2, Class A-3, Class A-4,
Class M-1, Class M-2 and Class B-1 Notes as described herein, the extent to
which any reduction in Overcollateralization Amount is distributed to the
Residual Interest Certificates and the delinquency rate of the Loans from time
to time.
Prepayments on loans such as the Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the 'Prepayment Assumption'), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of loans for the life of such loans. A 100% Prepayment
Assumption assumes a constant prepayment rate ('CPR') of 2.0% per annum of the
outstanding principal balance of such loans in the first month of the life of
the loans and an additional approximate 0.929 (precisely 13/14 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 15.0% 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. Neither the Transferor,
the Depositor nor the Underwriter makes any representations about the
appropriateness of the Prepayment Assumption or the CPR.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the 'Modeling Assumptions') have been made:
(i) all scheduled principal payments on the Loans are timely received
on the first day of a Due Period, which will begin on the first day of each
month and end on the thirtieth day of the month, with the first Due Period
for the Initial Loans commencing on May 1, 1998, and with the first Due
Period for the Subsequent Loans commencing on June 1, 1998, no
delinquencies or losses occur on the Loans;
(ii) the scheduled payments on the Loans have been calculated on the
outstanding Principal Balance (prior to giving effect to prepayments), the
Loan Rate and the remaining term to stated maturity such that the Loans
will fully amortize by their remaining term to stated maturity;
(iii) all scheduled payments of interest and principal in respect of
the Loans have been made through the Cut-Off Date or, in the case of
Sub-Pools 14 through 16 (specified in the table below), May 31, 1998;
(iv) all Loans prepay monthly at the specified percentages of the
Prepayment Assumption, no optional or other early termination of the
Offered Notes occurs (except with respect to the calculation of the
'Weighted Average Life-to-Call (Years)' figures in the following tables)
and no substitutions or repurchases of the Loans occur;
(v) all prepayments in respect of the Loans include 30 days' accrued
interest thereon;
(vi) the Closing Date for the Offered Notes is May 28, 1998;
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(vii) each year will consist of twelve 30-day months (with respect to
the Class A-1 Notes, interest will be calculated on the basis of a 360 day
year and the actual number of days elapsed);
(viii) cash payments are received by the holders of the Offered Notes
on the 20th day of each month, commencing in June 1998;
(ix) the Overcollateralization Target Amount will be as defined
herein;
(x) the Pre-Funding Payment Trigger does not occur;
(xi) the Note Interest Rate for each Class of Notes (other than the
Class A-1 Notes) is as set forth on the cover page hereof; provided,
however, that the Note Interest Rate on each Class of 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;
(xii) the Note Interest Rate on the Class A-1 Notes will remain
constant at 5.78244% per annum;
(xiii) the additional fees deducted from the interest collections in
respect of the Loans include the Servicing Fee;
(xiv) no reinvestment income from any Account (except the Pre-Funding
Account) is earned and available for payment;
(xv) Sub-Pools 14 through 16 (specified in the table below) are
transferred to the Grantor Trust in May 1998 with principal payments on
such Loans being received by the Servicer in June 1998 and passed through
to holders of the Offered Notes on the Payment Date in July 1998;
(xvi) funds in the Pre-Funding Account will be invested in investments
that accrue interest at a net rate of 5% per annum (provided, that for the
first Due Period, such investments will be less 50% of amounts earned);
(xvii) there will be no prepayment on the Offered Notes from amounts
on deposit in the Pre-Funding Account; and
(xviii) the Pool consists of Loans having the following
characteristics:
ASSUMED LOAN CHARACTERISTIC
<TABLE>
<CAPTION>
ORIGINAL TERM TO REMAINING TERM
CUT-OFF DATE MATURITY TO MATURITY
SUB-POOL PRINCIPAL BALANCE $ LOAN RATE % (MONTHS) (MONTHS)
-------- ------------------- ----------- -------- -------
<S> <C> <C> <C> <C>
1 8,875,632 13.693 169 169
2 11,001,211 13.895 169 168
3 13,949,902 13.618 170 168
4 24,808,234 13.321 131 117
5 5,187,777 13.656 240 240
6 7,338,596 13.940 240 239
7 9,040,949 13.752 240 238
8 11,115,627 13.764 240 235
9 17,589,745 13.536 300 300
10 18,657,418 13.877 300 299
11 16,073,656 13.933 300 298
12 10,192,744 13.742 300 297
13 9,421,197 13.869 300 295
14 18,585,926 13.556 153 153
15 10,359,708 13.783 240 240
16 22,801,676 13.786 300 300
</TABLE>
The following tables indicate at the specified percentages of the
Prepayment Assumption the corresponding weighted average lives of each Class of
Notes.
S-49
<PAGE>
<PAGE>
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-1 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 82 70 63 57 51 44
May 2000............................................................ 76 44 29 14 0 0
May 2001............................................................ 70 21 0 0 0 0
May 2002............................................................ 62 0 0 0 0 0
May 2003............................................................ 54 0 0 0 0 0
May 2004............................................................ 44 0 0 0 0 0
May 2005............................................................ 33 0 0 0 0 0
May 2006............................................................ 20 0 0 0 0 0
May 2007............................................................ 6 0 0 0 0 0
May 2008............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 4.99 1.86 1.44 1.20 1.04 0.93
Weighted Average Life-to-Call (Years)(2)............................ 4.99 1.86 1.44 1.20 1.04 0.93
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
------------------------
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-2 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 99 67
May 2001............................................................ 100 100 96 48 3 0
May 2002............................................................ 100 96 32 0 0 0
May 2003............................................................ 100 47 0 0 0 0
May 2004............................................................ 100 2 0 0 0 0
May 2005............................................................ 100 0 0 0 0 0
May 2006............................................................ 100 0 0 0 0 0
May 2007............................................................ 100 0 0 0 0 0
May 2008............................................................ 78 0 0 0 0 0
May 2009............................................................ 49 0 0 0 0 0
May 2010............................................................ 16 0 0 0 0 0
May 2011............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 10.95 4.98 3.74 3.00 2.51 2.17
Weighted Average Life-to-Call (Years)(2)............................ 10.95 4.98 3.74 3.00 2.51 2.17
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
S-50
<PAGE>
<PAGE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-3 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 100 100
May 2001............................................................ 100 100 100 100 100 55
May 2002............................................................ 100 100 100 72 46 29
May 2003............................................................ 100 100 73 42 23 7
May 2004............................................................ 100 100 46 23 4 0
May 2005............................................................ 100 59 30 7 0 0
May 2006............................................................ 100 43 15 0 0 0
May 2007............................................................ 100 29 2 0 0 0
May 2008............................................................ 100 16 0 0 0 0
May 2009............................................................ 100 6 0 0 0 0
May 2010............................................................ 100 0 0 0 0 0
May 2011............................................................ 78 0 0 0 0 0
May 2012............................................................ 55 0 0 0 0 0
May 2013............................................................ 47 0 0 0 0 0
May 2014............................................................ 39 0 0 0 0 0
May 2015............................................................ 29 0 0 0 0 0
May 2016............................................................ 18 0 0 0 0 0
May 2017............................................................ 6 0 0 0 0 0
May 2018............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 15.25 8.01 6.21 5.00 4.16 3.55
Weighted Average Life-to-Call (Years)(2)............................ 15.25 8.01 6.21 5.00 4.16 3.55
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
S-51
<PAGE>
<PAGE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS A-4 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 100 100
May 2001............................................................ 100 100 100 100 100 100
May 2002............................................................ 100 100 100 100 100 100
May 2003............................................................ 100 100 100 100 100 100
May 2004............................................................ 100 100 100 100 100 82
May 2005............................................................ 100 100 100 100 83 61
May 2006............................................................ 100 100 100 90 64 45
May 2007............................................................ 100 100 100 71 49 33*
May 2008............................................................ 100 100 85 56 37* 23*
May 2009............................................................ 100 100 70 45 28* 17*
May 2010............................................................ 100 93 58 35* 21* 12*
May 2011............................................................ 100 78 46 27* 15* 9*
May 2012............................................................ 100 65 37* 21* 11* 6*
May 2013............................................................ 100 56 31* 17* 9* 4*
May 2014............................................................ 100 48 25* 13* 6* 3*
May 2015............................................................ 100 41 20* 10* 5* 1*
May 2016............................................................ 100 33* 16* 8* 3* 0
May 2017............................................................ 100 26* 12* 5* 1* 0
May 2018............................................................ 89 19* 9* 4* 0 0
May 2019............................................................ 75 15* 6* 2* 0 0
May 2020............................................................ 59 11* 5* 0 0 0
May 2021............................................................ 41 7* 3* 0 0 0
May 2022............................................................ 21* 3* 0 0 0 0
May 2023............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 22.39 16.48 13.75 11.56 9.84 8.49
Weighted Average Life-to-Call (Years)(2)............................ 22.03 15.19 12.19 10.16 8.56 7.36
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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
provisions not being exercised.
S-52
<PAGE>
<PAGE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-1 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 100 100
May 2001............................................................ 100 100 100 100 100 100
May 2002............................................................ 100 100 100 100 88 74
May 2003............................................................ 100 100 100 85 69 56
May 2004............................................................ 100 100 88 69 54 42
May 2005............................................................ 100 98 75 56 42 31
May 2006............................................................ 100 86 63 45 32 23
May 2007............................................................ 100 74 52 36 25 16*
May 2008............................................................ 100 63 43 28 19* 12*
May 2009............................................................ 100 55 36 23 14* 9*
May 2010............................................................ 100 47 29 18* 11* 6*
May 2011............................................................ 100 39 23 14* 8* 4*
May 2012............................................................ 94 33 19* 11* 6* 3*
May 2013............................................................ 89 29 16* 8* 4* 2*
May 2014............................................................ 82 24 13* 7* 3* 0
May 2015............................................................ 74 20 10* 5* 2* 0
May 2016............................................................ 65 17* 8* 4* 1* 0
May 2017............................................................ 55 13* 6* 3* 0 0
May 2018............................................................ 45 10* 4* 1* 0 0
May 2019............................................................ 38 8* 3* 0 0 0
May 2020............................................................ 30 6* 2* 0 0 0
May 2021............................................................ 21 4* 0 0 0 0
May 2022............................................................ 11* 1* 0 0 0 0
May 2023............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 19.57 12.77 10.42 8.64 7.30 6.27
Weighted Average Life-to-Call (Years)(2)............................ 19.39 12.13 9.64 7.95 6.66 5.71
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
S-53
<PAGE>
<PAGE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS M-2 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 100 100
May 2001............................................................ 100 100 100 100 100 100
May 2002............................................................ 100 100 100 100 88 74
May 2003............................................................ 100 100 100 85 69 56
May 2004............................................................ 100 100 88 69 54 42
May 2005............................................................ 100 98 75 56 42 31
May 2006............................................................ 100 86 63 45 32 23
May 2007............................................................ 100 74 52 36 25 16*
May 2008............................................................ 100 63 43 28 19* 12*
May 2009............................................................ 100 55 36 23 14* 9*
May 2010............................................................ 100 47 29 18* 11* 6*
May 2011............................................................ 100 39 23 14* 8* 4*
May 2012............................................................ 94 33 19* 11* 6* 2*
May 2013............................................................ 89 29 16* 8* 4* 0
May 2014............................................................ 82 24 13* 7* 3* 0
May 2015............................................................ 74 20 10* 5* 1* 0
May 2016............................................................ 65 17* 8* 4* 0 0
May 2017............................................................ 55 13* 6* 2* 0 0
May 2018............................................................ 45 10* 4* 0 0 0
May 2019............................................................ 38 8* 3* 0 0 0
May 2020............................................................ 30 6* 0 0 0 0
May 2021............................................................ 21 4* 0 0 0 0
May 2022............................................................ 11* 0 0 0 0 0
May 2023............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 19.57 12.76 10.40 8.61 7.27 6.24
Weighted Average Life-to-Call (Years)(2)............................ 19.39 12.13 9.64 7.95 6.66 5.71
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
S-54
<PAGE>
<PAGE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereof)
and should be read in conjunction therewith.
PERCENT OF ORIGINAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION(1)
<TABLE>
<CAPTION>
CLASS B-1 NOTES
--------------------------------------------------
DATE 0% 50% 75% 100% 125% 150%
- ---- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Initial Percent..................................................... 100 100 100 100 100 100
May 1999............................................................ 100 100 100 100 100 100
May 2000............................................................ 100 100 100 100 100 100
May 2001............................................................ 100 100 100 100 100 100
May 2002............................................................ 100 100 100 100 88 74
May 2003............................................................ 100 100 100 85 69 56
May 2004............................................................ 100 100 88 69 54 42
May 2005............................................................ 100 98 75 56 42 31
May 2006............................................................ 100 86 63 45 32 23
May 2007............................................................ 100 74 52 36 25 16*
May 2008............................................................ 100 63 43 28 19* 12*
May 2009............................................................ 100 55 36 23 14* 9*
May 2010............................................................ 100 47 29 18* 11* 5*
May 2011............................................................ 100 39 23 14* 8* 2*
May 2012............................................................ 94 33 19* 11* 4* 0
May 2013............................................................ 89 29 16* 8* 2* 0
May 2014............................................................ 82 24 13* 6* 0 0
May 2015............................................................ 74 20 10* 3* 0 0
May 2016............................................................ 65 17* 8* 1* 0 0
May 2017............................................................ 55 13* 5* 0 0 0
May 2018............................................................ 45 10* 2* 0 0 0
May 2019............................................................ 38 8* 0 0 0 0
May 2020............................................................ 30 4* 0 0 0 0
May 2021............................................................ 21 0 0 0 0 0
May 2022............................................................ 11* 0 0 0 0 0
May 2023............................................................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (Years)(2)........................ 19.56 12.71 10.32 8.54 7.19 6.17
Weighted Average Life-to-Call (Years)(2)............................ 19.39 12.13 9.64 7.95 6.66 5.71
</TABLE>
- ------------
(1) The percentages in this table have been rounded to the nearest whole number.
(2) The weighted average life of a Class is determined by (a) multiplying the
amount of each 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.
------------------------
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Loans which may differ from the actual characteristics and performance thereto
and should be read in conjunction therewith.
The pay-down scenarios for the Offered Notes set forth in the foregoing
tables are subject to significant uncertainties and contingencies (including
those discussed above under this caption 'Prepayment and Yield Considerations').
As a result, there can be no assurance that any of the foregoing pay-down
scenarios and the Modeling Assumptions on which they were made will prove to be
accurate or that the actual weighted average lives of the Offered Notes will not
vary from those set forth in the foregoing tables, which variations may be
shorter or longer, and which variations may be greater with respect to later
years. Furthermore, it is unlikely that the Loans will prepay at a constant rate
or that all of the Loans will prepay at the same rate. Moreover, the Loans
actually included in the
S-55
<PAGE>
<PAGE>
Pool, the payment experience of such Loans and certain other factors affecting
the payments on the Offered Notes will not conform to the Modeling Assumptions
made in preparing the above tables. In fact, the characteristics and payment
experience of the Loans will differ in many respects from such Modeling
Assumptions. See 'The Pool' herein. To the extent that the Loans actually
included in the Pool have characteristics and a payment experience that differ
from those assumed in preparing the foregoing tables, the Offered Notes are
likely to have weighted average lives that are shorter or longer than those set
forth in the foregoing tables. See 'Risk Factors -- Yield, Prepayment and
Maturity Considerations' herein.
In light of the uncertainties inherent in the foregoing pay-down scenarios,
the inclusion of the weighted average lives of the Offered Notes in the
foregoing tables should not be regarded as a representation by the Transferor,
the Depositor, the Underwriter or any other person that any of the foregoing
pay-down scenarios will be experienced.
YIELD SENSITIVITY OF THE CLASS A-4 IO NOTES
INVESTORS PURCHASING THE CLASS A-4 IO NOTES SHOULD CONSIDER THE RISK THAT A
RAPID RATE OF PAYMENTS IN RESPECT OF PRINCIPAL (INCLUDING PREPAYMENTS) ON THE
LOANS WHICH RESULT IN A REDUCTION OF THE CLASS PRINCIPAL BALANCE OF THE CLASS
A-4 NOTES COULD RESULT IN THE FAILURE OF SUCH INVESTORS TO FULLY RECOVER THEIR
INITIAL INVESTMENTS. THE YIELD TO INVESTORS IN THE CLASS A-4 IO NOTES WILL BE
HIGHLY SENSITIVE TO THE RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS) ON
THOSE LOANS, TO THE EXTENT SUCH PAYMENTS REDUCE THE CLASS PRINCIPAL BALANCE OF
THE CLASS A-4 NOTES, AND TO ANY PARTIAL REDEMPTION OF THE CLASS A-4 NOTES
RESULTING FROM A DISTRIBUTION OF FUNDS FROM THE PRE-FUNDING ACCOUNT. AN INVESTOR
THAT PURCHASES ANY OF THE CLASS A-4 IO NOTES, WHICH HAVE NO PRINCIPAL BALANCE,
SHOULD CONSIDER THE RISK THAT A FASTER THAN ANTICIPATED RATE OF PRINCIPAL
PAYMENTS ON THE LOANS WILL RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN SUCH
INVESTOR'S EXPECTED YIELD AND SHOULD CONSIDER THE RISK THAT A RAPID RATE OF
PRINCIPAL PAYMENTS ON THE LOANS COULD RESULT IN THE FAILURE OF SUCH INVESTOR TO
FULLY RECOVER ITS INITIAL INVESTMENT.
Based upon the Modeling Assumptions and the further assumptions that (i)
the Class A-4 IO Notes will be purchased on May 28, 1998 for an aggregate
purchase price of 12.23253% of the initial Notional Balance and (ii) the initial
Class Notional Balance of the Class A-4 IO Notes which is applicable to the
Distribution Date occurring in June 1998 will equal the Class Principal Balance
of the Class A-4 Notes. The table below (the 'Principal Payment Sensitivity
Table') sets forth the sensitivity of the Class A-4 IO Notes to various rates of
prepayment on the Loans of the pre-tax yield to maturity. Notwithstanding the
prepayment rates reflected in the table on the Principal Payment Sensitivity
Table, it is not expected that the Loans will prepay at a constant percentage of
Prepayment Assumption until maturity or that all of the Loans will prepay at the
same percentage of Prepayment Assumption or that there will be no defaults or
delinquencies on the Loans. As a result of these factors, the pre-tax yields to
maturity of the Class A-4 IO Notes are likely to differ from those shown in the
Principal Payment Sensitivity Table, even if all the Loans prepay at the
indicated assumed rate of prepayment.
Timing of changes in the rate of prepayments may significantly affect the
actual yield to maturity to investors, even if the average rate of principal
prepayments is consistent with the expectations of investors. Investors must
make their own decisions as to the appropriate prepayment assumption to be used
in deciding whether to purchase any Class A-4 IO Notes.
SENSITIVITY TO PRINCIPAL PAYMENTS OF PRE-TAX YIELDS TO MATURITY OF THE CLASS A-4
IO NOTES
<TABLE>
<CAPTION>
PERCENTAGE OF THE PREPAYMENT ASSUMPTION
--------------------------------------------------
0% 50% 75% 100% 125% 150%
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Pre-Tax Yield to Maturity................................... 7.00% 7.00% 7.00% 7.00% 7.00% 7.00%
</TABLE>
S-56
<PAGE>
<PAGE>
THE OWNER TRUST
GENERAL
Master Financial Asset Securitization Trust 1998-2 (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 for the transactions described in
this Prospectus Supplement. After its formation, the Owner Trust will not engage
in any activity other than (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. The Residual Interest Certificates, together with the
Notes, will be delivered by the Issuer to the Depositor as consideration for the
Grantor Trust Certificate pursuant to the Sale and Servicing Agreement.
