Pursuant to Rule 424(b)(5)
File No. 333-79283
PROSPECTUS SUPPLEMENT DATED SEPTEMBER 20, 1999
(To prospectus dated August 20, 1999)
$500,257,334 (APPROXIMATE)
HOME LOAN ASSET BACKED CERTIFICATES, SERIES 1999-3
[COMPANY LOGO]
FREMONT HOME LOAN TRUST 1999-3
ISSUER
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
DEPOSITOR
FREMONT INVESTMENT & LOAN
TRANSFEROR AND MASTER SERVICER
COUNTRYWIDE HOME LOANS, INC.
SERVICER
The Fremont Home Loan Trust 1999-3 is issuing certificates in 5 classes.
Only the Class A-1, Class A-2 and Class B certificates are being offered by this
prospectus supplement.
o The trust's main source of funds for making distributions on the
offered certificates will be collections on the related pools of
first lien mortgage loans secured by one-to-four family residences
and other properties as described in this prospectus supplement.
o Credit enhancement consisting of an unconditional and irrevocable
guarantee of timely payment of interest and ultimate payment of
principal on the Class A-1 and Class A-2 certificates is provided by
a financial guaranty insurance policy issued by Ambac Assurance
Corporation.
PRICE TO PUBLIC UNDERWRITING DISCOUNT PROCEEDS TO DEPOSITOR
$486,000,000 $1,093,500 $484,906,500
100.00% 0.225%
The price to public, underwriting discount and proceeds to the depositor
are shown for the Class A-1 and Class A-2 certificates in the aggregate. The
Class B certificates will be offered at negotiated prices determined at the time
of sale with an underwriting discount of 0.75%. The aggregate proceeds to the
depositor for the Class A-1, Class A-2 and Class B certificates will be
$492,008,831, which includes accrued interest with respect to the Class B
certificates. See "Underwriting" in this prospectus supplement.
The proceeds to the depositor shown above are before deducting expenses,
estimated at $400,000.
[AMBAC LOGO]
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-16 OF
THIS PROSPECTUS SUPPLEMENT AND PAGE 16 IN THE PROSPECTUS.
The certificates will not represent obligations of PaineWebber Mortgage
Acceptance Corporation IV or any other person or entity. No governmental agency
or any other person will insure the certificates or the collateral securing the
certificates, except that Ambac Assurance Corporation will insure the Class A-1
and Class A-2 certificates to the extent described in this prospectus
supplement. The certificates are not obligations of a bank and are not insured
or guaranteed by the FDIC.
You should consult with your own advisors to determine if the notes are
appropriate investments for you and to determine the applicable legal, tax,
regulatory and accounting treatment of the certificates.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THE CERTIFICATES OR DETERMINED THAT THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We will not list the certificates on any securities exchange or on any
automated quotation system.
PaineWebber Incorporated, Credit Suisse First Boston Corporation, First
Union Capital Markets Corp., Banc One Capital Markets, Inc., Chase Securities
Inc. and Deutsche Bank Securities Inc., as the underwriters, will purchase the
offered certificates from PaineWebber Mortgage Acceptance Corporation IV and
offer them to the public.
The underwriters expect to deliver the offered certificates to purchasers
on or about September 23, 1999 in book-entry form through the facilities of The
Depository Trust Company, Cedelbank and The Euroclear System.
PAINEWEBBER INCORPORATED
CREDIT SUISSE FIRST BOSTON
FIRST UNION CAPITAL MARKETS CORP.
BANC ONE CAPITAL MARKETS, INC.
CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
Information about the offered certificates is provided in two separate
documents that progressively include more detail:
o the accompanying prospectus dated August 20, 1999, which provides
general information, some of which may not apply to the offered
certificates; and
o this prospectus supplement, which describes the specific terms of
the offered certificates.
Sales of the offered certificates may not be completed unless you have
received both this prospectus supplement and the prospectus. Please read this
prospectus supplement and the prospectus in full.
IF THE TERMS OF THE OFFERED CERTIFICATES VARY BETWEEN THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS, THEN YOU SHOULD RELY ON THE
INFORMATION IN THIS PROSPECTUS SUPPLEMENT.
Cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials are included to assist in locating
further related discussions. The following table of contents and the table of
contents in the accompanying prospectus provide the pages on which these
captions are located.
All statistical data with respect to the loans are approximate, and are
based on the actual principal balances of the loans as of August 25, 1999,
except where otherwise noted. The data with respect to the loans in this
prospectus supplement does not include information with respect to the loans
that may be acquired by the trust after the closing date and prior to December
23, 1999.
S-2
<PAGE>
TABLE OF CONTENTS
PAGE
----
Important Notice About Information Presented in this Prospectus
Supplement and the Prospectus............................................S-2
Summary....................................................................S-5
Risk Factors..............................................................S-16
Basis Risk May Adversely Affect Yield...............................S-16
Actual Yield to Maturity May Be Less Than Anticipated...............S-17
Unpredictability of Prepayments Could Adversely Affect Yield........S-17
Inability to Acquire Subsequent Loans May Cause Significant
Principal Payments on the Certificates............................S-18
Limited Liquidity May Adversely Affect Market Value of Certificates.S-18
Credit Enhancement May Not Be Adequate..............................S-18
Certificateholders' Rights Are Limited by Securities Insurer........S-19
Risks Relating to Non-Conforming Underwriting Guidelines............S-19
Transfers of Servicing May Adversely Affect Distributions
on the Certificates...............................................S-20
Failure of Servicer to Perform May Adversely Affect Distributions
on the Certificates...............................................S-20
Inadequacy of Value of Properties Could Affect Severity of Losses...S-20
Bankruptcy of Borrower May Adversely Affect Distributions on
the Certificates..................................................S-21
Geographic Concentration Could Increase Losses on the Loans.........S-21
Non-Recordation of Assignments Could Increase Losses on the Loans...S-21
Insolvency of Transferor May Adversely Affect Distributions
on the Certificates...............................................S-22
Bankruptcy of Other Parties May Adversely Affect Distributions
on the Certificates...............................................S-22
Violations of Federal and State Laws May Adversely Affect
Ability to Collect on Loans.......................................S-22
Transferor May Not Be Able to Repurchase or Replace Defective Loans.S-23
Year 2000 Non-Compliance May Adversely Affect Distributions
on the Certificates...............................................S-23
Year 2000 Legislation May Affect Timely Exercise to Remedies........S-24
Forward-Looking Statements................................................S-25
Defined Terms.............................................................S-25
The Pools.................................................................S-25
General.............................................................S-25
Payments on the Loans...............................................S-27
Characteristics of the Loans........................................S-29
Initial Pool 1 Loan Statistics......................................S-30
Initial Pool 2 Loan Statistics......................................S-39
Conveyance of Subsequent Loans......................................S-47
Fremont Investment & Loan.................................................S-48
General.............................................................S-48
Master Servicer...........................................................S-48
Master Servicer Duties..............................................S-48
Servicer..................................................................S-50
General.............................................................S-50
Servicing Procedures................................................S-51
Collection Procedures...............................................S-52
Foreclosure and Delinquency Experience..............................S-52
Underwriting Criteria.....................................................S-54
General.............................................................S-54
Prepayment and Yield Considerations.......................................S-59
General.............................................................S-59
Excess Spread and Reduction of Overcollateralization Target Amount..S-64
Reinvestment Risk...................................................S-65
Yield Considerations Relating to Adjustable-Rate Loans..............S-65
Weighted Average Lives of the Offered Certificates..................S-66
S-3
<PAGE>
Class B Certificates................................................S-72
Description of the Certificates...........................................S-75
General.............................................................S-75
Distributions on the Certificates...................................S-77
Priority of Distributions...........................................S-79
Securities Insurer Reimbursement Amount.............................S-83
Pre-Funding Account.................................................S-83
Capitalized Interest Account........................................S-84
Optional Termination................................................S-84
Description of Credit Enhancement.........................................S-85
General.............................................................S-85
Excess Spread and Overcollateralization.............................S-85
Reserve Account.....................................................S-87
Subordination.......................................................S-87
Financial Guaranty Insurance Policy.................................S-88
The Securities Insurer..............................................S-89
Description of the Transfer and Servicing Agreements......................S-91
Sale and Assignment of the Loans....................................S-91
Representations and Warranties......................................S-92
Repurchase of Loans.................................................S-93
Fees and Expenses...................................................S-93
Servicing...........................................................S-94
Collection Account and Distribution Account.........................S-95
Income From Accounts................................................S-95
Collection and Other Servicing Procedures For Loans.................S-96
Maintenance of Hazard Insurance Policies and Errors
and Omissions and Fidelity Coverage...............................S-96
Realization on Defaulted Loans......................................S-97
Evidence as to Compliance...........................................S-98
Certain Matters Regarding the Master Servicer.......................S-99
Master Servicer Events of Default..................................S-100
Certain Matters Regarding the Servicer.............................S-101
Servicer Determinations and Events of Default......................S-101
Restrictions on Certificateholders' Rights.........................S-102
The Trustee........................................................S-103
Duties of the Trustee..............................................S-103
Reports to Certificateholders......................................S-104
Federal Income Tax Consequences..........................................S-106
General............................................................S-106
Characterization of Investments in the Offered Certificates.......S-107
Taxation of Basis Risk Arrangements................................S-107
ERISA Considerations.....................................................S-109
Legal Investment.........................................................S-111
Use of Proceeds..........................................................S-112
Underwriting.............................................................S-112
Experts..................................................................S-114
Legal Matters............................................................S-114
Ratings..................................................................S-114
Glossary of Terms........................................................S-116
S-4
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making an
investment decision. To understand all of the terms of the offering of the
offered certificates, you should read carefully this entire document and the
accompanying prospectus.
RELEVANT PARTIES
Trust............................. Fremont Home Loan Trust 1999-3, a New York
common law trust. The trust will be
established pursuant to a pooling and master
servicing agreement among the depositor, the
trustee and Fremont Investment & Loan.
Depositor......................... PaineWebber Mortgage Acceptance Corporation
IV, a Delaware corporation. The depositor's
address is 1285 Avenue of the Americas, New
York, New York 10019, telephone number (212)
713-2000. See "The Depositor" in the
accompanying prospectus.
Transferor and Master Servicer.... Fremont Investment & Loan, a thrift and loan
organized as a California industrial loan
company. Fremont Investment & Loan is
regulated by the Federal Deposit Insurance
Corporation and the California Department of
Financial Institutions. Fremont's address is
175 North Riverview Drive, Anaheim,
California 92808, telephone number (714)
283-6500. See "Fremont Investment & Loan"
and "Master Servicer" in this prospectus
supplement. Fremont Investment & Loan will
also act as the initial servicer.
Servicer.......................... Countrywide Home Loans, Inc. Its address is
4500 Park Granada, Calabasas, California
91302, telephone number (818) 225-3000. See
"Servicer" in this prospectus supplement.
Countrywide Home Loans, Inc. will begin
servicing the loans on or before November
30, 1999. However, the servicing
commencement date may be extended to January
31, 2000 if the rating agencies deliver
written confirmation that the extension
would not result in a downgrade, withdrawal
or qualification of the then current ratings
of the offered certificates.
Securities Insurer................ Ambac Assurance Corporation, a
Wisconsin-domiciled stock insurance
corporation. The securities insurer's
address is One State Street Plaza, New York,
New York 10004, telephone number (212)
668-0340. See "Description of Credit
Enhancement--The Securities Insurer" in this
prospectus supplement.
S-5
<PAGE>
Trustee........................... The Bank of New York, a New York banking
corporation. Its principal office is located
at 101 Barclay Street-12E, New York, New
York 10286, telephone number (212) 815-8727.
See "The Trustee" in this prospectus
supplement.
RELEVANT DATES
Closing Date...................... On or about September 23, 1999.
Cut-Off Date...................... The close of business on September 1, 1999
with respect to the initial loans
transferred to the trust on the closing
date. With respect to any loans subsequently
transferred to the trust, the date specified
as the cut-off date in the applicable
transfer agreement.
Distribution Date................. The 25th day of each month or, if that day
is not a business day, the next business
day, commencing in October 1999.
Statistical Calculation Date...... The loans described in this prospectus
supplement represent the pools of loans as
of the statistical calculation date of
August 25, 1999 that have been identified by
Fremont. We anticipate that additional loans
will be conveyed to the trust at closing and
during the three months following closing.
In addition, other loans may be substituted
for the currently identified loans. The
information regarding the loans in this
prospectus supplement does not include any
information:
o with respect to the initial
loans that are identified by
the transferor after August 25,
1999 and transferred to the
trust on the closing date and
o with respect to the loans that
may be acquired by the trust
after the closing date and
prior to December 23, 1999.
See "The Pools" in this prospectus
supplement.
Due Period........................ For each distribution date, the period
commencing on the 2nd day of the calendar
month preceding the month in which the
relevant distribution date occurs, and
ending on the 1st day of the month in which
the relevant distribution date occurs.
Determination Date................ The 18th calendar day of each month or, if
that day is not a business day, then the
preceding business day.
Accrual Period.................... With respect to the Class A-1 and Class A-2
certificates and for the first distribution
date, the period beginning on the closing
date and ending on the day prior to the
first distribution date. With respect to the
Class A-1 and Class A-2 certificates and for
each other distribution date, the period
beginning on the prior distribution date and
ending on the day prior to the relevant
distribution date. With respect to the
S-6
<PAGE>
Class B certificates and each distribution
date, the calendar month prior to the
related distribution date.
OFFERED SECURITIES................. We are offering the Class A-1, Class A-2 and
Class B certificates. Each class will be
issued with the following approximate
original principal balance, subject to a
permitted variance of plus or minus 5%:
CLASS ORIGINAL PRINCIPAL BALANCE
----- --------------------------
A-1 $325,000,000
A-2 $161,000,000
B $ 14,257,334
The Series 1999-3 certificates will consist
of a total of 5 classes. However, the Class
X and the Class R certificates are not being
offered by this prospectus supplement. In
general, distributions on the Class A-1 and
Class A-2 certificates will be made from
separate loan pools. In general,
distributions on the Class B certificates
will be made from the principal and interest
payments available in each loan pool on a
subordinated basis. These loan pools are
described in the section under "--Assets of
the Trust--Loans" below.
Interest Distributions............ On each distribution date, interest accrued
during the preceding accrual period will be
due on the offered certificates. The offered
certificates will accrue interest for each
accrual period on their unpaid principal
balance.
The offered certificates will bear interest
at the following rates per annum:
Class Pass-Through Rate
----- -----------------
A-1 one-month LIBOR + 0.355%, or
commencing on the first day of
the accrual period in which the
optional termination date
occurs, one-month LIBOR +
0.710%.
A-2 one-month LIBOR + 0.395%, or
commencing on the first day of
the accrual period in which the
optional termination date
occurs, one-month LIBOR +
0.790%.
B 9.250%, or commencing on the
first day of the accrual period
in which the optional
termination date occurs,
9.750%.
S-7
<PAGE>
The interest rates on the offered
certificates will be subject to an available
funds cap. The available funds cap is
different for each class and is described in
"Description of the Certificates--General"
in this prospectus supplement. Any shortfall
resulting from the imposition of the
available funds cap together with interest
on the shortfall will be carried forward and
will be distributed on the current or
following distribution dates to the extent
there are funds available. The guaranty
insurance policy will not cover any of these
shortfalls.
The ratings assigned to the offered
certificates do not address the likelihood
of your receipt of interest carried forward
to later distribution dates due to the
available funds cap.
Interest on the Class A-1 and Class A-2
certificates will be calculated on the basis
of the actual number of days elapsed in the
accrual period and a 360-day year. Interest
on the Class B certificates will be
calculated on the basis of a 360-day year
consisting of twelve 30-day months.
See "Description of the Certificates--
Distributions on the Certificates" in this
prospectus supplement.
Principal Distributions........... On each distribution date, one or more
classes of the offered certificates will be
due distributions of principal. See
"Description of the Certificates--
Distributions on the Certificates" in this
prospectus supplement for a detailed
discussion of the amount and timing of
principal payments.
Allocation and Distributions to
the Offered Certificates....... Interest and principal distributions due on
the Class A-1 and Class A-2 certificates
will generally be distributable from:
o any available funds from payments and
collections from the pool of loans
related to the applicable class;
o any available funds from payments and
collections from the other pool of loans
to the extent described in this
prospectus supplement; and
o any payments that are made under the
financial insurance guaranty policy
described below.
Interest and principal distributions due on
the Class B certificates will generally be
distributable from any available funds from
payments and collections from each pool of
loans after distributions of interest and
principal, respectively, to the Class A-1
and Class A-2 certificates.
S-8
<PAGE>
The right of the Class B certificates to
receive interest is subordinated to the
rights of the Class A-1 and Class A-2
certificates to receive interest. The right
of the Class B certificates to receive
principal is subordinated to the rights of
the Class A-1 and Class A-2 certificates to
receive principal. On each distribution
date, the priority of distributions to the
applicable classes of certificates will be
as described in this prospectus supplement
under the caption "Description of the
Certificates--Priority of Distributions."
OTHER SECURITIES ISSUED............ In addition to the offered certificates, the
trust is also issuing the Class X and the
Class R certificates. The Class X and Class
R certificates are subordinate to the
offered certificates.
We are not offering the Class X or the Class
R certificates through this prospectus
supplement or the accompanying prospectus.
ASSETS OF THE TRUST
Loans............................. The assets of the trust will consist
primarily of two pools of mortgage loans.
The pool 1 loans will back the Class A-1 and
Class B certificates, in that payments on
pool 1 loans will generally be used to make
distributions on the Class A-1 and Class B
certificates. Similarly, the pool 2 loans
will back the Class A-2 and Class B
certificates. The loans will be secured by
first liens on one- to four-unit residences,
condominium units and manufactured housing.
Each pool of loans to be transferred to the
trust on the closing date is expected to
have the following aggregate unpaid
principal balance as of the cut-off date, in
each case subject to a variance of plus or
minus 5%:
Pool 1 $253,500,430
Pool 2 $125,648,916
On or prior to December 23, 1999, the trust
may purchase additional loans for each pool
having the following approximate aggregate
unpaid principal balance, in each case
subject to a variance of plus or minus 5%:
Pool 1 $81,033,795
Pool 2 $40,074,193
Unless the context indicates otherwise, any
numerical or statistical information with
respect to the loans presented in this
prospectus supplement is based upon the
characteristics, as of August 25, 1999, of
the portion of the total pools of loans that
have been identified.
S-9
<PAGE>
The portion of the pool 1 loans described in
this prospectus supplement will have an
aggregate principal balance of approximately
$250,394,077 as of August 25, 1999.
The portion of the pool 2 loans described in
this prospectus supplement will have an
aggregate principal balance of approximately
$115,584,286 as of August 25, 1999.
The loans will bear interest at fixed or
adjustable rates.
The loans have been originated using
underwriting standards that are less
stringent than FHLMC or FNMA guidelines
concerning first-lien mortgage loans. See
"The Pools" in this prospectus supplement
and "The Trust Funds--Residential loans" in
the accompanying prospectus.
PRE-FUNDING ACCOUNT................ On the closing date, approximately
$121,107,988 will be deposited in a
pre-funding account in the name of the
trustee, subject to a variance of plus or
minus 5%. $81,033,795, subject to a variance
of plus or minus 5%, may be used by the
trustee to purchase pool 1 loans subsequent
to the closing date. $40,074,193, subject to
a variance of plus or minus 5%, may be used
by the trustee to purchase pool 2 loans
subsequent to the closing date. These
subsequently acquired loans will back the
applicable class of certificates. These
subsequently acquired loans may only be
acquired during the period commencing on the
closing date and ending generally on the
earlier to occur of:
(1) the date on which the amount on deposit
in the pre-funding account as it relates to
the applicable pool, net of any investment
earnings on that amount, is less than
$50,000; and
(2) December 23, 1999.
See "Description of the Certificates--
Pre-Funding Account" in this prospectus
supplement.
CAPITALIZED INTEREST
ACCOUNT......................... On the closing date, a portion of the sale
proceeds of the offered certificates will be
deposited in a capitalized interest account.
Funds in this account will be applied by the
trustee on the distribution dates occurring
in October 1999, November 1999 and December
1999 to cover shortfalls in distributions on
the certificates that may arise due to the
utilization of the pre-funding account as
described in this prospectus supplement. Any
amounts in the capitalized interest account
that are not required to cover these
interest
S-10
<PAGE>
shortfalls will be paid to the transferor.
SERVICING OF THE LOANS............. Countrywide Home Loans, Inc., as the
servicer, will perform the loan servicing
and receive a monthly servicing fee and
other servicing compensation. The servicer
also will make reasonable and customary
expense advances with respect to the loans,
in accordance with reasonable and customary
servicing procedures. The servicer will not
be required to make advances of principal
and interest due on the loans. See
"Description of the Transfer and Servicing
Agreements--Servicing" in this prospectus
supplement. Fremont Investment & Loan will
be the master servicer.
The master servicer will generally:
o advance delinquent payments of interest
and principal on the loans,
o pay compensating interest to cover
prepayment interest shortfalls to the
extent described in this prospectus
supplement,
o monitor the servicing activities of the
servicer, and
o be available to assume the servicing if
the servicer is terminated. See "Master
Servicer" in this prospectus supplement.
The master servicer will service the loans
for an interim period beginning on the
closing date until Countrywide Home Loans,
Inc. has assumed its duties as servicer.
CREDIT ENHANCEMENT................. Credit enhancement for the Class A-1 and
Class A-2 certificates will be provided by
the following:
o excess payments of interest on the loans
in the pool of loans backing the
applicable class;
o excess payments of interest on the loans
in the pool of loans backing the other
class of Class A certificates, to the
extent not needed for the other class of
Class A certificates and under the
circumstances as described in
"Description of the Certificates--
Priority of Payments" in this prospectus
supplement;
o the overcollateralization that results
from the cash flow structure described in
"Description of the Certificates-Priority
of Payments" in this prospectus
supplement;
o a reserve fund funded by certain excess
payments of interest on the loans;
o the subordination of the right of the
Class B certificates to receive interest
and principal distributions,
respectively,
S-11
<PAGE>
and the subordination of the right of the
Class X and Class R certificates to
receive distributions of any remaining
amounts from the loans; and
o a guaranty insurance policy issued by the
securities insurer.
The guaranty insurance policy will
irrevocably and unconditionally guaranty to
the trustee timely payment of interest,
subject to any applicable available funds
caps, as described in this prospectus
supplement and ultimate payment of principal
due on the Class A-1 and Class A-2
certificates. The guaranty insurance policy
may not be canceled for any reason. The
guaranty insurance policy does not guaranty
any specified rate of prepayments. The
guaranty insurance policy does not provide
funds to redeem any of the Class A-1 and
Class A-2 certificates upon an optional
termination of the trust, unless the
termination is at the option of the
securities insurer. The guaranty insurance
policy will not cover any shortfalls on the
Class A-1 and Class A-2 certificates
resulting from the imposition of the
available funds cap.
Credit enhancement for the Class B
certificates will be provided by the
following:
o excess payments of interest on the loans
in both pools of loans;
o the overcollateralization that results
from the cash flow structure described in
"Description of the Certificates-Priority
of Payments" in this prospectus
supplement; and
o the subordination of the right of the
Class X and the Class R certificates to
receive distributions of any remaining
amounts from the loans.
See "Description of Credit Enhancement" in
this prospectus supplement.
These sources of credit enhancement are
intended to increase the likelihood that you
will receive the full and timely amount of
interest payments and full amount of
principal payments due on the applicable
class of offered certificates. In addition,
these sources of credit enhancement are
intended to provide protection against
losses on the loans. The credit enhancement
for the offered certificates is for the
benefit of the offered certificates only.
The offered certificates will not be
entitled to the benefits of any other credit
enhancement. See "Risk Factors--Credit
Enhancement May Not Be Adequate" in this
prospectus supplement.
S-12
<PAGE>
Optional Termination.............. The holders of the majority percentage
interest in the Class R certificates have
the option to effect an early termination of
the trust on or after any distribution date
on which the outstanding aggregate principal
balance of the loans declines to 10% or less
of an amount equal to the sum of :
o the aggregate principal balance, as of
the cut-off date, of the loans
transferred to the trust on the closing
date and
o the aggregate principal balance, as of
the applicable cut-off date, of the loans
transferred to the trust after the
closing date and on or prior to December
23, 1999.
If the exercise of this option would result
in a draw under the guaranty insurance
policy, the holders of the Class R
certificates may only exercise this option
with the consent of the securities insurer.
The securities insurer or the servicer will
have the option to effect the same early
termination of the trust if the holders of
the Class R certificates fail to exercise
this early termination option and the
aggregate principal balance of the loans
declines to 5% or less of the amount
described in the immediately preceding
sentence.
See "Description of the Certificates--
Optional Termination" in this prospectus
supplement.
CLEARANCE, SETTLEMENT AND
DENOMINATIONS OF THE
CERTIFICATES..................... The offered certificates will be issued only
in book-entry form through DTC in the United
States, or Cedelbank or Euroclear in Europe.
Transfers will be in accordance with the
usual rules and operating procedures of DTC,
Cedelbank and Euroclear. You will not
receive a definitive certificate
representing your interest in the trust,
except in limited circumstances described in
the accompanying prospectus. See "Risk
Factors--Book-Entry System for Certain
Classes May Decrease Liquidity and Delay
Payment" and "Description of the
Securities--Book-Entry Registration of
Securities" in the accompanying prospectus.
We will offer beneficial interests in the
trust in minimum denominations of $25,000
and integral multiples of $1 in excess of
that amount. However, one certificate of
each class may be issued in any denomination
as may be necessary to represent the
remainder of the aggregate amount of
certificates of the class.
TAX STATUS......................... The trustee will make an election to treat
designated portions of the trust fund as two
REMICs for federal income tax purposes. In
the opinion of counsel, those portions of
the trust will qualify for this treatment. A
portion of the trust,
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which includes the rights of the holders of
the offered certificates to receive interest
in excess of the weighted average interest
rate of the loans, net of expenses, will be
treated as a grantor trust.
Pertinent federal income tax consequences of
an investment in the offered certificates
include:
o Your certificates will represent:
o a "regular interest" in a REMIC and
o the right to receive interest from the
grantor trust at the excess of their
pass-through rates, without regard to
their respective caps, over the
weighted average interest rates on the
loans, net of expenses.
o The regular interests will be treated as
newly originated debt instruments and the
interests in the grantor trust will
represent notional principal contracts
for federal income tax purposes, to the
extent described in this prospectus
supplement.
o The portion, if any, of your purchase
price for the offered certificates
allocable to the right to receive
interest on that class in excess of the
REMIC rate will be amortizable under the
rules for notional principal contracts,
subject to limitations if you are an
individual.
See "Federal Income Tax Consequences" in
this prospectus supplement and in the
accompanying prospectus.
ERISA CONSIDERATIONS............... A fiduciary of any employee benefit plan or
other retirement arrangement subject to
ERISA, or Section 4975 of the Internal
Revenue Code of 1986, as amended, should
carefully review with its legal advisors
whether the purchase or holding of offered
certificates could give rise to a
transaction prohibited or not otherwise
permissible under ERISA or the Internal
Revenue Code. The U.S. Department of Labor
has issued to PaineWebber Incorporated
prohibited transaction exemption 90-36. This
exemption generally exempts from the
application of certain of the prohibited
transaction provisions of ERISA, and the
excise taxes and civil penalties imposed on
prohibited transactions by Section 4975(a)
and (b) of the Internal Revenue Code and
Section 502(i) of ERISA, transactions
relating to the purchase, sale and holding
of pass-through certificates such as the
Class A-1 and Class A-2 certificates, but
not the Class B certificates, and the
servicing and operation of asset pools such
as the trust, provided that specified
conditions are satisfied. See "ERISA
Considerations" in this prospectus
supplement and in the accompanying
prospectus.
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LEGAL INVESTMENT................... Your certificates will not constitute
"mortgage related securities" for purposes
of the Secondary Mortgage Market Enhancement
Act of 1984, as amended. The appropriate
characterization of your certificates under
various legal investment restrictions, and
therefore your ability, if you are subject
to these restrictions, to purchase the
certificates may be subject to significant
interpretive uncertainties. You should
consult your own legal advisors to determine
whether the certificates constitute legal
investments for you. See "Legal Investment"
in this prospectus supplement and in the
accompanying prospectus.
CERTIFICATE RATINGS................ On the closing date, the offered
certificates are required to be rated by
Moody's Investors Service, Inc., Standard &
Poor's, a division of The McGraw-Hill
Companies, Inc. and Duff & Phelps Credit
Rating Co. as follows:
CLASS MOODY'S S&P DCR
----- ------- --- ---
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
B NR BBB- BBB
See "Ratings" in this prospectus supplement
and "Rating" in the accompanying prospectus
for a discussion of the primary factors on
which the ratings are based.
IMPORTANT COVENANTS OF
CERTIFICATEHOLDERS............... By accepting your certificate, you agree to
allow the securities insurer to exercise all
of your voting rights with respect to your
certificates. See "Risk Factors--
Certificateholders' Rights are Limited by
Securities Insurer" and "Description of the
Transfer and Servicing Agreements--
Restrictions on Certificateholders' Rights"
in this prospectus supplement.
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RISK FACTORS
Before making an investment decision, you should carefully consider the
following risks which we believe describe the principal factors that make an
investment in the offered certificates speculative or risky. In particular,
payments on your certificates will depend on payments received on and other
recoveries with respect to the loans.
BASIS RISK MAY ADVERSELY AFFECT YIELD
The yield on the Class A-1 and Class A-2 certificates will be sensitive to
fluctuations in the level of one-month LIBOR. The yield on the Class A-1, Class
A-2 and Class B certificates may also be adversely affected by the application
of the available funds cap. The prepayment of the loans with higher loan
interest rates may result in a lower available funds cap. If on any distribution
date the application of the available funds cap results in an interest payment
lower than the pass-through rate on the certificates during the related accrual
period, the value of your certificates may decline.
Although you will be entitled to receive on subsequent distribution dates
the amount of any interest shortfall resulting from the application of the
available funds cap on your certificates, in light of the distribution
priorities on the relevant distribution dates, there is no assurance that funds
will be available. The guaranty insurance policy does not cover, and the ratings
of the offered certificates do not address, the likelihood of the distribution
of those amounts carried forward.
The mortgage pools will contain adjustable-rate mortgage loans that, after
a period of six months, one year, two years, three years or five years following
the date of origination, adjust semi-annually based on the London interbank
offered rate for six-month United States dollar deposits. Consequently, the
interest due on the related mortgage loans during any due period may not equal
the amount of interest that would accrue at one-month LIBOR plus the applicable
margin on the Class A-1 and Class A-2 certificates during the related accrual
period. The mortgage pools will also contain fixed-rate loans. If there are
significant losses on or prepayments of the adjustable rate loans in the pools,
interest distributions on the Class A-1 and Class A-2 certificates may be
supported primarily by the fixed-rate mortgage loans remaining in the pools. In
particular, in a rising interest rate environment, because the pass-through rate
on the Class A-1 and Class A-2 certificates adjusts monthly, while the interest
rates on the adjustable-rate loans adjust semi-annually after an initial period
where the interest rate is fixed and the interest rates on the fixed-rate loans
do not adjust, the amount of interest distributed on the Class A-1 and Class A-2
certificates on any distribution date may be less than one-month LIBOR plus the
applicable margin. If there are significant losses on or prepayments of the
fixed rate loans in the pools, interest distributions on the Class B
certificates, which bear interest at a fixed-rate, may be supported primarily by
the adjustable-rate loans remaining in the pools.
The yield to maturity on your certificates may be affected by the
resetting of the interest rates on the adjustable-rate loans. In addition,
because the interest rate for the adjustable-rate loans is based on six-month
LIBOR plus the related margin, this rate could be higher than prevailing market
interest rates, which may result in an increase in the rate of prepayments on
the loans after the adjustment.
See "Certain Legal Aspects of Residential Loans--Prepayment Charges and
Prepayments" in the prospectus.
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ACTUAL YIELD TO MATURITY MAY BE LESS THAN ANTICIPATED
The degree to which the actual yield of your certificates may vary from
the anticipated yield will depend on:
o the price of your certificates, including the amount of any premium
or discount;
o the degree to which the timing of payments on your certificates is
sensitive to the prepayment experience of loans and the application
of excess payments of interest on the loans as principal on the
certificates;
o the timing of delinquencies, defaults and losses on the loans to the
extent not covered by the credit enhancement, including the guaranty
insurance policy in the case of the Class A-1 and Class A-2
certificates; and
o a change in the overcollateralization target amount for the Class
A-1 or Class A-2 certificates or a change in the delinquency levels
with respect to the loans used to determine an increase or decrease
in the overcollateralization target amount.
The allocation of excess payments of interest on the loans backing the Class A-1
or Class A-2 certificates as an additional distribution of principal on that
class until the amount of overcollateralization for that class equals the
overcollateralization target amount for that class will accelerate the principal
amortization of that class of certificates relative to the speed at which
principal is paid on the related loans. However, any reduction in the
overcollateralization target amount will slow the principal amortization of that
class. See "Prepayment and Yield Considerations" in this prospectus supplement.
The yield to maturity of the Class B certificates will be sensitive, in
varying degrees, to delinquencies and losses on the loans. This is so because
any realized losses on the loans will be borne by the Class R and Class X
certificates in the first instance and then by the Class B certificates. As a
result, holders of the Class B certificates may incur a loss on their
investment. In addition, the yield to maturity of the Class B certificates will
also be sensitive to fluctuations in the level of one-month LIBOR. As one-month
LIBOR increases, excess payments of interest from the loans available to
distribute to the Class B certificates will be reduced. As a result, the
amortization of principal of the Class B certificates will be slowed in that
event and the yield of the Class B certificates would be adversely affected.
UNPREDICTABILITY OF PREPAYMENTS COULD ADVERSELY AFFECT YIELD
The rate and timing of payments of principal on the loans, among other
factors, will affect the rates of principal payments on your certificates and
the aggregate amount of payments and the yield to maturity of your certificates.
While a substantial majority of the "1/29," "2/28," "3/27" and "5/25" loans
impose prepayment penalties if a loan is prepaid, generally during the initial
five years of the loan, the penalties for the "2/28" loans and the "3/27" loans
are typically suspended during the 60-day period following the initial
adjustment date. The servicer will be required to enforce prepayment penalties
unless doing so would be unlawful or the master servicer consents to waive the
prepayment penalties. The suspension or waiving of the prepayment penalties may
result in increased prepayments and this may cause your certificates to be paid
more quickly than anticipated. Because the prepayment experience of the loans
will depend on future events and a variety of factors, the prepayment experience
of the loans is uncertain and in all likelihood will not conform to any
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projected rates of prepayments. These factors will include whether any amounts
are in the pre-funding account that are not used by the trust to acquire loans
subsequent to the closing date. See "Prepayment and Yield Considerations" in
this prospectus supplement.
INABILITY TO ACQUIRE SUBSEQUENT LOANS MAY CAUSE SIGNIFICANT PRINCIPAL PAYMENTS
ON THE CERTIFICATES
The ability of the transferor to acquire or originate loans subsequent to
the closing date and on or prior to December 23, 1999 that meet the requirements
for transfer to the trust is affected by a variety of factors. These factors
include interest rates, employment levels, the rate of inflation and the general
consumer perception of economic conditions. We expect that substantially all of
the funds in the pre-funding account will be used to transfer additional loans
to the trust prior to December 23, 1999, so that you will not receive material
unanticipated principal distributions. However, we cannot assure you that this
will occur. If significant amounts remain in the pre-funding account after
December 23, 1999, you will receive a significant unanticipated distribution of
principal in December 1999.
LIMITED LIQUIDITY MAY ADVERSELY AFFECT MARKET VALUE OF CERTIFICATES
A secondary market for the offered certificates may not develop or, if it
does develop, it may not provide you with liquidity of investment or continue
while your certificates are outstanding. Limited liquidity could result in a
substantial decrease in the market value of your certificates. See "Risk
Factors--Limited Liquidity of Securities May Adversely Affect Market Value of
Securities" in the accompanying prospectus.
Because the Class B certificates are subordinated to the Class A-1 and
Class A-2 certificates, the requirements of certain prohibited transaction
exemptions will not be satisfied. As a result, the purchase or holding of any of
the Class B certificates by a plan investor may constitute a non-exempt
prohibited transaction or result in the imposition of excise taxes or civil
penalties. Accordingly, the Class B certificates are not offered to or
transferable to plan investors unless the plan investor meets certain
requirements. See "ERISA Considerations" in this prospectus supplement and in
the accompanying prospectus.
CREDIT ENHANCEMENT MAY NOT BE ADEQUATE
RATINGS OF SECURITIES INSURER. Any reduction in a rating assigned to the
claims-paying ability of the securities insurer may result in a reduction in the
rating of the Class A-1 and Class A-2 certificates. Future events may reduce the
rating of the securities insurer or impair the ability of the securities insurer
to pay claims for insured payments under the financial guaranty insurance
policy. In that event, the securities insurer might not have the ability to
cover delays or shortfalls in payments of interest or ultimate principal due on
the Class A-1 and Class A-2 certificates. See "Description of Credit
Enhancement--Financial Guaranty Insurance Policy" in this prospectus supplement.
LOAN DELINQUENCIES, DEFAULTS AND LOSSES. Delinquencies, if not advanced by
the master servicer, defaults and losses on the loans will reduce the credit
enhancement available from the overcollateralization feature. If amounts
available from this credit enhancement are not adequate to protect against the
delinquencies, defaults and losses experienced on the loans, then delays or
shortfalls in distributions of interest or principal due on the Class A-1, Class
A-2 and Class B certificates will occur, unless, in the case of the Class A-1
and Class A-2 certificates, these delays or
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shortfalls are covered under the financial guaranty insurance policy. See
"Description of Credit Enhancement" in this prospectus supplement.
AVAILABILITY OF EXCESS SPREAD FOR OVERCOLLATERALIZATION. Excess payments
of interest on each pool of loans may not be generated in sufficient amounts to
create and maintain the related amount of overcollateralization for the Class
A-1 and Class A-2 certificates at the related overcollateralization target
amount at all times. In particular, delinquencies, if not advanced by the master
servicer or the trustee, defaults and principal prepayments on the loans will
reduce the excess payments of interest on the loans that otherwise would be
available on a distribution date. The reduction of the available excess payments
of interest on the pools of loans will result in a slower principal amortization
of the related classes of offered certificates. This in turn will result in a
lower level of overcollateralization for that class of certificates. See
"Description of Credit Enhancement-Excess Spread and Overcollateralization" in
this prospectus supplement.
SUBORDINATION IS LIMITED IN SCOPE. The Class B certificates are
subordinated to the Class A-1 and Class A-2 certificates. Realized losses in
excess of the subordination provided by the Class R and Class X certificates
will be borne by the Class B certificates. Thereafter, realized losses in excess
of the subordination provided by the Class R, Class X and Class B certificates
will be borne by the Class A-1 and Class A-2 certificates to the extent that the
securities insurer defaults under the financial guaranty insurance policy.
The holders of the Class R, Class X and Class B certificates are generally
never obligated to refund amounts previously distributed to them to holders of
more senior classes of certificates, including payments of excess interest. This
is the case even if on a subsequent distribution date insufficient funds are
available to distribute interest or principal due on your certificates. See
"Description of Credit Enhancement--Subordination" in this prospectus
supplement.
CERTIFICATEHOLDERS' RIGHTS ARE LIMITED BY SECURITIES INSURER
Generally, the securities insurer may exercise all of the voting rights
with respect to the Class A-1 and Class A-2 certificates without the consent of
the related holders. The exercise, or a refusal to consent to the exercise, by
the securities insurer of some certificateholder rights could be adverse to your
interest. See "Description of the Transfer and Servicing
Agreements--Restrictions on Certificateholders' Rights" in this prospectus
supplement.
RISKS RELATING TO NON-CONFORMING UNDERWRITING GUIDELINES
The originator's underwriting standards are intended to assess the
creditworthiness of the borrower and the value of the mortgaged property and to
evaluate the adequacy of the mortgaged property as collateral for the loan. In
comparison to first lien mortgage loans that conform to the underwriting
guidelines of FNMA or FHLMC, the loans have generally been underwritten or
reunderwritten with more lenient underwriting criteria. For example, the loans
may have been made to borrowers having imperfect credit histories, ranging from
minor delinquencies to bankruptcies, or borrowers with higher ratios of monthly
mortgage payments to income or higher ratios of total monthly credit payments to
income.
Accordingly, the loans will likely experience higher, and possibly
substantially higher, rates of delinquencies, defaults and losses than the rates
experienced by loans underwritten according to FNMA or FHLMC guidelines. As a
result, the risk that you will suffer losses could increase. Furthermore,
changes in the values of the mortgaged properties may have a greater effect on
the
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delinquency, foreclosure, bankruptcy and loss experience of the loans than on
mortgage loans originated according to FNMA or FHLMC guidelines. We cannot
assure you that the values of the mortgaged properties have remained or will
remain at the levels in effect on the dates of origination of the related loans.
See "--Credit Enhancement May Not Be Adequate" above, and "Underwriting
Criteria" in this prospectus supplement.
TRANSFERS OF SERVICING MAY ADVERSELY AFFECT DISTRIBUTIONS ON THE CERTIFICATES
The servicing of loans like those originated under the underwriting
guidelines described above, as compared to the servicing of prime mortgage
loans, requires special skill and diligence. The servicing of these types of
loans generally requires:
o more attention to each account;
o earlier and more frequent contact with borrowers in default; and
o commencing the foreclosure process at an earlier stage of default.
The loans are not currently being serviced by the servicer. On or before
November 30, 1999, the servicing of the loans will be transferred from the
master servicer to the servicer. However, this servicing transfer date may be
extended to January 31, 2000 if the rating agencies deliver written confirmation
that this extension would not result in a downgrade, withdrawal or qualification
of the then current ratings of the offered certificates. Following that time,
the servicer will directly service all of the loans. Interruptions in servicing
may occur during the transfer of servicing to the servicer.
The term of the servicer will be extendable for successive 90 day terms
until the Class A-1 and Class A-2 certificates are paid in full, provided that
prior to the expiration of each term the securities insurer delivers written
notice of renewal to the servicer. If this renewal notice is not delivered and a
successor servicer is appointed, the servicing of the loans will be transferred.
During this period, interruptions in servicing may occur potentially resulting
in the loans suffering a higher default rate.
FAILURE OF SERVICER TO PERFORM MAY ADVERSELY AFFECT DISTRIBUTIONS ON THE
CERTIFICATES
The amount and timing of distributions on the certificates generally will
be dependent upon the servicer performing its servicing obligations in an
adequate and timely manner. See "Servicer--Servicing Procedures" in this
prospectus supplement. The failure of the securities insurer to renew the term
of the servicer every 90 days or the occurrence of events of default may result
in the termination of the servicer. See "Description of the Transfer and
Servicing Agreements--Servicer Determinations and Events of Default" in this
prospectus supplement. The master servicer or other successor appointed by the
master servicer and approved by the securities insurer will assume the loan
servicing functions if the servicer is terminated. This termination, with its
transfer of daily collection activities, will likely increase the rates of
delinquencies, defaults and losses on the loans. See "Servicer--Servicing
Procedures" in this prospectus supplement.
INADEQUACY OF VALUE OF PROPERTIES COULD AFFECT SEVERITY OF LOSSES
Assuming that the mortgaged properties provide adequate security for the
loans, substantial delays in recoveries may occur from the foreclosure or
liquidation of defaulted loans. No assurance can be given that the values of the
mortgaged properties have remained or will remain at the levels in effect on the
dates of origination of the related loans. Further, liquidation expenses,
including legal
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fees, real estate taxes, servicing advances and maintenance and preservation
expenses, will reduce the proceeds payable on the mortgage notes and thereby
reduce the security for the loans. As a result, the risk that you will suffer
losses could increase. If any of the mortgaged properties fail to provide
adequate security for the related loan, you may experience a loss if the
securities insurer were unable to perform its obligations under the guaranty
insurance policy. See "Description of the Transfer and Servicing
Agreements--Realization on Defaulted Loans" in this prospectus supplement, and
"Certain Legal Aspects of Residential Mortgage Loans--Foreclosure on Mortgages"
in the prospectus.
BANKRUPTCY OF BORROWER MAY ADVERSELY AFFECT DISTRIBUTIONS ON THE CERTIFICATES
The application of federal and state laws, including bankruptcy and debtor
relief laws, may interfere with or adversely affect the ability to realize on
the mortgaged properties, enforce deficiency judgments or pursue collection
litigation with respect to defaulted loans. As a consequence, borrowers who have
defaulted on their loans and sought, or are considering seeking, relief under
bankruptcy or debtor relief laws will have substantially less incentive to repay
their loans. These loans will likely experience more severe losses, which may be
total losses. As a result, the risk that you will suffer losses could increase.
See "--Credit Enhancement May Not Be Adequate" above and "--Violations of
Federal and State Laws May Adversely Affect Ability to Collect on Loans" below.
GEOGRAPHIC CONCENTRATION COULD INCREASE LOSSES ON THE LOANS
Because of the geographic concentration of mortgaged properties within
California, an economic downturn or recession in California may affect the
ability of the borrowers to timely pay their loans. In addition, mortgaged
properties located in California may experience special hazards that are not
covered by any available casualty insurance, including earthquakes, mudslides
and other disasters. Accordingly, the pools of loans may experience higher rates
of delinquencies, defaults and losses than the rates experienced by pools of
loans having greater geographical diversification. See "--Adequacy of Credit
Enhancement May Not Be Adequate" above.
NON-RECORDATION OF ASSIGNMENTS COULD INCREASE LOSSES ON THE LOANS
The transferor will not be required to record assignments of the mortgages
to the trustee in the real property records of California and some other states.
The master servicer will retain record title to the related mortgages on behalf
of the trustee. See "Description of the Transfer and Servicing Agreements--Sale
and Assignment of the Loans" in this prospectus supplement.
The recordation of the assignments of the mortgages in favor of the
trustee is not necessary to effect a transfer of the loans to the trustee.
However, if the transferor or the depositor were to sell, assign, satisfy or
discharge any loan prior to recording the related assignment in favor of the
trustee, the other parties to this sale, assignment, satisfaction or discharge
may have rights superior to those of the trustee. In some states, in the absence
of a related recordation of the assignments of the mortgages, the transfer to
the indenture trustee of the loans may not be effective against particular
creditors of, or purchasers from the transferor or a trustee in bankruptcy of
the transferor. If these other parties, creditors or purchasers have rights to
the loans that are superior to those of the trustee, you could lose the right to
future payments of principal and interest from the related loans. As a result
you could suffer a loss of principal and interest to the extent that the
relevant loss is not otherwise covered by the applicable credit enhancement.
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Insolvency of TRANSFEROR May Adversely Affect Distributions on the Certificates
If the FDIC is appointed receiver or conservator of the transferor, the
FDIC's administrative expenses may have priority over the interest of the
trustee in the loans. In addition, the Federal Deposit Insurance Act, as amended
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989,
gives the FDIC particular powers in its capacity as a receiver or conservator of
the transferor. If these powers are exercised delays or reductions in
distributions of principal and interest on your certificates could result,
unless these distributions are covered under the guaranty insurance policy.
The FDIC has the power as receiver or conservator to disaffirm or
repudiate any of the transferor's contracts or leases if the performance would
be burdensome and the disaffirmance or repudiation would promote the orderly
administration of the transferor's affairs. It is unclear whether the FDIC can
utilize this power to repudiate the transfer of the loans to the depositor and
administer the loans as part of any receivership or conservatorship of the
transferor. Any attempt by the FDIC to repudiate the transfer of the loans to
the depositor in a receivership or conservatorship of the transferor, even if
unsuccessful, could result in delays or reductions in distributions of principal
and interest on your certificates, unless these payments are covered under the
guaranty insurance policy.
On September 9, 1999, the FDIC gave formal notice of a proposed
rulemaking. Under the proposed rule, the FDIC will not seek to repudiate
transfers made as part of a securitization. These transfers would include the
transfer of the loans to the depositor. Although the rule is not yet final, much
of it merely confirms the FDIC's existing practice and substantive changes are
not expected. The transfer of the loans to the depositor has been structured
with the specific intent to satisfy the requirements of the proposed rule.
See "Description of the Transfer and Servicing Agreements--Sale and
Assignment of the Loans" in this prospectus supplement.
BANKRUPTCY OF OTHER PARTIES MAY ADVERSELY AFFECT DISTRIBUTIONS ON THE
CERTIFICATES
If a bankruptcy or insolvency of the master servicer or servicer occurs,
the bankruptcy trustee or receiver may have the power to prevent the securities
insurer, the trustee or the depositor from appointing a successor master
servicer or servicer.
If an insolvency of the servicer occurs and if cash collections are
commingled with the servicer's own funds for at least ten days, the trustee will
likely not have an ownership interest in these collections. This is because the
collections would not have been deposited in a segregated account within ten
days after the related collection. The inclusion of these cash collections
within the bankruptcy estate of the servicer in this situation may result in
delays in distribution and failure to distribute amounts due on your
certificates.
In addition, federal and state statutory provisions, including the federal
bankruptcy laws and state laws affording relief to debtors, may interfere with
or affect the ability of the secured mortgage lender to realize on its security.
See "Certain Legal Aspects of Residential Loans" in the prospectus.
VIOLATIONS OF FEDERAL AND STATE LAWS MAY ADVERSELY AFFECT ABILITY TO COLLECT ON
LOANS
Federal and state laws regulate the underwriting, origination, servicing
and collection of the loans. These laws could change over time and may become
more restrictive or stringent with respect
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to some of these activities of the servicer, master servicer and transferor.
Violations of these federal and state laws may:
o limit the ability of the servicer or master servicer to collect
principal or interest on the loans,
o entitle the borrowers to a refund of amounts previously paid, and
o subject the trust, the servicer, master servicer or transferor to
damages and administrative sanctions.
The inability to collect principal or interest on the loans because of
violations of federal or state laws will likely cause the loans to experience
higher rates of delinquencies, defaults and losses. An assessment of damages or
sanctions against the trust could result in the trust's assets being
insufficient to distribute all interest and principal due on your certificates.
An assessment of damages or sanctions against the servicer, master servicer or
the transferor may adversely affect the ability of the servicer or master
servicer to service the loans or the transferor to repurchase or replace
defective loans. See "Risk Factors--Violations of Federal Laws May Adversely
Affect Ability to Collect on Loans" in the prospectus. The transferor will be
required to repurchase or replace any loan that did not materially comply with
applicable federal and state laws. See "--Transferor May Not Be Able to
Repurchase or Replace Defective Loans" below.
POTENTIAL LAWSUITS AGAINST TRANSFEROR. Because the nature of the
transferor's business involves the collection of numerous accounts, the validity
of liens and compliance with state and federal lending laws, the transferor is
subject to claims and legal actions in the ordinary course of its business.
Several class-action lawsuits have been filed against a number of consumer
finance companies alleging that the compensation of mortgage brokers through the
payment of yield spread premiums violates various federal and state consumer
protection laws. While the transferor is not a party to any suit of this nature,
lawsuits could be filed against the transferor in the future, and the results of
any lawsuits are uncertain.
TRANSFEROR MAY NOT BE ABLE TO REPURCHASE OR REPLACE DEFECTIVE LOANS
If the transferor fails to cure a material breach of its loan
representations and warranties with respect to any loan in a timely manner, then
the transferor is required to repurchase or replace the related defective loan.
See "Description of the Transfer and Servicing Agreements--Representations and
Warranties" in this prospectus supplement. The transferor may not be capable of
repurchasing or replacing any defective loans, for financial or other reasons.
The transferor's inability to repurchase or replace defective loans would likely
cause the loans to experience higher rates of delinquencies, defaults and
losses. As a result, shortfalls in distributions due on your certificates could
occur if not covered by the guaranty insurance policy. See "--Credit Enhancement
May Not Be Adequate" above, and "Fremont Investment & Loan" and "Description of
Credit Enhancement" in this prospectus supplement.
YEAR 2000 NON-COMPLIANCE MAY ADVERSELY AFFECT DISTRIBUTIONS ON THE CERTIFICATES
The transferor and the depositor are aware of the issues associated with
the programming code in existing computer systems as the year 2000 approaches.
The "year 2000 problem" is pervasive and complex. The rollover of the two-digit
year value to 00 will affect virtually every computer in some way. The issue is
whether the computer systems will properly recognize date-sensitive information
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when the year changes to 2000. Systems that do not properly recognize this
information could generate erroneous data or cause a system to fail.
The master servicer, the servicer and the trustee will certify that they
are committed either to:
o implement modifications to their respective existing systems to the
extent required to cause them to be year 2000 ready; or
o acquire computer systems that are year 2000 ready, in each case
prior to January 1, 2000.
However, the depositor has not made any independent investigation of the
computer systems of the master servicer, the servicer or the trustee. If
computer problems arise out of a failure of these efforts to be completed on
time, or if the computer systems of the master servicer, the servicer or the
trustee are not fully year 2000 ready, the resulting disruptions in the
collection or distribution of receipts on the loans could materially and
adversely affect your investment.
DTC has informed members of the financial community that it has developed
and is implementing a program for the year 2000 problem. The purpose of this
program is to make its systems, as they relate to the timely payment of
distributions, including principal and interest payments to security holders,
book-entry deliveries, and settlement of trades within DTC, continue to function
appropriately on and after January 1, 2000. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
on other parties, including but not limited to, its participating organizations,
through which you will hold your certificates, as well as the computer systems
of third party service providers. DTC has informed the financial community that
it is contacting and will continue to contact third party vendors from whom DTC
acquires services to:
o impress on them the importance of these services being year 2000
compliant; and
o determine the extent of their efforts for year 2000 remediation,
and, as appropriate, testing, of their services.
In addition, DTC has stated that it is in the process of developing those
contingency plans as it deems appropriate.
If problems associated with the year 2000 problem were to occur with
respect to DTC and the services described above, distributions to you could be
delayed or otherwise adversely affected.
YEAR 2000 LEGISLATION MAY AFFECT TIMELY EXERCISE TO REMEDIES
In July 1999, Congress approved, and the President signed into law,
legislation that limits legal liability for losses due to year 2000
computer-related errors. This legislation, among other things, also protects
borrowers from foreclosure if their residential mortgage loans become delinquent
because an actual year 2000 failure results in the inability to accurately or
timely process their mortgage payments.
This legislation is not intended to extinguish or otherwise affect a
borrower's payment obligations but instead delays the enforcement of obligations
on an otherwise defaulted mortgage
S-24
<PAGE>
loan. Borrowers seeking foreclosure protection under this legislation must
provide timely written notice and documentation to the servicer of the failure
of their mortgage payments to be accurately or timely applied. Absent an
extension from the servicer, borrowers will then have four weeks to make up late
payments on their loans. This legislation does not apply to mortgage loans for
which a default occurs before December 15, 1999, or for which an imminent
default is foreseeable before that date. Moreover, this legislation does not
protect borrowers who deliver notice of a year 2000 failure after March 15,
2000. Mortgage loans that remain in default after the applicable grace period
will be subject to foreclosure or other enforcement.