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, the Capitalized
Interest 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, as 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 therefrom.
THE GRANTOR TRUST
On the Closing Date, the Depositor will deposit into Master Financial
Grantor Trust 1998-2 (the 'Grantor Trust') the Initial Loans expected to have an
aggregate principal balance as of the Cut-Off Date of approximately $163,252,689
(the 'Original Pool Principal Balance'), pursuant to a Grantor Trust Agreement
dated as of May 1, 1998 (the 'Grantor Trust Agreement') among the Depositor, as
depositor, Master Financial and the Grantor Trustee. On or prior to August 28,
1998, the Grantor Trustee may purchase additional loans (the 'Subsequent Loans'
and, together with the Initial Loans, the 'Loans') having an aggregate unpaid
principal balance of up to the Original Pre-Funding Amount. On the Closing Date,
the Depositor will sell the Grantor Trust Certificate to the Issuer pursuant to
a Sale and Servicing Agreement dated as of May 1, 1998 (the 'Sale and Servicing
Agreement'), among the Issuer, the Depositor, the Transferor, the Servicer, the
Grantor Trustee and the Indenture Trustee.
The assets of the Grantor Trust will consist primarily of the Pool of
Loans, substantially all of which are secured by second lien Mortgages. See 'The
Pool' herein. 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, in the case of the Initial Loans, approximately 50% of the interest
collected thereon during May 1998; (ii) amounts on deposit in the Collection
Account and Pre-Funding Account; (iii) an assignment of the Depositor's rights
under a Home Loan Purchase Agreement dated as of May 1, 1998 between the
Transferor and the Depositor (the 'Home Loan Purchase Agreement'); and (iv)
certain other ancillary or incidental funds, rights and properties related to
the foregoing.
The Grantor Trust will include the unpaid Principal Balance of each Loan as
of its applicable Cut-Off Date (the 'Cut-Off Date Principal Balance'). The
'Principal Balance' of a Loan on any day is
S-57
<PAGE>
<PAGE>
equal to its Cut-Off Date Principal Balance minus all principal reductions
credited against the Principal Balance of such Loan since the Cut-Off Date,
including any principal losses recorded by the Servicer on account of a
modification of such Loan; provided, however, that any Liquidated Home Loan will
have a Principal Balance of zero. With respect to any date, the 'Pool Principal
Balance' will be equal to the aggregate Principal Balances of all Loans as of
such date.
The Servicer will service the Loans pursuant to the Sale and Servicing
Agreement and will be compensated for such services as described under
'Description of the Transfer and Servicing Agreements -- Servicing' herein.
DESCRIPTION OF THE OFFERED NOTES
GENERAL
The Issuer will issue nine Classes of Home Loan Asset Backed Notes
(collectively, the 'Notes') pursuant to an Indenture to be dated as of May 1,
1998 (the 'Indenture'), between the Issuer and the Indenture Trustee. The Notes
listed on the cover hereof (the 'Offered Notes') have the designations and
aggregate initial principal amounts specified on the cover hereof. The Notes
will also include $6,514,500 aggregate initial principal amount of Class B-2
Notes (the 'Class B-2 Notes'). The Issuer will also issue certificates (the
'Residual Interest Certificates') evidencing the residual interest in the Issuer
(the 'Residual Interest') pursuant to the terms of an Owner Trust Agreement
dated as of May 1, 1998 (the 'Owner Trust Agreement'), among the Transferor, the
Depositor and the Owner Trustee. The Notes will be secured by the assets of the
Issuer pursuant to the Indenture. The Class B-2 Notes and the Residual Interest
Certificates are not being offered hereby.
On the 20th day of each month or, if such day is not a Business Day, the
first Business Day immediately following such day, commencing in June 1998 (each
such date, a 'Payment Date'), the Indenture Trustee or its designee will 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. Prior to any termination of the book-entry
provisions, payments on the Offered Notes will be made to Beneficial Owners only
through DTC and DTC Participants. See 'Description of the
Securities -- Book-Entry Registration of Securities' in the Prospectus.
Beneficial ownership interests in each of the Class A-1, Class A-2, Class
A-3, Class A-4, Class M-1, Class M-2 and Class B-1 Notes will be held in minimum
denominations of $25,000 initial principal amount and integral multiples of
$1,000 in excess thereof; provided, however, that one Offered Note of each Class
may be issued in such denomination as may be necessary to represent the
remainder of the aggregate amount of Notes of such Class. Beneficial ownership
interests in the Class A-4 IO Notes will be held in minimum denominations of
$1,000,000 initial notional amount and integral multiples of $1,000 in excess
thereof; provided, however, that one Offered Note of each Class may be issued in
such denomination as may be necessary to represent the remainder of the
aggregate amount of Notes of such Class.
PAYMENTS ON THE OFFERED NOTES
For the definitions of certain of the defined terms used in the following
subsections, see ' -- Related Definitions' below.
Available Collection Amount. Payments on the Offered Notes on each Payment
Date will be made from the Available Collection Amount. The Servicer will
calculate the Available Collection Amount on the fourteenth calendar day of each
month or, if such day is not a Business Day, then the immediately preceding
Business Day (each such day, a 'Determination Date'). With respect to each
Payment Date, the 'Available Collection Amount' is the sum of (i) all amounts
received on the Loans or required to be paid by the Servicer or the Transferor
during the related Due Period (exclusive of amounts not required to be deposited
by the Servicer in the Collection Account and amounts permitted to be withdrawn
by the Indenture Trustee from the Collection Account) as reduced by any portion
thereof that may not be withdrawn therefrom pursuant to an order of a United
States bankruptcy court of
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competent jurisdiction imposing a stay pursuant to Section 362 of the United
States Bankruptcy Code; (ii) any and all income or gain from investments in the
Collection Account, the Note Payment Account and the Certificate Distribution
Account; (iii) the Purchase Price paid for any Loans required to be repurchased
and the Substitution Adjustment to be deposited in the Collection Account in
connection with any substitution, in each case prior to the related
Determination Date; and (iv) upon the exercise of an optional termination by the
Issuer, the Termination Price.
Payments of Interest. Interest on the Class Principal Balance or Class
Notional Balance, as the case may be, of each Class of Notes will accrue thereon
during each Accrual Period at their respective Note Interest Rates per annum,
and will be payable to the holders of the Notes monthly on each Payment Date,
commencing in June 1998; provided, however, that the Note Interest Rate on each
Class of 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.
Interest payments on the Notes will be made from the 'Available Payment
Amount,' which is the Available Collection Amount (plus, on the Payment Date
relating to the Due Period in which the termination of the Pre-Funding Period
occurred, the amount on deposit in the Pre-Funding Account at such time received
in respect of the Grantor Trust Certificate and on each Payment Date on or prior
to the Payment Date in August 1998, the amount if any withdrawn from the
Capitalized Interest Account as described herein under ' -- Capitalized Interest
Account') remaining after the payment of the Fees and Expenses. Interest
payments will be made, first, to the Classes of Senior Notes pro rata, second,
to the Classes of Mezzanine Notes sequentially, and, third, to the Class B Notes
sequentially. Under certain circumstances, the amount available for interest
payments could be less than the amount of interest payable on all Classes of
Notes on any Payment Date. In such event, each Note of the affected Class will
receive its ratable share (based upon the aggregate amount of interest due to
such Class) of the remaining amount available to be paid as interest after the
payment of all interest due on each Class having a higher interest payment
priority. In addition, any such interest deficiency will be carried forward as a
Noteholders' Interest Carry-Forward Amount, and will be paid to holders of each
such Class of 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. 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 (other than the Class A-4 IO Notes) on each Payment Date in an amount
generally equal to (i) the Regular Principal Distribution Amount plus (ii) to
the extent of the Overcollateralization Deficiency Amount, any Excess Spread for
such Payment Date less (iii) the excess, if any, of the Overcollateralization
Amount over the Overcollateralization Target Amount. The aggregate payments of
principal to each Class of Notes (other than the Class A-4 IO Notes) will not
exceed the Original Class Principal Balances thereof.
PRIORITY OF PAYMENTS
A. On each Payment Date, the Regular Payment Amount will be paid in the
following order of priority:
(i) to the holders of the Senior Notes, pro rata, the applicable
portion of the Noteholders' Interest Payment Amount required to be paid in
respect of the Senior Notes;
(ii) sequentially, to the holders of the Class M-1 and Class M-2
Notes, in that order, the applicable portion of the Noteholders' Interest
Payment Amount required to be paid in respect of the Mezzanine Notes;
(iii) sequentially, to the holders of the Class B-1 and Class B-2
Notes, in that order, the applicable portion of the Noteholders' Interest
Payment Amount required to be paid in respect of the Class B Notes;
(iv) if with respect to such Payment Date the Pre-Funding Payment
Trigger has occurred, the amount on deposit in the Pre-Funding Account at
the end of the Pre-Funding Period will be paid to all Classes of Notes
(other than the Class A-4 IO Notes) then outstanding, pro rata, based on
the Original Class Principal Balances thereof;
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(v) sequentially, to pay principal to the holders of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes, in that order, until the
respective Class Principal Balances thereof are reduced to zero, the amount
necessary to reduce the aggregate Class Principal Balance of such Class A
Notes to the Senior Optimal Principal Balance for such Payment Date;
provided, however, that on each Payment Date occurring on or after the
reduction of the Class Principal Balances of the Class M-1 Notes, Class M-2
Notes, Class B-1 Notes and Class B-2 Notes to zero through the application
of Allocable Loss Amounts, payments shall be made among the then
outstanding Class A-1, Class A-2, Class A-3 and Class A-4 Notes pro rata
and not sequentially, until the respective Class Principal Balances thereof
are reduced to zero;
(vi) sequentially, to the holders of the Class M-1 and the Class M-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class M-1 Optimal Principal Balance and the Class M-2
Optimal Principal Balance, respectively, for such Payment Date;
(vii) sequentially, to the holders of the Class B-1 and Class B-2
Notes, in that order, until the Class Principal Balances thereof are
reduced to the Class B-1 Optimal Principal Balance and the Class B-2
Optimal Principal Balance, respectively, for such Payment Date;
(viii) to the appropriate Classes of Notes, an amount equal to the
Overcollateralization Deficiency Amount, if any, in the priorities and
amounts specified in paragraph B below (after giving effect to payments
made pursuant to clauses (i) through (vii) above), and thereafter
sequentially, to the Class M-1 Notes, Class M-2 Notes, Class B-1 Notes and
the Class B-2 Notes, in that order, until their respective Loss
Reimbursement Deficiencies, if any, have been paid in full;
(ix) to the Servicer, if the Servicing Fee Rate has been reduced to
0.75% as described under 'Description of the Transfer and Servicing
Agreements -- Servicing' herein with respect to such Payment Date, the Make
Whole Servicing Fee; and
(x) any remaining amount to the holders of the Residual Interest
Certificates.
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):
(i) in an amount equal to the Overcollateralization Deficiency Amount,
if any, as follows:
(A) sequentially, as principal to the holders of the Class A-1,
Class A-2, Class A-3 and Class A-4 Notes, in that order, until the
respective Class Principal Balances thereof are reduced to zero, the
amount necessary to reduce the aggregate Class Principal Balance of such
Class A Notes to the Senior Optimal Principal Balance for such Payment
Date;
(B) sequentially, as principal to the holders of the Class M-1 and
Class M-2 Notes, in that order, until the Class Principal Balances
thereof are reduced to the Class M-1 Optimal Principal Balance and the
Class M-2 Optimal Principal Balance, respectively, for such Payment
Date; and
(C) sequentially, as principal to the holders of the Class B-1 and
Class B-2 Notes, in that order, until the Class Principal Balances
thereof are reduced to the Class B-1 Optimal Principal Balance and the
Class B-2 Optimal Principal Balance, respectively, for such Payment
Date;
(ii) sequentially, to the Class M-1 Notes, the Class M-2 Notes, the
Class B-1 Notes and the Class B-2 Notes, in that order, until their
respective Loss Reimbursement Deficiencies, if any, have been paid in full;
and
(iii) any remaining amount to the holders of the Residual Interest
Certificates.
The Class A-4 IO Notes are 'interest only' Notes and will receive no
payments in respect of principal.
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RELATED DEFINITIONS
For purposes hereof, the following terms shall have the following meanings:
Accrual Period. For each Class of Notes will be (i) in the case of the
Class A-1 Notes, the period beginning on the Payment Date in the calendar
month preceding the month in which the related Payment Date occurs (or, in
the case of the first Payment Date, beginning on May 28, 1998) and ending
on the day preceding the related Payment Date, and (ii) in the case of the
other Classes of Notes, the calendar month preceding the month in which the
related Payment Date occurs (or in the case of the first Payment Date,
beginning May 28, 1998). Interest on the Class A-1 Notes will be calculated
on the basis of a 360-day year and the actual number of days elapsed in
each Accrual Period. Interest on the other Classes of 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 are primarily located
and are authorized or obligated by law or executive order to be closed.
Class Principal Balance: With respect to each Class of Notes and as of
any date of determination, the Original Class Principal Balance of such
Class reduced by the sum of (i) all amounts previously paid in respect of
principal of such Class on all previous Payment Dates and (ii) with respect
to the Mezzanine Notes and the Class B Notes, all Allocable Loss Amounts
applied in reduction of principal of such Classes on all previous Payment
Dates.
Class Notional Balance: With respect to the Class A-4 IO Notes and as
of any date of determination, the Class A-4 Principal Balance; provided,
however, that if the Class Principal Balance of the Class A-4 Notes is
greater than zero after July 20, 2000, the Class Notional Balance will be
zero for each Payment Date after July 20, 2000.
Class B-1 Optimal Principal Balance: With respect to any Payment Date
prior to the Step-down Date, zero; and with respect to any other Payment
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes
and the Mezzanine Notes (after taking into account any payments made on
such Payment Date in reduction of the Class Principal Balances of the
Senior Notes and the Mezzanine Notes) and (ii) the greater of (x) 6.06% of
the Pool Principal Balance as of the related Determination Date plus the
Overcollateralization Target Amount (calculated without giving effect to
the proviso in the definition thereof) for such Payment Date and (y) 0.50%
of the Maximum Collateral Amount.
Class B-2 Optimal Principal Balance: With respect to any Payment Date
prior to the Step-down Date, zero; and with respect to any other Payment
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes,
the Mezzanine Notes and the Class B-1 Notes (after taking into account any
payments made on such Payment Date in reduction of the Class Principal
Balances of the Senior Notes, the Mezzanine Notes and the Class B-1 Notes)
and (ii) the Overcollateralization Target Amount for such Payment Date.
Class M-1 Optimal Principal Balance. With respect to any Payment Date
prior to the Step-down Date, zero; and with respect to any other Payment
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes
(after taking into account payments made on such Payment Date in reduction
of the Class Principal Balances of the Classes of Senior Notes) and (ii)
the greater of (x) 40.40% of the Pool Principal Balance as of the related
Determination Date plus the Overcollateralization Target Amount (calculated
without giving effect to the proviso in the definition thereto for such
Payment Date) and (y) 0.50% of the Maximum Collateral Amount.
Class M-2 Optimal Principal Balance. With respect to any Payment Date
prior to the Step-down Date, zero; and with respect to any other Payment
Date, the Pool Principal Balance as of the related Determination Date minus
the sum of (i) the aggregate Class Principal Balance of the Senior Notes
(after taking into account any payments made on such Payment Date in
reduction of
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the Class Principal Balances of the Classes of Senior Notes) plus the Class
Principal Balance of the Class M-1 Notes (after taking into account any
payments made on such Payment Date in reduction of the Class Principal
Balance of the Class M-1 Notes) and (ii) the greater of (x) 22.22% of the
Pool Principal Balance as of the related Determination Date plus the
Overcollateralization Target Amount (without giving effect to the proviso
in the definition thereof) for such Payment Date and (y) 0.50% of the
Maximum Collateral Amount.
Excess Spread: With respect to any Payment Date, the excess, if any,
of (a) the Available Payment Amount over (b) the Regular Payment Amount.
Insurance Proceeds: With respect to any Payment Date, the proceeds
paid to the Grantor Trustee or the Servicer by any insurer pursuant to any
FHA Insurance, 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 the
proceeds of any insurance policy that are to be applied to the restoration
or repair of the Mortgaged Property or released to the Obligor in
accordance with accepted loan servicing procedures.
LIBOR: For each Accrual Period (other than the initial Accrual Period)
will be the rate for United States dollar deposits for one month that
appears on Telerate Screen Page 3750 as of 11:00 a.m., London time, on the
second LIBOR Business Day before the first day of such Accrual Period. If
such rate does not appear on such page (or such other page as may replace
that page on that service, or if such service is no longer offered, such
other service for displaying LIBOR or comparable rates as may be reasonably
selected by the Indenture Trustee), LIBOR for the applicable Accrual Period
will be the Reference Bank Rate as defined herein. If no such quotations
can be obtained and no Reference Bank Rate is available, LIBOR will be
LIBOR applicable to the preceding Accrual Period. LIBOR for the initial
Accrual Period will be 5.64844% per annum.
LIBOR Business Day: Any day on which banks are open for dealing in
foreign currency and exchange in London and New York City.
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: (a) the
liquidation of the related Mortgaged Property acquired through foreclosure
or similar proceedings, (b) the Servicer's determination in accordance with
customary accepted servicing practices that no further amounts are
collectible on the Loan and any related Mortgaged Property or (c) any
portion of a scheduled monthly payment of principal and interest is in
excess of 180 days past due.
Loss Reimbursement Deficiency: As of any date of determination and as
to the Class M-1 Notes, Class M-2 Notes, Class B-1 Notes or the Class B-2
Notes, the amount of Allocable Loss Amounts applied to the reduction of the
Class Principal Balance of such Class, plus interest accrued on the
unreimbursed portion thereof at the applicable Note Interest Rates through
the end of the Due Period immediately preceding the date of payment.
Maximum Collateral Amount: The sum of the Original Pool Principal
Balance and the Original Pre-Funding Amount.
Net Delinquency Calculation Amount: With respect to any Payment Date,
the excess, if any, of (x) the product of the Multiplier and the Six-Month
Rolling Delinquency Average over (y) the aggregate of the amounts of Excess
Spread for the three preceding Payment Dates. The 'Multiplier' will
initially equal 1.7. The Multiplier may from time to time be permanently
modified to a lesser amount (including zero) in the event that the Issuer
shall have delivered to the Indenture Trustee confirmation from each Rating
Agency that the rating assigned by it to each Class of Notes which it
originally rated will not be downgraded or withdrawn as a result of such
reduction.
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
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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 any other fees and expenses paid in
connection with the foreclosure, conservation and liquidation of the
related Liquidated Home Loans or Mortgaged Properties.
Net Weighted Average Rate. With respect to any Payment Date will be
the per annum rate equal to the weighted average (by principal balance) of
the Loan Rates as of the first day of the related Due Period less 1.25%.