This legislation could delay the servicer's ability to foreclose on some
loans during the first quarter of the year 2000. These delays could consequently
affect the timing of payments on your certificates.
FORWARD-LOOKING STATEMENTS
In this prospectus supplement and the accompanying prospectus, we use
certain forward-looking statements. These forward-looking statements are found
in the material, including each of the tables set forth under "Risk Factors" and
"Prepayment and Yield Considerations." Forward-looking statements are also found
elsewhere in this prospectus supplement and prospectus and include words like
"expects," "intends," "anticipates," "estimates" and other similar words. These
statements are intended to convey our projections or expectations as of the date
of this prospectus supplement. These statements are inherently subject to a
variety of risks and uncertainties. Actual results could differ materially from
those we anticipate due to changes in, among other things:
o economic conditions and industry competition,
o political and/or social conditions, and
o the law and government regulatory initiatives.
We will not update or revise any forward-looking statement to reflect
changes in our expectations or changes in the conditions or circumstances on
which the statements were originally based.
DEFINED TERMS
We define and use capitalized terms in this prospectus supplement and the
prospectus to assist you in understanding the terms of the offered certificates
and this offering. We define the capitalized terms we use in this prospectus
supplement under the caption "Glossary of Terms" beginning on page S-116 in this
prospectus supplement. We define capitalized terms we use in the accompanying
prospectus under the caption "Glossary of Terms" beginning on page 168 in the
prospectus.
THE POOLS
GENERAL
On or about September 23, 1999, the depositor will acquire from the
transferor two pools of loans. On the Closing Date, the Initial Pool 1 Loans are
expected to have an aggregate unpaid principal balance of approximately
$253,500,430 as of the Cut-Off Date, subject to a permitted variance of plus or
minus 5%. On the Closing Date, the Initial Pool 2 Loans are expected to have an
S-25
<PAGE>
aggregate unpaid principal balance of approximately $125,648,916 as of the
Cut-Off Date, subject to a permitted variance of plus or minus 5%. The depositor
will transfer the Initial Pool 1 Loans and Initial Pool 2 Loans to the trust
under the Pooling and Master Servicing Agreement. The statistical information
presented in this prospectus supplement with respect to the Initial Loans
includes a portion of the Initial Loans that are expected to be transferred to
the trust on the closing date. This information is presented as of August 25,
1999, the Statistical Calculation Date. On or prior to December 23, 1999,
additional Pool 1 Loans and Pool 2 Loans may be transferred to the trust having
an unpaid principal balance of up to $81,033,795 and $40,074,193, respectively,
in each case, subject to a variance of plus or minus 5%. The trust will be
entitled to all payments of principal and interest in respect of the loans due
after the Cut-Off Date. The loans will be secured by first lien mortgages, deeds
of trust and security deeds of trust and security deeds on residences. None of
the loans will be insured or guaranteed by any governmental agency.
The loans will have been originated for the purpose of:
o purchasing and refinancing single-family residences,
o consolidating debt,
o financing property improvements,
o providing cash to the borrower for unspecified purposes, or
o a combination of the foregoing.
The majority of the loans will have been originated or acquired by the
transferor on a flow basis, through a network of small independent mortgage
brokers. The remaining loans will have been acquired by the transferor either
through a network of correspondents, direct origination or will have been
purchased by the transferor through bulk acquisitions. See "Underwriting
Criteria" in this prospectus supplement.
All of the loans will be fully amortizing adjustable-rate or fixed-rate
home loans. The Pool 1 Loans will have original principal balances that are
equal to or less than the amounts set forth in the following table.
Approximately 45.83% of the Initial Pool 2 Loans by Statistical Pool Principal
Balance will have original principal balances that exceed the corresponding
amounts for the Pool 1 Loans set forth in the following table.
MAXIMUM ORIGINAL PRINCIPAL BALANCES OF POOL 1 LOANS
NUMBER OF UNITS CONTINENTAL UNITED STATES ALASKA OR HAWAII
--------------- ------------------------- ----------------
1 $240,000 $360,000
2 $307,100 $460,650
3 $371,200 $556,800
4 $461,350 $692,025
The loans will have been underwritten in compliance with the underwriting
standards of the transferor. See "Underwriting Criteria" in this prospectus
supplement.
S-26
<PAGE>
PAYMENTS ON THE LOANS
Interest on each loan is payable monthly on its outstanding principal
balance at a per annum loan interest rate. Approximately 8.22% of the Initial
Pool 1 Loans, by Statistical Pool Principal Balance for the Pool 1 Loans, and
approximately 6.31% of the Initial Pool 2 Loans, by Statistical Pool Principal
Balance for the Pool 2 Loans, bear interest at a fixed interest rate.
The loan interest rate on each adjustable-rate loan will be subject to
adjustment based on Six-Month LIBOR after an initial period. Approximately 0.13%
of the Initial Pool 1 Loans, by Statistical Pool Principal Balance for the
Initial Pool 1 Loans, and none of the Initial Pool 2 Loans, by Statistical Pool
Principal Balance for the Initial Pool 2 Loans, known as "1/29" loans, will bear
interest at a fixed-rate for approximately 1 year after origination.
Approximately 51.15% of the Initial Pool 1 Loans, by Statistical Pool Principal
Balance for the Initial Pool 1 Loans, and approximately 53.93% of the Initial
Pool 2 Loans, by Statistical Pool Principal Balance for the Initial Pool 2
Loans, known as "2/28" loans, will bear interest at a fixed rate for
approximately two years after origination. Approximately 27.37% of the Initial
Pool 1 Loans, by Statistical Pool Principal Balance for the Initial Pool 1
Loans, and approximately 29.63% of the Initial Pool 2 Loans, by Statistical Pool
Principal Balance for the Initial Pool 2 Loans, known as "3/27 loans" will bear
interest at a fixed rate for approximately three years after origination.
Approximately 2.32% of the Initial Pool 1 Loans, by Statistical Pool Principal
Balance for the Initial Pool 1 Loans, and approximately 3.14% of the Initial
Pool 2 Loans, by Statistical Pool Principal Balance for the Initial Pool 2
Loans, will bear interest at a fixed rate for six months after origination.
Approximately 10.81% of the Initial Pool 1 Loans, by Statistical Pool Principal
Balance for the Initial Pool 1 Loans, and approximately 6.99% of the Initial
Pool 2 Loans, by Statistical Pool Principal Balance for Initial Pool 2 Loans,
known as "5/25" loans, will bear interest at a fixed rate for approximately five
years after origination.
At the end of the six-month, one-year, two-year, three-year or five-year
periods and at six month intervals after those periods, the interest rate on
each adjustable-rate loan will be adjusted to a rate equal to the sum of:
(1) Six-Month LIBOR, as published in The Wall Street Journal; and
(2) the Gross Margin stated in the mortgage note.
The new loan interest rate will be rounded and may be subject to Periodic Rate
Caps, Lifetime Caps and Lifetime Floors. Certain of the loans may have larger
Periodic Rate Caps on their initial reset dates of up to approximately 3%. A
Periodic Rate Cap limits changes in the interest rate for each loan on a
particular reset date. The Lifetime Cap for a loan is the maximum interest rate
that may be charged on a loan. The Lifetime Floor is the minimum interest rate
that may be charged on a loan. The loans do not provide for negative
amortization or limits on changes in monthly payments.
SIX-MONTH LIBOR. Listed below are monthly Six-Month LIBOR rates on the
last business day of the related calendar month beginning in 1995, as published
by Bloomberg L.P. The Six-Month LIBOR rates may fluctuate significantly from
month to month as well as over longer periods and may not increase or decrease
in a constant pattern. There can be no assurance that levels of Six-Month LIBOR
published in Bloomberg on a different LIBOR reference date would have been at
the same levels as those set forth below. The following does not purport to be
representative of future levels of Six-Month LIBOR. No assurance can be given as
to the level of Six-Month LIBOR on any reset date or during the life of any loan
based on Six-Month LIBOR.
S-27
<PAGE>
SIX-MONTH LIBOR
MONTH 1999 1998 1997 1996 1995
----- ---- ---- ---- ---- ----
January............ 4.971% 5.625% 5.688% 5.266% 6.688%
February........... 5.127% 5.695% 5.688% 5.297% 6.438%
March.............. 5.060% 5.750% 5.938% 5.500% 6.500%
April.............. 5.043% 5.813% 6.000% 5.563% 6.375%
May................ 5.245% 5.750% 6.000% 5.633% 6.000%
June............... 5.650% 5.781% 5.906% 5.789% 5.996%
July............... 5.705% 5.750% 5.801% 5.883% 5.875%
August............. 5.919% 5.594% 5.844% 5.773% 5.906%
September.......... 5.246% 5.844% 5.734% 5.945%
October............ 4.978% 5.785% 5.566% 5.875%
November........... 5.148% 5.914% 5.543% 5.688%
December........... 5.066% 5.844% 5.602% 5.508%
The initial interest rate in effect on an adjustable-rate loan generally
will be lower, and may be significantly lower, than the interest rate that would
have been in effect based on the rate of Six-Month LIBOR and the Gross Margin
specified in the mortgage note at the origination of the loan. Therefore, unless
Six-Month LIBOR declines after origination of a loan, the related loan interest
rate will generally increase on the first reset date following origination of
the loan, subject to the periodic rate cap. The repayment of the adjustable-rate
loans will be dependent on the ability of the borrowers to make larger monthly
payments following adjustments of the loan interest rate. Adjustable-rate loans
that have the same initial interest rate at the cut-off date may not always bear
interest at the same interest rate. This is so because the adjustable-rate loans
may have different reset dates, and the loan interest rates therefore may
reflect different levels of Six-Month LIBOR, Gross Margins, Lifetime Caps and
Lifetime Floors.
The principal balance of a loan on any day is equal to:
(1) its unpaid principal as of the Cut-Off Date after giving effect to
scheduled principal payments due on the loan on or prior to the
Cut-Off Date, whether or not received, minus
(2) all principal reductions credited against the principal balance of
the related loan since the Cut-Off Date, including any principal
losses recorded by the servicer on account of a short pay-off, short
sale or other modification of that loan affecting the applicable
principal balance.
However, any Liquidated Loan will have a principal balance of zero. With respect
to any date, the principal balance of loans in a pool will be equal to the
aggregate principal balances of all loans in the pool as of that date.
Although the loans may be prepaid at any time, prepayment may subject the
borrower to a prepayment penalty, subject to state regulation. The prepayment
penalties may be in effect during a period ranging from one year to five years.
Generally, approximately 91.53% of the Initial Pool 1 Loans, by Statistical Pool
Principal Balance for the Initial Pool 1 Loans and approximately 90.91% of the
Initial Pool 2 Loans, by Statistical Pool Principal Balance for the Initial Pool
2 Loans, provide for a prepayment penalty for certain partial prepayments and
any prepayments in full. With respect to the "2/28" and 3/27" loans, however,
the prepayment penalties are typically suspended during the 60-day period that
coincides with the initial adjustment date for the loan. The prepayment penalty
S-28
<PAGE>
would equal, generally, a specified amount of advance interest on the amount of
the prepayment of the loan. Because the master servicer is entitled to keep the
prepayment penalties as additional compensation, it will not be available to
make payments on the certificates. The servicer will be required to enforce
prepayment penalties unless doing so would be unlawful or the master servicer
consents to waive the prepayment penalties.
The loans will be serviced under an actuarial interest method in which
interest is charged to the related borrowers, and payments are due from those
borrowers as of a scheduled day each month that is fixed at the time of
origination. Payments received after a grace period following the scheduled day
are subject to a late charge. Therefore, each regular scheduled payment made by
the borrower is treated as containing a predetermined amount of interest and
principal. Scheduled monthly payments made by the borrowers on the loans either
earlier or later than their scheduled due dates will not affect the amortization
schedule or the relative application of those payments to principal and
interest. Interest accrued on each loan will be calculated on the basis of a
360-day year consisting of twelve 30-day months.
In connection with a partial prepayment, the servicer, at the request of
the borrower, may recalculate the amortization schedule of the related loan to
reduce the scheduled monthly payment over the remaining term to maturity.
CHARACTERISTICS OF THE LOANS
Set forth below is statistical information regarding characteristics, as
of August 25, 1999, the Statistical Calculation Date, of only a portion of the
Initial Loans to be transferred to the trust on the closing date and included in
the pools. With respect to the Initial Pool 1 Loans, this portion consists of
loans having an aggregate principal balance of $250,394,077 as of the
Statistical Calculation Date. With respect to the Initial Pool 2 Loans, this
portion consists of loans having an aggregate principal balance of $115,584,286
as of the Statistical Calculation Date. Unless the context indicates otherwise,
any numerical or statistical information presented in this prospectus supplement
is based on the characteristics of the portion of the total of each pool of
Initial Loans that comprise the Statistical Pool Principal Balance for each
pool.
Before the closing date, the transferor may remove any of the Initial
Loans identified as of the date of this prospectus supplement or may substitute
comparable loans for any of the Initial Loans identified as of the date of this
prospectus supplement. However, the aggregate principal balance of the
substituted Initial Loans will not exceed 5% of the principal balance of the
Initial Loans as of the Cut-Off Date. As a result, the statistical information
presented below regarding the characteristics of the portion of Initial Loans
identified for inclusion in each related pool may vary in some respects from
comparable information based on the actual composition of the Initial Loans
included in the pool on the closing date. In addition, after the Cut-Off Date,
the characteristics of the actual Initial Loans may materially vary from the
information below due to a number of factors. These factors include prepayments
of the Initial Loans after the Cut-Off Date, the substitution or repurchase of
Initial Loans after the closing date or the transfer to the trust of Subsequent
Loans after the closing date.
If the trust acquires Subsequent Loans, a Current Report on Form 8-K
containing a description of the loans at the end of the Pre-Funding Period will
be filed with the SEC within 15 days after the end of the Pre-Funding Period.
S-29
<PAGE>
INITIAL POOL 1 LOAN STATISTICS
As of the Statistical Calculation Date, the portion of the Initial Pool 1
Loans that have been identified had the following approximate characteristics:
INITIAL POOL 1 LOANS
Number of Initial Pool 1 Loans...................... 2,492
Principal Balance
Aggregate........................................ $250,394,077
Average.......................................... $100,479
Range............................................ $11,965 to $291,000
Current Loan Rate
Weighted Average................................. 9.952%
Range............................................ 7.250% to 14.000%
Current Loan Rate (fixed-rate loans)
Weighted Average................................. 10.042%
Range............................................ 7.750% to 13.900%
Current Loan Rate (adjustable-rate loans)
Weighted Average................................. 9.944%
Range............................................ 7.250% to 14.000%
Gross Margin (adjustable-rate loans)
Weighted Average................................. 6.233%
Range............................................ 3.750% to 10.000%
Lifetime Caps (adjustable-rate loans)
Weighted Average................................. 16.838%
Range............................................ 13.500% to 21.000%
Lifetime Floors (adjustable-rate loans)
Weighted Average................................. 9.929%
Range............................................ 7.250% to 14.000%
Months to Next Change Date (adjustable-rate loans)
Weighted Average................................. 29 months
Range............................................ 2 months to 60 months
Remaining Term to Maturity (months)
Weighted Average................................. 356 months
Range............................................ 119 months to 360 months
Seasoning (months)
Weighted Average................................. 2 months
Range............................................ 0 months to 18 months
Loan-to-Value Ratio
Weighted Average................................. 78.500%
Range............................................ 14.370% to 90.000 %
S-30
<PAGE>
As of the Statistical Calculation Date, all of the Initial Pool 1 Loans
had original stated maturities of not more than 30 years, and no Initial Pool 1
Loan was scheduled to mature later than September 1, 2029.
As of the Statistical Calculation Date, all of the Initial Pool 1 Loans
were secured by mortgaged properties located in 46 states and the District of
Columbia.
S-31
<PAGE>
The following tables are based on statistical characteristics as of the
Statistical Calculation Date, with respect to the portion of the Initial Pool 1
Loans that have been identified. The sum of the dollar amounts and percentages
in the following tables may not equal the totals due to rounding.
<TABLE>
POOL 1 - GEOGRAPHIC DISTRIBUTION
<CAPTION>
AGGREGATE % OF STATISTICAL POOL
JURISDICTION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------- ----------------- -----------------
<S> <C> <C> <C>
California......................... 576 $ 76,332,459 30.48%
Illinois........................... 195 17,894,756 7.15
Florida............................ 203 17,212,726 6.87
Washington......................... 142 16,651,218 6.65
New York........................... 112 11,417,820 4.56
New Jersey......................... 103 10,764,441 4.30
Utah............................... 93 9,561,841 3.82
Michigan........................... 135 9,212,219 3.68
Ohio............................... 102 7,178,782 2.87
Arizona............................ 80 7,061,485 2.82
Massachusetts...................... 54 6,865,154 2.74
Oregon............................. 62 6,739,093 2.69
Colorado........................... 60 6,209,288 2.48
Nevada............................. 40 4,551,684 1.82
Missouri........................... 63 4,305,274 1.72
Indiana............................ 58 3,965,013 1.58
Pennsylvania....................... 57 3,428,446 1.37
Georgia............................ 34 3,207,038 1.28
North Carolina..................... 31 2,835,912 1.13
Idaho.............................. 34 2,737,884 1.09
Wisconsin.......................... 37 2,688,091 1.07
Connecticut........................ 21 1,979,647 0.79
New Hampshire...................... 17 1,682,406 0.67
Minnesota.......................... 21 1,644,873 0.66
Kansas............................. 19 1,606,778 0.64
South Carolina..................... 15 1,407,608 0.56
Texas.............................. 16 1,399,712 0.56
Maryland........................... 13 1,363,902 0.54
Oklahoma........................... 17 1,309,058 0.52
New Mexico......................... 12 1,087,299 0.43
Alaska............................. 9 1,073,715 0.43
Tennessee.......................... 11 790,296 0.32
Montana............................ 8 674,580 0.27
Rhode Island....................... 7 658,552 0.26
Maine.............................. 5 457,169 0.18
Virginia........................... 4 415,691 0.17
Delaware........................... 3 357,374 0.14
Kentucky........................... 5 352,378 0.14
Hawaii............................. 2 257,500 0.10
Mississippi........................ 2 186,963 0.07
Vermont............................ 2 177,816 0.07
West Virginia...................... 3 164,960 0.07
Arkansas........................... 2 150,940 0.06
Nebraska........................... 2 121,184 0.05
Louisiana.......................... 3 114,799 0.05
District of Columbia............... 1 75,824 0.03
Iowa............................... 1 62,428 0.02
----- ------------ ------
Total........................ 2,492 $250,394,077 100.00%
===== ============ ======
</TABLE>
S-32
<PAGE>
<TABLE>
POOL 1 - PRINCIPAL BALANCES
<CAPTION>
NUMBER AGGREGATE % OF STATISTICAL POOL
RANGE OF PRINCIPAL BALANCES OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
$ 10,000.01-$ 15,000.00............... 2 $ 26,939 0.01%
$ 15,000.01-$ 20,000.00............... 5 99,946 0.04
$ 20,000.01-$ 30,000.00............... 56 1,519,129 0.61
$ 30,000.01-$ 40,000.00............... 150 5,328,826 2.13
$ 40,000.01-$ 50,000.00............... 183 8,372,555 3.34
$ 50,000.01-$100,000.00............... 1,020 75,671,096 30.22
$100,000.01-$250,000.00............... 1,073 158,556,078 63.32
$250,000.01-$500,000.00............... 3 819,508 0.33
----- ------------ ------
Total............................ 2,492 $250,394,077 100.00%
===== ============ ======
As of the Statistical Calculation Date, the average principal balance of
the Initial Pool 1 Loans was approximately $100,479.
POOL 1 - CURRENT LOAN RATES
NUMBER AGGREGATE % OF STATISTICAL POOL
RANGE OF LOAN RATES OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
7.001% - 8.000%............... 49 $ 6,710,843 2.68%
8.001% - 9.000%............... 438 53,135,852 21.22
9.001% - 10.000%............... 855 90,674,410 36.21
10.001% - 11.000%............... 699 63,888,360 25.52
11.001% - 12.000%............... 323 27,396,221 10.94
12.001% - 13.000%............... 102 7,099,822 2.84
13.001% - 14.000%............... 26 1,488,569 0.59
----- ------------ ------
Total....................... 2,492 $250,394,077 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the Initial Pool 1 Loans was approximately 9.952% per annum.
POOL 1 - CURRENT LOAN RATES - FIXED-RATE LOANS
NUMBER AGGREGATE % OF STATISTICAL POOL PRINCIPAL
RANGE OF LOAN RATES OF LOANS PRINCIPAL BALANCE BALANCE OF FIXED-RATE LOANS
- ------------------- -------- ----------------- ---------------------------
<S> <C> <C> <C>
7.001% - 8.000%..................... 2 $ 354,120 1.72%
8.001% - 9.000%..................... 43 4,591,621 22.31
9.001% - 10.000%..................... 78 7,432,445 36.12
10.001% - 11.000%..................... 66 4,892,269 23.77
11.001% - 12.000%..................... 30 1,954,116 9.50
12.001% - 13.000%..................... 20 877,837 4.27
13.001% - 14.000%..................... 11 475,179 2.31
--- ----------- ------
Total............................. 250 $20,577,587 100.00%
=== =========== ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the fixed-rate Initial Pool 1 Loans was approximately 10.042% per annum.
</TABLE>
S-33
<PAGE>
<TABLE>
POOL 1 - CURRENT LOAN RATES - ADJUSTABLE-RATE LOANS
<CAPTION>
AGGREGATE % OF STATISTICAL POOL PRINCIPAL
RANGE OF LOAN RATES NUMBER OF LOANS PRINCIPAL BALANCE BALANCE OF ADJUSTABLE-RATE LOANS
- ------------------- --------------- ----------------- --------------------------------
<S> <C> <C> <C>
7.001% - 8.000%................ 47 $ 6,356,723 2.77%
8.001% - 9.000%................ 395 48,544,231 21.12
9.001% - 10.000%................ 777 83,241,965 36.22
10.001% - 11.000%................ 633 58,996,091 25.67
11.001% - 12.000%................ 293 25,442,105 11.07
12.001% - 13.000%................ 82 6,221,984 2.71
13.001% - 14.000%................ 15 1,013,390 0.44
----- ------------ ------
Total.......................... 2,242 $229,816,489 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the adjustable-rate Initial Pool 1 Loans was approximately 9.944% per
annum.
</TABLE>
<TABLE>
POOL 1 - DISTRIBUTION OF GROSS MARGINS - ADJUSTABLE RATE LOANS
<CAPTION>
RANGE OF AGGREGATE % OF STATISTICAL POOL PRINCIPAL
GROSS MARGINS NUMBER OF LOANS PRINCIPAL BALANCE BALANCE OF ADJUSTABLE-RATE LOANS
------------- --------------- ----------------- --------------------------------
<S> <C> <C> <C>
3.501% - 3.750%............... 1 $ 48,490 0.02%
3.751% - 4.000%............... 1 55,584 0.02
4.251% - 4.500%............... 3 337,708 0.15
4.501% - 4.750%............... 7 719,183 0.31
4.751% - 5.000%............... 17 1,928,620 0.84
5.001% - 5.250%............... 31 3,046,037 1.33
5.251% - 5.500%............... 170 19,976,674 8.69
5.501% - 5.750%............... 119 12,970,027 5.64
5.751% - 6.000%............... 543 58,223,275 25.33
6.001% - 6.250%............... 552 56,856,677 24.74
6.251% - 6.500%............... 197 20,726,639 9.02
6.501% - 6.750%............... 264 26,750,620 11.64
6.751% - 7.000%............... 77 7,202,043 3.13
7.001% - 7.250%............... 119 9,714,161 4.23
7.251% - 7.500%............... 49 3,915,448 1.70
7.501% - 7.750%............... 38 2,945,775 1.28
7.751% - 8.000%............... 23 1,980,354 0.86
8.001% - 8.250%............... 9 892,413 0.39
8.251% - 8.500%............... 11 703,076 0.31
8.501% - 8.750%............... 5 409,351 0.18
8.751% - 9.000%............... 3 246,975 0.11
9.001% - 9.250%............... 1 88,971 0.04
9.251% - 9.500%............... 1 42,575 0.02
9.751% - 10.000%............... 1 35,816 0.02
----- ------------ ------
Total.................... 2,242 $229,816,489 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average Gross Margin
of the adjustable-rate Initial Pool 1 Loans was approximately 6.233% per annum.
</TABLE>
S-34
<PAGE>
<TABLE>
POOL 1 - DISTRIBUTION OF LIFETIME CAPS - ADJUSTABLE RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
PRINCIPAL BALANCE
RANGE OF AGGREGATE OF ADJUSTABLE-RATE
LIFETIME CAPS NUMBER OF LOANS PRINCIPAL BALANCE LOANS
------------- --------------- ----------------- -----
<S> <C> <C> <C>
13.001%-14.000%............... 8 $ 958,786 0.42%
14.001%-15.000%............... 75 10,198,373 4.44
15.001%-16.000%............... 429 51,464,286 22.39
16.001%-17.000%............... 778 82,145,076 35.74
17.001%-18.000%............... 585 54,336,695 23.64
18.001%-19.000%............... 277 23,985,156 10.44
19.001%-20.000%............... 78 5,887,116 2.56
20.001%-21.000%............... 12 841,001 0.37
----- ------------ -----
Total .................. 2,242 $229,816,489 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average Lifetime Cap
on the adjustable-rate Initial Pool 1 Loans was approximately 16.838% per annum.
</TABLE>
<TABLE>
POOL 1 - DISTRIBUTION OF LIFETIME FLOORS - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
PRINCIPAL BALANCE
RANGE OF AGGREGATE OF ADJUSTABLE-RATE
LIFETIME FLOORS NUMBER OF LOANS PRINCIPAL BALANCE LOANS
- --------------- --------------- ----------------- -----
<S> <C> <C> <C>
7.001%- 8.000%............... 49 $ 6,530,634 2.84%
8.001%- 9.000%............... 404 49,990,345 21.75
9.001%-10.000%............... 777 82,863,145 36.06
10.001%-11.000%............... 626 58,182,492 25.32
11.001%-12.000%............... 290 25,079,869 10.91
12.001%-13.000%............... 81 6,156,614 2.68
13.001%-14.000%............... 15 1,013,390 0.44
----- ------------ ------
Total...................... 2,242 $229,816,489 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average Lifetime
Floor of the adjustable-rate Initial Pool 1 Loans was approximately 9.929% per
annum.