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 deposited in the
Note Distribution Account 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 during the related Accrual Period on each
Class of Notes at the respective Note Interest Rate for such Class on the
Class Principal Balance thereof (or Class Notional Balance, in the case of
the Class A-4 IO Notes) 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 such Class of Notes on or
prior to such preceding Payment Date.
Overcollateralization Amount: With respect to any Payment Date, the
amount equal to the excess, if any, of (a) the sum of the Pool Principal
Balance and the Pre-Funding Amount, each as of the end of the preceding Due
Period, over (b) the aggregate of the Class Principal Balances of the Notes
(after giving effect to 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 Target Amount. (A) With respect to any Payment
Date occurring prior to the Step-down Date, an amount equal to the greater
of (x) 3.5% of the Maximum Collateral Amount and (y) the Net Delinquency
Calculation Amount; and (B) with respect to any other Payment Date, an
amount equal to the greater of (x) 7% of the Pool Principal Balance as of
the end of the related Due Period and (y) the Net Delinquency Calculation
Amount; provided, however, that the Overcollateralization Target Amount
will in no event be less than 0.50% of the Maximum Collateral Amount or
greater than the sum of the aggregate Class Principal Balances of all
Classes of Notes. The Overcollateralization Target Amount may be increased
to an amount specified in the Sale and Servicing Agreement if losses on the
Loans exceed a percentage of the Pool Principal Balance specified in the
Sale and Servicing Agreement.
Reference Bank Rate: With respect to any Accrual Period (other than
the initial Accrual Period), the arithmetic mean (rounded upwards, if
necessary, to the nearest one sixteenth of a percent) of the offered rates
for United States dollar deposits for one month that are offered by the
Reference Banks as of 11:00 a.m., New York City time, on the second LIBOR
Business Day prior to the first day of such Accrual Period to prime banks
in the London interbank market for a period of one month in amounts
approximately equal to the outstanding Class Principal Balance of the Class
A-1 Notes, provided that at least two such Reference Banks provide such
rate. If fewer than two offered rates appear, the Reference Bank Rate will
be the arithmetic mean of the rates quoted by one or more major banks in
New York City, selected by the Indenture Trustee, as of 11:00 a.m., New
York City time, on such date for loans in U.S. Dollars to leading European
Banks for a period of one month in amounts approximately equal to the
outstanding Class Principal Balance of the Class A-1 Notes. If no such
quotations can be obtained, the Reference Bank Rate will be the Reference
Bank Rate applicable to the preceding Accrual Period.
Reference Banks: Three money center banks selected by the Indenture
Trustee.
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Regular Payment Amount: With respect to any Payment Date, the lesser
of (a) the Available Payment Amount and (b) the sum of (i) the Noteholders'
Interest Payment Amount and (ii) the Regular Principal Payment Amount.
Regular Principal Payment Amount: On each Payment Date, an amount (but
not in excess of the aggregate of the Class Principal Balances of the Notes
immediately prior to 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 prior to the related Determination Date, (v) the principal portion
of any Substitution Adjustments required to be deposited in the Collection
Account as of the related Determination Date, (vi) if such Payment Date
relates to the Due Period in which the Pre-Funding Period shall have ended
and at the termination of such Pre-Funding Period a Pre-Funding Payment
Trigger shall not have occurred, the amount on deposit in the Pre-Funding
Account on such date, and (vii) 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
and due and unpaid Fees and Expenses).
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 Obligor in accordance
with applicable law, accepted mortgage servicing procedures and the Sale
and Servicing Agreement.
Senior Optimal Principal Balance: With respect to any Payment Date
prior to the Step-down Date, zero; with respect to any other Payment Date,
an amount equal to the Pool Principal Balance as of the related
Determination Date minus the greater of (a) 60.60% of the Pool Principal
Balance as of the related Determination Date plus the Overcollateralization
Target Amount (without giving effect to the proviso in the definition
thereto) for such Payment Date and (b) 0.50% of the Maximum Collateral
Amount.
Six-Month Rolling Delinquency Average. With respect to any Payment
Date, the average of the applicable 60-Day Delinquency Amounts for each of
the six immediately preceding Due Periods, where the '60-Day Delinquency
Amount' for any Due Period is the aggregate of the Principal Balances of
all Loans that are 60 or more days delinquent, in foreclosure or REO
Property as of the end of such Due Period.
Step-down Date: The first Payment Date occurring after May 20, 2001 as
to which the aggregate Class Principal Balance of the Senior Notes (after
giving effect to payments of principal on such Payment Date) will be able
to be reduced on such Payment Date (such determination to be made by the
Indenture Trustee prior to giving effect to any payments on such Payment
Date) to the excess of (i) the Pool Principal Balance as of the preceding
Determination Date over (ii) the greater of (a) the sum of (1) 60.60% of
the Pool Principal Balance as of the preceding Determination Date and (2)
the Overcollateralization Target Amount for such Payment Date (such
Overcollateralization Target Amount calculated without giving effect to the
proviso in the definition thereof and calculated pursuant only to clause
(B) in the definition thereof) and (b) 0.50% of the Maximum Collateral
Amount.
Undercollateralization Amount: With respect to any Payment Date, an
amount (not less than zero) equal to the excess, if any, of (a) the
aggregate of the Class Principal Balances of all Classes of Notes, after
giving effect to payments in respect of the Notes and the Residual Interest
Certificates on such Payment Date, over (b) the sum of (i) the Pool
Principal Balance as of the end of the preceding Due Period and (ii) the
amount, if any, on deposit in the Pre-Funding Account as of the end of such
Due Period. Notwithstanding the foregoing, on any date after the Payment
Date on which the Undercollateralization Amount is first reduced to zero,
such amount shall be deemed to be zero.
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APPLICATION OF ALLOCABLE LOSS AMOUNTS
On any Payment Date after the Undercollateralization Amount has been
reduced to zero, any Allocable Loss Amounts will be applied, sequentially, in
reduction of the Class Principal Balances of the Class B-2 Notes, the Class B-1
Notes, the Class M-2 Notes and the Class M-1 Notes, in that order, until their
respective Class Principal Balances have been reduced to zero. On each Payment
Date prior to the Payment Date on which the Undercollateralization Amount is
reduced to zero, the Allocable Loss Amount will be zero. The Class Principal
Balances or Class Notional Balance, as applicable, of the Senior Notes will not
be reduced by any application of Allocable Loss Amounts. The reduction of the
Class Principal Balance of any applicable Class of Offered Notes by the
application of Allocable Loss Amounts entitles such Class to reimbursement in an
amount equal to the Loss Reimbursement Deficiency. Each such Class of Notes will
be entitled to receive its Loss Reimbursement Deficiency, or any portion
thereof, in accordance with the payment priorities specified herein. Payment in
respect of Loss Reimbursement Deficiencies will not reduce the Class Principal
Balance of the related Class or Classes. The Loss Reimbursement Deficiency with
respect to the Class M-1, Class M-2 and Class B Notes will remain outstanding
until the earlier of (x) the payment in full of such amount to the holders of
such Class and (y) the occurrence of the applicable Maturity Date (although
there is no requirement that such amounts be paid on such date).
PRE-FUNDING ACCOUNT
On the Closing Date, approximately $51,747,311 (the 'Original Pre-Funding
Amount') will be deposited in an account (the 'Pre-Funding Account'), which
account will be in the name of the Indenture Trustee and shall be part of the
assets of the Grantor Trust and which amount will be used to acquire Subsequent
Loans. Depending on the Original Pool Principal Balance of the Initial Loans,
the Original Pre-Funding Amount may be decreased or increased accordingly,
provided that the amount of any such variance shall not exceed $5,000,000.
During the Pre-Funding Period, the amount on deposit in the Pre-Funding Account
(net of investment earnings thereon) (the 'Pre-Funding Amount') will be reduced
by the amount thereof used to purchase Subsequent Loans in accordance with the
Grantor Trust Agreement. The 'Pre-Funding Period' is the period commencing on
the Closing Date and ending generally on the earlier to occur of (i) the date on
which the amount on deposit in the Pre-Funding Account (net of any investment
earnings thereon) is less than $50,000, (ii) the date on which any Servicer
Event of Default occurs and (iii) August 28, 1998. On the Payment Date following
the Due Period in which the termination of the Pre-Funding Period occurs, if the
Pre-Funding Amount at the end of the Pre-Funding Period is less than $50,000,
any such Pre-Funding Amount will be distributed in respect of the Grantor Trust
Certificate and paid to holders of the Classes of Offered Notes (other than the
Class A-4 IO Notes) and the Class B-2 Notes then entitled to receive principal
on such Payment Date in reduction of the related Class Principal Balances, thus
resulting in a partial redemption of the related Securities on such date. On the
Payment Date following the Due Period in which the termination of the
Pre-Funding Period occurs, if the Pre-Funding Amount at the end of the Pre-
Funding Period is greater than or equal to $50,000, such Pre-Funding Amount will
be distributed in respect of the Grantor Trust Certificate and paid to the
holders of all Classes of Notes (other than the Class A-4 IO Notes), pro rata,
based on the respective Original Class Principal Balances thereof.
Amounts on deposit in the Pre-Funding Account will be invested in eligible
investments. Any interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Note Payment Account
for remittance to the Residual Interest Certificates.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, a portion of the sales proceeds of the Notes will be
deposited in an account (the 'Capitalized Interest Account') for application by
the Indenture Trustee on the Payment Dates in June 1998, July 1998 and August
1998 to cover shortfalls in interest on the Offered Notes and the Class B-2
Notes that may arise due to the utilization of the Pre-Funding Account as
described herein. Any amounts remaining in the Capitalized Interest Account at
the end of the Pre-Funding Period will be paid to Master Financial.
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OPTIONAL TERMINATION
The Issuer may, at its option, effect an early redemption of the Notes on
or after any Payment Date on which the Pool Principal Balance declines to 10% or
less of the Maximum Collateral Amount (the 'Cleanup Call Date'). Such redemption
may be effected at the Servicer's election by the Servicer's purchase of 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 Class Principal Balances of
the Classes of Notes plus all accrued and unpaid interest thereon, or in the
case of the Class A-4 IO Notes, all accrued and unpaid interest on their
outstanding Class Notional Balance, (ii) any Fees and Expenses due and unpaid on
such date 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, net of the Servicing Fee, to such date;
and (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 prior to
such date. The proceeds from such sale will be distributed in respect of the
Grantor Trust Certificate and paid (1) first, to the outstanding Fees and
Expenses, (2) second, to the holders of Notes (other than the Class A-4 IO
Notes) in an amount equal to the then outstanding Class Principal Balance of the
Notes plus all accrued and unpaid interest thereon, and, in the case of the
Class A-4 IO Notes, all accrued and unpaid interest on the Class Notional
Balance, and (3) third, 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) and (2) above.
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DESCRIPTION OF CREDIT ENHANCEMENT
Credit enhancement with respect to the Offered Notes will be provided by
(i) the subordination of the right of the Residual Interest and certain Classes
of Notes to receive payments with respect to interest and principal as described
below under ' -- Subordination and Allocation of Losses' and (ii) the
overcollateralization feature described below under ' -- Overcollateralization.'
SUBORDINATION AND ALLOCATION OF LOSSES
Payments of interest on the Notes will be made first to the Senior Notes,
second to the Class M-1 Notes, third to the Class M-2 Notes, fourth to the Class
B-1 Notes and then to the Class B-2 Notes, such that no interest will be paid on
the Mezzanine Notes until all required interest payments have been made on the
Senior Notes and no interest will be paid on the Class B Notes until all
required interest payments have been made on the Senior Notes and the Mezzanine
Notes. In addition, payments of principal of the Notes (other than the Class A-4
IO Notes) generally will be made sequentially, such that no Class of Notes will
receive any payments of principal until the Class Principal Balances of all
Classes of Notes senior thereto have received all required payments of
principal. In addition, all Allocable Loss Amounts applied in reduction of the
Class Principal Balances of the Mezzanine Notes and Class B Notes will be
applied first to the Class B-2 Notes, second to the Class B-1 Notes, third to
the Class M-2 Notes and then to the Class M-1 Notes, until their respective
Class Principal Balances have been reduced to zero. Allocable Loss Amounts will
not be applied to any Class of Senior Notes. The rights of the holders of the
Residual Interest and the Class B-2 Notes to receive any payments on any Payment
Date generally will be subordinated to the rights of the holders of the Offered
Notes. The subordination described above is intended to enhance the likelihood
of the regular receipt of interest and principal due to the holders of the
Classes of Notes and to afford such holders protection against losses on the
Loans, with the greatest amount of such enhancement and protection being
provided to the Classes of Senior Notes, a lesser amount of such enhancement and
protection being provided to the Mezzanine Notes and, in particular, the Class
M-2 Notes, and the least amount of such enhancement and protection being
provided to the Class B Notes, and in particular, the Class B-2 Notes. See 'Risk
Factors -- Adequacy of Credit Enhancement' herein.
On each Payment Date after the Undercollateralization Amount has been
reduced to zero, the 'Allocable Loss Amount' will be equal to the excess, if
any, of (a) the aggregate of the Class Principal Balances of all Classes of
Notes (after giving effect to all payments on such Payment Date) over (b) the
sum of the Pool Principal Balance and the Pre-Funding Amount, each as of the end
of the preceding Due Period. On each Payment Date prior to the Payment Date on
which the Initial Undercollateralization Amount is reduced to zero, the
Allocable Loss Amount will be zero.
OVERCOLLATERALIZATION
As of any date of determination, the 'Overcollateralization Amount' will
equal the excess of the sum of the Pool Principal Balance and the Pre-Funding
Amount, each as of the end of the previous Due Period over the aggregate of the
Class Principal Balances of all Classes of Notes (other than the Class A-4 IO
Notes) (after giving effect to all payments on the Notes on such Payment Date).
A limited acceleration of the principal amortization of the Notes relative to
the principal amortization of the Loans has been designed, first, to eliminate
the Initial Undercollateralization Amount, and then 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 at least equal to the Overcollateralization
Target Amount. The 'Overcollateralization Target Amount' for any Payment Date
occurring prior to the Step-down Date will be equal to the greater of (x) 3.5%
of the Maximum Collateral Amount and (y) the Net Delinquency Calculation Amount;
with respect to any other Payment Date, the Overcollateralization Target Amount
will be equal to the greater of (x) 7% of the Pool Principal Balance as of the
end of the related Due Period and (y) the Net Delinquency Calculation Amount;
provided, however, that the Overcollateralization Target Amount will in no event
be less than 0.50% of the Maximum Collateral Amount or greater than the sum of
the aggregate Class Principal Balances of all Classes of Notes. The
Overcollateralization Target Amount may be increased
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to an amount specified in the Sale and Servicing Agreement if losses on the
Loans exceed a percentage of the Pool Principal Balance specified in the Sale
and Servicing Agreement.
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 (other than the Class A-4 IO Notes), to
be allocated among such Classes of Notes in the order of priority set forth
under 'Description of the Offered Notes -- Priority of Payments' herein. Such
payments of Excess Spread are intended, first, to eliminate the 1%
undercollateralization that will exist on the Closing Date, and then to
accelerate the amortization of the Class Principal Balances of all Classes of
Notes (other than the Class A-4 IO Notes) relative to the amortization of the
Loans, thereby increasing the Overcollateralization Amount. The relative
percentage of the aggregate of the Class Principal Balances of the Notes to the
Pool Principal Balance will decrease as a result of the application of Excess
Spread to reduce the Class Principal Balances of such Notes.
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 rather than being paid as
principal to the holders of the applicable Notes, thereby ceasing the
acceleration of principal amortization of such Notes in relation to the
principal amortization of the Pool until such time as the Overcollateralization
Deficiency Amount is greater than zero (i.e., due to a reduction in the
Overcollateralization Amount as a result of Net Loan Losses or delinquencies or
due to an increase in the Overcollateralization Target Amount as a result of the
failure to satisfy certain delinquency criteria).
While the application of Excess Spread in the manner specified above has
been designed to produce and maintain a given level of overcollateralization,
there can be no assurance that Excess Spread will be generated in sufficient
amounts to ensure that such overcollateralization level will be achieved or
maintained at all times. For example, while the Class A-1 Notes remain
outstanding, any increase in LIBOR will decrease the amount of Excess Spread for
the related Payment Date. 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 Class Principal
Balances of the Notes could decrease at a slower rate relative to the Pool
Principal Balance, resulting in a possible reduction of the
Overcollateralization Amount and, in some circumstances, an Allocable Loss
Amount. See 'Risk Factors -- Adequacy of Credit Enhancement' herein.
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 Offered Notes. The summary does not
purport to be complete and is subject to, and qualified in its entirety by
reference to, all the provisions of the Transfer and Servicing Agreements. The
following summary supplements, and to the extent inconsistent therewith
replaces, the description of the general terms and provisions of the Transfer
and Servicing Agreements set forth under the heading 'Description of the
Securities' in the Prospectus, to which description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS AND THE GRANTOR TRUST CERTIFICATE
On the Closing Date, all of the Transferor's right, title and interest in
and to the Initial 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 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.
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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 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'). The Transferor will deliver
to the Custodian after recordation the assignments of the Mortgages in the name
of the Grantor Trustee. In the event that, with respect to any Loan, the
Transferor cannot deliver the Mortgage or any assignment of Mortgage with
evidence of recording thereon concurrently with the conveyance thereof to the
Grantor Trustee because it has or they have not yet been returned by the public
recording office, the Transferor will deliver or cause to be delivered to the
Custodian a true photocopy of such Mortgage or assignment of Mortgage. The
Transferor will deliver or cause to be delivered to the Custodian any such
Mortgage or assignment of Mortgage with evidence of recording indicated thereon
upon receipt thereof from the public recording office. The Custodian will agree,
for the benefit of the holders of the Notes, to review (or cause to be reviewed)
each 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.
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.
FEES AND EXPENSES
As compensation for its services pursuant to the Sale and Servicing
Agreement, the Servicer is entitled to the Servicing Fee and additional
servicing compensation and reimbursement as described under ' -- Servicing'
below. As compensation for their services pursuant to the applicable Transfer
and Servicing Agreements, the Indenture Trustee is entitled to the Indenture
Trustee Fee, the Owner Trustee is entitled to the Owner Trustee Fee and the
Grantor Trustee is entitled to the Grantor Trustee Fee.
SERVICING
In consideration for the performance of the loan servicing functions for
the Loans, the Servicer is entitled to a monthly fee (the 'Servicing Fee') equal
to 1.25% per annum (the 'Servicing Fee Rate') of the Pool Principal Balance as
of the first day of the immediately preceding Due Period; provided, however,
that so long as the Overcollateralization Target Amount equals the Net
Delinquency Calculation Amount, the Servicing Fee shall be equal to 0.75% per
annum; provided further that, during any period when the Servicing Fee is so
reduced, the Servicer shall be entitled to receive a make whole servicing fee
equal to 0.50% per annum of the Pool Principal Balance as of the first day of
the immediately preceding Due Period (the 'Make Whole Servicing Fee') in the
priority described under 'Description of the Offered Notes -- Priority of
Payments' above. See 'Risk Factors -- Dependence on Servicer for Servicing
Loans' herein. The Servicing Fee will be reduced on any Loan with a Loan Rate
below 9.7575% per annum for the Due Periods on or before the Cleanup Call Date
and on any Loan with a Loan Rate below 10.2575% per annum for the Due Periods
after the Cleanup Call Date. The Servicer may retain Subservicers to service
certain of the Loans. The Servicer will remain responsible for the servicing of
any such loans and will pay the fees of any Subservicer out of its own funds. As
of
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the Closing Date, none of the Initial Loans will be serviced by a Subservicer.
The Servicer is obligated to pay certain ongoing expenses associated with the
Trust Fund, including the obligation to pay the Insurance Premiums required by
FHA Regulations, and insured by the Servicer in connection with its
responsibilities under the Sale and Servicing Agreement. In addition to the
Servicing Fee, the Servicer is entitled to retain additional servicing
compensation in the form of assumption and other administrative fees, release
fees, insufficient funds charges, prepayment charges, late payment charges and
any other servicing-related penalties and fees, together with any income or gain
from investment of funds in the Collection Account (collectively, such
additional compensation and Servicing Fee, the 'Servicing Compensation').
In the event of a delinquency or a default with respect to a Loan, the
Servicer will have no obligation to advance scheduled monthly payments of
principal or interest with respect to such Loan. Further, the Servicer will have
no obligation to advance for the preservation, restoration and protection of any
Mortgaged Property.
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, all
Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or substitution
of any Loan, interest and gains on funds held in the Collection Account and any
amount required to be deposited in the Collection Account in connection with the
termination of the Offered Notes. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the Loans on or before the Cut-Off Date. Withdrawals will
be made from the Collection Account only for the purposes specified in the Sale
and Servicing Agreement. The Collection Account may be maintained at any
depository institution which satisfies the requirements set forth in the
definition of Eligible Account in the Sale and Servicing Agreement.
The Servicer will establish and maintain with the Indenture Trustee an
account, in the name of the Indenture Trustee on behalf of the holders of Notes,
into which amounts released from the Collection Account in respect of
distributions on the Grantor Trust Certificate 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 second Business Day prior to each Payment Date, the Indenture
Trustee will deposit into the Payment Accounts 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
Payment Accounts for application of the amounts specified under 'Description of
the Offered Notes -- Payments on the Offered Notes' herein.
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 one or more Permitted Investments (as defined in
the Sale and Servicing Agreement) bearing interest or sold at a discount. No
such investment in any Account will mature later than the Business Day
immediately preceding the next Payment Date. All income or other gain from
investments in any Account will be deposited in such Account, immediately on
receipt and shall comprise a portion of the Available Collection Amount.
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COLLECTION AND OTHER SERVICING PROCEDURES FOR LOANS
The Servicer has agreed to manage, service, administer and make collections
on the Loans and perform the other actions required by the Servicer under the
Sale and Servicing Agreement. In performing such obligations, the Servicer is
required to act in good faith in a commercially reasonable manner and in
accordance with the terms of the Sale and Servicing Agreement. The Servicer has
full power and authority, subject only to the specific requirements and
prohibitions of the Sale and Servicing Agreement and the respective Loans, to do
any and all things in connection with such servicing and administration which
are consistent with the manner in which it services similar types of loans owned
by the Servicer or any of its affiliates or serviced by the Servicer for others
and which are consistent with the ordinary practices of prudent mortgage lending
institutions.
The Servicer's loan servicing activities include responding to borrower
inquiries, processing and administering loan payments, reporting and remitting
principal and interest to trustees, investors and other entities that own
interests in the loans, collecting delinquent loan payments, conducting
foreclosure proceedings and disposing of foreclosed property and otherwise
administering the loans. The Servicer utilizes a computer-based loan servicing
system. It provides payment processing and cashiering functions, automated
payoff statements, on-line collection, statement and notice mailing along with a
full range of investor reporting requirements.
Collection activity begins once a loan is 5 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 second day until acceptable payment arrangements have been
made. In addition to collection calls, the servicing system generates delinquent
letters at periodic times during the delinquency period taking into
consideration Federal Debt Collection Practices Act and mortgage note or deed of
trust requirements. Generally this follows a five, fifteen and 30 day
delinquency cycle. A third party property inspection company may be engaged to
visit the borrower's home to complete an exterior inspection of the property
securing the loan, if applicable. The inspection provides specific details about
the property, including whether the property is vacant or occupied, and a notice
is left to call the Servicer's servicing department.
Once the loan becomes 45 to 60 days delinquent, a demand notice is sent to
the borrower, via certified mail with return receipt requested. Collection calls
are generally continued at least every other day and additional delinquency
notices are manually ordered by the Servicer's servicing department. At 60 days
of delinquency, the status of any senior lien is verified, all tax information
is verified and a current credit report is obtained to determine if there have
been any additional liens or judgments filed. Finally, at 90 days of
delinquency, the loan file is referred to the Servicer's loss mitigation
department for review. All information is updated and referred to the Servicer's
loss mitigation department for determination of appropriate action which may
include (but is not limited to) negotiating a settlement or new payment plan,
pursuing judgment against the borrower, foreclosure or charge off.
Under the Sale and Servicing Agreement, the Servicer may resign from its
duties thereunder only in accordance with the terms thereof. No removal or
resignation will become effective until the Grantor Trustee or a successor
servicer has assumed the Servicer's responsibilities and obligations in
accordance therewith.
The Servicer may not assign its obligations under the Sale and Servicing
Agreement. Notwithstanding anything in the preceding sentence to the contrary,
the Servicer may delegate certain of its obligations to a sub-servicer pursuant
to a sub-servicing agreement. A sub-servicer must meet certain eligibility
requirements, as set forth in the Sale and Servicing Agreement, and each
sub-servicing agreement shall require that the Loans be serviced in a manner
that is consistent with the terms of the Sale and Servicing Agreement. The
Servicer will not be released of its servicing obligations and duties with
respect to any subserviced Loans. As of the Closing Date, the Servicer will not
have subcontracted its servicing obligations and duties with respect to the
Loans.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace
period, the Servicer must take such action as it shall deem to be in the best
interest of the Securityholders and the Grantor Trust.
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The Servicer may modify any provision of any Loan if, in the Servicer's
reasonable determination, such modification is not materially adverse to the
interests of the Securityholders; provided that the Servicer may not make any
modification that would change the Loan Rate, defer or forgive payment of
interest or principal or extend the stated maturity unless the Obligor is in
default with respect to such Loan, or a default is, in the judgment of the
Servicer, reasonably foreseeable.
INSURANCE
The Servicer is not required to cause to be maintained such fire and hazard
insurance covering any Mortgaged Property acquired by the Grantor Trustee in
foreclosure as the Servicer shall deem reasonable.
REALIZATION UPON DEFAULTED LOANS
With respect to any Loan in default, the Servicer may, among other things,
accept short pay-offs, short sales, enter into assumptions and modifications,
pursue collection litigation or alternative court proceedings to foreclosure
actions, institute foreclosure proceedings, exercise any power of sale to the
extent permitted by law, obtain a deed in lieu of foreclosure, or otherwise
acquire possession of or title to any Mortgaged Property, by operation of law or
otherwise; provided, however, that in the Servicer's reasonable judgment such
action will be likely to result in a positive economic benefit to the Grantor
Trust by creating Net Liquidation Proceeds (after reimbursement of all amounts
owed with respect to such Loan to the Servicer). The Servicer will have no
obligation to perform any environmental review before taking title to any
Mortgaged Property.
In connection with any such foreclosure proceeding, power of sale, deed in
lieu of foreclosure or other acquisition of a Mortgaged Property and any sale or
liquidation of the Loan or related Mortgaged Property, the Servicer shall comply
with the requirements of the Sale and Servicing Agreement, shall follow such
practices and procedures as are consistent with the Servicer's procedure for
foreclosure and operation of foreclosed property with respect to similar loans
held in the Servicer's portfolio for its own account or, if there are no such
loans, such loans serviced by the Servicer for others, giving due consideration
to accepted servicing practices of prudent lending institutions.
EVIDENCE AS TO COMPLIANCE
The Sale and Servicing Agreement provides that the Servicer shall deliver
to the Indenture Trustee, the Grantor Trustee, the Depositor and the Rating
Agencies an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under the Sale and Servicing
Agreement throughout the preceding year, except as specified in such statement.
Each year (within 120 days following the end of the Servicer's fiscal
year), beginning in 1999, the Servicer will furnish to the Grantor Trustee 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 ends on June 30, 1998.
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
Grantor Trustee 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 and Indenture Trustee. No resignation of
the Servicer shall become effective until the Grantor Trustee or a successor
servicer shall have assumed the Servicer's servicing responsibilities and
obligations.
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The Servicer has agreed not to merge or consolidate with any other company
or permit any other company to become the successor to the Servicer's business
unless, after the merger or consolidation, the successor or surviving entity (i)
shall be an Eligible Servicer (as defined in the Sale and Servicing Agreement)
and (ii) shall be capable of fulfilling the duties of the Servicer contained in
the Sale and Servicing Agreement. Any company into which the Servicer may be
merged or consolidated shall be the successor to the Servicer under the Sale and
Servicing Agreement without the execution or filing of any paper or any further
act.
The Sale and Servicing Agreement provides that neither the Servicer nor any
of its directors, officers, employees or agents shall have any liability to the
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.
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 Payable Amount payable to the Senior Notes or, if the
Class A Notes have been paid in full, a failure to pay the portion of such
amount payable to the other Class of Notes then outstanding that has the next
highest priority of payment (collectively, the 'Highest Priority Classes')
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'). However, an Event of Default will not occur solely due
to (i) the failure to pay the full amount of the Noteholders' Interest Payable
Amount allocable to any Class of Notes other than the Highest Priority Classes
(a 'Non-Priority Class') or (ii) allocation of an Allocable Loss Amount to a
Non-Priority Class, until all the Classes of Notes having a higher priority of
payment have been paid in full (including all Noteholders' Interest
Carry-Forward Amounts and Loss Reimbursement Deficiencies payable with respect
thereto), and then only if all Noteholders' Interest Carry-Forward Amounts and
Loss Reimbursement Deficiencies payable to such Non-Priority Class have not been
paid. Until the Notes have been declared due and payable upon an Event of
Default, the holders of any Non-Priority Class may not request the Indenture
Trustee to take any action, other than the application of the Available
Collection Amount to principal and interest as provided herein, and may not
otherwise take or cause any action to be taken to enforce the obligation of the
Issuer to pay principal and interest on such Non-Priority Class.
Upon the occurrence of an Event of Default, holders of Senior Notes
representing more than 50% of the aggregate of the voting interests of the
Senior Notes then outstanding may exercise their remedies under the Indenture;
provided, however, that if the aggregate outstanding Class Principal Balance of
the Class A Notes has been reduced to zero, the holders of the Highest Priority
Classes representing more than 50% of the voting interests of such Classes of
Notes may exercise their remedies under the Indenture.
SERVICER EVENTS OF DEFAULT
'Servicer Events of Default' will consist of, among other things: (i) any
failure of the Servicer to deposit in the Collection Account any amount required
to be deposited under the Sale and Servicing Agreement, which failure continues
unremedied for two Business Days; (ii) any failure by the Servicer duly to
observe or perform in any material respect any other of its covenants or
agreements in the Sale and Servicing Agreement, which failure continues
unremedied for 60 days after notice; (iii) the voluntary or involuntary
commencement of a proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization, or other similar law (an 'Insolvency Event'); (iv)
the written admission by the Servicer of its inability to pay its debts as they
become due, make an assignment for the benefit of its creditors, or voluntarily
suspend payment of its obligations; (v) a majority of the holders of the Notes
receive notice from the Servicer that the Servicer is no longer able to
discharge its duties under the Sale and Servicing Agreement or they determine,
in their reasonable judgment and based upon published reports (including wire
services), which they believe in good faith to be reliable,
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that the Servicer (a) has experienced a material adverse change in its business,
assets, liabilities, operations, condition (financial or otherwise) or
prospects, (b) has defaulted on any of its material obligations, or (c) has
ceased to conduct its business in the ordinary course; or (vi) as of any
Determination Date, the total Expected Loan Loss Percentage (as defined below)
exceeds (1) up to the fifth anniversary of the Cut-Off Date, 22.0%, or (2)
thereafter, 33.0%.
If a Servicer Event of Default shall occur and be continuing, the Grantor
Trustee, the Indenture Trustee or the holders of Notes evidencing not less than
50% of the voting interests of the Notes, by notice given in writing to the
Servicer (and to the Indenture Trustee, if given by such holders of Notes) may
terminate all of the rights and obligations of the Servicer under the Sale and
Servicing Agreement. On or after the receipt by the Servicer of such written
notice, and the appointment of and acceptance of appointment by a successor
Servicer, all authority, power, obligations and responsibilities of the Servicer
under the Sale and Servicing Agreement shall become obligations and
responsibilities of the successor Servicer. After the Servicer receives a notice
of termination or upon the resignation of the Servicer, the Grantor Trustee
shall be the successor in all respects to the Servicer in its capacity as
servicer under the Sale and Servicing Agreement.
Any successor Servicer shall be entitled to such compensation (whether
payable out of the Collection Account or otherwise) as the Servicer would have
been entitled to under the Sale and Servicing Agreement if the Servicer had not
resigned or been terminated thereunder. In addition, any successor Servicer
shall be entitled to reasonable transition expenses incurred in acting as
successor Servicer.
The 'Expected Loan Loss Percentage' will be the sum of (A) the cumulative
net Loan losses divided by the Maximum Collateral Amount, plus (B) 25% of the
aggregate Principal Balance of the Loans which are then 30 or more but less than
60 days delinquent divided by the Maximum Collateral Amount, plus (C) 50% of the
aggregate Pool Principal Balance of the Loans which are then 60 or more but less
than 90 days delinquent divided by the Maximum Collateral Amount, plus (D) 100%
of the aggregate Pool Principal Balance of the Loans which are then 90 or more
days delinquent divided by the Maximum Collateral Amount).
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 Offered Notes in
their own names or as pledges.
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 Master Financial
will be obligated to appoint a successor thereto. Master Financial may remove
the Owner Trustee if it 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, Master Financial will be obligated to appoint a successor
Owner Trustee. 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 Master Financial will be obligated to appoint a successor thereto. The
holders of a majority in outstanding amount of the Notes may remove the
Indenture Trustee or Grantor Trustee and may appoint a successor thereto.
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Master Financial 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 Grantor Trust Agreement, as the case may
be, or becomes legally unable to act or becomes insolvent. In such
circumstances, Master Financial will be obligated to appoint a successor. Any
such resignation or removal and appointment of a successor thereto will not
become effective until acceptance of the appointment by such successor.
The Owner Trust Agreement, Indenture and Grantor Trust Agreement will
provide that the Trustees 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 and the Indenture Trustee, no holder
of a Residual Interest 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. The Indenture Trustee
will not be charged with knowledge of a failure by the Servicer to perform its
duties under the Owner Trust Agreement, the Sale and Servicing Agreement or the
Administration Agreement which failure constitutes an Event of Default under the
Indenture, unless the Indenture Trustee obtains such actual knowledge of such
failure as specified in the Indenture.
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The Indenture Trustee will be under no obligation to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Notes, unless such holders have offered to the Indenture Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that may be incurred therein or thereby. No holder of Notes will have any right
under the Indenture to institute any proceeding with respect to the Indenture,
unless such holder will previously have given to the Indenture Trustee written
notice of the occurrence of an Event of Default and (i) the Event of Default
arises from the Servicer's failure to remit payments when due or (ii) holders of
Notes evidencing not less than 25% of the voting interests of the Highest
Priority Classes, 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 and the Rating Agencies,
stating the date of original issuance of the Notes and such other information,
including the following:
(i) the Available Collection Amount and Available Payment Amount for
the related Payment Date;
(ii) the Class Principal Balance or Notional Balance, as applicable,
of each Class of 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;
(iii) the Class Factor with respect to each Class of the Notes then
outstanding ('Class Factor' means with respect to each Class and any date
of determination, the then applicable Class Principal Balance of such Class
divided by the Original Class Principal Balance thereof);
(iv) the amount of principal, if any, and interest to be paid to each
Class of Notes on the related Payment Date;
(v) with respect to each Class of Notes other than the Class A-4 IO
Notes, the Optimal Principal Balance thereof;
(vi) the Overcollateralization Deficiency Amount, and any amount to be
paid to the holders of the Notes or paid to the holders of the Residual
Interest on such Payment Date;
(vii) the Servicing Compensation, the Indenture Trustee Fee, the
Grantor Trustee Fee and the Owner Trustee Fee, if any, for such Payment
Date;
(viii) the Overcollateralization Amount (or Undercollateralization
Amount) on such Payment Date, the Overcollateralization Target Amount as of
such Payment Date, the Allocable Loss Amount for such Payment Date and the
application of the Allocable Loss Amount for such Payment Date;
(ix) the weighted average maturity of the Loans and the weighted
average Loan Rate of the Loans;
(x) certain performance information, including, without limitation,
delinquency and foreclosure information with respect to the Loans and
60-Day Delinquency Amounts (as defined in the definition of 'Six-Month
Rolling Delinquency Average');
(xi) 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;
(xii) 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
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Principal Balances of all Loans, all as of the close of business on the
last day of the related Due Period;
(xiii) 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;
(xiv) 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;
(xv) the scheduled principal payments and the principal prepayments
received with respect to the Loans during the Due Period; and
(xvi) 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 an Offered Note that holds
the Offered Note as a capital asset and, unless otherwise indicated below, is a
United States person (as defined in the Prospectus). This summary does not
address special tax rules which may apply to certain types of investors, and
investors that hold Offered Notes as part of an integrated investment. This
summary supplements the discussion contained in the Prospectus under the heading
'Certain Federal Income Tax Consequences,' and supersedes that discussion to the
extent that it is inconsistent therewith.
CLASSIFICATION OF INVESTMENT ARRANGEMENT
In the opinion of Cadwalader, Wickersham & Taft, special counsel to the
Depositor, 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 Offered Notes. There are no regulations, published
rulings or judicial decisions addressing the characterization for federal income
tax purposes of securities with terms that are substantially the same as those
of the Offered Notes. However, in the opinion of Cadwalader, Wickersham & Taft,
special counsel to the Depositor, the Offered Notes will be treated as
indebtedness for federal income tax purposes and not as an ownership interest in
the Loans or an equity interest in the Issuer.
Interest and Original Issue Discount. Although unclear for federal income
tax purposes, it is anticipated that the Class A-4 IO Notes will be considered
to be issued with original issue discount in an amount equal to the excess of
all distributions of interest expected to be received thereon over their
respective issue prices (including accrued interest). Any 'negative' amounts of
original issue discount on the Class A-4 IO Notes attributable to rapid
prepayments with respect to the Loans will not be deductible currently, but may
be offset against future positive accruals of original issue discount, if any.
Finally, a holder of a Class A-4 IO Note may be entitled to a loss deduction to
the extent it becomes certain that such holder will not recover a portion of its
basis in such Note, assuming no further prepayments. In the alternative, it is
possible that rules similar to the 'noncontingent bond method' of
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the contingent interest rules in the OID Regulations, as amended on June 12,
1996, may be promulgated with respect to the Class A-4 IO Notes. Under the
noncontingent bond method, if the interest payable for any period is greater or
less than the amount projected, the amount of income included for that period
would be either increased or decreased accordingly. Any net reduction in the
income accrual for the taxable year below zero (a 'Negative Adjustment') would
be treated by a Noteholder as ordinary loss to the extent of prior income
accruals and would be carried forward to offset future interest accruals. At
maturity, any remaining Negative Adjustment would be treated as a loss on
retirement of the Note. The legislative history of relevant Code provisions
indicates, however, that negative amounts of original issue discount on an
instrument such as a Note may not give rise to taxable losses in any accrual
period prior to the instrument's disposition or retirement. Thus, it is not
clear whether any losses resulting from a Negative Adjustment would be
recognized currently or carried forward until disposition of retirement of the
debt obligation. See 'Certain Federal Income Tax
Consequences -- REMICs -- Taxation of Classes of REMIC Regular
Certificates -- Premium' and ' -- Original Issue Discount' in the Prospectus.