</TABLE>
S-35
<PAGE>
<TABLE>
POOL 1 - MONTH OF NEXT CHANGE DATE - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
PRINCIPAL BALANCE
NUMBER OF AGGREGATE OF ADJUSTABLE RATE
MONTH OF NEXT CHANGE DATE LOANS PRINCIPAL BALANCE LOANS
- ------------------------- ----- ----------------- -----
<S> <C> <C> <C>
October, 1999................. 6 $ 865,549 0.38%
November, 1999................ 9 940,063 0.41
December, 1999................ 10 884,068 0.38
January, 2000................. 18 1,607,013 0.70
February, 2000................ 8 857,196 0.37
March, 2000................... 3 648,707 0.28
April, 2000................... 5 414,231 0.18
June, 2000.................... 3 279,857 0.12
July, 2000.................... 9 462,670 0.20
August, 2000.................. 11 867,894 0.38
September, 2000............... 17 1,868,826 0.81
October, 2000................. 73 7,478,369 3.25
November, 2000................ 126 12,726,897 5.54
December, 2000................ 51 5,153,257 2.24
January, 2001................. 22 2,321,364 1.01
February, 2001................ 52 5,347,973 2.33
March, 2001................... 48 4,840,351 2.11
April, 2001................... 28 2,633,269 1.15
May, 2001..................... 25 2,453,512 1.07
June, 2001.................... 65 7,054,366 3.07
July, 2001.................... 345 37,672,743 16.39
August, 2001.................. 303 30,773,142 13.39
September, 2001............... 65 6,293,733 2.74
October, 2001................. 11 948,216 0.41
November, 2001................ 17 1,560,726 0.68
December, 2001................ 8 605,477 0.26
January, 2002................. 4 463,975 0.20
February, 2002................ 5 331,084 0.14
March, 2002................... 16 1,577,043 0.69
April, 2002................... 22 2,729,483 1.19
May, 2002..................... 83 8,598,066 3.74
June, 2002.................... 27 2,745,456 1.19
July, 2002.................... 231 23,432,438 10.20
August, 2002.................. 201 19,899,589 8.66
September, 2002............... 52 5,273,040 2.29
June, 2003.................... 1 63,489 0.03
December, 2003................ 1 139,031 0.06
May, 2004..................... 1 179,772 0.08
June, 2004.................... 13 1,307,217 0.57
July, 2004.................... 128 13,274,584 5.78
August, 2004.................. 93 10,040,223 4.37
September, 2004............... 26 2,202,530 0.96
----- ------------ ------
Total ................... 2,242 $229,816,489 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average month of next
interest rate change date of the adjustable-rate Initial Pool 1 Loans was
approximately January 1, 2002.
</TABLE>
S-36
<PAGE>
<TABLE>
POOL 1 - LOAN-TO-VALUE RATIOS
<CAPTION>
AGGREGATE % OF STATISTICAL POOL
RANGE OF LOAN-TO-VALUE RATIO NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- --------------- ----------------- ---------------------
<S> <C> <C> <C>
10.001%-15.000%............... 1 $ 25,000 0.01%
15.001%-20.000%............... 2 59,900 0.02
20.001%-25.000%............... 5 232,470 0.09
25.001%-30.000%............... 7 523,188 0.21
30.001%-35.000%............... 10 573,658 0.23
35.001%-40.000%............... 11 486,403 0.19
40.001%-45.000%............... 16 948,526 0.38
45.001%-50.000%............... 35 2,464,039 0.98
50.001%-55.000%............... 26 1,924,702 0.77
55.001%-60.000%............... 74 5,349,278 2.14
60.001%-65.000%............... 130 10,622,053 4.24
65.001%-70.000%............... 241 21,088,817 8.42
70.001%-75.000%............... 374 38,585,940 15.41
75.001%-80.000%............... 827 82,539,421 32.96
80.001%-85.000%............... 361 40,422,345 16.14
85.001%-90.000%............... 372 44,548,338 17.79
----- ------------ ------
Total.................... 2,492 $250,394,077 100.00%
===== ============ ======
</TABLE>
As of the Statistical Calculation Date, the weighted average Loan-to-Value
Ratio of the Initial Pool 1 Loans was approximately 78.50%.
<TABLE>
POOL 1 - OCCUPANCY STATUS
<CAPTION>
AGGREGATE % OF STATISTICAL
OCCUPANCY NUMBER OF LOANS PRINCIPAL BALANCE POOL PRINCIPAL BALANCE
--------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
Owner Occupied................... 2,244 $232,362,796 92.80%
Non-Owner Occupied............... 248 18,031,281 7.20
----- ------------ ------
Total....................... 2,492 $250,394,077 100.00%
===== ============ ======
POOL 1 - MORTGAGED PROPERTY TYPES
AGGREGATE % OF STATISTICAL
PROPERTY TYPE NUMBER OF LOANS PRINCIPAL BALANCE POOL PRINCIPAL BALANCE
------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
Single Family...................... 2,176 $220,670,482 88.13%
2-4 Family......................... 184 18,733,684 7.48
Condominium........................ 100 8,588,697 3.43
Manufactured Housing............... 32 2,401,214 0.96
----- ------------ ------
Total......................... 2,492 $250,394,077 100.00%
===== ============ ======
</TABLE>
S-37
<PAGE>
<TABLE>
POOL 1 - MONTHS SINCE ORIGINATION
<CAPTION>
AGGREGATE % OF STATISTICAL
RANGE OF LOAN AGE (IN MONTHS) NUMBER OF LOANS PRINCIPAL BALANCE POOL PRINCIPAL BALANCE
- ----------------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
0....................... 909 $ 88,119,593 35.19%
1....................... 770 79,636,119 31.80
2....................... 147 15,403,675 6.15
3....................... 102 10,838,089 4.33
4....................... 56 5,806,591 2.32
5....................... 65 6,355,670 2.54
6....................... 60 5,918,785 2.36
7....................... 51 5,193,120 2.07
8 or more............... 332 33,122,433 13.23
----- ------------ ------
Total.............. 2,492 $250,394,077 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average number of
months since origination of the Initial Pool 1 Loans was approximately 2 months.
POOL 1 - REMAINING TERMS TO MATURITY
RANGE OF REMAINING TERMS AGGREGATE % OF STATISTICAL
TO MATURITY (IN MONTHS) NUMBER OF LOANS PRINCIPAL BALANCE POOL PRINCIPAL BALANCE
----------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
Up to 352............... 372 $ 35,983,008 14.37%
353..................... 50 5,144,826 2.05
354..................... 57 5,634,656 2.25
355..................... 64 6,303,233 2.52
356..................... 55 5,774,904 2.31
357..................... 98 10,438,938 4.17
358..................... 147 15,403,675 6.15
359..................... 756 78,698,393 31.43
360..................... 893 87,012,443 34.75
----- ------------ ------
Total.............. 2,492 $250,394,077 100.00%
===== ============ ======
As of the Statistical Calculation Date, the weighted average remaining
term to maturity of the Initial Pool 1 Loans was approximately 356 months.
POOL 1 - TRANSFEROR ASSIGNED RISK CATEGORIES
AGGREGATE % OF STATISTICAL
TRANSFEROR ASSIGNED RISK CATEGORIES NUMBER OF LOANS PRINCIPAL BALANCE POOL PRINCIPAL BALANCE
- ----------------------------------- --------------- ----------------- ----------------------
<S> <C> <C> <C>
Loan Class A................ 369 $ 38,090,914 15.21%
Loan Class A-............... 801 92,684,755 37.02
Loan Class B................ 693 67,813,059 27.08
Loan Class C................ 483 40,744,355 16.27
Loan Class C-............... 97 7,390,150 2.95
Loan Class D................ 49 3,670,844 1.47
----- ------------- ------
Total.................. 2,492 $250,394,077 100.00%
===== ============= ======
</TABLE>
S-38
<PAGE>
INITIAL POOL 2 LOAN STATISTICS
As of the Statistical Calculation Date, the portion of the Initial Pool 2
Loans that have been identified as of the date of this prospectus supplement had
the following approximate characteristics:
INITIAL POOL 2 LOANS
Number of Initial Pool 2 Loans......................... 789
Principal Balance
Aggregate........................................... $115,584,286
Average............................................. $146,495
Range............................................... $19,268 to $500,000
Current Loan Rate
Weighted Average.................................... 9.784%
Range............................................... 7.500% to 14.000%
Current Loan Rate (fixed-rate loans)
Weighted Average.................................... 10.069%
Range............................................... 7.990% to 14.000%
Current Loan Rate (adjustable-rate loans)
Weighted Average.................................... 9.765%
Range............................................... 7.5000% to 13.240%
Gross Margin (adjustable-rate loans)
Weighted Average.................................... 6.217%
Range............................................... 4.250% to 8.750%
Lifetime Caps (adjustable-rate loans)
Weighted Average.................................... 16.658%
Range............................................... 12.990% to 20.240%
Lifetime Floors (adjustable-rate loans)
Weighted Average.................................... 9.740%
Range............................................... 6.990% to 13.240%
Months to Next Change Date (adjustable-rate loans)
Weighted Average.................................... 27 months
Range............................................... 2 months to 60 months
Remaining Term to Maturity (months)
Weighted Average.................................... 357 months
Range............................................... 174 months to 360 months
Seasoning (months)
Weighted Average.................................... 2 months
Range............................................... 0 months to 15 months
Loan-to-Value Ratio
Weighted Average.................................... 78.62%
Range............................................... 23.130% to 90.000 %
S-39
<PAGE>
As of the Statistical Calculation Date, all of the Initial Pool 2 Loans
had original stated maturities of not more than 30 years, and no Initial Pool 2
Loan was scheduled to mature later than September 1, 2029.
As of the Statistical Calculation Date, all of the Initial Pool 2 Loans
were secured by mortgaged properties located in 42 states.
The following tables are based on statistical characteristics, as of the
Statistical Calculation Date, with respect to the portion of the Initial Pool 2
Loans that have been identified. The sum of the dollar amounts and percentages
in the following tables may not equal the totals due to rounding.
<TABLE>
POOL 2 - GEOGRAPHIC DISTRIBUTION
<CAPTION>
AGGREGATE % OF STATISTICAL POOL
JURISDICTION NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ --------------- ----------------- -----------------
<S> <C> <C>
California................... 239 $ 50,129,942 43.37%
Illinois..................... 78 9,170,093 7.93
Washington................... 51 7,130,382 6.17
New Jersey................... 43 6,976,709 6.04
Florida...................... 58 6,020,586 5.21
Michigan..................... 32 3,770,524 3.26
New York..................... 32 3,728,605 3.23
Utah......................... 19 2,965,306 2.57
Arizona...................... 22 2,828,061 2.45
Massachusetts................ 18 2,122,180 1.84
Nevada....................... 14 1,985,591 1.72
Georgia...................... 9 1,869,356 1.62
Oregon....................... 14 1,816,254 1.57
Ohio......................... 25 1,674,634 1.45
Connecticut.................. 10 1,394,827 1.21
Colorado..................... 16 1,325,637 1.15
Pennsylvania................. 16 1,131,463 0.98
Maryland..................... 4 757,042 0.65
Wisconsin.................... 6 745,684 0.65
Minnesota.................... 5 743,399 0.64
Missouri..................... 12 732,634 0.63
Kansas....................... 6 726,974 0.63
Hawaii....................... 3 644,840 0.56
North Carolina............... 4 642,747 0.56
Montana...................... 4 559,471 0.48
New Mexico................... 5 558,414 0.48
Idaho........................ 6 477,154 0.41
Virginia..................... 2 434,164 0.38
Indiana...................... 8 402,145 0.35
Oklahoma..................... 3 345,430 0.30
South Carolina............... 4 328,646 0.28
New Hampshire................ 4 282,556 0.24
Alaska....................... 2 216,088 0.19
Vermont...................... 2 171,108 0.15
Kentucky..................... 3 154,755 0.13
Texas........................ 3 139,074 0.12
Arkansas..................... 2 128,687 0.11
Louisiana.................... 1 113,955 0.10
Delaware..................... 1 93,934 0.08
Tennessee.................... 1 69,700 0.06
Maine........................ 1 39,920 0.03
Iowa......................... 1 35,613 0.03
--- ------------ ------
Total................... 789 $115,584,286 100.00%
=== ============ ======
</TABLE>
S-40
<PAGE>
<TABLE>
POOL 2 - PRINCIPAL BALANCES
<CAPTION>
AGGREGATE % OF STATISTICAL POOL
RANGE OF PRINCIPAL BALANCES NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
$ 15,000.01 - $ 20,000.00............... 3 $ 59,260 0.05%
$ 20,000.01 - $ 30,000.00............... 12 334,114 0.29
$ 30,000.01 - $ 40,000.00............... 38 1,346,418 1.16
$ 40,000.01 - $ 50,000.00............... 42 1,907,088 1.65
$ 50,000.01 - $100,000.00............... 253 18,708,028 16.19
$100,000.01 - $250,000.00............... 293 46,875,749 40.56
$250,000.01 - $500,000.00............... 148 46,353,630 40.10
--- ------------ ------
Total.............................. 789 $115,584,286 100.00%
=== ============ ======
</TABLE>
As of the Statistical Calculation Date, the average principal balance of
the Initial Pool 2 Loans was approximately $146,495.
<TABLE>
POOL 2 - CURRENT LOAN RATES
AGGREGATE % OF STATISTICAL POOL
RANGE OF LOAN RATES NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
7.001% - 8.000%............... 22 $ 3,506,838 3.03%
8.001% - 9.000%............... 135 25,822,201 22.34
9.001% - 10.000%............... 304 47,857,531 41.40
10.001% - 11.000%............... 218 28,235,260 24.43
11.001% - 12.000%............... 86 8,093,574 7.00
12.001% - 13.000%............... 19 1,661,588 1.44
13.001% - 14.000%............... 5 407,293 0.35
--- ------------ ------
Total...................... 789 $115,584,286 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the Initial Pool 2 Loans was approximately 9.784% per annum.
</TABLE>
<TABLE>
POOL 2 - CURRENT LOAN RATES - FIXED-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
AGGREGATE PRINCIPAL BALANCE OF
RANGE OF LOAN RATES NUMBER OF LOANS PRINCIPAL BALANCE FIXED-RATE LOANS
- ------------------- --------------- ----------------- ----------------
<S> <C> <C> <C>
7.001% - 8.000%............... 1 $ 92,675 1.27%
8.001% - 9.000%............... 11 1,457,892 19.99
9.001% - 10.000%............... 22 2,331,154 31.96
10.001% - 11.000%............... 18 2,310,303 31.68
11.001% - 12.000%............... 7 662,780 9.09
12.001% - 13.000%............... 3 184,327 2.53
13.001% - 14.000%............... 4 254,293 3.49%
-- ---------- ------
Total...................... 66 $7,293,424 100.00%
== ========== ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the fixed-rate Initial Pool 2 Loans was approximately 10.069% per annum.
</TABLE>
S-41
<PAGE>
<TABLE>
POOL 2 - CURRENT LOAN RATES - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
AGGREGATE PRINCIPAL BALANCE OF
RANGE OF LOAN RATES NUMBER OF LOANS PRINCIPAL BALANCE ADJUSTABLE-RATE LOANS
- ------------------- --------------- ----------------- ---------------------
<S> <C> <C> <C>
7.001% - 8.000%............... 21 $ 3,414,163 3.15%
8.001% - 9.000%............... 124 24,364,309 22.50
9.001% - 10.000%............... 282 45,526,377 42.04
10.001% - 11.000%............... 200 25,924,957 23.94
11.001% - 12.000%............... 79 7,430,794 6.86
12.001% - 13.000%............... 16 1,477,261 1.36
13.001% - 14.000%............... 1 153,000 0.14
--- ------------ ------
Total...................... 723 $108,290,862 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average loan interest
rate of the adjustable-rate Initial Pool 2 Loans was approximately 9.765% per
annum.
</TABLE>
<TABLE>
POOL 2 - DISTRIBUTION OF GROSS MARGINS - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
RANGE OF AGGREGATE PRINCIPAL BALANCE OF
GROSS MARGINS NUMBER OF LOANS PRINCIPAL BALANCE ADJUSTABLE-RATE LOANS
- ------------- --------------- ----------------- ---------------------
<S> <C> <C> <C>
4.001 - 4.250%............... 2 $ 99,151 0.09%
4.501 - 4.750%............... 3 531,888 0.49
4.751 - 5.000%............... 7 1,252,956 1.16
5.001 - 5.250%............... 9 1,664,469 1.54
5.251 - 5.500%............... 52 7,818,170 7.22
5.501 - 5.750%............... 32 6,639,910 6.13
5.751 - 6.000%............... 182 29,234,532 27.00
6.001 - 6.250%............... 169 23,250,665 21.47
6.251 - 6.500%............... 76 12,149,031 11.22
6.501 - 6.750%............... 94 13,243,317 12.23
6.751 - 7.000%............... 22 4,305,533 3.98
7.001 - 7.250%............... 41 4,239,070 3.91
7.251 - 7.500%............... 13 1,557,162 1.44
7.501 - 7.750%............... 12 1,003,190 0.93
7.751 - 8.000%............... 5 652,092 0.60
8.001 - 8.250%............... 3 451,770 0.42
8.501 - 8.750%............... 1 197,955 0.18
--- ------------ ------
Total................... 723 $108,290,862 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average Gross Margin
of the adjustable-rate Initial Pool 2 Loans was approximately 6.217% per annum.
</TABLE>
S-42
<PAGE>
<TABLE>
POOL 2 - DISTRIBUTION OF LIFETIME CAPS - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
RANGE OF AGGREGATE PRINCIPAL BALANCE OF
LIFETIME CAPS NUMBER LOANS PRINCIPAL BALANCE ADJUSTABLE-RATE LOANS
------------- ------------ ----------------- ---------------------
<S> <C> <C> <C>
12.001% - 13.000%............... 1 $ 303,599 0.28%
13.001% - 14.000%............... 4 752,516 0.69
14.001% - 15.000%............... 30 5,048,329 4.66
15.001% - 16.000%............... 136 25,644,291 23.68
16.001% - 17.000%............... 274 44,392,646 40.99
17.001% - 18.000%............... 186 23,506,751 21.71
18.001% - 19.000%............... 75 7,012,469 6.48
19.001% - 20.000%............... 16 1,477,261 1.36
20.001% - 21.000%............... 1 153,000 0.14
--- ------------ ------
Total..................... 723 $108,290,862 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average Lifetime Cap
on the adjustable-rate Initial Pool 2 Loans was approximately 16.658% per annum.
</TABLE>
<TABLE>
POOL 2 - DISTRIBUTION OF LIFETIME FLOORS - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
RANGE OF AGGREGATE PRINCIPAL BALANCE OF
LIFETIME FLOORS NUMBER LOANS PRINCIPAL BALANCE ADJUSTABLE-RATE LOANS
--------------- ------------ ----------------- ---------------------
<S> <C> <C> <C>
6.001% - 7.000%............... 1 $ 303,599 0.28%
7.001% - 8.000%............... 22 3,762,462 3.47
8.001% - 9.000%............... 125 24,103,085 22.26
9.001% - 10.000%............... 284 46,225,599 42.69
10.001% - 11.000%............... 196 24,941,464 23.03
11.001% - 12.000%............... 78 7,324,392 6.76
12.001% - 13.000%............... 16 1,477,261 1.36
13.001% - 14.000%............... 1 153,000 0.14
--- ------------- ------
Total...................... 723 $ 108,290,862 100.00%
=== ============= ======
As of the Statistical Calculation Date, the weighted average Lifetime
Floor of the adjustable-rate Initial Pool 2 Loans was approximately 9.740% per
annum.
</TABLE>
S-43
<PAGE>
<TABLE>
POOL 2 - MONTH OF NEXT CHANGE DATE - ADJUSTABLE-RATE LOANS
<CAPTION>
% OF STATISTICAL POOL
PRINCIPAL BALANCE OF
MONTH OF NEXT CHANGE DATE NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE ADJUSTABLE-RATE LOANS
- ------------------------- --------------- --------------------------- ---------------------
<S> <C> <C> <C>
October, 1999................. 3 $ 626,840 0.58%
November, 1999................ 5 855,874 0.79
December, 1999................ 2 298,159 0.28
January, 2000................. 8 1,210,577 1.12
February, 2000................ 3 557,701 0.52
April, 2000................... 1 138,519 0.13
June, 2000.................... 3 617,058 0.57
July, 2000.................... 2 418,554 0.39
August, 2000.................. 3 520,061 0.48
September, 2000............... 6 1,490,149 1.38
October, 2000................. 27 3,735,217 3.45
November, 2000................ 33 5,947,880 5.49
December, 2000................ 10 1,224,110 1.13
January, 2001................. 6 814,712 0.75
February, 2001................ 20 2,438,535 2.25
March, 2001................... 18 2,565,306 2.37
April, 2001................... 12 1,587,059 1.47
May, 2001..................... 10 1,501,474 1.39
June, 2001.................... 26 3,961,140 3.66
July, 2001.................... 112 17,773,486 16.41
August, 2001.................. 106 15,831,342 14.62
September, 2001............... 19 2,188,250 2.02
October, 2001................. 4 1,002,540 0.93
November, 2001................ 4 619,094 0.57
December, 2001................ 3 362,586 0.33
January, 2002................. 4 450,241 0.42
February, 2002................ 2 330,016 0.30
March, 2002................... 5 1,329,815 1.23
April, 2002................... 5 747,704 0.69
May, 2002..................... 20 3,258,355 3.01
June, 2002.................... 12 1,412,408 1.30
July, 2002.................... 74 11,463,713 10.59
August, 2002.................. 66 9,553,857 8.82
September, 2002............... 16 3,380,435 3.12
April, 2003................... 1 75,461 0.07
May, 2003..................... 1 80,078 0.07
June, 2004.................... 5 336,640 0.31
July, 2004.................... 27 3,509,568 3.24
August, 2004.................. 33 3,294,300 3.04
September, 2004............... 6 782,050 0.72
--- ------------ ------
Total.................... 723 $108,290,862 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average month of next
interest rate change date of the adjustable-rate Initial Pool 2 Loans was
approximately November 1, 2001.
</TABLE>
S-44
<PAGE>
<TABLE>
POOL 2 - LOAN-TO-VALUE RATIOS
<CAPTION>
% OF STATISTICAL POOL
RANGE OF LOAN-TO-VALUE RATIO NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------------------------- --------------- --------------------------- ---------------------
<S> <C> <C> <C>
20.001%-25.000%............... 2 $ 56,992 0.05%
25.001%-30.000%............... 4 170,408 0.15
30.001%-35.000%............... 4 348,516 0.30
35.001%-40.000%............... 3 144,498 0.13
40.001%-45.000%............... 9 547,012 0.47
45.001%-50.000%............... 6 311,336 0.27
50.001%-55.000%............... 13 2,014,173 1.74
55.001%-60.000%............... 22 3,289,696 2.85
60.001%-65.000%............... 28 3,763,193 3.26
65.001%-70.000%............... 61 7,664,278 6.63
70.001%-75.000%............... 127 18,534,954 16.04
75.001%-80.000%............... 264 39,132,837 33.86
80.001%-85.000%............... 126 19,337,633 16.73
85.001%-90.000%............... 120 20,268,761 17.54
--- ------------ ------
Total.................... 789 $115,584,286 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average Loan-to-Value
Ratio of the Initial Pool 2 Loans was approximately 78.62%.
</TABLE>
<TABLE>
POOL 2 - OCCUPANCY STATUS
<CAPTION>
% OF STATISTICAL POOL
OCCUPANCY NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE
--------- --------------- --------------------------- -----------------
<S> <C> <C> <C>
Owner Occupied................... 722 $107,823,501 93.29%
Non-Owner Occupied............... 67 7,760,785 6.71
--- ------------ ------
Total....................... 789 $115,584,286 100.00%
=== ============ ======
POOL 2 - MORTGAGED PROPERTY TYPES
% OF STATISTICAL POOL
PROPERTY TYPE NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- --------------- --------------------------- -----------------
<S> <C> <C> <C>
Single Family...................... 689 $103,136,068 89.23%
2-4 Family......................... 61 7,568,291 6.55
Condominium........................ 31 4,112,055 3.56
Manufactured Housing............... 8 767,873 0.66
--- ------------ ------
Total......................... 789 $115,584,286 100.00%
=== ============= ======
</TABLE>
S-45
<PAGE>
<TABLE>
POOL 2 - MONTHS SINCE ORIGINATION
<CAPTION>
% OF STATISTICAL POOL
RANGE OF LOAN AGE (IN MONTHS) NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- --------------- --------------------------- -----------------
<S> <C> <C> <C>
0................... 302 $ 41,260,730 35.70%
1................... 215 33,352,893 28.86
2................... 64 8,280,822 7.16
3................... 26 4,331,139 3.75
4................... 23 3,685,435 3.19
5................... 23 3,176,284 2.75
6................... 18 2,465,110 2.13
7................... 17 1,546,079 1.34
8 or more........... 101 17,485,794 15.13
--- ------------ ------
Total.......... 789 $115,584,286 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average number of
months since origination of the Initial Pool 2 Loans was approximately 2 months.
</TABLE>
<TABLE>
POOL 2 - REMAINING TERMS TO MATURITY
<CAPTION>
RANGE OF REMAINING TERMS % OF STATISTICAL POOL
TO MATURITY (IN MONTHS) NUMBER OF LOANS AGGREGATE PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------- --------------- --------------------------- -----------------
<S> <C> <C> <C>
Up to 352........ 105 $ 18,017,223 15.59%
353.............. 17 1,546,079 1.34
354.............. 17 2,371,381 2.05
355.............. 23 3,176,284 2.75
356.............. 23 3,685,435 3.19
357.............. 26 4,331,139 3.75
358.............. 64 8,280,822 7.16
359.............. 215 33,352,893 28.86
360.............. 299 40,823,030 35.32
--- ------------ ------
Total....... 789 $115,584,286 100.00%
=== ============ ======
As of the Statistical Calculation Date, the weighted average remaining
term to maturity of the Initial Pool 2 Loans was approximately 357 months.
</TABLE>
<TABLE>
POOL 2 - TRANSFEROR ASSIGNED RISK CATEGORIES
<CAPTION>
AGGREGATE % OF STATISTICAL POOL
TRANSFEROR ASSIGNED RISK CATEGORIES NUMBER OF LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------------- --------------- ----------------- -----------------
<S> <C> <C> <C>
Loan Class A............. 130 $ 21,831,492 18.89%
Loan Class A-............ 277 44,519,927 38.52
Loan Class B............. 212 29,524,169 25.54
Loan Class C............. 132 15,875,200 13.73
Loan Class C-............ 26 2,900,401 2.51
Loan Class D............. 12 933,097 0.81
--- ------------ -----
Total............... 789 $115,584,286 100.00%
=== ============ ======
</TABLE>
S-46
<PAGE>
CONVEYANCE OF SUBSEQUENT LOANS
The trust may acquire Subsequent Pool 1 Loans and Subsequent Pool 2 Loans
from the depositor after the closing date and prior to December 23, 1999, having
an unpaid principal balance of up to $81,033,795 and $40,074,193, respectively,
in each case, plus or minus a 5% variance. The depositor will purchase these
Subsequent Loans from the transferor. Accordingly, the statistical
characteristics of all the loans after giving effect to the acquisition of any
Subsequent Loans will likely differ from the information regarding the Initial
Loans in this prospectus supplement, because this information is based
exclusively on the Initial Loans. The acquisition of Subsequent Loans by the
trust during the Pre-Funding Period is subject to the following requirements:
(1) no Subsequent Loans may be 30 or more days delinquent as of the
applicable Cut-Off Date;
(2) the Subsequent Loan must be secured by a first priority lien;
(3) the Subsequent Loan must have an outstanding principal balance of at
least $2,500 as of the applicable Cut-Off Date;
(4) the first payment on the 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. However, if the transferor deposits into
the Collection Account 30 days' interest on the Subsequent Loan at
the applicable loan interest rate less the applicable servicing fee
rate, the first payment on the 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;
(5) the Subsequent Loan is a fully amortizing loan with level payments
over the remaining term of no fewer than 10 years and no more than
30 years and the scheduled maturity will be no later than January 1,
2030;
(6) the Subsequent Loan must have a fixed interest rate equal to at
least 7.750% per annum or an adjustable loan interest rate equal to
Six-Month LIBOR plus a Gross Margin equal to at least 3.750%;
(7) any Subsequent Loan must have an original Loan-to-Value Ratio of no
more than 90.00%;
(8) the Subsequent Loan must be underwritten, re-underwritten or
reviewed, as applicable, in accordance with the underwriting
guidelines similar to those of the Initial Loans;
(9) following the acquisition of the Subsequent Loans by the trust, all
the Pool 1 Loans and the Pool 2 Loans must have a weighted average
remaining term to maturity, weighted average loan interest rate,
weighted average Gross Margin and weighted average Loan-to-Value
Ratio as of each respective Cut-Off Date comparable to those of the
Initial Loans transferred to the trust on the closing date;
(10) following the acquisition of the Subsequent Loans by the trust, the
percentage of the Pool 1 Loans and Pool 2 Loans that are fixed-rate
loans must be comparable to the respective percentages based on the
Initial Loans transferred to the trust on the closing date; and
(11) no Subsequent Loan may be acquired by the trust unless the
securities insurer and the rating agencies shall consent.