The prepayment assumption that will be used for accruing original issue discount
for federal income tax purposes is 100% of the Prepayment Assumption.
Interest on the Class A-1, Class A-2, Class A-3, Class A-4, Class M-1,
Class M-2 and Class B-1 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 Class A-1, Class A-2, Class A-3, Class
A-4, Class M-1, Class M-2 and Class B-1 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 Class A-1, Class A-2, Class A-3,
Class A-4, Class M-1, Class M-2 and Class B-1 Notes will be determined in the
same manner as described under 'Certain Federal Income Tax Consequences --
REMICs -- Taxation of Classes of REMIC Regular Certificates -- Premium' and
' -- Original Issue Discount' in the Prospectus. The prepayment assumption that
will be used for 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 an Offered Note, a beneficial owner generally
will recognize capital gain or loss equal to the difference, if any, between the
amount realized (adjusted for accrued stated interest) on the sale or other
disposition and the owner's Offered Note. 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 Offered Notes who are nonresident
aliens, foreign corporations, or other Non-U.S. Persons (i.e., any person who is
not a 'U.S. Person,' as defined below), will be considered 'portfolio interest'
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a '10-percent shareholder'
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) with respect to the Depositor
or the 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 Offered Note is a Non-U.S. Person. If such stateme nt,
or any other required statement, is not provided, 30% withholding will apply
unless reduced or eliminated pursuant to an applicable tax treaty or unless the
interest on the Offered Note is effectively connected with the conduct of a
trade or business within the United States by such Non-U.S. Person. In the
latter case, such Non-U.S. Person will be subject to United States federal
income tax at regular rates. Investors who are Non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
an Offered Certificate. The term 'U.S. Person' means a citizen or resident of
the United States, a corporation, partnership (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
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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 Offered Notes and proceeds from the sale of Offered
Notes to or through certain brokers may be subject to a 'backup' withholding tax
of 31% of 'reportable payments' (including interest 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 Offered 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 interest discount, if any, and certain
information needed to compute accrued market discount, if any, 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 Prospectus.
ERISA CONSIDERATIONS
GENERAL
Title I of the Employee Retirement Income Security Act of 1974, as amended
('ERISA'), and section 4975 of the Internal Revenue Code of 1986, as amended
(the 'Code'), impose certain restrictions on employee benefit plans and other
retirement plans or arrangements subject thereto ('Plans') and on persons who
are parties in interest or disqualified persons ('Parties in Interest') with
respect to such Plans. Certain employee benefit plans, such as governmental
plans and church plans (if no election has been made under section 410(d) of the
Code) are not subject to the restrictions of ERISA, and assets of such plans may
be invested in the Offered Notes without regard to the ERISA considerations
described below, subject to other applicable federal and state law. However, any
such governmental or church plan which is qualified under section 401(a) of the
Code and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Offered Notes
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the Offered Notes.
See 'ERISA Considerations' in the Prospectus. Investments by Plans are also
subject to ERISA's general fiduciary requirements, including the requirement of
investment prudence and diversification and the requirement that a Plan's
investments be made in accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
General. Section 406 of ERISA prohibits Parties in Interest with respect to
a Plan from engaging in certain transactions (including loans) involving a Plan
and its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes certain excise taxes (or, in some
cases, a civil penalty may be assessed pursuant to section 502(i) of ERISA) on
Parties in Interest which engage in non-exempt prohibited transactions.
Plan Asset Regulation. The United States Department of Labor (the 'DOL')
has issued regulations concerning the definition of what constitutes the assets
of a Plan for purposes of ERISA and the prohibited transaction provisions of the
Code (the 'Plan Asset Regulation'). The Plan Asset Regulation describes the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be 'plan assets' such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the Plan
Asset Regulation, generally when a Plan invests in another entity, the Plan's
assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulation provides
that, if a Plan acquires an
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'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 Offered Notes are not treated as equity interests in the
Issuer for purposes of the Plan Asset Regulation, a Plan's investment in such
Offered 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 Offered Notes, the purchase of Offered Notes using Plan assets over
which any such parties have investment authority might be deemed to be a
violation of the prohibited transaction rules of ERISA and the Code for which no
exemption may be available. Accordingly, Offered Notes may not be purchased
using the assets of any Plan if the Depositor, the Servicer, the Indenture
Trustee, or the Owner Trustee has investment authority with respect to such
assets.
In addition, certain affiliates of the 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 Offered Notes by or on behalf of such
a Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions such as Prohibited Transaction Class Exemption ('PTCE') 84-14, which
exempts certain transactions effected on behalf of a Plan by a 'qualified
professional asset manager,' PTCE 90-1, which exempts certain transactions
involving insurance company pooled separate accounts, PTCE 91-38, which exempts
certain transactions involving bank collective investment funds, PTCE 95-60,
which exempts certain transactions involving insurance company general accounts,
or PTCE 96-23, which exempts certain transactions effected on behalf of a Plan
by certain 'in-house asset managers.' Each purchaser or transferee of a Note
that is a Plan or is investing assets of a Plan shall be deemed to have
represented that the relevant conditions for exemptive relief under at least one
of the foregoing exemptions have been satisfied.
If the Offered Notes are deemed to be equity interests in the Issuer, the
Issuer could be considered to hold Plan assets by reason of a Plan's investment
in the Offered Notes. In such an event, the Servicer and other persons
exercising management or discretionary control over the assets of the 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 Offered Notes on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment and the availability of any prohibited transaction
exemptions. The sale of Offered Notes to a Plan is in no respect a
representation by the Depositor or the Underwriter that this investment meets
all relevant requirements with respect to investments by Plans generally or any
particular Plan or that this investment is appropriate for Plans generally or
any particular Plan.
LEGAL INVESTMENT MATTERS
The Offered Notes will not constitute 'mortgage related securities' under
SMMEA because substantially all of the Loans are secured by Mortgages that are
primarily second liens.
No representation is made as to the proper characterization of the Offered
Notes for legal investment purposes, financial institution regulatory purposes,
or other purposes, or as to the ability of
S-80
<PAGE>
<PAGE>
particular investors to purchase the Offered Notes under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the Offered Notes. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Offered Notes
constitute a legal investment or are subject to investment, capital or other
restrictions.
USE OF PROCEEDS
The proceeds from the Sale of the Notes, net of certain expenses will be
used by the Depositor for the purchase of the Initial Loans from the Transferor
and to fund the Pre-Funding Account and the Capitalized Interest Account. The
Transferor in turn will use such proceeds from the sale of the Initial Loans to
repay certain indebtedness under warehouse financing arrangements that have been
utitized to finance the acquisition of such Initial Loans and are secured by
such Initial Loans. See 'Underwriting' herein.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the 'Underwriting Agreement'), the Depositor has agreed to sell to each of the
Underwriters named (collectively, the 'Underwriters'), and each of the
Underwriters has agreed to purchase from the Depositor, the amount of Notes set
forth opposite its name in the tables below:
<TABLE>
<CAPTION>
CLASS PRINCIPAL BALANCE OR CLASS NOTIONAL BALANCE OF:
------------------------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-4 IO
UNDERWRITER NOTES NOTES NOTES NOTES NOTES
----------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PaineWebber Incorporated............. $24,753,333 $10,690,667 $ 9,361,333 $ 5,863,000 $ 17,589,000
Deutsche Morgan Grenfell Inc. ....... $24,753,333 $10,690,667 $ 9,361,333 $ 5,863,000 $ 0
Residential Funding Securities
Corporation........................ $24,753,333 $10,690,667 $ 9,361,333 $ 5,863,000 $ 0
----------- ----------- ----------- ----------- ------------
Total........................... $74,260,000 $32,072,000 $28,084,000 $17,589,000 $ 17,589,000
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
<TABLE>
<CAPTION>
CLASS PRINCIPAL BALANCE OF:
-----------------------------------------
CLASS M-1 CLASS M-2 CLASS B-1
UNDERWRITER NOTES NOTES NOTES
----------- ----- ----- -----
<S> <C> <C> <C>
PaineWebber Incorporated............................................ $10,857,500 $ 9,771,750 $ 8,686,000
Residential Funding Securities Corporation.......................... $10,857,500 $ 9,771,750 $ 8,686,000
----------- ----------- -----------
Total.......................................................... $21,715,000 $19,543,500 $17,372,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Depositor has been advised by the Underwriters that they propose
initially to offer the Notes to the public at the prices set forth herein, and
to certain dealers at such prices less the initial concession set forth below
for each Class. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of that set forth below for each Class. After the
initial public offering of the Notes, the public offering price and such
concessions and reallowances may be changed.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-4 IO
--------- --------- --------- --------- ------------
<S> <C> <C> <C> <C> <C>
Concessions......................................... 0.060% 0.090% 0.105% 0.300% 0.075%
Reallowances........................................ 0.040% 0.060% 0.070% 0.200% 0.050%
</TABLE>
<TABLE>
<CAPTION>
CLASS M-1 CLASS M-2 CLASS B-1
--------- --------- ---------
<S> <C> <C> <C>
Concessions.................................................................... 0.30% 0.45% 0.90%
Reallowances................................................................... 0.20% 0.30% 0.60%
</TABLE>
Until the distribution of the Offered Notes is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Offered Notes. As an exception to these
rules, the Underwriters are permitted to engage in certain transactions
S-81
<PAGE>
<PAGE>
that stabilize the price of the Offered Notes. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Offered Notes.
If the Underwriters create a short position in the Offered Notes in
connection with the offering, i.e., if they sell more Offered Notes than are set
forth on the cover page of this Prospectus Supplement, the Underwriters may
reduce that short position by purchasing Offered Securities 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 Underwriters 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 Offered Notes. In addition, neither
the Depositor nor the Underwriters makes any representation that the
Underwriters 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 Offered Notes. There can be
no assurance that a secondary market for the Offered Notes will develop or, if
it does develop, that it will continue.
The Depositor has agreed to indemnify the Underwriters against, or make
contributions to the Underwriters with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
In addition to the purchase of the Offered Notes pursuant to the
Underwriting Agreement, affiliates of Residential Funding Securities Corporation
have several business relationships with Master Financial and its affiliates.
One or more affiliates of Residential Funding Securities Corporation will
provide warehouse financing and may provide repurchase arrangements to the
Transferor for its consumer and mortgage loans, including property improvement,
debt consolidation and combination loans. See 'Use of Proceeds' herein. In
addition, affiliates of Residential Funding Securities Corporation may provide
other term financing arrangements to the Transferor for the Residual Interest
retained by it and other residual interest securities retained by it that were
issued in connection with one of the prior series of asset backed securities
involving the Transferor.
As of the date of this Prospectus Supplement, the Transferor has a
warehouse credit facility and a working capital credit facility with an
affiliate of Residential Funding Securities Corporation. Immediately prior to
the sale of the Loans to the Depositor, the Initial Loans were, and any
Subsequent Loans will have been, subject to financing under such warehouse
credit facility. The Transferor will apply the proceeds it receives from the
sale of the Loans to the Depositor to repay such financing. In addition,
pursuant to a stock option agreement, such affiliate of Residential Funding
Securities Corporation has an option, subject to certain conditions and
limitations, to purchase all or a portion of the Transferor's issued and
outstanding shares of common stock. Such affiliate of Residential Funding
Securities Corporation will also be issued a portion of the Residual Interest in
consideration for payment by such affiliate of certain costs associated with the
origination of certain Loans by the Transferor.
LEGAL MATTERS
The validity of the Offered Notes and certain federal income tax matters
will be passed upon for the Depositor and for the Underwriters by Cadwalader,
Wickersham & Taft, New York, New York.
RATINGS
It is a condition to the issuance of the Offered Notes that each of the
Class A-1 Notes, Class A-2 Notes, Class A-3 Notes , Class A-4 Notes and Class
A-4 IO Notes be rated 'Aaa' by Moody's and 'AAA' by Fitch and DCR, the Class M-1
Notes be rated 'Aa2' by Moody's and 'AA' by Fitch and DCR, the Class M-2 Notes
be rated 'A2' by Moody's and 'A' by Fitch and DCR and the Class B-1 Notes be
rated 'Baa3' by Moody's and 'BBB' by Fitch and DCR. The ratings on the Offered
Notes do not address the ability of the Issuer to acquire Subsequent Loans, any
potential redemption with respect thereto or the effect to yield resulting
therefrom.
S-82
<PAGE>
<PAGE>
The ratings on the Offered Notes address the likelihood of the receipt by
the holders of the Offered Notes of all payments on the Loans to which they are
entitled. The ratings on the Offered Notes also address the structural, legal
and issuer-related aspects of the Offered Notes, including the nature of the
Loans. In general, the ratings on the Offered Notes address credit risk and not
prepayment risk. The ratings on the Offered Notes do not represent any
assessment of the likelihood that principal prepayments of the Loans will be
made by borrowers or the degree to which the rate of such prepayments might
differ from that originally anticipated. As a result, the initial ratings
assigned to the Offered Notes do not address the possibility that holders of the
Offered Notes might suffer a lower than anticipated yield in the event of
principal payments on the Offered Notes (other than the Class A-4 IO Notes)
resulting from rapid prepayments of the Loans, funds remaining in the Pre-
Funding Account at the end of the Pre-Funding Period or the application of
Excess Spread as described herein, or in the event that the Owner Trust is
terminated prior to the final Maturity Date of the Notes. The rating of the
Class A-4 IO Notes do not address the possibility that rapid rates of principal
prepayments could result in the failure of the holders of the Class A-4 IO Notes
to fully recover their initial investment.
The Depositor has not solicited ratings on the Offered Notes with any
rating agency other than the Rating Agencies. However, there can be no assurance
as to whether any other rating agency will rate the Offered Notes or, if it
does, what rating would be assigned by any such other rating agency. Any rating
on the Offered Notes by another rating agency, if assigned at all, may be lower
than the ratings assigned to the Offered Notes by the Rating Agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. In the event that the ratings initially assigned to any
of the Offered Notes by the Rating Agencies are subsequently lowered for any
reason, no person or entity is obligated to provide any additional support or
credit enhancement with respect to such Offered Notes.
S-83
<PAGE>
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
-6-
60-Day Delinquency Amount....................................................................... S-64
-A-
Accounts........................................................................................ S-70
Accrual Period.................................................................................. S-61
Administration Agreement........................................................................ S-8
Administrator................................................................................... S-7
Allocable Loss Amount........................................................................... S-15, S-67
Available Collection Amount..................................................................... S-58
Available Payment Amount........................................................................ S-59
-B-
Bankruptcy Code................................................................................. S-27
Bankruptcy Commission........................................................................... S-27
Business Day.................................................................................... S-61
-C-
Capitalized Interest Account.................................................................... S-16, S-65
Certificate Distribution Account................................................................ S-70
Claimable Amount................................................................................ S-40
Class........................................................................................... S-2
Class A Notes................................................................................... S-2, S-8
Class B Notes................................................................................... S-8
Class B-1 Optimal Principal Balance............................................................. S-61
Class B-2 Notes................................................................................. S-58
Class B-2 Optimal Principal Balance............................................................. S-61
Class Factor.................................................................................... S-76
Class M-1 Optimal Principal Balance............................................................. S-61
Class M-2 Optimal Principal Balance............................................................. S-61
Class Notional Balance.......................................................................... S-61
Class Principal Balance......................................................................... S-61
Clean-up Call Date.............................................................................. S-17, S-66
Code............................................................................................ S-18, S-79
Collection Account.............................................................................. S-70
Combined Loan-To-Value Ratio.................................................................... S-13
Commission...................................................................................... S-4
correspondent originations...................................................................... S-28
CPR............................................................................................. S-48
Custodial Agreement............................................................................. S-7
Custodian....................................................................................... S-7
Cut-Off Date Principal Balance.................................................................. S-12, S-57
-D-
DCR............................................................................................. S-18
Defective Loan.................................................................................. S-13, S-37
Deleted Loan.................................................................................... S-37
Depositor....................................................................................... S-1, S-7
Depository...................................................................................... S-1
Determination Date.............................................................................. S-58
direct originations............................................................................. S-28
Distribution Statement.......................................................................... S-76
DOL............................................................................................. S-79
</TABLE>
S-84
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DTC............................................................................................. S-11
Due Period...................................................................................... S-8
-E-
ERISA........................................................................................... S-18, S-79
Event of Default................................................................................ S-73
Excess Spread................................................................................... S-62
Expected Loan Loss Percentage................................................................... S-74
-F-
Fees and Expenses............................................................................... S-16
FHA............................................................................................. S-2, S-13
FHA Claims Administrator........................................................................ S-41
FHA Insurance Amount............................................................................ S-41
FHA Reserve..................................................................................... S-38
Fitch........................................................................................... S-18
-G-
Grantor Trust................................................................................... S-2, S-7, S-57
Grantor Trust Agreement......................................................................... S-7, S-57
Grantor Trust Certificate....................................................................... S-2, S-7
Grantor Trustee................................................................................. S-7
Grantor Trustee's Loan File..................................................................... S-69
Grantor Trustee Fee............................................................................. S-16
-H-
Highest Priority Classes........................................................................ S-73
Home Loan Purchase Agreement.................................................................... S-7, S-57
-I-
Indenture....................................................................................... S-2, S-7, S-58
Indenture Trustee............................................................................... S-2, S-7
Indenture Trustee Fee........................................................................... S-16
Initial FHA Insurance Amount.................................................................... S-41
Initial Loans................................................................................... S-2, S-11
Initial Undercollateralization Amount........................................................... S-14
Insolvency Event................................................................................ S-73
Insurance Premium............................................................................... S-39
Insurance Proceeds.............................................................................. S-62
Issuer.......................................................................................... S-1, S-7, S-57
-L-
LIBOR........................................................................................... S-62
LIBOR Business Day.............................................................................. S-62
Liquidated Home Loan............................................................................ S-62
Loan Rate....................................................................................... S-28
Loan Schedule................................................................................... S-69
Loans........................................................................................... S-2, S-12, S-57
Loss Reimbursement Deficiency................................................................... S-15, S-62
-M-
Make Whole Servicing Fee........................................................................ S-69
Master Financial................................................................................ S-1, S-7, S-36
Maturity Date................................................................................... S-10
Maximum Collateral Amount....................................................................... S-14, S-62
Mezzanine Notes................................................................................. S-2, S-8
</TABLE>
S-85
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Modeling Assumptions............................................................................ S-48
Moody's......................................................................................... S-18
Mortgaged Properties............................................................................ S-12, S-28
Mortgages....................................................................................... S-2, S-12
Multiplier...................................................................................... S-62
-N-
National Housing Act............................................................................ S-13
Negative Adjustment............................................................................. S-78
Net Delinquency Calculation Amount.............................................................. S-62
Net Liquidation Proceeds........................................................................ S-62
Net Weighted Average Rate....................................................................... S-63
Noteholder Interest Carry Forward Amount........................................................ S-63
Noteholders Interest Payment Amount............................................................. S-63
Noteholders Monthly Interest Payment............................................................ S-63
Non-Priority Class.............................................................................. S-73
Note Interest Rate.............................................................................. S-9
Note Payment Account............................................................................ S-70
Notes........................................................................................... S-1, S-58
-O-
Obligors........................................................................................ S-19
Offered Notes................................................................................... S-1, S-58
Original Class Principal Balance................................................................ S-8
Original Pool Principal Balance................................................................. S-11, S-29, S-57
Original Pre-Funding Amount..................................................................... S-16, S-65
Overcollateralization Amount.................................................................... S-14, S-63, S-67
Overcollateralization Deficiency Amount......................................................... S-63
Overcollateralization Target Amount............................................................. S-14, S-63, S-67
Owner Trust..................................................................................... S-1, S-7, S-57
Owner Trust Agreement........................................................................... S-1, S-7, S-58
Owner Trustee................................................................................... S-1, S-8
Owner Trustee Fee............................................................................... S-16
-P-
Parties in Interest............................................................................. S-79
Paying Agent.................................................................................... S-1, S-7
Payment Accounts................................................................................ S-70
Payment Date.................................................................................... S-2, S-8, S-58
Plan Asset Regulation........................................................................... S-79
plan assets..................................................................................... S-79
Plans........................................................................................... S-79
Pool............................................................................................ S-2, S-12
Pool Principal Balance.......................................................................... S-12, S-58
portfolio acquisition........................................................................... S-28
Pre-Funding Account............................................................................. S-2, S-16, S-65
Pre-Funding Amount.............................................................................. S-16, S-65
Pre-Funding Payment Trigger..................................................................... S-16, S-23
Pre-Funding Period.............................................................................. S-16, S-65
prepayment...................................................................................... S-48
Prepayment Assumption........................................................................... S-48
Principal Balance............................................................................... S-57
Prospectus...................................................................................... S-3
</TABLE>
S-86
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PTCE............................................................................................ S-80
Purchase Price.................................................................................. S-37
-Q-
Qualified Substitute Loan....................................................................... S-37
-R-
Rating Agencies................................................................................. S-18
Record Date..................................................................................... S-8, S-58
Reference Bank Rate............................................................................. S-63
Reference Banks................................................................................. S-63
Regular Payment Amount.......................................................................... S-64
Regular Principal Payment Amount................................................................ S-64
Related Series Trusts........................................................................... S-41
Released Mortgaged Property Proceeds............................................................ 64
Residual Interest............................................................................... S-58
Residual Interest Certificates.................................................................. S-2, S-9, S-58
-S-
Sale and Servicing Agreement.................................................................... S-7, S-57
Securities...................................................................................... S-2
Security Owners................................................................................. S-11
Senior Notes.................................................................................... S-2, S-8
Senior Optimal Principal Balance................................................................ S-64
Servicer........................................................................................ S-7
Servicer Events of Default...................................................................... S-73
Servicing Compensation.......................................................................... S-16, S-17, S-70
Servicing Fee................................................................................... S-17, S-69
Servicing Fee Rate.............................................................................. S-69
Six-Month Rolling Delinquency Average........................................................... S-64
SMMEA........................................................................................... S-18
Step-down Date.................................................................................. S-64
Subsequent Loans................................................................................ S-2, S-12, S-57
Subservicer..................................................................................... S-17
Substitution Adjustment......................................................................... S-37
-T-
Termination Price............................................................................... S-66
The Bank of New York............................................................................ S-7
Title I......................................................................................... S-13
Title I Contract................................................................................ S-39
Title I Contract Holder......................................................................... S-41
Title I Lenders................................................................................. S-38
Title I Loans................................................................................... S-2, S-13
Title I Regulations............................................................................. S-39
Transfer and Servicing Agreements............................................................... S-68
Transferor...................................................................................... S-7
Trustees........................................................................................ S-74
-U-
U.S. Person..................................................................................... S-78
Undercollateralization Amount................................................................... S-64
Underwriters.................................................................................... S-1, S-81
Underwriting Agreement.......................................................................... S-81
-W-
weighted average life........................................................................... S-44
</TABLE>
S-87
<PAGE>
<PAGE>
PROSPECTUS
MAY 22, 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
<PAGE>
<PAGE>
THE SECURITIES OF EACH SERIES WILL NOT REPRESENT AN INTEREST IN OR
OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR, EXCEPT AS SET FORTH HEREIN OR IN THE
RELATED PROSPECTUS SUPPLEMENT, ANY UNDERLYING RESIDENTIAL LOAN (OTHER THAN
RESIDENTIAL LOANS IDENTIFIED AS FHA LOANS OR VA LOANS IN THE RELATED PROSPECTUS
SUPPLEMENT) OR ANY MORTGAGE SECURITY, WILL BE INSURED OR GUARANTEED BY ANY
GOVERNMENTAL AGENCY OR INSTRUMENTALITY. ALTHOUGH PAYMENT OF PRINCIPAL AND
INTEREST ON AGENCY SECURITIES WILL BE GUARANTEED AS DESCRIBED HEREIN AND IN THE
RELATED PROSPECTUS SUPPLEMENT BY GNMA, FNMA OR FHLMC, THE CERTIFICATES OF ANY
SERIES EVIDENCING INTERESTS IN A TRUST FUND INCLUDING SUCH AGENCY SECURITIES
WILL NOT BE SO GUARANTEED.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The Securities may be offered through one or more different methods,
including offerings through underwriters, as more fully described under 'Plans
of Distribution' and in the related Prospectus Supplement. The Depositor may
retain or hold for sale, from time to time, one or more classes of a Series of
Securities.
The Depositor does not intend to list any of the Securities on any
securities exchange and has not made any other arrangement for secondary trading
of the Securities. With respect to each Series, all of the Securities of each
class offered hereby will be rated in one of the four highest rating categories
by one or more nationally recognized statistical rating organizations. There
will have been no public market for any Series of Securities prior to the
offering thereof. No assurance can be given that such a market will develop as a
result of such an offering.
The Securities are offered when, as and if delivered to and accepted by the
underwriters subject to prior sale, withdrawal or modification of the offer
without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON. THIS PROSPECTUS AND THE RELATED PROSPECTUS SUPPLEMENT
DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES OFFERED HEREBY AND THEREBY NOR AN OFFER OF
THE SECURITIES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH
OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS OR THE RELATED
PROSPECTUS SUPPLEMENT AT ANY TIME DOES NOT IMPLY THAT INFORMATION THEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THEIR RESPECTIVE DATE.
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
<PAGE>
<PAGE>
World Wide Web at 'http://www.sec.gov' at which users can view and download
copies of reports, proxy and information statements and other information filed
electronically through the Electronic Data Gathering, Analysis and Retrieval
('EDGAR') system. The Depositor has filed the Registration Statement, including
all exhibits thereto, through the EDGAR system and therefore such materials
should be available by logging onto the Commission's Web site. The Commission
maintains computer terminals providing access to the EDGAR system at each of the
offices referred to above.
This Prospectus does not contain all of the information set forth in the
Registration Statement (of which this Prospectus forms a part) and exhibits
thereto which the Depositor has filed with the Commission under the Securities
Act of 1933 and to which reference is hereby made.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's most recent Information Statement and any subsequent information
statement, any supplement to any information statement relating to FHLMC and any
quarterly report made available by FHLMC after December 31, 1983 can be obtained
by writing or calling the FHLMC Investor Inquiry Department at 8200 Jones Branch
Drive, Mail Stop 319, McLean, Virginia 22102 (800-336-3672). The Depositor did
not participate in the preparation of FHLMC's Offering Circular, Information
Statement or any supplement and, accordingly, makes no representation as to the
accuracy or completeness of the information set forth therein.
Copies of FNMA's most recent Prospectus for FNMA Certificates are available
from FNMA's Mortgage Backed Securities Office, 3900 Wisconsin Avenue, N.W.,
Washington, D.C. 20016 (202-752-6547). FNMA's annual report and quarterly
financial statements, as well as other financial information, are available from
FNMA's Office of the Treasurer, 3900 Wisconsin Avenue, N.W., Washington, D.C.
20016 (202-752-7000) or the Office of the Vice President of Investor Relations,
3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-752-7000). The
Depositor did not participate in the preparation of FNMA's Prospectus and,
accordingly, makes no representations as to the accuracy or completeness of the
information set forth therein.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer or the Trustee (as specified in the related Prospectus
Supplement) will furnish to all registered holders of Securities of the related
Series monthly, quarterly, semi-annually or at such other intervals specified in
the related Prospectus Supplement, reports and annual statements containing
information with respect to each Trust Fund described herein and in the related
Prospectus Supplement. See 'Description of the Securities -- statements to
Securityholders.'
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
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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.
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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.
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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.
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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
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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.
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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 an employee benefit plan or other retirement 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, SUB-PERFORMING AND NON-PERFORMING
RESIDENTIAL LOANS
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. Credit enhancement provided with respect to a
particular Series of Certificates may not cover all losses related to such
delinquent, sub-performing or non-performing Residential Loans. Prospective
investors should consider the risk that the inclusion of such Residential Loans
in the Trust Fund for a Series may cause the rate of defaults and prepayments on
the Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Securities of such Series. See 'The Trust Funds -- Residential Loans.'
PRE-FUNDING ACCOUNTS
If so provided in the related Prospectus Supplement, on the Closing Date
the Depositor will deposit an amount (the 'Pre-Funded Amount') specified in such
Prospectus Supplement into the Pre-
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Funding Account. The Pre-Funded Amount will be used to purchase Residential
Loans ('Subsequent Loans') within a period commencing from the Closing Date and
ending on a date not more than three months after the Closing Date (such period,
the 'Funding Period') from the Depositor (which, in turn, will acquire such
Subsequent Loans from the seller or sellers specified in the related Prospectus
Supplement). To the extent that the entire Pre-Funded Amount has not been
applied to the purchase of Subsequent Loans by the end of the related Funding
Period, any amounts remaining in the Pre-Funding Account will be distributed as
a prepayment of principal to Securityholders on the Distribution Date
immediately following the end of the Funding Period, in the amounts and pursuant
to the priorities set forth in the related Prospectus Supplement.
OTHER CONSIDERATIONS
There is no assurance that the market value of the Trust Fund Assets or any
other assets of a Trust Fund will at any time be equal to or greater than the
principal amount of the Securities of the related Series then outstanding, plus
accrued interest thereon. Moreover, upon an event of default under the Agreement
for a Series and a sale of the assets in the Trust Fund or upon a sale of the
assets of a Trust Fund for a Series of Securities, the Trustee, the Master
Servicer, the credit enhancer, if any, and any other service provider specified
in the related Prospectus Supplement generally will be entitled to receive the
proceeds of any such sale to the extent of unpaid fees and other amounts owing
to such persons under the related Agreement prior to distributions to
Securityholders. Upon any such sale, the proceeds thereof may be insufficient to
pay in full the principal of and interest on the Securities of such Series.
THE TRUST FUNDS
Each Trust Fund Asset will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased, either directly or through affiliates,
from sellers not affiliated with the Depositor (any such sellers of Residential
Loans, hereinafter 'Unaffiliated Sellers'), or, if provided in the related
Prospectus Supplement, from sellers affiliated with the Depositor.
RESIDENTIAL LOANS
The Residential Loans will consist of mortgage loans (the 'Mortgage Loans')
secured by first or junior liens on one- to four-family residential properties
(each, a 'Mortgaged Property,' collectively, 'Mortgaged Properties') (which may
include Mortgage Securities) or mortgage loans (the 'Multifamily Loans') secured
by first or junior liens on multifamily residential properties consisting of
five or more dwelling units (also, 'Mortgaged Properties'), home improvement
installment sales contracts and installment loan agreements (the 'Home
Improvement Contracts') which may be unsecured or secured by a lien on the
related Mortgaged Property or a Manufactured Home, which lien may be
subordinated to one or more senior liens on the related Mortgaged Property,
cooperative loans (the 'Cooperative Loans') secured primarily by shares in the
related private cooperative housing corporation (a 'Cooperative') that, with the
related proprietary lease or occupancy agreement, give the owner thereof the
right to occupy a particular dwelling unit (each, a 'Cooperative Unit') in the
Cooperative or manufactured housing conditional sales contracts and installment
loan agreements (the 'Manufactured Housing Contracts'), which may be secured by
either liens on (a) new or used Manufactured Homes or (b) the real property and
any improvements thereon (the 'Mortgaged Property,' which may include the
related Manufactured Home if deemed to be part of the real property under
applicable state law) relating to a Manufactured Housing Contract as well as in
certain cases a lien on a new or used Manufactured Home which is not deemed to
be a part of the related real property under applicable state law (such
Manufactured Housing Contracts that are secured by Mortgaged Property are
referred to herein as 'Land Contracts'). The Mortgaged Properties, Cooperative
shares (together with the right to occupy a particular Cooperative Unit
evidenced thereby) and Manufactured Homes (collectively, the 'Residential
Properties') may be located in any one of the fifty states, the District of
Columbia or the Commonwealth of Puerto Rico. Unless otherwise provided in the
related Prospectus Supplement, each Trust Fund will contain (and any
participation interest in any of the foregoing will relate to) only one of the
following types of Residential Loans:
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(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. 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
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Period'), prohibiting prepayments entirely or requiring the payment of a
prepayment penalty upon prepayment in full or in part.
If so specified in the related Prospectus Supplement, the Trust Fund Assets
in the related Trust Fund may include Residential Loans that are delinquent,
sub-performing or non-performing. The inclusion of such Residential Loans in the
Trust Fund for a Series may cause the rate of defaults and prepayments on the
Residential Loans to increase and, in turn, may cause losses to exceed the
available credit enhancement for such Series and affect the yield on the
Certificates of such Series.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the 'Mortgage
Notes') secured by mortgages or deeds of trust (the 'Mortgages') creating first
or junior liens on the Mortgaged Properties. The Mortgage Loans will be secured
by one- to four-family residences, including detached and attached dwellings,
townhouses, rowhouses, individual condominium units, individual units in
planned-unit developments and individual units in de 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 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.
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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.
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.'
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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 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
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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 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').
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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.
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
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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 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
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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 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
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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 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
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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 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
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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 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
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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 to the Trustee or Master Servicer to
damages and administrative sanctions which could reduce the amount of
distributions available to holders of the Certificates.
The Prospectus Supplement for each Series of Securities may set forth
additional information regarding yield considerations.
MATURITY AND PREPAYMENT CONSIDERATIONS
The original terms to maturity of the Trust Fund Assets in a given Trust
Fund may vary depending upon the type of Residential Loans or the residential
loans underlying the Agency Securities included therein. Each Prospectus
Supplement will contain information with respect to the type and maturities of
the Trust Fund Assets in the related Trust Fund. Unless otherwise specified in
the related Prospectus Supplement, the Residential Loans or residential loans
underlying the Agency Securities may be prepaid in full or in part at any time
without penalty. The prepayment experience on the Residential Loans or
residential loans underlying the Agency Securities will affect the life of the
related Securities. The average life of a Security refers to the average amount
of time that will elapse from the date of issuance of a Security until the
principal amount of such Security has been reduced to zero. The average life of
the Securities will be affected by, among other things, the rate at which
principal on the related Residential Loans is paid, which may be in the form of
scheduled amortization payments or unscheduled prepayments and liquidations due
to default, casualty, insurance, condemnation and similar sources. If
substantial principal prepayments on the Residential Loans are received, the
actual average life of the Securities may be significantly shorter than would
otherwise be the case. As to any Series of Securities, based on the public
information with respect to the residential lending industry, it may be
anticipated that a significant number of the related Residential Loans will be
paid in full prior to stated maturity.
Prepayments on residential loans are commonly measured relative to a
prepayment standard or model. For certain Series of Securities comprised of more
than one class, or as to other types of Series where applicable, the Prospectus
Supplement will describe the prepayment standard or model used in connection
with the offering of such Series and, if applicable, will contain tables setting
forth the projected weighted average life of the Securities of such Series and
the percentage of the initial Security Principal Balance that would be
outstanding on specified Distribution Dates based on the assumptions stated in
the Prospectus Supplement, including assumptions that prepayments on the related
Residential
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Loans or residential loans underlying the Agency Securities are made at rates
corresponding to various percentages of the prepayment standard or model
specified in the Prospectus Supplement.
It is unlikely that prepayment of the Trust Fund Assets will conform to any
model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of residential loans is influenced by a variety of
economic, social, geographic, demographic and other factors, including homeowner
mobility, economic conditions, enforceability of due-on-sale clauses, market
interest rates and the availability of funds, the existence of lockout
provisions and prepayment penalties, the inclusion of delinquent, non-performing
or sub-performing Residential Loans in the Trust Fund Assets, the relative tax
benefits associated with the ownership of property and, in the case of
Multifamily Loans, the quality of management of the property. The rate of
prepayments of conventional residential loans has fluctuated significantly in
recent years. In general, however, if prevailing interest rates fall
significantly below the interest rates on the Trust Fund Assets, such Trust Fund
Assets are likely to be the subject of higher principal prepayments than if
prevailing rates remain at or above the interest rates borne by such Trust Fund
Assets.
Other factors that might be expected to affect the prepayment rate of
Securities backed by junior lien mortgage loans or Home Improvement Contracts
include the amounts of, and interest rates on, the underlying senior mortgage
loans, and the use of first mortgage loans as long-term financing for home
purchase and subordinate mortgage loans as shorter-term financing for a variety
of purposes, including home improvement, education expenses and purchases of
consumer durables such as automobiles. In addition, any future limitations on
the right of borrowers to deduct interest payments on junior liens that are home
equity loans for federal income tax purposes may increase the rate of
prepayments on such Residential Loans.
In addition, acceleration of payments on the Residential Loans or
residential loans underlying the Agency Securities as a result of certain
transfers of the underlying properties is another factor affecting prepayment
rates. Unless otherwise provided in the related Prospectus Supplement, all
Residential Loans, except for FHA Loans and VA Loans, will contain 'due-on-sale'
provisions permitting the lender to accelerate the maturity of the Residential
Loan upon sale or certain transfers by the borrower with respect to the
underlying Residential Property. Conventional residential loans that underlie
FHLMC Certificates and FNMA Certificates may contain, and in certain cases must
contain, 'due-on-sale' clauses permitting the lender to accelerate the unpaid
balance of the loan upon transfer of the property by the borrower. FHA Loans and
VA Loans and all residential loans underlying GNMA Certificates contain no such
clause and may be assumed by the purchaser of the property. In addition,
Multifamily Loans may contain 'due-on-encumbrance' clauses permitting the lender
to accelerate the maturity of the Multifamily Loan upon further encumbrance by
the borrower of the underlying Residential Property. In general, where a
'due-on-sale' or 'due-on-encumbrance' clause is contained in a conventional
residential loan under a FHLMC or the FNMA program, the lender's right to
accelerate the maturity of the residential loan upon transfer or further
encumbrance of the property must be exercised, so long as such acceleration is
permitted under applicable law.