S-47
<PAGE>
FREMONT INVESTMENT & LOAN
GENERAL
Fremont Investment & Loan, a thrift and loan organized as a California
industrial loan company will sell the loans to the depositor. Fremont will be
the master servicer of the loans under the Pooling and Master Servicing
Agreement.
Fremont was established in 1937 as a state chartered industrial loan
company and is currently engaged in the businesses of residential sub-prime real
estate lending, commercial real estate lending, insurance premium finance and
syndicated loan purchases. Fremont had total assets of approximately $3.3
billion as of June 30, 1999 and is regulated by both the FDIC and the California
Department of Financial Institutions. Fremont funds its loans primarily through
its 18 depository branches and, prior to 1999, has held its residential loans in
portfolio or participated in whole loan sale transactions. As of year end 1998,
Fremont had 804 employees.
Fremont began originating sub-prime residential mortgage loans in
California in 1994 and currently originates loans through a national network of
mortgage brokers in approximately 30 states through five regional business
centers located in southern California, northern California, Illinois and
Florida. Two of the regional business centers are located in southern
California. Fremont also acquires loans from licensed mortgage originators in
approximately 40 states. Fremont's residential loan originations are secured by
one to four family residential properties, planned unit developments,
condominiums, manufactured housing and townhomes. Fremont originates first
mortgages to borrowers with impaired or limited credit profiles. Fremont
reunderwrites every loan prior to funding and maintains strict quality control
procedures to maintain the quality of its originations at all locations.
Fremont originated approximately $1.0 billion in sub-prime residential mortgage
loans in 1998.
Fremont has its principal offices at 175 North Riverview Drive, Anaheim,
California 92808, and its telephone number is (714) 283-6500.
Fremont is a wholly owned subsidiary of Fremont General Corporation.
Fremont General Corporation, a Nevada corporation, is an insurance and financial
services holding company operating select businesses nationally in niche
markets. Fremont General's business strategy includes achieving income balance
and geographic diversity among its business units in order to limit its exposure
to industry, market and regional concentrations. Fremont General's common stock
is traded on the New York Stock Exchange under the symbol "FMT."
Fremont General's principal executive offices are located at 2020 Santa
Monica Boulevard, Santa Monica, California, 90404, and its telephone number is
(310) 315-5500.
MASTER SERVICER
MASTER SERVICER DUTIES
Fremont, as master servicer, will be responsible for performing the loan
master servicing functions for the loans under the Pooling and Master Servicing
Agreement. In consideration for the performance of the master servicing
functions for the loans, the master servicer is entitled to receive a monthly
servicing fee as to each loan in an amount equal to the Master Servicer Fee. The
Servicing Fee payable to the servicer with respect to each loan will be paid
from the Master Servicer Fee. In
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<PAGE>
addition, the master servicer is entitled to receive on a monthly basis
additional compensation attributable to:
o investment earnings from amounts on deposit in the Collection
Account and the Distribution Account;
o prepayment penalties; and
o late payment charges.
The master servicer will service the loans for an interim period beginning
on the closing date and ending on or before November 30, 1999. However, this
interim period may be extended to January 31, 2000 if the rating agencies
deliver written confirmation that this extension would not result in a
downgrade, withdrawal or qualification of the then current ratings of the
offered certificates. During this time the master servicer will be entitled to
all Servicing Compensation, and shall be vested with all of the rights and
obligations of the servicer. The master servicer will transfer the servicing of
the loans to the servicer on or before the interim period. After this date, the
servicer will perform the servicing functions with respect to the loans.
Under the Pooling and Master Servicing Agreement, the master servicer will
perform the following master servicing functions:
o The master servicer will advance delinquent payments of interest and
principal on the loans in order to maintain a regular flow of
scheduled distributions to holders of the certificates. Prior to
each distribution date, the master servicer will remit a Monthly
Advance, if necessary, to the trustee for deposit into the
Distribution Account to be distributed on the related distribution
date. The Monthly Advance will equal delinquent interest and
principal due on the loans, net of the Master Servicer Fee, without
reduction for the Servicing Fee payable to the servicer, during the
related Due Period. The master servicer may recover Monthly
Advances, first from the borrower on whose behalf the related
Monthly Advance was made, then from subsequent collections on the
related loan. The master servicer is not required to make any
Monthly Advance it deems not recoverable from subsequent collections
on the related loan;
o If a loan prepays in full or in part in any month other than on the
date the related monthly payment was due, the borrower is only
required to pay interest to the date of prepayment. In this event,
the master servicer is obligated to pay any shortfall in interest
due on each loan up to an amount equal to the Master Servicer
Compensation for the related distribution date. The master servicer
will be reimbursed for all amounts paid by it in respect of these
shortfall payments from amounts that would otherwise be distributed
to the holders of the Class X and Class R certificates;
o The master servicer will periodically review the servicing reports,
loan level information and other relevant information as may be
reasonably required by the master servicer to ascertain whether the
servicer is in compliance with the Servicing Agreement;
o If the reports submitted by the servicer are inaccurate or
incomplete, then the master servicer will prepare and submit
exception reports to the trustee, the securities insurer and the
rating agencies and notify the trustee, the securities insurer and
the rating agencies of any event of default with respect to the
servicer under the Servicing Agreement;
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<PAGE>
o If the servicer is terminated as servicer under the Servicing
Agreement, then the master servicer will accept appointment as, or
cause another entity as directed by the securities insurer to act
as, the successor servicer under the Servicing Agreement; and
o The master servicer will either maintain computer systems and
software compatible with the computer systems of the servicer or
will obtain computer systems allowing it to assume the servicing of
the loans, if necessary.
Under the Servicing Agreement, the servicer will facilitate the master
servicing functions of the master servicer as follows:
o the servicer will comply with the terms of the various agreements it
is entering into in connection with the loans, including but not
limited to, the Servicing Agreement;
o the servicer will provide to the master servicer information
regarding the loans and its servicing activities of those loans; and
o the servicer will permit the master servicer to inspect the
servicer's books and records.
In limited circumstances and conditions, the master servicer may resign or
be removed by the securities insurer, in which event another third-party master
servicer will be sought to become the successor master servicer. The master
servicer has the right to resign under the Pooling and Master Servicing
Agreement with the consent of the securities insurer and the trustee if it gives
60 days' notice any time on or after one year from the closing date. No removal
or resignation of the master servicer will become effective until the trustee,
or a successor master servicer appointed by the securities insurer, has assumed
the master servicer's responsibilities and obligations under the Pooling and
Master Servicing Agreement.
See "Description of the Transfer and Servicing Agreements" in this
prospectus supplement.
SERVICER
GENERAL
Countrywide Home Loans, Inc. will act as servicer and will service the
loans in accordance with the terms set forth in the Pooling and Master Servicing
Agreement and the terms of the servicing agreement between the servicer and the
master servicer. Notwithstanding the terms of its servicing arrangement with the
servicer, the master servicer will remain liable for its servicing duties and
obligations under the Pooling and Master Servicing Agreement as if the master
servicer alone were servicing the loans.
The servicer is a New York corporation and a subsidiary of Countrywide
Credit Industries, Inc. The servicer is engaged primarily in the mortgage
banking business, and as such, originates, purchases, sells and services
mortgage loans. The servicer originates mortgage loans through a retail branch
system and through mortgage loan brokers and correspondents nationwide. The
servicer's mortgage loans are principally first-lien, fixed or adjustable rate
mortgage loans secured by single-family residences.
As of June 30, 1999, the Servicer provided servicing for mortgage loans
with an aggregate principal balance of approximately $230.1 billion,
substantially all of which are being serviced for unaffiliated persons. As of
June 30, 1999, the servicer provided servicing for approximately $3.3 billion in
B&C quality mortgage loans.
S-50
<PAGE>
The principal executive offices of the servicer are located at 4500 Park
Granada, Calabasas, California 91302. Its telephone number is (818) 225-3000.
The servicer conducts operations from its headquarters in Calabasas and from
offices throughout the nation.
The master servicer will service the loans for an interim period beginning
on the closing date and ending on or before November 30, 1999. However, this
interim period may be extended to January 31, 2000 if the rating agencies
deliver written confirmation that this extension would not result in a
downgrade, withdrawal or qualification of the then current ratings of the
offered certificates. During this time the master servicer will be entitled to
all Servicing Compensation, and will be vested with all of the rights and
obligations of the servicer. The master servicer will transfer the servicing of
the loans to the servicer on or before the end of the interim period. After that
date the servicer will perform the servicing functions with respect to the
loans. The servicer may be replaced by the master servicer in accordance with
the terms of the Pooling and Master Servicing Agreement and with the prior
consent of the securities insurer.
The information contained in this prospectus supplement with regard to the
servicer has been provided to the depositor, or compiled from information
provided to the depositor, by the servicer. None of the depositor, the trustee,
the master servicer, the transferor, the securities insurer or any of their
respective affiliates has made any independent investigation of that information
or has made or will make any representation as to the accuracy or completeness
of that information.
SERVICING PROCEDURES
The following is a general description of the servicer's servicing
policies and procedures currently employed by the servicer with respect to B&C
quality mortgage loans. For a description of other servicing procedures
applicable to the loans, see "Description of the Transfer and Servicing
Agreements" in this prospectus supplement.
The servicer has established standard policies for the servicing and
collection of mortgages. Servicing includes, but is not limited to:
o collecting, aggregating and remitting mortgage loan payments,
o accounting for principal and interest,
o holding escrow (impound) funds for payment of taxes and insurance,
o making inspections as required of the mortgaged properties,
o preparation of tax related information in connection with the
mortgage loans,
o supervision of delinquent mortgage loans,
o loss mitigation efforts,
o foreclosure proceedings and, if applicable, the disposition of
mortgaged properties, and
o generally administering the mortgage loans, for which it receives
servicing fees.
Billing statements with respect to mortgage loans are mailed monthly by
the servicer. The statement details all debits and credits and specifies the
payment due. Notice of changes in the applicable loan rate are provided by the
servicer to the mortgagor with the statements.
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<PAGE>
COLLECTION PROCEDURES
When a mortgagor fails to make a payment on a B&C quality mortgage loan,
the servicer attempts to cause the deficiency to be cured by corresponding with
the mortgagor. In most cases, deficiencies are cured promptly. Pursuant to the
servicer's B&C servicing procedures, the servicer generally mails to the
mortgagor a notice of intent to foreclose after the loan becomes 31 days past
due (two payments due but not received) and, within 30 days thereafter, if the
loan remains delinquent, institutes appropriate legal action to foreclose on the
mortgaged property. Foreclosure proceedings may be terminated if the delinquency
is cured. Mortgage loans to borrowers in bankruptcy proceedings may be
restructured in accordance with law and with a view to maximizing recovery of
the loans, including any deficiencies.
Once foreclosure is initiated by the servicer, a foreclosure tracking
system is used to monitor the progress of the proceedings. The system includes
state specific parameters to monitor whether proceedings are progressing within
the time frame typical for the state in which the mortgaged property is located.
During the foreclosure proceeding, the servicer determines the amount of the
foreclosure bid and whether to liquidate the mortgage loan.
If foreclosed, the mortgaged property is sold at a public or private sale
and may be purchased by the servicer. After foreclosure, the servicer may
liquidate the mortgaged property and charge-off the loan balance which was not
recovered through liquidation proceeds.
Servicing and charge-off policies and collection practices with respect to
B&C quality mortgage loans may change over time in accordance with, among other
things, the servicer's business judgment, changes in the servicing portfolio and
applicable laws and regulations.
FORECLOSURE AND DELINQUENCY EXPERIENCE
The following table summarizes the delinquency and foreclosure experience,
respectively, on the dates indicated, of the servicer's B&C quality mortgage
loans. A B&C quality mortgage loan is characterized as delinquent if the
borrower has not paid the monthly payment due within one month of the Due Date.
The delinquency and foreclosure percentages may be affected by the size and
relative lack of seasoning of the servicing portfolio because many of the loans
in the portfolio were not outstanding long enough to give rise to some or all of
the periods of delinquency indicated in the chart below. Accordingly, the
information should not be considered as a basis for assessing the likelihood,
amount, or severity of delinquency or losses on the applicable loans. No
assurances can be given that the delinquency or foreclosure experience presented
in the table below will be indicative of the delinquency or foreclosure
experience on the loans in the pools. The sum of the columns below may not equal
the total indicated due to rounding.
For purposes of the following table:
o the period of delinquency is based on the number of days payments
are contractually past due,
o certain total percentages and dollar amounts may not equal the sum
of the percentages and dollar amounts indicated in the columns due
to differences in rounding,
o the "Foreclosure Rate" is the dollar amount of mortgage loans in
foreclosure as a percentage of the total principal balance of
mortgage loans outstanding as of the date indicated, and
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<PAGE>
o the "Bankruptcy Rate" is the dollar amount of mortgage loans for
which the related borrower has declared bankruptcy as a percentage
of the total principal balance of mortgage loans outstanding as of
the date indicated.
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1998 AS OF JUNE 30, 1999
PRINCIPAL BALANCE PERCENTAGE PRINCIPAL BALANCE PERCENTAGE PRINCIPAL BALANCE PERCENTAGE
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio ........... $1,370,527,327 -- $2,248,667,416 -- $3,287,852,345 --
-------------- -------------- --------------
Delinquency percentage
30-59 Days .......... $ 48,214,088 3.52% $ 103,063,606 4.58% $ 142,423,532 4.33%
60-89 Days .......... 13,795,882 1.01 23,791,571 1.06 46,489,104 1.41
90 + Days ........... 5,486,264 0.40 3,913,233 0.17 12,127,203 0.37
-------------- ---- -------------- ---- -------------- ----
Total ............... $ 67,496,234 4.92% $ 130,768,410 5.82% $ 201,039,839 6.11%
============== ==== ============== ==== ============== ====
Foreclosure Rate .......... $ 12,191,592 0.89% $ 40,596,310 1.81% $ 52,848,533 1.61%
Bankruptcy Rate ........... $ 12,022,391 0.88% $ 20,237,252 0.90% $ 33,064,024 1.01%
</TABLE>
Historically, a variety of factors, including the appreciation of real
estate values, have limited the loss and delinquency experience on B&C quality
mortgage loans. There can be no assurance that factors beyond the servicer's
control, such as national or local economic conditions or downturn in the real
estate markets of its lending areas, will not result in increased rates of
delinquencies and foreclosure losses in the future.
S-53
<PAGE>
UNDERWRITING CRITERIA
GENERAL
The Initial Loans were, and it is expected that the Subsequent Loans will
be, underwritten or reunderwritten in accordance with Fremont's underwriting
standards. These standards are designed to permit mortgage lending to borrowers
whose creditworthiness and repayment ability do not satisfy the more stringent
underwriting requirements used as standards for FNMA and FHLMC. Fremont has
established risk categories by which it aggregates acceptable loans into
groupings considered to have progressively greater risk characteristics. The
discussion under this section sets forth a more detailed description of those
risk categories applicable to the loans.
Fremont's underwriting of the Initial Loans generally consisted of, and is
expected to consist of, with respect to the Subsequent Loans, analyzing the
following as standards applicable to the loans:
o the creditworthiness of a borrower;
o the income sufficiency of a borrower's projected family income
relative to the mortgage payment and to other fixed obligations,
including in some instances rental income from investment property;
and
o the adequacy of the mortgaged property, expressed in terms of
Loan-to-Value Ratio, to serve as the collateral for a mortgage loan.
Fremont has implemented a credit policy that provides a number of
guidelines to assist underwriters in the credit decision process. The
creditworthiness characteristics emphasized by Fremont are the borrower's
debt-to-income ratio, credit history and employment stability. The
debt-to-income ratio for a borrower is calculated by dividing:
o the borrower's total monthly payment obligations, including payments
due under the loan with Fremont, but after any debt consolidation
from the proceeds of that loan, by
o the borrower's monthly gross income.
A credit bureau report that reflects the applicant's credit history is
obtained by Fremont from an independent, nationally recognized credit-reporting
agency. The credit report typically contains information reflecting
delinquencies, repossessions, judgments, foreclosures, bankruptcies and similar
instances of adverse credit that can be discovered by a search of public
records. A loan applicant's credit report must be current at the time of
application - generally less than 90 days old. The credit report is used to
evaluate the borrower's payment record and tendency to repay debts in a timely
manner. A lack of credit payment history will not necessarily preclude a loan if
other favorable borrower characteristics exist, including sufficient equity in
the property or an adequate debt-to-income ratio.
The calculation of the borrower's debt-to-income ratio involves a careful
review of all debts listed on the credit report and the loan application, as
well as the verification of gross income. Other than with respect to "Stated
Income Applications," a borrower's income is verified through various means,
including:
o applicant interviews,
o written verifications with employers, and
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<PAGE>
o the review of pay stubs, bank statements, tax returns, W-2's or
other acceptable forms of documentation.
The debt-to-income ratio is calculated to determine if a borrower demonstrates
sufficient income levels to cover or satisfy all debt repayment requirements.
Generally, each borrower would have been required to complete an
application designed to provide to the original lender pertinent credit
information concerning the borrower. As part of the description of the
borrower's financial condition, each borrower furnished:
o information, which may have been supplied solely in that
application, with respect to its assets, liabilities, income, credit
history, employment history and personal information, and
o an authorization to apply for a credit report which summarized the
borrower's credit history with local merchants and lenders and any
record of past or present bankruptcy or foreclosure proceedings.
The borrower may have also been required to authorize verifications of deposits
at financial institutions where the borrower had demand or savings accounts. In
the case of investment properties, income derived from the mortgaged property
may have been considered for underwriting purposes. With respect to mortgaged
property consisting of vacation or second homes, generally no income derived
from the property was considered for underwriting purposes, but could be
considered as a compensating factor.
A determination was made by Fremont that the borrower's monthly income
would be sufficient to enable the borrower to meet its monthly obligations on
the mortgage loan and other expenses related to the property. These expenses
include property taxes, utility costs, standard hazard insurance and other,
fixed obligations other than housing expenses. This determination was based on:
o the data provided in the application,
o certain verifications, which are not required with respect to the
"Stated Income Applications" or the "Easy Documentation" programs,
and
o the appraisal or other valuation of the mortgaged property.
In some circumstances, Fremont may also have considered the amount of liquid
assets available to the borrower after origination.
Prospective borrowers may submit loan applications under one of three
programs. These programs differ from each other with respect to the requirements
for the verification of the income of the borrower and the source of funds
required to be deposited by the applicant in order to close the loan. Some of
the loans have been originated under the "Easy Documentation" programs that
require less documentation and verification than do traditional "Full
Documentation" programs. Generally, under this type of program, minimal
investigation into a borrower's income profile would have been undertaken by the
originator. The underwriting for those mortgage loans will place a greater
emphasis on the value of the mortgaged property and credit history. Under the
"Easy Documentation" program, applicants must have income evidenced by six
months of personal bank statements. Under the "Full Documentation" program,
borrowers are generally required to submit documentation verifying at least two
years of income and employment history. Under the "Stated Income Application"
program, no verification of the applicant's income is required. Rather, the
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<PAGE>
applicant may be qualified based on monthly income as stated in the mortgage
loan application, if that income is supported by the general information
included in the loan application package.
As used in this discussion of the underwriting standards, Loan-to-Value
Ratio generally means that ratio, expressed as a percentage of:
(1) the principal balance of the loan at origination, over
(2) the lesser of the sales price or the appraised value of the related
mortgaged property at origination, or in the case of a refinanced or
modified loan, either the appraised valued determined at origination
or, if applicable, at the time of the refinancing or modification.
The adequacy of a mortgaged property as security for repayment of the
related mortgage loan generally has been determined by an appraisal in
accordance with preestablished appraisal procedure guidelines for appraisals
established by Fremont. Appraisers were typically licensed independent
appraisers selected in accordance with the Fremont Guidelines. The appraisal
procedure guidelines generally required the appraiser or an agent on its behalf
to inspect the property personally and to verify whether the property was in
good condition and that construction, if new, had been substantially completed.
The appraisal would have considered a market data analysis of recent sales of
comparable properties and, when deemed applicable, an analysis based on income
generated from the property or replacement cost analysis based on the current
cost of constructing or purchasing a similar property. The Loan-to-Value Ratio
has been supported by a review appraisal conducted by Fremont or an independent
review company.
Under these underwriting standards, each loan was assigned a risk grade
and categorized in a "Loan Class," denominated by a letter. Fremont's risk
classification system is designed to assess the likelihood that each borrower
will satisfy the repayment obligations associated with the related mortgage loan
and to establish the maximum permissible Loan-to-Value Ratio for the mortgage
loan. Time frames referred to below, e.g., "within the last 12 months," are
measured from the time of underwriting of a borrower's credit.
LOAN CLASS A: For a loan to have been assigned to a Loan Class A, the
prospective borrower must have overall "good" to "excellent" consumer credit.
One 30-day and no 60-day or 90-day late payments within the last 12 months are
acceptable on an existing mortgage loan. Any existing mortgage loan must be
current at the time of the application and no notices of default within the last
three years on an existing mortgage loan are permitted. Minor derogatory items
are allowed as to non-mortgage credit. However, open collections and charge-offs
in excess of $500 must be paid down to zero at closing unless they are three
years old or older and not reflected in the title report or are medical related.
The prospective borrower must have at least a 3-year credit history with a
minimum of 5 credit accounts. Three 30-day late payments within the last 12
months are permitted. No Chapter 7 bankruptcies with respect to the borrower may
have been discharged during the previous three years. No Chapter 13 bankruptcy
may have been discharged by the borrower during the previous year and the
borrower must have a satisfactory payment history with the bankruptcy trustee.
No foreclosures may have been filed within the last three years with respect to
borrower property. No foreclosure sales with respect to borrower property may
have been conducted within the last three years. The mortgaged property must be
in average to good condition. A maximum Loan-to-Value Ratio of 90% is permitted
for a mortgage loan secured by a single family owner-occupied property, or 85%
for a mortgage loan originated under an "Easy Documentation" program and 80% for
a mortgage loan originated under a "Stated Income" application program. A
maximum Loan-to-Value Ratio of 80% or 75% for mortgage loans originated under an
"Easy Documentation" program and 65% for mortgage loans originated under the
"Stated Income" application program is permitted for a mortgage loan secured by
a non-owner occupied property. The maximum
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permissible Loan-to-Value Ratio may be lower for mortgage loans with initial
principal amounts in excess of $350,000 secured by owner-occupied properties, or
lower dollar amounts for loans secured by non-owner-occupied properties, and for
mortgage loans made in connection with a borrower refinancing in which the
borrower borrows more than is needed to refinance his old mortgage loan. The
borrower's debt service-to-income ratio generally is 45% or less.
LOAN CLASS A-: For a loan to have been assigned to Loan Class A-, the
prospective borrower is required to have overall "good" to "excellent" consumer
credit. A maximum of two 30-day late payments, and no 60-day or 90-day late
payments within the last 12 months is acceptable on an existing mortgage loan.
Any existing mortgage loan must be current at the time of the application and no
notices of default within the last three years on an existing mortgage loan are
permitted. As to non-mortgage credit, some prior defaults may have occurred.
However, open collections and charge-offs in excess of $500 must be paid down to
zero at closing unless they are three years old or older and not reflected in
the title report or are medical related. The prospective borrower must have at
least a 3-year credit history with a minimum of 5 credit accounts. Less than 35%
of the credit accounts may have been delinquent within the last 12 months, and
three 30-day late payments within the last 12 months are permitted. In addition,
isolated 60-day late payments are permitted. No Chapter 7 bankruptcies with
respect to the borrower may have been discharged during the previous two years.
No Chapter 13 bankruptcy may have been discharged by the borrower during the
previous year and the borrower must have a satisfactory payment history with the
bankruptcy trustee. No foreclosures may have been filed within the last three
years with respect to borrower property. No foreclosure sales with respect to
the borrower property may have been conducted within the last three years. The
mortgaged property must be in average to good condition. A maximum Loan-to-Value
Ratio of 90% or 85% for a loan originated under an "Easy Documentation" program
and 80% for a mortgage loan originated under a "Stated Income" application
program is permitted for a mortgage loan secured by an owner-occupied property.
A maximum Loan-to-Value Ratio of 80% or 75% for mortgage loans originated under
an "Easy Documentation" program and 65% for mortgage loans originated under a
Stated Income Application program, is permitted for a mortgage loan secured by
non-owner-occupied property. The maximum permissible Loan-to-Value Ratio may be
lower for mortgage loans with initial principal amounts in excess of $350,000
secured by owner-occupied properties, or lower dollar amounts for loans secured
by non-owner-occupied properties. The maximum permissible Loan-to-Value Ratio
may also be lower for mortgage loans made in connection with a borrower
refinancing in which the borrower borrows more than is needed to refinance his
old mortgage loan. The debt service-to-income ratio generally is 50% or less.
LOAN CLASS B: For a loan to have been assigned to Loan Class B, the
prospective borrower may not have paid all previous or existing installment or
revolving debt according to its terms and may have some charge-offs, and is
required to have overall "satisfactory" consumer credit. A maximum of four
30-day late payments, or two 30-day late payments and one 60-day late payment,
but no 90-day late payments, within the last 12 months is acceptable on an
existing mortgage loan and no notices of default within the last two years on an
existing mortgage loan are permitted. As to non-mortgage credit, some prior
defaults may have occurred. However, open collections and chargeoffs must be
paid down to an amount not in excess of $500 at closing unless they are three
years old or older and not reflected in the title report or are medical related.
The prospective borrower must have at least a 2-year credit history with a
minimum of 3 credit accounts. Less than 50% of the credit accounts may have been
delinquent within the last 12 months. Isolated 90-day late payments are
permitted, but all accounts must be current when the loan is originated. No
Chapter 7 bankruptcies with respect to the borrower may have been discharged
during the previous two years. No Chapter 13 bankruptcy may have been discharged
by the borrower during the previous year and the borrower must have a
satisfactory payment history with the bankruptcy trustee. No foreclosures may
have been filed within the last two years with respect to borrower property. A
maximum Loan-to-Value
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Ratio of 85% or 80% for a mortgage loan originated under an "Easy Documentation"
program and 75% for a mortgage loan originated under a "Stated Income"
application program, is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 75% or 70% for
mortgage loans originated under an "Easy Documentation" program and 65% for
mortgage loans originated under a "Stated Income" application program is
permitted for a mortgage loan secured by a non-owner-occupied property. The
maximum permissible Loan-to-Value Ratio may be lower for mortgage loans with
initial principal amounts in excess of $350,000 secured by owner-occupied
properties, or lower dollar amounts for loans secured by non-owner-occupied
properties. The maximum permissible Loan-to-Value Ratio may also be lower for
mortgage loans made in connection with a borrower refinancing in which the
borrower borrows more than is needed to refinance his old mortgage loan. The
debt service-to-income ratio generally is 50% or less.
LOAN CLASS C: For a loan to have been assigned to Loan Class C, the
prospective borrower may have experienced significant credit problems in the
past, with overall "fair" consumer credit. As to mortgage credit, the borrower
may have had a history of being generally 30 days delinquent, and a maximum of
two 60-day late payments and one 90-day late payment within the last 12 months
is acceptable on an existing mortgage loan. No notices of default within the
last twelve months, or eighteen months if the Loan-to-Value Ratio is 75% or
higher, or on an existing mortgage loan are permitted. As to non-mortgage
credit, significant prior defaults may have occurred. However, open collections
and charge-offs must be paid down to an amount not in excess of $1,500 at
closing unless they are three years old or older and not reflected in the title
report or are medical related. The prospective borrower must have at least a
1-year credit history with less than 50% of the credit accounts currently
delinquent. No bankruptcies may have been filed or discharged during the
12-month period prior to the date the mortgage loan was made. No foreclosures
may have been filed within the last year with respect to borrower property. The
mortgaged property must be in average to good condition. A maximum Loan-to-Value
Ratio of 80% or 75% for a mortgage loan originated under an "Easy Documentation"
program and 70% for a mortgage loan originated under a "Stated Income"
application program is permitted for a mortgage loan secured by an
owner-occupied property. A maximum Loan-to-Value Ratio of 70% or 65% for
mortgage loans originated under an "Easy Documentation" program and 65% for
mortgage loans originated under a "Stated Income" application program is
permitted for a mortgage loan secured by a non-owner-occupied property. The
maximum permissible Loan-to-Value Ratio may be lower for mortgage loans with
initial principal amounts in excess of $300,000 secured by owner-occupied
properties, or lower dollar amounts for loans secured by non-owner occupied
properties. The maximum permissible Loan-to-Value Ratio may also be lower for
mortgage loans made in connection with a borrower refinancing in which the
borrower borrows more than is needed to refinance his old mortgage loan. The
debt service-to-income ratio generally is 55% or less.
LOAN CLASS C-: For a loan to have been assigned to Loan Class C-, the
prospective borrower may have experienced significant credit problems in the
past, with overall "poor" consumer credit. As to mortgage credit, the borrower
may have had a history of being generally 30 days delinquent, is not more than
120-days delinquent on an existing mortgage loan and there may not be a current
notice of default outstanding on an existing mortgage loan. As to non-mortgage
credit, significant prior defaults may have occurred. However, open collections
and charge-offs must be paid down to an amount not in excess of $1,500 at
closing unless they are three years old or older and not reflected in the title
report or are medical related. The mortgaged property must be in average to good
condition. A maximum Loan-to-Value Ratio of 70% or 60% for a mortgage loan
originated under a "Stated Income" application program is permitted for a
mortgage loan secured by an owner-occupied property. A maximum Loan-to-Value
Ratio of 65% or 60% for a mortgage loan originated under a "Stated Income"
application Program is permitted for a mortgage loan secured by a non-
owner-occupied property. The maximum permissible Loan-to-Value Ratio may be
lower for mortgage
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loans with initial principal amounts in excess of $300,000 secured by
owner-occupied properties, or lower dollar amounts for loans secured by
non-owner occupied properties. The maximum permissible Loan-to-Value Ratio may
also be lower for mortgage loans made in connection with a borrower refinancing
in which the borrower borrows more than is needed to refinance his old mortgage
loan. The debt service-to-income ratio generally is 55% or less.
LOAN CLASS D: For a loan to have been assigned to Loan Class D, the
prospective borrower will have experienced substantial credit problems in the
past, and generally will have overall poor credit. The prospective borrower's
credit history is poor and a notice of default on an existing mortgage loan may
have been filed against the borrower. As to non-mortgage credit, significant
prior defaults may have occurred. However, open collections and charge-offs must
be paid down to an amount not in excess of $2,500 at closing unless they are
three years old or older and not reflected in the title report or are medical
related. A bankruptcy filing by the borrower is permitted if it is discharged at
closing. Also, on a case-by-case basis, Fremont may make a loan on a mortgage
that takes a borrower out of foreclosure. Fremont will make a mortgage loan to a
borrower to take him out of bankruptcy or foreclosure only if it improves the
borrower's financial situation. The mortgaged property must be in average to
good condition. A maximum Loan-to-Value Ratio of 65% is permitted for mortgage
loans originated under a full documentation program or "Easy Documentation"
program. A maximum Loan-to-Value Ratio of 60% for mortgage loans originated
under a full documentation program or "Easy Documentation" program is permitted
for a mortgage loan secured by a non-owner-occupied property. Mortgage loans
originated under a "Stated Income" application program are not permitted in loan
Class D. The maximum permissible loan-to-Value Ratio may be lower for mortgage
loans with initial principal amounts in excess of $300,000 secured by
owner-occupied properties or lower dollar amounts for loans secured by
non-owner-occupied properties. The maximum permissible Loan-to-Value Ratio may
also be lower for mortgage loans made in connection with a borrower refinancing
in which the borrower borrows more than is needed to refinance his old mortgage
loan. The debt service-to-income ratio generally is 55% or less.
As described in this section the indicated underwriting standards
applicable to the loans include the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, Fremont may have determined in the
course of its underwriting process that a prospective borrower warrants a
Loan-to-Value Ratio upgrade based on compensating factors. For example, a
borrower may be able to get a loan in a particular Loan Class with a
Loan-to-Value Ratio 5% higher than the ratio that would otherwise be permitted
for that Loan Class if certain compensating factors exist.
Based on the indicated underwriting standards applicable for mortgage
loans with risk features originated under these standards, and in particular
loans in Loan Classes C- and D as described in this prospectus supplement, these
loans may experience substantially greater rates of delinquency, foreclosure and
loss, than mortgage loans underwritten under more stringent underwriting
standards.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield on the Class A-1 and Class A-2 certificates will be sensitive to
fluctuations in the level of One-Month LIBOR because their Pass-Through Rates
are based on One-Month LIBOR. The yield on the Class B certificates will also be
sensitive to fluctuations in the level of One-Month LIBOR because as One-Month
LIBOR increases Excess Spread will be reduced. A reduction in the Excess Spread
will slow the amortization of the Class B certificates. The yield on the Class
A-1, Class A-2 and Class B certificates will also be sensitive to the available
funds cap.
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In addition, because the rate and timing of principal distributions on
offered certificates depends primarily on the rate and timing of principal
payments, i.e., the prepayment experience, of the loans in the related pool and
the availability and amount of Excess Spread from the applicable pool, the final
distribution of principal on your certificates could occur significantly earlier
or later than you anticipate. If significant principal prepayments are made on
your certificates, you may not be able to reinvest those distributions in a
comparable alternative investment having a comparable yield. No prediction can
be made as to the rate of prepayments on the loans in either stable or changing
interest rate environments. You will bear entirely any reinvestment risk
resulting from the rate of prepayments on the pool loans related to your class.
The rate of principal distributions on each class of offered certificates,
the aggregate amount of each interest distribution on each class and the yield
to maturity on each class will be directly related to and affected by:
(1) the prepayment experience of the loans in the pool backing each
class,
(2) the application of Excess Spread, if any, from each pool, and in
certain circumstances from the other pool 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, in each case to
reduce the principal balance of each class of certificates to the
extent described in this prospectus supplement under "Description
of Credit Enhancement--Excess Spread and Overcollateralization,"
(3) the application of amounts on deposit in the Reserve Account to
reduce the principal balance of the Class A certificates, and
(4) under some circumstances, the rates of delinquencies, defaults or
losses experienced on the loans in the pool backing each class.
The prepayment experience of the loans will be affected by:
(1) the scheduled amortization of the loans, and
(2) any unscheduled principal prepayments or reductions of the loans,
which may include:
(a) borrower prepayments and refinancings,
(b) liquidations, write-offs and some modifications of the loans
due to defaults, casualties, condemnations or other
dispositions, and
(c) repurchases of defective and Defaulted Loans pursuant to the
Transfer and Servicing Agreements.
Modifications of Defaulted Loans by the servicer may have the effect of
delaying or decreasing principal reductions that would have otherwise occurred
on the Defaulted Loans. On or after any distribution date on which the principal
balance of all the loans declines to 10% or less of the aggregate of the
principal balance of the Initial Loans and the Subsequent Loans for both pools,
as of the applicable Cut-Off Date, the holders of a majority of the percentage
interest in the Class R certificates may purchase all of the loans from the
trust at a price equal to the Termination Price. If the exercise of this option
would result in a draw under the Guaranty Policy, the holders of the Class R
certificates may only exercise this option with the consent of the securities
insurer. This purchase will result in a termination of the trust. Furthermore,
to the extent that the Class R certificateholders fail to exercise this optional
termination right, the securities insurer and the servicer may be entitled to
exercise a similar right to effect an optional termination of the certificates
if the principal balance
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of all the loans declines to 5% or less of the aggregate of the principal
balance of the Initial Loans and the Subsequent Loans for both pools, as of the
applicable Cut-Off Date. See "Description of the Certificates--Optional
Termination" in this prospectus supplement.
The weighted average life of a certificate is the average amount of time
that will elapse from the closing date to the date each dollar in respect of
principal of that certificate is repaid. The weighted average life of a
certificate will be influenced by, among other factors, the following:
(1) the prepayment experience of the loans in the pool backing the
certificates;
(2) the rate at which Excess Spread is paid to holders of the
certificates;
(3) the rate at which amounts on deposit in the Reserve Account are
paid to holders of the Class A certificates;
(4) the extent to which any reduction of the Overcollateralization
Amount is paid to the holders of the Class B, Class X or Class R
certificates; and
(5) under some circumstances, the rates of delinquencies, defaults or
losses experienced on the loans.
If substantial principal prepayments on the loans in a pool are received
from unscheduled prepayments, liquidations or repurchases, then the payments to
the holders of the related class of Class A certificates resulting from the
prepayments may significantly shorten the actual average lives of that class of
certificates. If the loans experience delinquencies for which no Monthly Advance
is made, or defaults in the payment of principal, then the holders of the
related class of certificates may similarly experience a delay in the receipt of
principal distributions attributable to those delinquencies and defaults. In
particular instances, these delinquencies and defaults may result in longer
actual average lives of the certificates than would otherwise be the case.
However, the principal portion of any proceeds received upon liquidation
of a loan would be applied as a principal prepayment. If upon liquidation the
Net Liquidation Proceeds are insufficient to repay the loan in full, and the
loss causes an Overcollateralization Deficiency Amount, Excess Spread from the
related pool and from the other pool, and amounts on deposit in the Reserve
Account, if any, may be applied as a principal distribution on the related class
of Class A certificates, to the extent available under the cash flow priorities
described under "Description of the Certificates--Priority of Distributions" in
this prospectus supplement. In either case, if these distributions are made in
connection with a Liquidated Loan, the holders of the related class of Class A
certificates will experience an acceleration in the receipt of principal
payments. In some instances this may result in shorter actual average lives of
the certificates than would otherwise be the case. See "Risk Factors--Credit
Enhancement May Not Be Adequate" in this prospectus supplement.
A variety of general economic and social factors, as well as other factors
and characteristics that relate specifically to each loan, will influence
prepayments on loans. Factors that relate specifically to the loans and that may
affect the prepayment rate of the loans include the following:
(1) the outstanding principal balances of the loans;
(2) the interest rates on the loans;
(3) changes in the value of the related mortgaged properties and the
related Loan-to-Value Ratios;
(4) changes in the creditworthiness of the borrowers;
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(5) changes in the availability of comparable financing to the
borrowers on either more or less favorable terms; and
(6) changes in the borrowers' housing needs or employment status.
Additional factors that relate to the loans on a specific basis include
the seasoning of the loans, the existence and enforceability of "due-on-sale"
clauses, and the existence and enforceability of prepayment penalties. For
example, some of the loans contain due-on-sale provisions. The servicer intends
to enforce due-on-sale provisions, unless:
(1) the servicer, in a manner consistent with the accepted servicing
procedures, permits the purchaser of the related mortgaged
property to assume the loan, or
(2) the enforcement is not permitted by applicable law.
See "Certain Legal Aspects of Residential Loans--Enforceability of Certain
Provisions" in the accompanying prospectus. In some cases, if the borrower is
selling its mortgaged property, the servicer, in a manner consistent with the
accepted servicing procedures, may permit short sales, short pay-offs or other
modifications. See "Description of the Transfer and Servicing
Agreements--Realization On Defaulted Loans" in this prospectus supplement.
Some of the loans contain prepayment penalties. Prepayment penalties
generally obligate the related borrower to pay penalties in connection with a
prepayment of the borrower's loan. The servicer will enforce prepayment
penalties unless doing so would be unlawful or the master servicer consents to
waiver. The master servicer has no obligation to enforce prepayment penalties
and will exercise its rights to enforce them to the extent it deems appropriate.
In addition, the prepayment penalties with respect to the "2/28" and "3/27"
loans are typically suspended during the 60-day period that coincides with the
initial adjustment date for a loan, where applicable. The master servicer is
entitled to retain all prepayment penalties to the extent the servicer collects
them from borrowers. The existence of prepayment penalties and any enforcement
by the master servicer of the prepayment penalties contained in the loans may
have an effect on the decisions of borrowers to prepay their loans and thus may
affect the weighted average lives of the certificates.
Other general economic and social factors that may affect the prepayment
rate of the loans, include, among other matters:
o the rate of inflation,
o unemployment levels,
o personal bankruptcy levels,
o prevailing interest rates,
o consumer spending and saving habits,
o competition within the mortgage and consumer finance industries,
and
o consumer, bankruptcy and tax law developments.
For example, any further limitations on the rights of borrowers to deduct
interest payments on mortgage loans for federal income tax purposes may result
in a higher rate of prepayments on the loans.
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In addition, the rate of prepayment on a pool of mortgage loans is
generally affected by prevailing market interest rates for similar types of
loans of a comparable term and risk level. If prevailing interest rates were to
fall significantly below the respective interest 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
interest rates on the loans, the rate of prepayment on the loans would be
expected to decrease. Depending on prevailing market interest rates, the outlook
for market interest rates, and economic conditions generally, some borrowers may
sell or refinance their mortgaged properties to realize their equity in order to
meet cash flow needs or to make other investments.
As a result of these general economic and social factors, as well as the
loan specific factors and characteristics, the prepayment experience of the
loans:
(1) cannot be predicted with certainty,
(2) will be likely to fluctuate over the life of the loans and
(3) may differ significantly from the prepayment rates of other similar
loans.
None of the transferor, the servicer, the master servicer, the securities
insurer, the depositor, nor the underwriters makes any representation as to:
(1) the particular factors that will affect the prepayment of the loans,
(2) the relative importance of these factors, or
(3) the percentage of the principal balances of the loans that will be
paid as of any date.
Distributions of principal to holders of the certificates at a faster rate
than anticipated will increase the yields on the certificates purchased at
discounts but will decrease the yields on the certificates purchased at
premiums. The distribution of principal may be attributable to scheduled
payments and prepayments of principal on the loans and to the application of
Excess Spread. The effect on an investor's yield due to distributions to the
holders of the certificates occurring at a rate that is faster or slower than
the rate anticipated by the investor during any period following the issuance of
the certificates will not be entirely offset by a subsequent like reduction or
increase in the rate of the distributions of principal during any subsequent
period.
The rate of delinquencies and defaults on the loans, and the recoveries,
if any, on Defaulted Loans and foreclosed properties, will also affect the
prepayment experience of the loans. As a result, the weighted average lives of
the certificates will also be affected. To the extent that the delinquencies,
defaults and losses cause a reduction in the amount of Excess Spread from a pool
of loans, then distributions of principal to the holders of the related class of
certificates could be delayed and result in a slower rate of principal
amortization of the related class of certificates. See "Description of Credit
Enhancement--Excess Spread and Overcollateralization" in this prospectus
supplement.
However, to the extent that the delinquencies, defaults and losses cause
an increase in the Overcollateralization Deficiency Amount for the Class A-1 or
Class A-2 certificates, then an increasing amount of Excess Spread from the
related pool and, in certain circumstances, from the other pool, may be applied
to the distribution of principal to the holders of the related class of
certificates. This increase in the Overcollateralization Deficiency Amount would
result in a faster rate of principal amortization of that class of certificates.
If the Overcollateralization Amount for the Class A-1 or Class A-2 certificates
is reduced to zero, then the defaults and losses would result in an
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Overcollateralization Deficit for the class. This would cause an increase in the
distribution of principal to the holders of that class of certificates to the
extent of:
(1) amounts on deposit in the Reserve Account;
(2) Excess Spread, if any, from the related pool and, in certain
circumstances, from the other pool; and
(3) the defaults or losses are covered by the guaranty insurance policy.
Several factors may influence delinquencies, defaults and losses,
including:
o the outstanding loan principal balances;
o the related Loan-to-Value Ratios; and
o other underwriting standards for the loans.
In general, defaults on mortgage 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. See "Risk
Factors--Inadequacy of Value of Properties Could Affect Severity of Losses" and
"Underwriting Criteria" in this prospectus supplement.
Furthermore, the rate and timing of prepayments, delinquencies, defaults,
liquidations and losses on the loans will be affected by the general economic
condition of the region of the country in which the related mortgaged properties
are located or the related borrowers are residing. See "Risk Factors--Geographic
Concentration Could Increase Losses on the Loans" and "The Pools" in this
prospectus supplement. The risk of delinquencies, defaults and losses is greater
and voluntary principal prepayments are less likely in regions where a weak or
deteriorating economy exists. A weak or deteriorating economy may be evidenced
by, among other factors, increasing unemployment or falling property values.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION TARGET AMOUNT
The overcollateralization feature has been designed to accelerate the
principal amortization of each class of certificates relative to the principal
amortization of the loans in the related pool. If on any distribution date, the
Overcollateralization Target Amount with respect to a pool exceeds the
Overcollateralization Amount of the related pool, Excess Spread, if any, from
that pool and, in certain circumstances, from the other pool, will be paid as
principal to the holders of the Class A-1 or Class A-2 certificates, as
applicable, in the amounts described under "Description of the
Certificates--Priority of Distributions" in this prospectus supplement. If the
Overcollateralization Amount for a pool equals or exceeds the
Overcollateralization Target Amount for the pool on any distribution date,
Excess Spread from the pool will instead be distributed to the holders of the
Class B certificates until their principal balance is reduced to zero. When the
principal balance of the Class B certificates is reduced to zero, this Excess
Spread will instead be distributed to the holders of the Class X and the Class R
certificates. This distribution will be made to the Class B, Class X or Class R
certificates only if not needed to be paid to the other class of Class A
certificates for shortfalls due to losses or unadvanced delinquencies or to fund
the Reserve Account up to the required level. This distribution to the Class B,
Class X and Class R certificates will reduce the rate of, and under certain
circumstances delay, the principal amortization of the Class A certificates,
until the related Overcollateralization Amount is reduced to the
Overcollateralization Target Amount.
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If the securities insurer changes the Overcollateralization Target Amount
with respect to a class of Class A certificates or the delinquency levels that
determine whether the Overcollateralization Target Amount will increase or
decrease, the principal on your class of certificates may be paid more slowly or
quickly than otherwise would be the case. This could adversely affect the yield
to maturity of your certificates. See "--Reinvestment Risk" below and
"Description of Credit Enhancement-- Excess Spread and Overcollateralization" in
this prospectus supplement.
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the certificates
will be affected by the rate and timing of principal payments, including
prepayments, in relation to the prevailing interest rates at the time of receipt
of these principal payments. For example, during periods of falling interest
rates, holders of the certificates may receive an increased amount of principal
payments from the loans at a time when the related holders may be unable to
reinvest these payments in investments having a yield and rating comparable to
their respective certificates. Conversely, during periods of rising interest
rates, holders of the certificates may receive a decreased amount of principal
prepayments from the loans at a time when the holders may have an opportunity to
reinvest these payments in investments having a higher yield than, and a
comparable rating to, their respective certificates. If the securities insurer
changes the Overcollateralization Target Amount with respect to either class of
Class A certificates or the delinquency levels that determine whether the
Overcollateralization Target Amount will increase or decrease, your principal on
the certificates may be paid more slowly or quickly than may otherwise be the
case. This could adversely affect your ability to reinvest principal payments
received on the certificates at a comparable yield.
YIELD CONSIDERATIONS RELATING TO ADJUSTABLE-RATE LOANS
During the initial period following origination, substantially all of the
loans bear interest at loan interest rates which were set independently of
Six-Month LIBOR. See "The Pools--Payments on the Loans" in this prospectus
supplement.
At the initial interest rate reset date for each adjustable-rate loan, the
interest rate was or will be adjusted to a rate based on the applicable
Six-Month LIBOR plus the related Gross Margin. However, the interest rate for
each adjustable-rate loan is subject to the applicable Periodic Rate Cap and
applicable Lifetime Cap and Lifetime Floor. On an interest rate reset date,
increases in Six-Month LIBOR will increase the interest rates of the
adjustable-rate loans, subject to the applicable Periodic Rate Cap and the
applicable Lifetime Cap. Resulting increases in the amount of the required
monthly payments on the adjustable-rate loans in excess of those assumed in
underwriting the adjustable-rate loans may result in a default rate higher than
that on mortgage loans with fixed mortgage rates.
If the interest rate on any adjustable-rate loan cannot increase above a
particular level due to the applicable Periodic Rate Cap or the applicable
Lifetime Cap, the yield on your certificates could be adversely affected. In
addition, if the interest rate on any adjustable-rate loan is not able to
decrease below a particular level due to the applicable Lifetime Floor or
Periodic Rate Cap, the related borrower may be more likely to prepay this loan
in full in order to refinance at a lower rate.
The interest rates on the adjustable-rate loans adjust periodically based
on Six-Month LIBOR. The interest rates on the fixed-rate loans do not adjust.
The interest rate on the Class A-1 and Class A-2 certificates adjusts monthly
based on One-Month LIBOR and the interest rate on the Class B certificates is
fixed and, in each case, as described under "Description of the Certificates" in
this prospectus supplement, in each case, subject to an available funds cap. As
a result, the interest due on the loans during any Due Period may not equal the
amount of interest that would accrue on your
S-65
<PAGE>
certificates during the related Accrual Period. To the extent any shortfall is
created as a result, the shortfall will only be paid to you to the extent and in
the priority described under "Description of the Certificates--Distributions on
the Certificates" in this prospectus supplement. In addition, Six-Month LIBOR
and One-Month LIBOR may respond to different economic and market factors, and
there is not necessarily a correlation between them. Thus, it is possible, for
example, that One-Month LIBOR may rise during periods in which Six-Month LIBOR
is stable or is falling. It is also possible that, even if both One-Month LIBOR
and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise more
rapidly than Six-Month LIBOR.
The transferor is not aware of any publicly available statistics that set
forth principal prepayment experience or prepayment forecasts of adjustable-rate
mortgage loans over an extended period of time. The transferor's experience with
respect to the loans is insufficient to draw any conclusions with respect to the
expected prepayment rates on the adjustable-rate loans. The rate of principal
prepayments with respect to adjustable-rate mortgage loans has fluctuated in
recent years.
In addition, the features of adjustable-rate mortgage loan programs in the
past have varied significantly in response to market conditions like interest
rates, consumer demand, regulatory restrictions and other factors. The lack of
uniformity of the terms and provisions of the adjustable-rate mortgage loan
programs has made it impracticable to compile meaningful comparative data on
prepayment rates. As a result, there can be no certainty as to the rate of
prepayments on the adjustable-rate loans in stable or changing interest rate
environments. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayment in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant. Higher prepayment rates will occur because the availability of
fixed-rate mortgage loans at competitive interest rates may cause borrowers to
refinance their adjustable-rate mortgage loans in order to obtain lower fixed
interest rates.
WEIGHTED AVERAGE LIVES OF THE OFFERED CERTIFICATES
The following information is given solely to illustrate the effect of
prepayments of the loans on the weighted average lives of the offered
certificates under particular stated assumptions. The following information is
not a prediction of the prepayment rate that may actually be experienced by the
loans. Weighted average lives of the offered certificates refers to the average
amount of time that will elapse from the date of delivery of the offered
certificates until each dollar of principal of the offered certificates will be
repaid to the investor. The weighted average lives of the offered certificates
will be influenced by:
o the rate at which principal of the loans is paid, which may be in
the form of scheduled amortization or prepayments,
o the rate at which Excess Spread, if any, from the related pool and,
in certain circumstances, from the other pool, is paid to holders of
the related class of certificates,
o the extent to which any reduction in Overcollateralization Amount is
paid to the Class B, Class X and Class R certificates,
o the rate of delinquencies and losses on the loans from time to time,
o the rate at which amounts on deposit in the Reserve Account are paid
to holders of the Class A certificates, and
S-66
<PAGE>
o the extent to which amounts remain in the Pre-Funding Account at the
end of the Pre-Funding Period and are paid to the holders of the
certificates.
For this purpose, the term "prepayment" includes reductions of principal,
including, without limitation, those resulting from:
o unscheduled full or partial prepayments,
o refinancings,
o liquidations and write-offs due to defaults,
o casualties or other dispositions and substitutions, and
o repurchases by or on behalf of the transferor.
See "Description of Credit Enhancement-- Excess Spread and
Overcollateralization" in this prospectus supplement.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used in this prospectus supplement is the constant
prepayment rate (CPR). CPR represents an assumed rate of prepayment each month
to the then outstanding principal balance of a pool of loans for the life of the
related loans. A specified CPR percentage is used for each month during the life
of the loans. CPR does not purport to be a historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
loans, including the loans in the trust. The transferor believes that no
existing statistics of which it is aware provide a reliable basis for the
holders of the offered certificates to predict the amount or the timing of
receipt of prepayments on the loans.
Modeling assumptions. For purposes of preparing the tables below, the
following modeling assumptions have been made:
(1) all scheduled principal payments on the loans are timely received on
the first day of each Due Period, with the first Due Period for the
Initial Loans commencing on September 2, 1999, and no delinquencies
or losses occur on the loans;
(2) the scheduled payments on the loans have been calculated on the
outstanding principal balance, before giving effect to prepayments,
the loan interest rate and the remaining term to stated maturity so
that the loans will fully amortize by their remaining term to stated
maturity;
(3) all scheduled payments of interest and principal in respect of the
loans have been made through the Cut-Off Date, or in the case of
Pool 1 Loans, Sub-Pools 10 through 13 and Pool 2 Loans, Sub-Pools 11
through 14, October 1, 1999;
(4) the loan interest rate on each adjustable-rate loan is adjusted on
its next interest rate reset date and subsequent reset dates, if
necessary, to equal the sum of:
(a) an assumed level of Six-Month LIBOR, equal to 5.957%, and
(b) the Gross Margin, subject to the Periodic Rate Caps, the
Lifetime Cap and the Lifetime Floor;
(5) One-Month LIBOR remains constant at 5.380% per annum;
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<PAGE>
(6) (a) all loans prepay monthly at the specified percentage of CPR,
(b) no optional or other early termination of the
certificates occurs, except with respect to the
calculation of the "Weighted Average Life-to-Call
(Years)" figures in the following tables, and
(c) no substitutions or repurchases of the loans occur;
(7) all prepayments in respect of the loans include 30 days' accrued
interest;
(8) the closing date for the certificates is September 23, 1999;
(9) with respect to the loans, each year will consist of twelve 30-day
months;
(10) cash payments in full are received by the holders of the
certificates on the 25th day of each month, commencing in October
1999;
(11) the Overcollateralization Target Amount for each class of Class A
certificates will be 5.15% of the related Maximum Collateral Amount
with respect to any distribution date prior to the Stepdown Date.