With respect to a Series of Securities evidencing interests in a Trust Fund
including Residential Loans, unless otherwise provided in the related Prospectus
Supplement, the Master Servicer generally will enforce any provision limiting
prepayments and any due-on-sale or due-on-encumbrance clause, to the extent it
has knowledge of the conveyance or encumbrance or the proposed conveyance or
encumbrance of the underlying Residential Property and reasonably believes that
it is entitled to do so under applicable law; provided, however, that the Master
Servicer will not take any enforcement action that would impair or threaten to
impair any recovery under any related insurance policy. See 'Description of the
Securities -- Collection and Other Servicing Procedures' and 'Certain Legal
Aspects of Residential Loans -- Enforceability of Certain Provisions' and
'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
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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 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
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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 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
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primary credit insurance was effective at the origination of each Residential
Loan, and that each policy (or certificate of title) remained in effect on the
date of purchase of the Residential Loan from the Unaffiliated Seller by or on
behalf of the Depositor; (ii) that the Unaffiliated Seller had good title to
each such Residential Loan and such Residential Loan was subject to no offsets,
defenses, counterclaims or rights of rescission except to the extent that any
buydown agreement described herein may forgive certain indebtedness of a
borrower; (iii) if the Trust Fund includes Mortgage Loans, that each Mortgage
constituted a valid lien on the Mortgaged Property (subject only to permissible
title insurance exceptions and Senior Liens, if any); (iv) if the Trust Fund
includes Manufactured Housing Contracts, each Manufactured Housing Contract
creates a valid, subsisting and enforceable first priority security interest in
the Manufactured Home covered thereby; (v) that the Residential Property was
free from damage and was in good repair; (vi) that there were no delinquent tax
or assessment liens against the Residential Property; (vii) that each
Residential Loan was current as to all required payments; and (viii) that each
Residential Loan was made in compliance with, and is enforceable under, all
applicable local, state and federal laws and regulations in all material
respects.
In certain cases, the representations and warranties of an Unaffiliated
Seller in respect of a Residential Loan may have been made as of the date on
which such Unaffiliated Seller sold the Residential Loan to the Depositor or its
affiliate. A substantial period of time may have elapsed between such date and
the date of initial issuance of the Series of Securities evidencing an interest
in such Residential Loan. Since the representations and warranties of an
Unaffiliated Seller do not address events that may occur following the sale of a
Residential Loan by such Unaffiliated Seller, its repurchase obligation
described below will not arise if the relevant event that would otherwise have
given rise to such an obligation occurs after the date of such sale to or on
behalf of the Depositor.
The only representations and warranties, if any, to be made for the benefit
of holders of Securities in respect of any Residential Loan relating to the
period commencing on the date of sale of such Residential Loan to the Depositor
or its affiliates will be certain limited representations of the Depositor and
of the Master Servicer described below under 'Description of the Securities --
Assignment of Trust Fund Assets.' If the Master Servicer is also an Unaffiliated
Seller of Residential Loans with respect to a particular Series, such
representations will be in addition to the representations and warranties made
by the Master Servicer in its capacity as an Unaffiliated Seller.
The Master Servicer will promptly notify the relevant Unaffiliated Seller
of any breach of any representation or warranty made by it in respect of a
Residential Loan which materially and adversely affects the interests of the
Securityholders in such Residential Loan. If such Unaffiliated Seller cannot
cure such breach within 60 days (or such other time period set forth in the
related Prospectus Supplement) from the date on which the Unaffiliated Seller
was notified of such breach, then such Unaffiliated Seller will be obligated to
repurchase such Residential Loan from the Trustee within 90 days (or such other
time period set forth in the related Prospectus Supplement) from the date on
which the Unaffiliated Seller was notified of such breach, at the Purchase Price
therefor. As to any Residential Loan, unless otherwise specified in the related
Prospectus Supplement, the 'Purchase Price' is equal to the sum of (i) the
unpaid principal balance thereof, (ii) unpaid accrued interest on the Stated
Principal Balance (as defined below) from the date as to which interest was last
paid by the borrower to the end of the calendar month in which the purchase is
to occur at a rate equal to the Net Mortgage Rate minus the rate at which the
Sub-Servicer's servicing fee is calculated if the Sub-Servicer is the purchaser,
(iii) any unpaid servicing fees and certain unreimbursed servicing expenses
payable or reimbursable to the Master Servicer with respect to such Residential
Loan, (iv) any unpaid Retained Interest with respect to such Residential Loan,
(v) any Realized Losses incurred with respect to such Residential Loan, as
described below under 'Description of the Certificates -- Subordination,' and
(vi) if applicable, any expenses reasonably incurred or to be 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
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efforts to enforce such obligations of the Unaffiliated Seller for the benefit
of the Trustee and the holders of the Securities, following the practices it
would employ in its good faith business judgment were it the owner of such
Residential Loan. Unless otherwise specified in the related Prospectus
Supplement, this repurchase or substitution obligation will constitute the sole
remedy available to holders of Certificates or the Trustee for a breach of
representation by an Unaffiliated Seller. For each Series with respect to which
a REMIC election is to be made, unless the related Prospectus Supplement
provides otherwise, the Master Servicer will be obligated to pay any prohibited
transaction tax which may arise in connection with such repurchase or
substitution. See 'Description of the Certificates -- General.'
The 'Stated Principal Balance' of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts, including
advances by the Master Servicer, allocable to principal that are distributed to
Securityholders on or before the date of determination, and as further reduced
to the extent that any Realized Loss (as hereinafter defined) thereon has been
(or, if it had not been covered by any form of credit support, would have been)
allocated to one or more class of Securities on or before the date of
determination.
Neither the Depositor nor the Master Servicer (unless the Master Servicer
is an Unaffiliated Seller) will be obligated to purchase or substitute for a
Residential Loan if an Unaffiliated Seller defaults on its obligation to do so,
and no assurance can be given that Unaffiliated Sellers will carry out such
obligations with respect to Residential Loans. To the extent that a breach of
the representations and warranties of an Unaffiliated Seller also constitutes a
breach of a representation made by the Depositor, the Depositor may have a
repurchase or substitution obligation as described below under 'Description of
the Securities -- Assignment of Trust Fund Assets.' Any Residential Loan that is
not repurchased or substituted for shall remain in the related Trust Fund and
any losses thereon shall be borne by Securityholders, to the extent not covered
by credit enhancement.
SUB-SERVICING
Any Master Servicer may delegate its servicing obligations in respect of a
Residential Loan to Sub-Servicers pursuant to a sub-servicing agreement (a
'Sub-Servicing Agreement'), which will be consistent with the terms of the
Servicing Agreement relating to the Trust Fund that includes such Residential
Loan. Although each Sub-Servicing Agreement will be a contract solely between
the Master Servicer and the Sub-Servicer, the Pooling and Servicing Agreement
pursuant to which a Series of Securities is issued will provide that, if for any
reason the Master Servicer for such Series of Securities is no longer acting in
such capacity, the Trustee or any successor Master Servicer must recognize the
Sub-Servicer's rights and obligations under such Sub-Servicing Agreement.
With the approval of the Master Servicer, a Sub-Servicer may delegate its
servicing obligations to third-party servicers, but such Sub-Servicer will
remain primarily liable for such obligations under the related Sub-Servicing
Agreement. Each Sub-Servicer will be required to perform the customary functions
of a servicer of residential loans, including collecting payments from borrowers
and remitting such collections to the Master Servicer; maintaining FHA
insurance, any VA guarantee, and primary hazard and credit insurance as
described herein and in any related Prospectus Supplement, and filing and
settling claims thereunder, subject in certain cases to the right of the Master
Servicer to approve in advance any 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
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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 Bankruptcy Code. See 'Certain Legal Aspects of Residential
Loans -- Foreclosure on Mortgages' and ' -- Repossession with respect to
Manufactured Housing Contracts.'
RESERVE FUNDS
If so provided in the related Prospectus Supplement, the Depositor will
deposit or cause to be deposited in an account (a 'Reserve Fund') any
combination of cash, one or more irrevocable letters of credit or one or more
Permitted Instruments in specified amounts, or any other instrument satisfactory
to the Rating Agency or Agencies, which will be applied and maintained in the
manner and under the conditions specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, to the extent described in the
related Prospectus Supplement, a Reserve Fund may be funded through application
of a portion of the interest payment on each Mortgage Loan or of all or a
portion of amounts otherwise payable on the Subordinate Securities. Amounts in a
Reserve Fund may be distributed to Securityholders, or applied to reimburse the
Master Servicer for outstanding Advances, or may be used for other purposes, in
the manner and to the extent specified in the related Prospectus Supplement.
Unless otherwise provided in the related Prospectus Supplement, any such Reserve
Fund will not be deemed to be part of the related Trust Fund.
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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 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 securing a
Contract. However, such liens
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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 United
States Bankruptcy Code) and, therefore, could be rescinded in favor of the
bankrupt's estate, if (i) the foreclosure sale was held while the debtor was
insolvent and not more than one year prior to the filing of the bankruptcy
petition, and (ii) the price paid for the foreclosed property did not represent
'fair consideration' ('reasonably equivalent value' under the United States
Bankruptcy Code). However, on May 23, 1994, Durrett was effectively overruled by
the United States Supreme Court in BFP v. Resolution Trust Corporation, as
Receiver for Imperial Federal Savings and Loan Association, et al., in which the
Court held that '`reasonably equivalent value', for foreclosed property, is the
price in face received at the foreclosure sale, so long as all the requirements
of the State's foreclosure law have been complied with.' For these reasons, it
is common for the lender to purchase the property from the trustee or referee
for an amount equal to the principal amount of the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure. Generally,
state law controls the amount of foreclosure costs and expenses, including
attorneys' and trustee's fees, which may be recovered by a lender. In some
states there is a statutory minimum purchase price which the lender may offer
for the property. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume ownership of the mortgaged property and, therefore, the burdens of
ownership, including obtaining casualty insurance, paying taxes and making such
repairs at its own expense as are necessary to render the property suitable for
sale. Depending upon market conditions, the ultimate proceeds of the sale of the
property may not equal the lender's investment in the property. Any loss may be
reduced by the receipt of any mortgage insurance proceeds, if any.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a 'due-on-sale' clause, the junior
mortgagee may be required to pay the full amount of the senior mortgages to the
senior mortgagees. Accordingly, with respect to those Mortgage Loans which are
junior mortgage loans, if the lender purchases the property, the lender's title
will be subject to all senior liens and claims and certain governmental liens.
The proceeds received by the referee or trustee from the sale are applied first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower is in default. Any additional proceeds are
generally payable to the mortgagor or trustor. The payment of the proceeds to
the holders of junior mortgages may occur in the foreclosure action of the
senior mortgagee or may require the institution of separate legal proceedings.
In foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
a lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower's failure to adequately maintain the property or
the borrower's execution of a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns for
adequate notice require that borrowers under deeds of
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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 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
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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. A few states
have enacted legislation which requires that the debtor be given an opportunity
to cure its default (typically 30 days to bring the account current) before
repossession can commence. So long as a manufactured home has not become so
attached to real estate that it would be treated as a part of the real estate
under the law of the state where it is located, repossession of such home in the
event of a default by the obligor will generally be governed by the UCC. Article
9 of the UCC provides the statutory framework for the repossession of
manufactured housing. While the UCC as adopted by the various states may vary in
certain small particulars, the general repossession procedure established by the
UCC is as follows:
(i) Except in those states where the debtor must receive notice of his
right to cure his default, repossession can commence immediately upon
default without prior notice. Repossession may be effected either through
self-help (peaceable retaking without court order), voluntary repossession
or through judicial process (repossession pursuant to court-issued writ of
replevin). The self-help and/or voluntary repossession methods are more
commonly employed, and are accomplished simply by retaking possession of
the manufactured home. In cases where the debtor objects or raises a
defense to repossession, a court order must be obtained from the
appropriate state court, and the manufactured home must then be repossessed
in accordance with that order. Whether the method employed is self-help,
voluntary repossession or judicial repossession, the repossession can be
accomplished either by an actual physical removal of the manufactured home
to a secure location for refurbishment and resale or by removing the
occupants and their belongings from the manufactured home and maintaining
possession of the manufactured home on the location where the occupants
were residing. Various factors may affect whether the manufactured home is
physically removed or left on location, such as the nature and term of the
lease of the site on which it is located and the condition of the unit. In
many cases, leaving the manufactured home on location is preferable, in the
event that the home is already set up, because the expenses of retaking and
redelivery will be saved. However, in those cases where the home is left on
location, expenses for site rentals will usually be incurred.
(ii) Once repossession has been achieved, preparation for the
subsequent disposition of the manufactured home can commence. The
disposition may be by public or private sale, 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 suing for the
deficiency judgment to remit the surplus to the debtor. Because the
defaulting owner
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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 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 laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against virtually all actions against the debtor,
including the enforcement of remedies of collection of a debt and, often, no
interest or principal payments are made during the bankruptcy proceeding.
Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through his or her Chapter 13 or Chapter 11 rehabilitative plan to cure a
monetary default with respect to a mortgage loan on a debtor's residence by
paying arrearages within a reasonable time period and reinstating the original
mortgage loan payment schedule even though the lender accelerated the mortgage
loan and final judgment of foreclosure had been entered in state court (provided
no sale of the property had yet occurred) prior to the filing of the debtor's
petition. Some courts with federal bankruptcy jurisdiction have approved plans,
based on the particular facts of the reorganization case, that effected the
curing of a mortgage loan default by paying arrearages over a number of years.
Except with respect to arrearages and the right to judicial sale, with rare
exception courts with federal bankruptcy jurisdiction have also indicated that
the terms of a mortgage loan secured only by property of the debtor that is the
debtor's principal residence may not be modified if the borrower has filed a
petition under Chapter 11 or 13. Courts may be able to modify the terms of a
cooperative loan, but no case law exists on this point. In all cases, the
secured creditor is entitled to the amount of its debt plus post-petition
interest, attorney's fees and costs to the extent the value of the security
equals or exceeds the debt.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted Mortgage Loan. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. The laws include the federal Truth-in-Lending
Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act, and related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans.
FOR COOPERATIVE LOANS
Generally, Article 9 of the UCC governs foreclosure on Cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the Cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
JUNIOR MORTGAGES
Some of the Mortgage Loans, Multifamily Loans and Home Improvement
Contracts may be secured by junior mortgages or deeds of trust, which are junior
to senior mortgages or deeds of trust which are not part of the Trust Fund. The
rights of the Certificateholders as the holders of a junior deed of trust or a
junior mortgage are subordinate in lien priority and in payment priority to
those of the holder of the senior mortgage or deed of trust, including the prior
rights of the senior mortgagee or beneficiary to receive and apply hazard
insurance and condemnation proceeds and, upon default of the mortgagor, to cause
a foreclosure on the property. Upon completion of the foreclosure proceedings by
the holder of the senior mortgage or the sale pursuant to the deed of trust, the
junior mortgagee's or junior beneficiary's lien will be extinguished unless the
junior lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See ' -- Foreclosure' herein.
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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, Regulation 'Z', the Equal Credit Opportunity Act,
Regulation 'B', the Fair Credit Reporting Act, and related statutes. These laws
can impose specific statutory liabilities upon creditors who fail to comply with
their provisions and may affect the enforceability of the contract.
Contracts often contain provisions obligating the obligor to pay late
charges if payments are not timely made. In certain cases, Federal and state law
may specifically limit the amount of late charges that may be collected. Unless
otherwise provided in the related Prospectus Supplement, under an Agreement,
late charges will be retained by the Master Servicer as additional servicing
compensation, and any inability to collect these amounts will not affect
payments to Certificateholders.
Courts have imposed general equitable principles upon repossession and
litigation involving deficiency balances. These equitable principles are
generally designed to relieve a consumer from the legal consequences of a
default.
In several cases, consumers have asserted that the remedies provided
secured parties under the UCC and related laws violate the due process
protections provided under the 14th Amendment to the Constitution of the United
States. For the most part, courts have upheld the notice provisions of the UCC
and related laws as reasonable or have found that the repossession and resale by
the creditor does not involve sufficient state action to afford constitutional
protection to consumers.
The so-called 'Holder-in-Due-Course' Rule of the Federal Trade Commission
(the 'FTC Rule') has the effect of subjecting a seller (and certain related
creditors and their assignees) in a consumer credit transaction and any assignee
of the creditor to all claims and defenses which the debtor in the transaction
could assert against the seller of the goods. Liability under the FTC Rule is
limited to the amounts paid by a debtor on the contract, and the holder of the
contract may also be unable to collect amounts still due thereunder.
Most of the Manufactured Housing Contracts and certain of the Home
Improvement Contracts in the Trust Fund will be subject to the requirements of
the FTC Rule. Accordingly, the Trustee, as holder of Manufactured Housing
Contracts, will be subject to any claims or defenses that the purchaser of the
related manufactured home may assert against the seller of the manufactured
home, subject to a maximum liability equal to the amounts paid by the obligor on
the Contract. If an obligor is successful in asserting any such claim or
defense, and if the Unaffiliated Seller had or should have had knowledge of such
claim or defense, the Master Servicer will have the right to require the
Unaffiliated Seller to repurchase the Contract because of a breach of its
Unaffiliated Seller's representation and warranty that no claims or defenses
exist which would affect the obligor's obligation to make the required payments
under the Contract. The Unaffiliated Seller would then have the right to require
the originating dealer to repurchase the Contract from it and might also have
the right to recover from the dealer for any losses suffered by the Unaffiliated
Seller with respect to which the dealer would have been primarily liable to the
obligor.
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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 five 'window period states' identified below. Due-on-sale
clauses contained in Mortgage Loans originated by federal savings and loan
associations or federal savings banks are fully enforceable pursuant to
regulations of the Federal Home Loan Bank Board, predecessor to the Office of
Thrift Supervision, which preempt state law restrictions on the enforcement of
due-on-sale clauses. Mortgage Loans originated by such institutions are
therefore not deemed to be Window Period Loans.
With the expiration of the exemption for Window Period Loans on October 15,
1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the 'window period', which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standards that, out of a total
of eleven 'window period states', three states (Michigan, New Mexico and Utah)
have enacted statutes extending, on various terms and for varying periods, the
prohibition on enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans. The Garn-St. Germain Act also sets forth
eight specific instances in which a mortgage lender covered by the
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Garn-St. Germain Act (including federal savings and loan associations and
federal savings banks) may not exercise a due-on-sale clause, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. The Garn-St. Germain
Act also grants the Director of the Office of Thrift Supervision (successor to
the Federal Home Loan Bank Board) authority to prescribe by regulation further
instances in which a due-on-sale clause may not be enforced upon the transfer of
the property. To date no such regulations have been issued. Regulations
promulgated under the Garn-St. Germain Act also prohibit the imposition of a
prepayment penalty upon the acceleration of a loan pursuant to a due-on-sale
clause.
The inability to enforce a due-on-sale clause may result in a Mortgage Loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the Mortgage Loans related to a Series and the number of such Mortgage
Loans which may be outstanding until maturity.
TRANSFER OF MANUFACTURED HOMES
Generally, manufactured housing contracts contain provisions prohibiting
the sale or transfer of the related manufactured homes without the consent of
the obligee on the contract and permitting the acceleration of the maturity of
such contracts by the obligee on the contract upon any such sale or transfer
that is not consented to. Unless otherwise provided in the related Prospectus
Supplement, the Master Servicer will, to the extent it has knowledge of such
conveyance or proposed conveyance, exercise or cause to be exercised its rights
to accelerate the maturity of the related Contracts through enforcement of
'due-on-sale' clauses, subject to applicable state law. In certain cases, the
transfer may be made by a delinquent obligor in order to avoid a repossession
proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home as to which the Master
Servicer desires to accelerate the maturity of the related Contract, the Master
Servicer's ability to do so will depend on the enforceability under state law of
the 'due-on-sale' clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of 'due-on-sale'
clauses applicable to the Manufactured Homes. Consequently, in some cases the
Master Servicer may be prohibited from enforcing a 'due-on-sale' clause in
respect of certain Manufactured Homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, conventional mortgage loans, Cooperative Loans, Home Improvement
and Manufactured Housing Contracts, residential owner occupied FHA loans and VA
loans may be prepaid in full or in part without penalty. Generally, multifamily
residential loans, including multifamily FHA Loans, may contain provisions
limiting prepayments on such loans, including prohibiting prepayment for a
specified period after origination, prohibiting partial prepayments entirely or
requiring the payment of a prepayment penalty upon prepayment in full or in
part.