After the Stepdown Date, the Overcollateralization Target Amount for
each pool will be the greater of:
(a) 10.30% of the principal balance of the loans in that pool as
of that distribution date, and
(b) 0.50% of the related Maximum Collateral Amount;
(12) the pass-through rates for the certificates are as described in this
prospectus supplement;
(13) all Servicing Fees, Master Servicer Fees and Trustee Fees assumed to
be deducted from the interest collections in respect of the loans
equal 0.5065% of the principal balance of the loans;
(14) other fees and expenses assumed to be deducted from the interest
collections in respect of the loans equal 0.20% of the aggregate
principal balance of the Class A certificates;
(15) no reinvestment income from any trust account is earned and
available for payment;
(16) the Overcollateralization Target Amount for each class of Class A
certificates will stepdown in one month;
(17) with respect to Pool 1 Loans, Sub-Pools 10 through 13, and with
respect to Pool 2 Loans, Sub-Pools 11 through 14, are transferred to
the trust in September, 1999. The principal payments on these loans
are received by the servicer in October, 1999 and paid to the
holders of the certificates on the distribution date in November,
1999; and
(18) the pools consist of loans having the following characteristics:
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<PAGE>
<TABLE>
ASSUMED LOAN CHARACTERISTICS - POOL 1
<CAPTION>
CUT-OFF REMAINING ORIGINAL TERM INITIAL
DATE AMORTIZATION TO MATURITY GROSS RESET GROSS INITIAL
SUB-POOL TYPE PRINCIPAL BALANCE LOAN RATE TERM (MONTHS) (MONTHS) MARGIN (MONTHS) PERIODIC CAP
- -------- ---- ----------------- --------- ------------- -------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 arm $28,412,007.39 9.7496% 349 360 6.4543% 12 2.6750%
2 arm $28,216,233.04 9.6846% 352 358 6.2738% 18 2.9092%
3 arm $19,056,962.71 9.8880% 351 356 6.4042% 31 2.9530%
4 arm $41,897,651.89 10.0953% 358 360 6.1918% 21 2.9540%
5 arm $36,751,529.65 10.1385% 359 360 6.1848% 23 3.0000%
6 arm $25,322,977.03 9.9973% 358 360 6.2108% 34 3.0000%
7 arm $25,725,458.43 10.0361% 359 360 6.1345% 35 3.0000%
8 arm $27,294,847.25 9.8365% 358 360 6.0884% 58 3.0000%
9 fixed $20,734,379.19 10.0280% 341 342
10 arm $35,898,870.68 10.1385% 360 360 6.1848% 24 3.0000%
11 arm $23,300,702.53 10.0361% 360 360 6.1345% 36 3.0000%
12 arm $12,458,542.77 9.8365% 360 360 6.0884% 60 3.0000%
13 fixed $ 9,464,062.85 10.0280% 342 342
</TABLE>
TABLE (CONTINUED)
GROSS
SUBSEQUENT GROSS GROSS
PERIODIC LIFETIME LIFETIME
SUB-POOL CAP CAP FLOOR
- -------- --- --- -----
1 1.3944% 16.4988% 9.6346%
2 1.3688% 16.4252% 9.6846%
3 1.1756% 16.3727% 9.8880%
4 1.4909% 17.0953% 10.0953%
5 1.5000% 17.1359% 10.1359%
6 1.5000% 16.9990% 9.9990%
7 1.5000% 17.0361% 10.0361%
8 1.5000% 16.8365% 9.8365%
9
10 1.5000% 17.1359% 10.1359%
11 1.5000% 17.0361% 10.0361%
12 1.5000% 16.8365% 9.8365%
13
<TABLE>
ASSUMED LOAN CHARACTERISTICS - POOL 2
<CAPTION>
CUT-OFF REMAINING ORIGINAL TERM INITIAL
DATE AMORTIZATION TO MATURITY GROSS RESET GROSS INITIAL
SUB-POOL TYPE PRINCIPAL BALANCE LOAN RATE TERM (MONTHS) (MONTHS) MARGIN (MONTHS) PERIODIC CAP
-------- ---- ----------------- --------- ------------- -------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 arm $15,215,229.74 9.4617% 349 360 6.3196% 12 2.7017%
2 arm $11,564,531.75 9.7759% 353 359 6.3063% 18 2.9034%
3 arm $8,922,747.17 9.4809% 354 360 6.4779% 30 2.9303%
4 arm $5,532,537.76 9.9357% 357 360 6.2051% 17 2.5622%
5 arm $18,989,401.72 9.8696% 358 360 6.1933% 22 3.0000%
6 arm $19,774,977.29 9.9194% 359 360 6.1113% 23 3.0000%
7 arm $14,518,061.70 9.9308% 358 360 6.1722% 34 3.0000%
8 arm $14,338,265.49 9.8792% 359 360 6.1974% 35 3.0000%
9 arm $8,723,156.97 9.8587% 359 360 6.1140% 59 3.0000%
10 fixed $8,070,006.17 10.1465% 349 351
11 arm $19,735,787.58 9.9194% 360 360 6.1113% 24 3.0000%
12 arm $12,856,478.18 9.8792% 360 360 6.1974% 36 3.0000%
13 arm $3,886,464.02 9.8587% 360 360 6.1140% 60 3.0000%
14 fixed $3,595,463.05 10.1465% 351 351
</TABLE>
TABLE (CONTINUED)
GROSS
SUBSEQUENT
PERIODIC GROSS LIFETIME GROSS LIFETIME
SUB-POOL CAP CAP FLOOR
-------- --- --- -----
1 1.3930% 16.1852% 9.3180%
2 1.3620% 16.4981% 9.7759%
3 1.2546% 16.0377% 9.4809%
4 1.4131% 16.9357% 9.9357%
5 1.5000% 16.8696% 9.8696%
6 1.5000% 16.9152% 9.9152%
7 1.5000% 16.9308% 9.9308%
8 1.5000% 16.8792% 9.8792%
9 1.5000% 16.8587% 9.8587%
10
11 1.5000% 16.9152% 9.9152%
12 1.5000% 16.8792% 9.8792%
13 1.5000% 16.8587% 9.8587%
14
S-69
<PAGE>
The following tables indicate the corresponding percentages of the initial
principal balance of the certificates that would be outstanding, based on the
specified percentages of CPR. These tables have been prepared based on the
modeling assumptions including the assumptions regarding the characteristics and
performance of the loans. These assumptions may differ from the actual
characteristics and performance and should be read in conjunction with these
assumptions. Any differences may have an effect on the percentages of the
principal balance outstanding and weighted average life of the certificates set
forth in the tables below. See "Risk Factors--Unpredictability of Prepayments
Could Adversely Affect Yield" in this prospectus supplement.
<TABLE>
CLASS A-1
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING CPR PERCENTAGES
<CAPTION>
DATE 0% 15% 20% 27% 35% 45%
---- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percent.................... 100 100 100 100 100 100
September 2000..................... 97 82 77 70 62 52
September 2001..................... 96 68 60 49 38 26
September 2002..................... 96 57 47 36 25 15
September 2003..................... 95 47 37 26 16 8*
September 2004..................... 95 40 29 19 10 5*
September 2005..................... 94 34 23 14 7* 2*
September 2006..................... 93 28 19 10 4* 1*
September 2007..................... 92 24 15 7* 3* 0
September 2008..................... 91 20 12 5* 2* 0
September 2009..................... 90 17 9* 4* 1* 0
September 2010..................... 89 14 7* 2* 0 0
September 2011..................... 87 12 6* 2* 0 0
September 2012..................... 86 10 5* 1* 0 0
September 2013..................... 84 8* 3* 1* 0 0
September 2014..................... 82 7* 3* 0 0 0
September 2015..................... 79 6* 2* 0 0 0
September 2016..................... 77 5* 1* 0 0 0
September 2017..................... 74 4* 1* 0 0 0
September 2018..................... 70 3* 1* 0 0 0
September 2019..................... 67 2* 0 0 0 0
September 2020..................... 62 2* 0 0 0 0
September 2021..................... 58 1* 0 0 0 0
September 2022..................... 52 1* 0 0 0 0
September 2023..................... 46 1* 0 0 0 0
September 2024..................... 40 0 0 0 0 0
September 2025..................... 33 0 0 0 0 0
September 2026..................... 26 0 0 0 0 0
September 2027..................... 17 0 0 0 0 0
September 2028..................... 7* 0 0 0 0 0
September 2029..................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(years).............................. 21.30 5.46 4.09 2.96 2.19 1.59
Weighted Average Life-to-Call (years) 21.26 5.05 3.76 2.72 2.01 1.46
</TABLE>
The percentages in this table have been rounded to the nearest whole
number. The weighted average life is determined by:
(a) multiplying the amount of each payment of principal by the number
of years from the date of issuance to the related distribution
date,
(b) summing the results, and
(c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to two decimal places.
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
CLASS A-2
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING CPR PERCENTAGES
<TABLE>
<CAPTION>
DATE 0% 15% 20% 27% 35% 45%
---- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percent................... 100 100 100 100 100 100
September 2000.................... 97 82 77 70 62 52
September 2001.................... 96 68 60 49 38 26
September 2002.................... 96 57 47 36 25 15
September 2003.................... 95 47 37 26 16 8*
September 2004.................... 95 40 30 19 10 5*
September 2005.................... 94 34 23 14 7* 2*
September 2006.................... 93 28 19 10 4* 1*
September 2007.................... 92 24 15 7* 3* 0
September 2008.................... 91 20 12 5* 2* 0
September 2009.................... 90 17 9* 4* 1* 0
September 2010.................... 89 14 7* 2* 0 0
September 2011.................... 87 12 6* 2* 0 0
September 2012.................... 86 10 5* 1* 0 0
September 2013.................... 84 8* 3* 1* 0 0
September 2014.................... 82 7* 3* 0 0 0
September 2015.................... 80 6* 2* 0 0 0
September 2016.................... 77 5* 1* 0 0 0
September 2017.................... 74 4* 1* 0 0 0
September 2018.................... 71 3* 1* 0 0 0
September 2019.................... 67 2* 0 0 0 0
September 2020.................... 63 2* 0 0 0 0
September 2021.................... 58 1* 0 0 0 0
September 2022.................... 53 1* 0 0 0 0
September 2023.................... 47 1* 0 0 0 0
September 2024.................... 41 0 0 0 0 0
September 2025.................... 34 0 0 0 0 0
September 2026.................... 26 0 0 0 0 0
September 2027.................... 18 0 0 0 0 0
September 2028.................... 8* 0 0 0 0 0
September 2029.................... 0 0 0 0 0 0
Weighted Average Life-to-Maturity
(years)........................... 21.40 5.46 4.10 2.96 2.19 1.59
Weighted Average Life-to-Call
(years)........................... 21.36 5.06 3.76 2.72 2.01 1.46
</TABLE>
The percentages in this table have been rounded to the nearest whole
number. The weighted average life is determined by:
(a) multiplying the amount of each payment of principal by the number
of years from the date of issuance to the related distribution
date,
(b) summing the results, and
(c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to two decimal places.
The percentages in the above table that are designated with "*" indicate
that the cash flows are contingent on the optional termination provision not
being exercised.
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<PAGE>
CLASS B
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING CPR PERCENTAGES
<TABLE>
<CAPTION>
DATE 0% 15% 20% 27% 35% 45%
---- -- --- --- --- --- ---
<S> <C> <C> <C> <C> <C> <C>
Initial Percent........................... 100 100 100 100 100 100
September 2000............................ 66 74 77 81 86 92
September 2001............................ 0 0 0 0 8 31
September 2002............................ 0 0 0 0 0 0
Weighted Average Life-to-Maturity (years). 1.16 1.26 1.30 1.38 1.50 1.73
Weighted Average Life-to-Call (years)..... 1.16 1.26 1.30 1.38 1.50 1.73
</TABLE>
The percentages in this table have been rounded to the nearest whole
number. The weighted average life is determined by:
(a) multiplying the amount of each payment of principal by the number
of years from the date of issuance to the related distribution
date,
(b) summing the results, and
(c) dividing the sum by the aggregate payments of principal referred
to in clause (a) and rounding to two decimal places.
The modeling assumptions assume that there will be no losses on the loans
and that One-Month LIBOR remains constant. If losses occur or if One-Month LIBOR
increases, the weighted average lives of the Class B certificates shown in the
above table could be materially longer. See the tables under "--Class B
Certificates" below.
The pay-down scenarios for the offered certificates 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, neither the pay-down scenarios nor the modeling
assumptions on which they were made will likely prove to be accurate. Indeed,
the actual weighted average lives of the offered certificates will likely vary
from those set forth in the foregoing tables. These variations may be shorter or
longer, and may be greater with respect to later years.
In light of the uncertainties inherent in the foregoing pay-down
scenarios, the inclusion of the weighted average lives of the offered
certificates in the foregoing tables should not be regarded as a representation
by the transferor, the depositor, the underwriters or any other person that any
of the pay-down scenarios will be experienced.
CLASS B CERTIFICATES
The tables set forth below show the corporate bond equivalent yields and
the weighted average lives based on the modeling assumptions described under
"--Modeling Assumptions" above and the following additional assumptions:
(1) the assumed purchase price is 99.00% of the original principal
balance of the Class B certificates, plus accrued interest from
September 23, 1999,
(2) defaults are projected at the constant default rates (CDR) specified
in the tables below, assuming no defaults for the first twelve
months under all scenarios, 100% severity and no delay to loss,
S-72
<PAGE>
(3) both One-Month LIBOR and Six-Month LIBOR are adjusted as specified
in the tables below,
(4) the LIBOR index rates increase over the number of months specified
in the tables below, if any,
(5) prepayments are projected at the CPR specified in the tables below,
(6) the optional termination is not exercised, and
(7) the weighted average lives shown in the tables below are based on
actual amounts of principal received.
The yields set forth in the following tables were calculated by
determining the monthly discount rates which, when applied to the assumed stream
of cash flows to be paid on the Class B certificates, would cause the discounted
present value of the assumed stream of cash flows as of the closing date to
equal the assumed purchase prices, plus accrued interest at the applicable
Pass-Through Rate, from and including September 1, 1999 to but excluding the
closing date. These resulting monthly rates were then converted to semi-annual
corporate bond equivalent rates. This calculation does not take into account
variations that may occur in the interest rates at which investors may be able
to reinvest funds received by them as principal distributions of the Class B
certificates and consequently does not purport to reflect the return on any
investment in that class when reinvestment rates are considered.
<TABLE>
CLASS B PRE-TAX YIELD TO MATURITY
(Libor + 0%)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 9.76% 9.74% 9.70% 9.60%
27% 9.74% 9.72% 9.68% 9.62%
35% 9.72% 9.69% 9.66% 9.62%
</TABLE>
<TABLE>
CLASS B PRE-TAX YIELD TO MATURITY
(Libor + 2.00% over 18 months)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 9.67% 9.63% 9.59% 9.53%
27% 9.65% 9.63% 9.60% 9.55%
35% 9.64% 9.62% 9.60% 9.58%
</TABLE>
S-73
<PAGE>
<TABLE>
CLASS B PRE-TAX YIELD TO MATURITY
(Libor + 3.00% over 6 months)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 9.58% 9.56% 9.54% 3.04%
27% 9.59% 9.57% 9.55% 1.92%
35% 9.60% 9.58% 9.56% 1.75%
</TABLE>
<TABLE>
CLASS B WEIGHTED AVERAGE LIFE (YEARS)
(Libor + 0%)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 1.30 1.40 1.58 2.64
27% 1.38 1.50 1.72 2.40
35% 1.50 1.66 1.89 2.37
</TABLE>
<TABLE>
CLASS B WEIGHTED AVERAGE LIFE (YEARS)
(Libor + 2.00% over 18 months)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 1.84 2.24 2.89 5.04
27% 1.97 2.27 2.70 4.07
35% 2.12 2.36 2.61 3.20
</TABLE>
<TABLE>
CLASS B WEIGHTED AVERAGE LIFE (YEARS)
(Libor + 3.00% over 6 months)
<CAPTION>
DEFAULT RATES
------------------ --------------------------- ------------------------ -------------------------
CPR % 0.00% CDR 1.00% CDR 2.00% CDR 4.00% CDR
- ----------- ------------------ --------------------------- ------------------------ -------------------------
<S> <C> <C> <C> <C>
20% 3.13 3.68 4.53 7.77
27% 2.94 3.37 4.08 6.70
35% 2.75 3.01 3.55 5.95
</TABLE>
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The depositor will issue the Home Loan Asset Backed Certificates, Series
1999-3 under the Pooling and Master Servicing Agreement. The Class A-1, Class
A-2 and Class B certificates will be offered by this prospectus supplement. The
offered certificates, together with the Class X and the Class R certificates,
will represent in the aggregate the entire beneficial interest in the trust.
Distributions on the Class A-1 certificates will be made primarily from
payments on the Pool 1 Loans. The Class A-1 certificates will have an
approximate aggregate original principal balance of $325,000,000 subject to a
permitted variance of plus or minus 5%. The Class A-1 certificates will bear
interest at a per annum pass-through rate equal to the lesser of:
(1) One-Month LIBOR plus 0.355%, or from and after the first day of the
Accrual Period in which the Optional Termination Date occurs,
One-Month LIBOR plus 0.710% and
(2) the Net Interest Rate for the Class A-1 certificates.
Distributions on the Class A-2 certificates will be made primarily from
payments on the Pool 2 Loans. The Class A-2 certificates will have an
approximate aggregate original principal balance of $161,000,000, subject to a
permitted variance of plus or minus 5%. The Class A-2 certificates will bear a
per annum pass-through rate equal to the lesser of:
(1) One-Month LIBOR plus 0.395%, or from and after the first day of the
Accrual Period in which the Optional Termination Date occurs,
One-Month LIBOR plus 0.790% and
(2) the Net Interest Rate for the Class A-2 certificates.
Distributions on the Class B certificates will be made primarily from
principal and interest from each pool of loans. The Class B certificates will
have an approximate aggregate original principal balance of $14,257,334, subject
to a permitted variance of plus or minus 5%. The Class B certificates will bear
interest at a per annum pass-through rate equal to the lesser of:
(1) 9.250%, or from and after the first day of the Accrual Period in which
the Optional Termination Date occurs, 9.750% and
(2) the Net Interest Rate for the Class B certificates.
The Net Interest Rate for any distribution date and each class of Class A
certificates will be equal to the annualized percentage, expressed on an
actual/360 basis, derived from the fraction,
o the numerator of which is the aggregate amount of all interest due
on the loans in both pools during the related Due Period, minus the
Certificateholders' Interest Distribution Amount for the Class B
certificates for that distribution date, and minus the aggregate
Interest Reduction Amount for both pools, and
o the denominator of which is the aggregate principal balance of the
Class A-1 and Class A-2 certificates immediately prior to the
related distribution date.
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<PAGE>
The Net Interest Rate for any distribution date and the Class B
certificates will be equal to the annualized percentage, expressed on a 30/360
basis, derived from the fraction,
o the numerator of which is the aggregate amount of all interest due
on the loans in both pools during the related Due Period, minus the
aggregate Interest Reduction Amount for both pools, and
o the denominator of which is the aggregate principal balance of the
loans in both pools as of the first day of the related Due Period.
The Interest Reduction Amount for any distribution date and any pool will be
equal to the sum of the Master Servicer Fee, the Trustee Fee and the Guaranty
Insurance Premium payable with respect to the loans in that pool. On each
distribution date on or after the April 2000 distribution date, the Net Interest
Rate for the Class A-1 and Class A-2 certificates will be decreased by 0.50% per
annum.
The Class X and Class R certificates are not being offered through this
prospectus supplement or the accompanying prospectus.
On each distribution date, to the extent of available funds, the trustee
or its designee will be required to pay to the persons in whose names the
certificates are registered on the last business day of the month immediately
preceding the month of the related distribution date, the portion of the
aggregate distribution to be made to each holder of a certificate as described
below. Before any termination of the book-entry provisions, distributions on the
certificates will be made to the Security Owners only through DTC and
participants in the United States, or Cedelbank or The Euroclear System, or
indirectly through participants in similar systems in Europe. See "Description
of the Securities--Book-Entry Registration of Securities" in the accompanying
prospectus.
Beneficial ownership interests in the certificates may only be held in
minimum denominations of $25,000 and integral multiples of $1 in excess of that
denomination. However, one certificate of each class may be issued in a
denomination as may be necessary to represent the remainder of the aggregate
amount of certificates.
"One-Month LIBOR" means the London interbank offered rate for one-month
United States dollar deposits. On the second LIBOR Business Day preceding the
first day of the Accrual Period, One-Month LIBOR will be established by the
trustee. One-Month LIBOR will equal, for any Accrual Period, the rate for United
States dollar deposits for one month that appears on the Telerate Screen Page
3750 as of 11:00 a.m., London, England time, on the second LIBOR Business Day
prior to the first day of the Accrual Period. One-Month LIBOR will equal the
Reference Bank Rate if:
(1) One-Month LIBOR does not appear on Telerate Screen Page 3750,
(2) any other page as may replace this page on this service, or
(3) if this service is no longer offered, any other service for
displaying One-Month LIBOR or comparable rates as may be reasonably
selected by the trustee after consultation with the master servicer.
If no quotations can be obtained and no Reference Bank Rate is available,
One-Month LIBOR will be One-Month LIBOR applicable to the preceding distribution
date.
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<PAGE>
"Telerate Page 3750" means the display page so designated on the Bridge
Telerate Service, or any other page as may replace page 3750 on that service for
the purpose of displaying London interbank offered rates of major banks.
"Reference Bank Rate" will be, with respect to any Accrual Period, as
follows: the arithmetic mean of the offered rates for United States dollar
deposits for one month which are offered by the banks selected by the trustee as
of 11:00 a.m., London, England time, on the second LIBOR Business Day prior to
the first day of the Accrual Period to prime banks in the London interbank
market for a period of one month in amounts approximately equal to the aggregate
principal balance of the Class A-1 and Class A-2 certificates. This rate must be
provided by at least two banks. 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 trustee after consultation
with the master servicer, as of 11:00 a.m., New York time, on that date for
loans in U.S. Dollars to leading European banks for a period of one month in
amounts approximately equal to the aggregate principal balance of the Class A-1
and Class A-2 certificates. If no quotations can be obtained, the Reference Bank
Rate will be the Reference Bank Rate applicable to the preceding Accrual Period.
The Reference Bank Rate may be rounded upwards, if necessary, to the nearest
one-sixteenth of one percent.
"LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
Listed below is monthly One-Month LIBOR on the last day of the related
calendar month beginning in 1995, as published by Bloomberg, L.P. The following
does not purport to be a prediction of the performance of One-Month LIBOR in the
future.
MONTH 1999 1998 1997 1996 1995
- ----- ---- ---- ---- ---- ----
January....... 4.939% 5.598% 5.438% 5.438% 6.094%
February...... 4.963% 5.688% 5.438% 5.313% 6.125%
March......... 4.937% 5.688% 5.688% 5.438% 6.125%
April......... 4.903% 5.656% 5.688% 5.438% 6.063%
May........... 4.944% 5.656% 5.688% 5.438% 6.063%
June.......... 5.236% 5.660% 5.688% 5.496% 6.125%
July.......... 5.194% 5.656% 5.625% 5.465% 5.875%
August........ 5.375% 5.645% 5.656% 5.438% 5.875%
September..... 5.375% 5.656% 5.434% 5.875%
October....... 5.239% 5.648% 5.375% 5.832%
November...... 5.621% 5.969% 5.563% 5.977%
December...... 5.064% 5.719% 5.500% 5.688%
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the trustee and the trustee's calculation of the Pass-Through Rate for the
related Accrual Period shall, in the absence of manifest error, be final and
binding. Each applicable rate of interest may be obtained by telephoning the
trustee's agent at (704) 383-9568.
DISTRIBUTIONS ON THE CERTIFICATES
Available Collection Amount. Distributions on each class of certificates
on each distribution date will be made from the related Available Collection
Amount. The servicer will calculate the
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<PAGE>
Available Collection Amount for each pool on the 18th calendar day of each month
or, if this day is not a business day, then the immediately preceding business
day.
On each distribution date, interest and principal payments on each class
of the certificates will generally be made from the related Available
Distribution Amount and, in the case of the Class A-1 and Class A-2
certificates, any related Insured Payments for the related distribution date.
Trust Fees and Expenses will be allocated to and will reduce the Available
Collection Amount with respect to each pool pro rata, on the basis of the
respective aggregate principal balance of the loans in each pool. However, the
Guaranty Insurance Premium will be allocated on the basis of the respective
principal balances of the Class A-1 and Class A-2 certificates. If for any
distribution date the securities insurer is required to make an Insured Payment,
the trustee must make a claim for this Insured Payment under the Guaranty Policy
by submitting the required notice prior to 12:00 noon, New York time, on the
second business day preceding this date. See "Description of Credit
Enhancement--Financial Guaranty Insurance Policy" in this prospectus supplement.
Distributions of Interest. For each class of offered certificates,
interest on the principal balance of that class will accrue during each Accrual
Period at the applicable Pass-Through Rate for that class. Interest will be
payable to the holders of the offered certificates monthly on each distribution
date, commencing in October, 1999.
On each distribution date, interest distributions on each class of the
offered certificates will generally be made from the related Available
Distribution Amount and, in the case of the Class A certificates, any related
Insured Payments for the distribution date. Under some circumstances, and in the
case of the Class A certificates, if a Securities Insurer Default occurs, the
amount available for interest distributions on the offered certificates could be
less than the amount of interest distributable on the offered certificates on
any distribution date. In this event, each certificate of a class will receive
its ratable share, based on the aggregate amount of interest due to the
certificates of that class, of the remaining amount available to be distributed
as interest from the Available Distribution Amount of that related class. In
addition, any related interest deficiency will be carried forward as a
Certificateholders' Interest Shortfall Amount. The Certificateholders' Interest
Shortfall Amount will be distributed to holders of the offered certificates on
the subsequent distribution dates to the extent that sufficient funds are
available from the Available Distribution Amount for the related class. Any
related interest deficiency could occur, for example, if delinquencies or losses
realized on the loans were exceptionally high or were concentrated in a
particular month and Insured Payments were not timely received under the
Guaranty Policy. No interest will accrue on any Certificateholders' Interest
Shortfall Amount.
Distributions of Principal. Principal distributions will be made to the
holders of the offered certificates on each distribution date in an amount
described under "--Priority of Distributions" below. The aggregate distributions
of principal to the offered certificates will not exceed the initial principal
balance for the related class of offered certificates.
Realized Losses. The principal balance of the Class B certificates will be
reduced without distribution on any distribution date as a write-off to the
extent of any realized losses that are allocated to that class. Realized losses
with respect to any distribution date means the amount, if any, by which
(1) the aggregate principal balance of the Class A certificates and the
Class B certificates after giving effect to all distributions made
on that distribution date exceeds
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<PAGE>
(2) the aggregate principal balance of the loans in both pools after
giving effect to any payments of principal received or advanced with
respect to the related Due Period.