The laws of certain states may render prepayment fees unenforceable after a
Mortgage Loan has been outstanding for a certain number of years, or may limit
the amount of any prepayment fee to a specified percentage of the original
principal amount of the Mortgage Loan, to a specified percentage of the
outstanding principal balance of a Mortgage Loan, or to a fixed number of
months' interest on the prepaid amount. In certain states, prepayment fees
payable on default or other involuntary acceleration of a Residential Loan may
not be enforceable against the related mortgagor or obligor. Some state
statutory provisions may also treat certain prepayment fees as usurious if in
excess of statutory limits.
SUBORDINATE FINANCING
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or
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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.
Title V also provides that, subject to the following conditions, state
usury limitations shall not apply to any loan which is secured by a first lien
on certain kinds of manufactured housing. The Contracts would be covered if they
satisfy certain conditions, among other things, governing the terms of any
prepayments, late charges and deferral fees and requiring a 30-day notice period
prior to instituting any action leading to repossession of or foreclosure with
respect to the related unit. Title V authorized any state to reimpose
limitations on interest rates and finance charges by adopting before April 1,
1983 a law or constitutional provision which expressly rejects application of
the federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V was not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on loans covered by Title V. In any state in which application of Title
V was expressly rejected or a provision limiting discount points or other
charges has been adopted, no Contract which imposes finance charges or provides
for discount points or charges in excess of permitted levels has been included
in the Trust Fund.
ALTERNATIVE MORTGAGE INSTRUMENTS
ARM Loans originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were simplified substantially as a
result of the enactment of Title VIII of the Garn-St. Germain Act ('Title
VIII'). Title VIII provides that, notwithstanding any state law to the contrary,
(i) state-chartered banks may originate 'alternative mortgage instruments'
(including ARM Loans) in accordance with regulations promulgated by the
Comptroller of the Currency with respect to origination of alternative mortgage
instruments by national banks, (ii) state-
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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.
The Depositor has been advised by its counsel that it is their opinion that
a court interpreting Title VIII would hold that ARM Loans which were originated
by state-chartered lenders before the date of enactment of any state law or
constitutional provision rejecting applicability of Title VIII would not be
subject to state laws imposing restrictions or prohibitions on the ability of
state-chartered lenders to originate alternative mortgage instruments.
All of the ARM Loans which were originated by a state-chartered lender
after the enactment of a state law or constitutional provision rejecting the
applicability of Title VIII complied with applicable state law. All of the ARM
Loans which were originated by federally chartered lenders or which were
originated by state-chartered lenders prior to enactment of a state law or
constitutional provision rejecting the applicability of Title VIII were
originated in compliance with all applicable federal regulations.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended ('CERCLA'), and under state law in certain states, a
secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property may become
liable in certain circumstances for the costs of cleaning up hazardous
substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
(the 'Conservation Act') amended, among other things, the provisions of CERCLA
with respect to lender liability and the secured creditor exemption. The
Conservation Act offers substantial protection to lenders by defining the
activities in which a lender can engage and still have the benefit of the
secured creditor exemption. In order for lender to be deemed to have
participated in the management of a mortgaged property, the lender must actually
participate in the operational affairs of the property of the borrower. The
Conservation Act provides that 'merely having the capacity to influence, or
unexercised right to control' operations does not constitute participation in
management. A lender will lose the protection of the secured creditor exemption
only if it exercises decision-making control over the borrower's environmental
compliance and hazardous substance handling and disposal practices, or assumes
day-to-day management of all operational functions of the mortgaged property.
The Conservation Act also provides that a lender will continue to have the
benefit of the secured creditor exemption even if it forecloses on a mortgaged
property, purchases it at a foreclosure sale or accepts a deed-in-lieu of
foreclosure provided that the lender seeks to sell the mortgaged property at the
earliest practicable commercially reasonable time on commercially reasonable
terms.
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,
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including petroleum, agricultural chemicals, hazardous wastes, asbestos, radon,
and lead-based paint. Such cleanup costs may be substantial. It is possible that
such cleanup costs could become a liability of a Trust Fund and reduce the
amounts otherwise distributable to the holders of the related Series of
Certificates. Moreover, certain federal statutes and certain states by statute
impose a lien for any cleanup costs incurred by such state on the property that
is the subject of such cleanup costs (an 'Environmental Lien'). All subsequent
liens on such property generally are subordinated to such an Environmental Lien
and, in some states, even prior recorded liens are subordinated to Environmental
Liens. In the latter states, the security interest of the Trustee in a related
parcel of real property that is subject to such an Environmental Lien could be
adversely affected.
Unless otherwise provided in the related Prospectus Supplement, the
Mortgage Loan Seller with respect to any Mortgage Loan included in a Trust Fund
for a particular Series of Securities will represent as to the material
compliance of the related Residential Property with applicable environmental
laws and regulations as of the date of transfer and assignment of such Mortgage
Loan to the Trustee. In addition, unless otherwise provided in the related
Prospectus Supplement, the related Agreement will provide that the Master
Servicer and any Special Servicer acting on behalf of the Trustee, may not
acquire title to a Residential Property or take over its operation unless the
Master Servicer (or Special Servicer) has previously determined, based on a
report prepared by a person who regularly conducts environmental audits, that
(a) there are no circumstances present at the Residential Property relating to
substances for which some action relating to their investigation or clean-up
could be required or that it would be in the best economic interest of the Trust
Fund to take such actions with respect to the affected Residential Property and
(b) that the Residential Property is in compliance with applicable environmental
laws or that it would be in the best economic interest of the Trust Fund to take
the actions necessary to comply with such laws. See 'Description of the
Certificates -- Realization Upon Defaulted Mortgage Loans.'
FORMALDEHYDE LITIGATION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS
A number of lawsuits are pending in the United States alleging personal
injury from exposure to the chemical formaldehyde, which is present in many
building materials, including such components of manufactured housing as plywood
flooring and wall paneling. Some of these lawsuits are pending against
manufacturers of manufactured housing, suppliers of component parts, and related
persons in the distribution process. The Depositor is aware of a limited number
of cases in which plaintiffs have won judgments in these lawsuits.
Under the FTC Rule, which is described above under 'Consumer Protection
Laws', the holder of any Contract secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Contract and may be
unable to collect amounts still due under the Contract. The successful assertion
of such claim constitutes a breach of a representation or warranty of the
Unaffiliated Seller, and the Securityholders would suffer a loss only to the
extent that (i) the Unaffiliated Seller breached its obligation to repurchase
the Contract in the event an obligor is successful in asserting such a claim,
and (ii) the Unaffiliated Seller, the Depositor or the Trustee were unsuccessful
in asserting any claim of contribution or subrogation on behalf of the
Securityholders against the manufacturer or other persons who were directly
liable to the plaintiff for the damages. Typical products liability insurance
policies held by manufacturers and component suppliers of manufactured homes may
not cover liabilities arising from formaldehyde in manufactured housing, with
the result that recoveries from such manufacturers, suppliers or other persons
may be limited to their corporate assets without the benefit of insurance.
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
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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, mid-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
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that 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 (28%) than ordinary income of such taxpayers (39.6%) for
capital assets held for more than one year but not more than eighteen months,
and a still lower maximum rate (20%) for capital assets held for more than
eighteen months. 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
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discount or are issued at a premium. If taxable income attributable to such a
mismatching is realized, in 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 and 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 affidavtis 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 to 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 (28%) than ordinary
income of such taxpayers (39.6%) for capital assets held for more than one year
but not more than eighteen months and a still lower maximum rate (20%) for
capital assets held for more than eighteen months. 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
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classes of Stripped Securities in proportion to the distributions to such
Classes for the related period or 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
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accordance with a constant yield method that takes into account the compounding
of interest, which 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
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each Mortgage Loan to the extent that such Stripped Security, or Classes of
Stripped Securities in the 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 employee
benefit plans and on certain other retirement plans and arrangements (including
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 the Securities if the Residential Loans, Agency
Securities, Mortgage Securities and other assets included in such Trust Fund are
deemed to be assets of the Plan. The U.S. Department of Labor (the 'DOL') has
promulgated regulations at 29 C.F.R. SS2510.3-101 (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 imposed on such prohibited transactions pursuant to Section
4975(a) and (b) of the Code and Section 502(i) of ERISA, certain transactions,
among others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of mortgage pass-through certificates, such as a
senior class of Certificates, underwritten by an Underwriter (as hereinafter
defined), provided that certain conditions set forth in the Exemption are
satisfied. For purposes of this Section 'ERISA Considerations,' the term
'Underwriter' shall include (a) PaineWebber Incorporated, (b) any person
directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with PaineWebber Incorporated and (c) any
member of the underwriting syndicate or selling group of which a person
described in (a) or (b) is a manager or co-manager with respect to a class of
Certificates.
The Exemption sets forth six general conditions which must be satisfied for
a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan must be on terms that are at least as favorable to the Plan as they
would be in an arm's-length transaction with an unrelated party. Second, the
Exemption only applies to Certificates evidencing rights and interests not
subordinated to the rights and interests evidenced by the other Certificates of
the same Series. Third, the Certificates at the time of acquisition by the Plan
must be rated in one of the three highest generic rating categories by Standard
& Poor's 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 mortgagor with respect to Trust Fund Assets constituting more than 5% of
the aggregate unamortized principal balance of the Trust Fund Assets in the
related Trust Fund as of the date of initial issuance of the Certificates.
Fifth, the sum of all payments made to and retained by the Underwriter(s) must
represent not more than reasonable compensation for underwriting the
Certificates; the sum of all payments made to and retained by the Depositor
pursuant to the assignment of the Trust Fund Assets to the related Trust Fund
must represent not more than the fair market value of such obligations; and the
sum of all payments made to and retained by the Master Servicer and any
Sub-Servicer must represent not more
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than reasonable compensation for such person's services under the related
Pooling and Servicing Agreement and reimbursement of such person's reasonable
expenses in connection therewith. Sixth, the investing Plan must be an
accredited investor as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933, as amended.
The Exemption also requires that the Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) 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) a mortgagor with respect to 5% or less of the
fair market value of the Trust Fund Assets or (b) an affiliate of such a person,
(2) the direct or indirect acquisition or disposition in the secondary market of
Certificates by a Plan and (3) the holding of Certificates by a Plan.
Further, if certain specific conditions of the Exemption are satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the 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.
128
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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 Plan Asset investor
should consider the availability of certain class exemptions granted by the DOL
('Class Exemptions'), which may provide relief from certain of the prohibited
transaction provisions of ERISA and the related excise tax provisions of the
Code, including Prohibited Transaction Class Exemption ('PTCE') 83-1, regarding
transactions involving mortgage pool investment trusts; PTCE 84-14, regarding
transactions effected by a 'qualified professional asset manager'; PTCE 90-1,
regarding transactions by insurance company pooled separate 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
129
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<PAGE>
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 Securities Activities' dated
January 28, 1992, as revised April 15, 1994 (the '1992 Policy Statement') of the
Federal Financial Institutions Examination Council ('FFIEC'). The 1992 Policy
Statement, 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, and by the NCUA (with certain modifications),
prohibits depository institutions from investing in certain 'high-risk mortgage
securities' (including securities such as certain Series or classes of the
Securities), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions.
Effective May 26, 1998 (October 1, 1998, in the case of federal credit unions),
the 1992 Policy Statement has been superseded by the FFIEC's 'Supervisory Policy
Statement on Investment Securities and End-User Derivatives Activities' (the
'1998 Policy
130
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<PAGE>
Statement'). The 1998 Policy Statement deletes the specific 'high-risk mortgage
securities' tests, and substitutes 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.
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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<PAGE>
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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<PAGE>
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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<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
-1-
1992 Policy Statement..........................................................................................130
1998 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-
BIF.............................................................................................................35
Book-Entry Securities...........................................................................................54
Buydown Funds...................................................................................................96
Buydown Loans...................................................................................................24
Buydown Period..................................................................................................24
-C-
CEDEL Participants..............................................................................................55
CERCLA......................................................................................................17, 91
Certificates..................................................................................................1, 5
Charter Act.....................................................................................................27
Class Exemptions.............................................................................................. 129
Code........................................................................................................ 7, 94
Collateral Value................................................................................................25
Commission...................................................................................................... 2
Conservation Act................................................................................................91
Consumer Protection Laws........................................................................................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
</TABLE>
134
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<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Deficiency Event................................................................................................63
Definitive Security.............................................................................................54
Deposit Period..................................................................................................51
Depositor....................................................................................................... 5
Disqualified Organization..................................................................................... 108
Distribution Date........................................................................................... 7, 45
DOL........................................................................................................... 126
DOL Regulations............................................................................................... 126
DTC.........................................................................................................18, 54
Due Period......................................................................................................48
due-on-sale provision...........................................................................................33
due-on-sale encumbrance.........................................................................................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............................................................................................................35
FFIEC......................................................................................................... 130
FHA.............................................................................................................10
FHA Loans.......................................................................................................22
FHLMC....................................................................................................... 1, 10
FHLMC Act.......................................................................................................28
FHLMC Certificate Group.........................................................................................28
FHLMC Certificates..........................................................................................10, 25
Final Distribution Date.........................................................................................46
Financial Intermediary..........................................................................................54
FNMA........................................................................................................ 1, 10
FNMA Certificates...........................................................................................10, 25
FTC Rule........................................................................................................87
Funding Period..................................................................................................20
-G-
Garn-St. Germain Act............................................................................................88
GNMA........................................................................................................ 1, 10
GNMA Certificates...............................................................................................25
Grantor Trust Certificates......................................................................................12
Grantor Trust Fund..............................................................................................94
Grantor Trust Securities....................................................................................12, 94
</TABLE>
135
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
-H-
Hazard Insurance Instrument.....................................................................................57
holder..........................................................................................................94
Holder in Due Course Rules..................................................................................17, 87
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..................................................................................................21
-M-
Manager.....................................................................................................21, 56
manufactured home...............................................................................................23
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, 130
Mortgage Securities.........................................................................................10, 21
Mortgaged Properties........................................................................................ 9, 20
Mortgaged Property...................................................................................... 9, 20, 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
</TABLE>
136
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Nonrecoverable Advance..........................................................................................52
Non-SMMEA Securities.......................................................................................... 130
Non-U.S. Person............................................................................................... 103
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
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...............................................................................................31
Primary Hazard Insurance Policy.................................................................................70
PTCE.......................................................................................................... 129
Purchase Price..................................................................................................36
-Q-
Qualifed Mortgage...............................................................................................96
-R-
Rating Agency..................................................................................................132
real estate assets..........................................................................................96, 97
real estate mortgage investment conduit...................................................................1, 7, 40
Realized Loss...................................................................................................49
Record Date.....................................................................................................45
regular interests...........................................................................................12, 40
Regular Securities........................................................................................ 94, 113
Regular Securityholder..........................................................................................97
Relevant Depositary.............................................................................................54
Relief Act......................................................................................................92
REMIC.................................................................................................1, 7, 40, 94
REMIC Pool......................................................................................................94
REMIC Provisions................................................................................................94
REMIC Regular Certificates......................................................................................12
REMIC Regulations...............................................................................................94
REMIC Residual Certificates.....................................................................................12
</TABLE>
137
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
REMIC Securities................................................................................................94
Reserve Fund................................................................................................50, 75
Residential Loans........................................................................................... 1, 21
Residential Properties...................................................................................... 9, 20
Residual Holders.............................................................................................. 104
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............................................................................................................35
SBJPA of 1996...................................................................................................96
Scheduled Principal Balance.....................................................................................50
Securities....................................................................................................1, 5
Security Interest Rate.......................................................................................... 6
Security Owners.................................................................................................54
Security Principal Balance...................................................................................... 6
Securityholder..................................................................................44, 50, 53, 63, 94
Securityholders.................................................................................................51
Senior Liens....................................................................................................23
Senior Percentage...............................................................................................50
Senior Securities........................................................................................... 6, 39
Senior/Subordinate Series.......................................................................................39
Series.......................................................................................................... 1
Servicemen's Readjustment Act...................................................................................24
Servicing Agreement.............................................................................................30
SMMEA..................................................................................................... 14, 119
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.................................................................................................87, 94
Stated Principal Balance....................................................................................37, 50
Strip Securities............................................................................................ 6, 40
Stripped Agency Securities......................................................................................29
Stripped Interest...............................................................................................31
Stripped Securities.......................................................................................113, 117
Subordinate Securities...................................................................................... 6, 38
Subordination...................................................................................................46
Subsequent Loans................................................................................................20
Sub-Servicer....................................................................................................30
Sub-Servicing Account...........................................................................................44
Sub-Servicing Agreement.........................................................................................37
-T-
Terms and Conditions............................................................................................56
thrift institutions........................................................................................... 107
Tiered REMICs...................................................................................................97
</TABLE>
138
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Title V.........................................................................................................90
Title VIII......................................................................................................90
Trust Account...................................................................................................10
Trust Agreement............................................................................................. 5, 39
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.............................................................................................88
</TABLE>
139
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<PAGE>
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_____________________________________ ____________________________________
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
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
Incorporation of Certain Documents by Reference........................................................................... S-4
Available Information..................................................................................................... S-4
Summary................................................................................................................... S-7
Risk Factors.............................................................................................................. S-19
The Pool.................................................................................................................. S-28
Master Financial.......................................................................................................... S-36
Underwriting Criteria..................................................................................................... S-41
Prepayment and Yield Considerations....................................................................................... S-42
The Owner Trust........................................................................................................... S-57
The Grantor Trust......................................................................................................... S-57
Description of the Offered Notes.......................................................................................... S-58
Description of Credit Enhancement......................................................................................... S-67
Description of the Transfer and Servicing Agreements...................................................................... S-68
Federal Income Tax Consequences........................................................................................... S-77
ERISA Considerations...................................................................................................... S-79
Legal Investment Matters.................................................................................................. S-80
Use of Proceeds........................................................................................................... S-81
Underwriting.............................................................................................................. S-81
Legal Matters............................................................................................................. S-82
Ratings................................................................................................................... S-82
Index of Defined Terms.................................................................................................... S-84
PROSPECTUS
Available Information..................................................................................................... 2
Reports to Certificateholders............................................................................................. 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........................................................................................................... 30
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>
MASTER FINANCIAL ASSET
SECURITIZATION TRUST 1998-2
[LOGO]
MASTER FINANCIAL, INC.
(TRANSFEROR AND SERVICER)
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
(DEPOSITOR)
---------------------
PROSPECTUS SUPPLEMENT
---------------------
PAINEWEBBER INCORPORATED
DEUTSCHE MORGAN GRENFELL
RESIDENTIAL FUNDING SECURITIES
CORPORATION
MAY 22, 1998
_____________________________________ ____________________________________