The aggregate amount of realized losses that may be allocated to the Class B
certificates may not exceed the initial principal balance of the Class B
certificates. Realized losses allocated to the Class B certificates will be
reimbursable to the Class B certificates, to the extent of available funds as
described under "--Priority of Distributions" below.
PRIORITY OF DISTRIBUTIONS
On each distribution date and for each class of certificates, the trustee
is required to make the following distributions and transfers from funds on
deposit in the Distribution Account, net of Trust Fees and Expenses and, if
applicable, from the Reserve Account and the Pre-Funding Account as specified
below, in the following order of priority:
(a) with respect to amounts from the Pool 1 Loans:
(1) from the Available Distribution Amount for the Pool 1 Loans
and any Insured Payments for the Class A-1 certificates, to
the Class A-1 certificates, the related Certificateholders'
Interest Distribution Amount;
(2) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class A-2 certificates, in an amount up to the
shortfall, if any, in the amount available to pay the
Certificateholders' Interest Distribution Amount to the Class
A-2 certificates required by clause (b)(1) below;
(3) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class B certificates, the related Allocation
Percentage of the Certificateholders' Interest Distribution
Amount for the Class B certificates;
(4) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class B certificates, the shortfall, if any,
in the amount available to pay the Certificateholders'
Interest Distribution Amount to the Class B certificates
required by clause (b)(3) below;
(5) from any remaining Available Distribution Amount for the Pool
1 Loans, the Regular Principal Distribution Amount for the
Pool 1 Loans,
(A) first, to the Class A-1 certificates, until the
principal balance of the Class A-1 certificates has been
reduced to zero, and
(B) second, to the Class A-2 certificates, until the
principal balance of the Class A-2 certificates has been
reduced to zero;
(6) from any remaining amounts in the Reserve Account and any
remaining Available Distribution Amount for the Pool 1 Loans,
in that order, and any Insured Payments for the Class A-1
certificates, to the Class A-1 certificates, in an amount not
to exceed the Overcollateralization Deficit for the Class A-1
certificates in reduction of the principal balance of the
Class A-1 certificates until the principal balance is reduced
to zero;
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<PAGE>
(7) from any remaining amounts on deposit in the Reserve Account
and any remaining Available Distribution Amount for the Pool 1
Loans, in that order, to the securities insurer, to reimburse
the securities insurer for any Securities Insurer
Reimbursement Amounts owing to the securities insurer under
the Insurance Agreement with respect to the Class A-1
certificates, and with respect to the Class A-2 certificates
for which funds are not available to reimburse the securities
insurer under clause (b)(7) below;
(8) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class A-1 certificates, in an amount up to the
remaining Overcollateralization Deficiency Amount for the
Class A-1 certificates after making the distributions required
by clause (a)(6) above, as a reduction of the principal
balance of the Class A-1 certificates, until the principal
balance is reduced to zero;
(9) from any remaining amounts on deposit in the Reserve Account
and any remaining Available Distribution Amount for the Pool 1
Loans, in that order, to the Class A-2 certificates, in an
amount up to any Overcollateralization Deficiency Amount for
the Class A-2 certificates, as a reduction of the principal
balance of the Class A-2 certificates, until the principal
balance is reduced to zero. For this purpose, the
Overcollateralization Deficiency Amount will be calculated
after taking into account the distribution of the amounts
required by clauses (b)(1) - (b)(8) below on the Class A-2
certificates;
(10) from the remaining Available Distribution Amount for the Pool
1 Loans, the related Class B Principal Distribution Amount, to
the Class B certificates until the principal balance of the
Class B certificates has been reduced to zero;
(11) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class A-1 certificates, any
Certificateholders' Interest Carry-Forward Amount for that
class;
(12) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class A-2 certificates, in an amount up to the
shortfall, if any, in the amount available to pay the
Certificateholders' Interest Carry-Forward Amount to the Class
A-2 certificates required by clause (b)(11) below remaining
after making distributions of the amounts required by clauses
(b)(1) - (b)(11) below;
(13) from any remaining Available Distribution Amount for the Pool
1 Loans, to the Class B certificates, any Certificateholders'
Interest Carry-Forward Amount for that class;
(14) from any amounts on deposit in the Reserve Account in excess
of the Reserve Account Requirement for that distribution date
after making the distributions required by clauses (a)(1) -
(a)(13) above and (b)(1) - (b)(13) below, and any remaining
Available Distribution Amount for the Pool 1 Loans, in that
order, to the Class B certificates, until the principal
balance of the Class B certificates has been reduced to zero;
(15) on the distribution date following the Due Period in which the
termination of the Pre-Funding Period occurs, the Pool 1
Pre-Funding Amount, if any, that is on deposit in the
Pre-Funding Account will be distributed to the Class A-1 and
Class B certificates,
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<PAGE>
in reduction of their principal balances, pro rata, based
on their Pool 1 Pre-Funding Percentages;
(16) from any remaining Available Distribution Amount for the Pool
1 Loans, to reimburse the Class B certificates in an amount up
to the aggregate realized losses allocated to the Class B
certificates as a reduction of their principal balance,
together with interest at the Pass-Through Rate for the Class
B certificates; and
(17) from any remaining Available Distribution Amount for the Pool
1 Loans,
(A) first, concurrently, to the servicer in an amount needed
to reimburse the servicer for any non-recoverable
Servicing Advances, and to the master servicer and the
trustee in an amount needed to reimburse the master
servicer and the trustee for any non-recoverable Monthly
Advances, and
(B) second, to the holders of the Class X and Class R
certificates.
(b) with respect to amounts from the Pool 2 Loans:
(1) from the Available Distribution Amount for the Pool 2 Loans
and any Insured Payments for the Class A-2 certificates, to
the Class A-2 certificates, the related Certificateholders'
Interest Distribution Amount;
(2) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class A-1 certificates, in an amount up to the
shortfall, if any, in the amount available to pay the
Certificateholders' Interest Distribution Amount to the Class
A-1 certificates required by clause (a)(1) above;
(3) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class B certificates, the related Allocation
Percentage of the Certificateholders' Interest Distribution
Amount for the Class B certificates;
(4) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class B certificates, the shortfall, if any,
in the amount available to pay the Certificateholders'
Interest Distribution Amount to the Class B certificates
required by clause (a)(3) above;
(5) from any remaining Available Distribution Amount for the Pool
2 Loans, the Regular Principal Distribution Amount for the
Pool 2 Loans,
(A) first, to the Class A-2 certificates, until the
principal balance of the Class A-2 certificates has been
reduced to zero, and
(B) second, to the Class A-1 certificates, until the
principal balance of the Class A-1 certificates has been
reduced to zero;
(6) from any remaining Available Distribution Amount for the Pool
2 Loans and any Insured Payments for the Class A-2
certificates, to the Class A-2 certificates, in an amount not
to exceed the Overcollateralization Deficit for the Class A-2
certificates in reduction of the principal balance of the
Class A-2 certificates until the principal balance is reduced
to zero;
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<PAGE>
(7) from any remaining amounts on deposit in the Reserve Account
and any remaining Available Distribution Amount for the Pool 2
Loans, in that order, to the securities insurer, to reimburse
the securities insurer for any Securities Insurer
Reimbursement Amounts owing to the securities insurer under
the Insurance Agreement with respect to the Class A-2
certificates, and with respect to the Class A-1 certificates
for which funds are not available to reimburse the securities
insurer under clause (a)(7) above;
(8) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class A-2 certificates, in an amount up to the
remaining Overcollateralization Deficiency Amount for the
Class A-2 certificates after making the distributions required
by clause (b)(6) above, as a reduction of the principal
balance of the Class A-2 certificates, until the principal
balance is reduced to zero;
(9) from any remaining Available Distribution Amount for the Pool
2 Loans,
(A) first, to deposit in the Reserve Account, an amount so
that the funds on deposit in the Reserve Account will
equal the Reserve Account Requirement. For this purpose,
the Reserve Account Requirement will be calculated after
taking into account the distribution of the amounts
required by clauses (a)(1) - (a)(8) above; and
(B) second, to the Class A-1 certificates, in an amount up
to any Overcollateralization Deficiency Amount in excess
of amounts on deposit in the Reserve Account for the
Class A-1 certificates, as a reduction of the principal
balance of the Class A-1 certificates, until the
principal balance is reduced to zero. For this purpose,
the Overcollateralization Deficiency Amount will be
calculated after taking into account the distribution of
the amounts required by clauses (a)(1) - (a)(8) above on
the Class A-1 certificates;
(10) from the remaining Available Distribution Amount for the Pool
2 Loans, the related Class B Principal Distribution Amount, to
the Class B certificates until the principal balance of the
Class B certificates has been reduced to zero;
(11) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class A-2 certificates, any
Certificateholders' Interest Carry-Forward Amount for that
class;
(12) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class A-1 certificates, in an amount up to the
shortfall, if any, in the amount available to pay the
Certificateholders' Interest Carry-Forward Amount to the Class
A-1 certificates required by clause (a)(11) above remaining
after making distributions of the amounts required by clauses
(a)(1) - (a)(11) above;
(13) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class B certificates, any Certificateholders'
Interest Carry-Forward Amount for that class, after making
distributions of the amounts required by clause (a)(13) above;
(14) from any remaining Available Distribution Amount for the Pool
2 Loans, to the Class B certificates, until the principal
balance of the Class B certificates has been reduced to zero,
after making distributions of the amounts required by clause
(a)(14) above;
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<PAGE>
(15) on the distribution date following the Due Period in which the
termination of the Pre-Funding Period occurs, the Pool 2
Pre-Funding Amount, if any, that is on deposit in the
Pre-Funding Account will be distributed to the Class A-2 and
Class B certificates, in reduction of their principal
balances, pro rata, based on their Pool 2 Pre-Funding
Percentages;
(16) from any remaining Available Distribution Amount for the Pool
2 Loans, to reimburse the Class B certificates in an amount up
to the aggregate realized losses allocated to the Class B
certificates as a reduction of their principal balance,
together with interest at the Pass-Through Rate for the Class
B certificates, after making the distributions required by
clause (a)(16) above; and
(17) from any remaining Available Distribution Amount for the Pool
2 Loans,
(A) first, concurrently, to the servicer in an amount needed
to reimburse the servicer for any non-recoverable
Servicing Advances, and to the master servicer and the
trustee in an amount needed to reimburse the master
servicer and the trustee for any non-recoverable Monthly
Advances, and
(B) second, to the holders of the Class X and Class R
certificates.
SECURITIES INSURER REIMBURSEMENT AMOUNT
On each distribution date, the securities insurer will be entitled to be
reimbursed for:
o any unreimbursed Insured Payments in respect of the Class A
certificates not previously reimbursed in the priority set forth in
"--Priority of Distributions" in this prospectus supplement and
o any other amounts owed to the securities insurer under the Insurance
Agreement, including legal fees and other expenses incurred by the
securities insurer.
This reimbursement will include interest on these unreimbursed amounts at the
rate specified in the Insurance Agreement and any accrued and unpaid Guaranty
Insurance Premiums. In connection with each Insured Payment, the trustee, as
attorney-in-fact for the applicable holder, will be required to assign to the
securities insurer the rights of the holders of the Class A certificates with
respect to the Class A certificates. This assignment will only be to the extent
of the Insured Payments, including, without limitation, in respect of any
amounts due to the holders of the Class A certificates as a result of a
securities law violation arising from the offer and sale of the Class A
certificates. If any Securities Insurer Reimbursement Amount is outstanding, the
holders of the Class R certificates will not be entitled to receive
distributions of any amounts of Excess Spread until the securities insurer has
been distributed the applicable Securities Insurer Reimbursement Amount in full.
PRE-FUNDING ACCOUNT
On the closing date, the Original Aggregate Pre-Funding Amount, which is
approximately $121,107,988, subject to a variance of plus or minus 5% will be
deposited in the Pre-Funding Account. The Pre-Funding Account will be in the
name of the trustee and will be part of the assets of the trust. Funds in the
Pre-Funding Account will be used by the trust to acquire Subsequent Loans.
During the Pre-Funding Period, the amount on deposit in the Pre-Funding Account,
net of investment earnings on those funds, will be reduced by the amount of
funds used to purchase Subsequent Loans.
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<PAGE>
On the distribution date following the Due Period in which the termination of
the Pre-Funding Period occurs, the Pre-Funding Amount for pool, if any, that
is on deposit in the Pre-Funding Account will be paid to the holders of each
related class of certificates.
Amounts on deposit in the Pre-Funding Account will be invested in eligible
investments. Any interest and other investment earnings on amounts on deposit in
the Pre-Funding Account will be paid to the transferor.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, a portion of the sales proceeds of the certificates
will be deposited into the Capitalized Interest Account. Funds in this account
will be applied by the trustee on the distribution dates in October 1999,
November 1999 and December 1999 to cover shortfalls in interest on the offered
certificates that may arise due to the utilization of the Pre-Funding Account as
described under "--Pre-Funding Account" above. Any amounts remaining in the
Capitalized Interest Account at the end of the Pre-Funding Period will be paid
to the transferor.
OPTIONAL TERMINATION
The holders of a majority of the percentage interest in the Class R
certificates may, at their option, cause the trustee to effect an early
termination of the trust on or after any distribution date on which the
principal balance of the loans declines to 10% or less of the aggregate of the
principal balance of the Initial Loans and Subsequent Loans for both pools, as
of the applicable Cut-Off Date. If the exercise of this termination option will
result in a draw under the Guaranty Policy, this option may not be exercised
without the prior consent of the securities insurer. This termination option
will be effected by purchasing all of the loans from the trust at a price equal
to the Termination Price.
The proceeds from the related sale of loans will be paid:
(1) first, to the outstanding Trust Fees and Expenses,
(2) second, to the servicer for unreimbursed Servicing Advances and to
the master servicer and trustee for unreimbursed Monthly Advances,
including those advances deemed to be nonrecoverable,
(3) third, to the holders of Class A-1 and Class A-2 certificates, pro
rata, in an amount equal to the then outstanding principal balance
of each class plus all accrued and unpaid interest on the principal
balance of the applicable class at the applicable Pass-Through Rate,
(4) fourth, to the securities insurer the Securities Insurer
Reimbursement Amount, if any,
(5) fifth, to the holders of the Class B certificates in an amount equal
to the then outstanding principal balance of the Class B
certificates plus all accrued and unpaid interest on the principal
balance of the Class B certificates at the applicable Pass-Through
Rate,
(6) sixth, to the Class A-1 and Class A-2 certificates, pro rata, in an
amount equal to the unpaid Certificateholders' Interest
Carry-Forward Amount for each class,
(7) seventh, to the Class B certificates, in an amount equal to the
unpaid Certificateholders' Interest Carry-Forward Amount for that
class,
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(8) eighth, to the Class B certificates, in an amount equal to the
aggregate unreimbursed realized losses allocated as a reduction of
the principal balance of the Class B certificates, together with
interest at the applicable Pass-Through Rate, and
(9) ninth, to the Class X and Class R certificates, in an amount equal
to the amount of proceeds remaining, if any, after the payments
specified in clauses (1) through (7) above.
On or after any distribution date the principal balance of the loans
declines to 5% or less of the aggregate of the principal balance of the Initial
Loans and the Subsequent Loans for both pools, as of the applicable Cut-Off
Date, the securities insurer or the servicer may, at each one's option and in
that order, cause the trustee to effect an early termination of the trust. This
option may be exercised only if the holders of a majority of the percentage
interest in the Class R certificates fail to exercise their option to cause to
the trustee to effect an early termination.
DESCRIPTION OF CREDIT ENHANCEMENT
GENERAL
Credit enhancement with respect to the offered certificates will be
provided by:
o with respect to the Class A certificates, Excess Spread from the
related pool of loans,
o with respect to the Class A certificates, Excess Spread from the
other pool of loans, to the extent not needed for the other class of
Class A certificates and to the extent necessary to cover shortfalls
due to delinquencies or losses on the pool of loans backing the
related class of certificates,
o with respect to the Class B certificates, the remaining Excess
Spread from each pool of loans,
o the overcollateralization feature described below under "--Excess
Spread and Overcollateralization,"
o with respect to the Class A certificates, amounts on deposit in the
Reserve Account,
o with respect to the Class A certificates, the subordination of the
right of the Class B certificates to receive interest and principal,
respectively, and the subordination of the right of the Class X and
Class R certificates to receive distributions of any remaining
amounts from the loans,
o with respect to the Class B certificates, the subordination of the
right of the Class X and Class R certificates to receive
distributions of any remaining amounts from the loans, and
o with respect to the Class A certificates, the Guaranty Policy.
EXCESS SPREAD AND OVERCOLLATERALIZATION
A limited acceleration of the principal amortization of each class of
Class A certificates relative to the principal amortization of the related loans
has been designed to increase the Overcollateralization Amount of each class of
Class A certificates over time. This occurs by making additional distributions
of principal to the holders of the Class A certificates from the distribution of
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amounts on deposit in the Reserve Account and of Excess Spread from the related
loans until the Overcollateralization Amount is equal to the
Overcollateralization Target Amount.
If on any distribution date there exists an Overcollateralization
Deficiency Amount with respect to any class of Class A certificates,
distributions of amounts on deposit in the Reserve Account and of Excess Spread,
if any, from the related pool, or, in some cases, the other pool in the event of
shortfalls in distributions on the related class resulting from delinquencies or
losses on the related pool of loans, will be made as an additional distribution
of principal to the holders of the related class of Class A certificates as set
forth under "Description of the Certificates--Priority of Distributions" in this
prospectus supplement. These distributions of amounts on deposit in the Reserve
Account and Excess Spread are intended to accelerate the amortization of the
principal balance of the related class of Class A certificates relative to the
amortization of the loans, thereby increasing the related Overcollateralization
Amount. The relative percentage of the principal balance of a class of Class A
certificates to the principal balance of the related pool of loans will decrease
as a result of the application of amounts on deposit in the Reserve Account and
Excess Spread to reduce the principal balance of the related class.
On any distribution date with respect to which the Overcollateralization
Deficiency Amount with respect to any class of Class A certificates is equal to
zero, all or a portion of the Excess Spread for the related pool, if not
otherwise required to be paid to the other class of Class A certificates or
deposited into the Reserve Account, may be distributed to the holders of the
Class B, the Class X or the Class R certificates as described in this prospectus
supplement rather than being distributed as principal to the holders of the
related class of Class A certificates. This would have the effect of ceasing the
acceleration of principal amortization of the related class of Class A
certificates in relation to the principal amortization of the related pool until
the time that the related Overcollateralization Deficiency Amount is greater
than zero. The Overcollateralization Deficiency Amount may be greater than zero
due to a reduction in the related Overcollateralization Amount as a result of
losses or delinquencies or due to an increase in the related
Overcollateralization Target Amount as a result of the failure to satisfy
certain delinquency or loss criteria.
On any distribution date occurring on or after the Stepdown Date or the
date on which the Overcollateralization Target Amount is reduced with respect to
any class of Class A certificates, a portion of the Regular Principal
Distribution Amount, equal to the Overcollateralization Reduction Amount, will
be distributed first, to the holders of the Class B certificates, until the
principal balance of the Class B certificates has been reduced to zero and then
to the holders of the Class X and Class R certificates. This distribution will
be made only if the amount is not otherwise required to be paid to the other
class of Class A certificates or deposited into the Reserve Account pursuant to
the distribution priorities set forth under "Description of the
Certificates--Priority of Distributions" in this prospectus supplement.
The Overcollateralization Target Amount with respect to any class of Class
A certificates may decrease or "stepdown":
(1) as a result of the performance of the pool of loans with respect to
the principal amortization of the loans declining to certain levels
and the delinquency experience of the loans staying lower than
certain levels established by the securities insurer, and
(2) if following an increase in the rates of delinquencies on the loans,
the delinquency rates improve in relation to the levels established
by the securities insurer.
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The Pooling and Master Servicing Agreement provides that the securities
insurer may modify, without the requirement of an amendment to the Pooling and
Master Servicing Agreement, the manner in which the Overcollateralization Target
Amount for any class of Class A certificates is determined. As a result, the
related Overcollateralization Target Amount may be decreased at any time in the
discretion of the securities insurer, if the decrease will not cause a
downgrade, withdrawal or qualification by the rating agencies of the then
current ratings of the Class A certificates.
While the application of amounts on deposit in the Reserve Account and
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 from a particular pool of loans will be generated in sufficient
amounts to ensure that the overcollateralization level for the related class of
Class A certificates will be achieved or maintained at all times. In particular,
a high rate of delinquencies on the loans in a pool during any Due Period could
cause the amount of interest received on the related loans during the Due Period
to be less than the amount of interest distributable on the related class of
Class A certificates on the related distribution date. In this case, the
principal balance of the related class of Class A certificates could decrease at
a slower rate relative to the principal balance of the related Class A
certificates, resulting in a possible reduction of the related
Overcollateralization Amount. In addition, losses from Liquidated Loans and
Defaulted Loans will reduce the principal balance of the related loans, which in
turn will reduce the related Overcollateralization Amount. See "Risk
Factors--Credit Enhancement May Not Be Adequate" in this prospectus supplement.
RESERVE ACCOUNT
The Pooling and Master Servicing Agreement requires the trustee to
establish and maintain the Reserve Account for the benefit of the holders of the
Class A certificates and the securities insurer. The trustee will be required to
deposit into the Reserve Account certain amounts of Excess Spread from the Pool
2 Loans on each distribution date as described in clause (b)(9)(A) under
"Description of the Certificates--Priority of Distributions" in this prospectus
supplement. The trustee will be required to deposit these amounts of Excess
Spread, if any, on each distribution date until the balance on deposit in the
Reserve Account is equal to the Reserve Account Requirement.
Funds in the Reserve Account will be available to cover shortfalls in
distributions on the Class A certificates resulting from losses or delinquencies
on the loans and will be available to reimburse the securities insurer for
amounts owing to it. In addition, to the extent not required to be distributed
to the Class A certificates or paid to the securities insurer, the funds on
deposit in the Reserve Account may be distributed to the Class B certificates.
Funds on deposit in the Reserve Account which exceed the amount required to be
on deposit in the account for a distribution date and are not otherwise
distributable to the Class A certificates or Class B certificates will be
distributable to the Class X and Class R certificates.
SUBORDINATION
Payments of interest and principal will be made first to each class of
Class A certificates prior to the respective amounts being paid to the Class B
certificates. The rights of the holders of the Class X and Class R certificates
to receive any distributions on any distribution date will be subordinated to
the rights of the holders of each class of offered certificates. The
subordination of the Class B, Class X and Class R certificates is intended to
enhance the likelihood of the regular receipt of interest and principal due to
the holders of each class of Class A certificates and to afford the Class A
certificates protection against losses on the loans. The subordination of the
Class X and Class R certificates is
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intended to enhance the likelihood of receipt of interest and principal due to
the holders of the Class B certificates and to afford the Class B certificates
protection against losses on the loans. See "Risk Factors--Credit Enhancement
May Not Be Adequate" in this prospectus supplement.
FINANCIAL GUARANTY INSURANCE POLICY
The following information has been supplied by Ambac Assurance Corporation
for inclusion in this prospectus supplement. No representation is made by the
depositor, the transferor, the servicer, the trustee, the master servicer, the
underwriters or any of their affiliates as to the accuracy or completeness of
this information.
The securities insurer, in consideration of the payment of the premium and
subject to the terms of the Guaranty Policy, agrees unconditionally and
irrevocably to pay to the trustee for the benefit of the applicable owners of
the Class A certificates, that portion of the Insured Amounts which shall become
Due for Payment but shall be unpaid by reason of Nonpayment.
The securities insurer will make such payments to the trustee from its own
funds on the later of:
(a) the business day following receipt of the Notice to the securities
insurer of Nonpayment or
(b) the business day on which the Insured Amounts are Due for Payment.
The securities insurer will be subrogated to all the certificateholders' rights
to distribution on the Class A certificates to the extent of the insurance
disbursements made. Once payment of the Insured Amounts have been made to the
trustee, the securities insurer will have no further obligation in respect of
the Insured Amounts. Payment of Insured Amounts will be made only at the time
set forth in the Guaranty Policy. No accelerated payment of Insured Amounts will
be made regardless of any acceleration of any of the Class A certificates,
unless the acceleration is at the sole option of the securities insurer.
The Guaranty Policy does not cover shortfalls, if any, attributable to the
liability of the trust or the trustee for withholding taxes, if any, including
interest and penalties related to that liability. The Guaranty Policy does not
cover, and Insured Payments do not include, any shortfalls due to the
application of the Soldiers' and Sailors' Civil Relief Act, and any shortfalls
on the Class A certificates resulting from the imposition of the available funds
cap.
The securities insurer will pay any Insured Payment that is a Preference
Amount on the business day following receipt on a business day by the securities
insurer of a certified copy of the order requiring the return of a preference
payment, and other documentation as is reasonably required by the securities
insurer. This documentation must be in a form satisfactory to the securities
insurer. However, if the documents are received after 12:00 noon New York City
time on that business day, they will be deemed to be received on the following
business day.
Insured Payments due under the Guaranty Policy, unless otherwise stated in
the Guaranty Policy, will be disbursed by the securities insurer to the trustee
on behalf of the holders of the Class A certificates by wire transfer or
immediately available funds in the amount of the Insured Payment.
Any notice under the Guaranty Policy may be made at the address listed
below for the securities insurer or such other address as the securities insurer
specifies in writing to the trustee.
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The notice address of the securities insurer is One State Street Plaza,
New York, New York 10004, Attention: General Counsel, or such other address as
the securities insurer shall specify to the trustee in writing. The Guaranty
Policy is being issued under and pursuant to, and will be construed under, the
laws of the State of New York, without giving effect to the conflict of laws
principles thereof.
THE INSURANCE PROVIDED BY THE GUARANTY POLICY IS NOT COVERED BY THE
PROPERTY/CASUALTY INSURANCE SECURITY FUND SPECIFIED BY THE INSURANCE LAWS OF THE
STATE OF NEW YORK.
The Guaranty Policy is not cancelable for any reason. The premium on the
Guaranty Policy is not refundable for any reason.
THE SECURITIES INSURER
The following information has been supplied by Ambac Assurance Corporation
as securities insurer for inclusion in this prospectus supplement. This
information has not been reviewed by the transferor, the depositor, the master
servicer, the servicer, the trustee, the underwriters or any of their respective
affiliates.
The securities insurer is a Wisconsin-domiciled stock insurance
corporation regulated by the Office of the Commissioner of Insurance of the
State of Wisconsin and is licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
securities insurer primarily insures newly-issued municipal and structured
finance obligations. The securities insurer is a wholly-owned subsidiary of
Ambac Financial Group, Inc. -- formerly AMBAC Inc. -- a 100% publicly-held
company. Moody's Investors Service, Inc., Standard & Poor's and Fitch IBCA, Inc.
have each assigned a triple-A financial strength rating to the securities
insurer.
The following financial statements are incorporated by reference into this
prospectus supplement and shall be deemed to be a part of this prospectus
supplement:
(1) the consolidated financial statements of the securities insurer and
subsidiaries as of December 31, 1998 and December 31, 1997 and for
each of the years in the three-year period ended December 31, 1998
prepared in accordance with generally accepted accounting
principles, included in the annual report on Form 10-K of Ambac
Financial Group, Inc. These financial statements were filed with the
SEC on March 30, 1999, SEC File No. 1-10777, and
(2) the unaudited consolidated financial statements of the securities
insurer and subsidiaries as of June 30, 1999 and for the periods
ending June 30, 1999 and June 30, 1998, included in the quarterly
report on Form 10-Q of Ambac Financial Group, Inc. for the period
ended June 30, 1999. These financial statements were filed with the
SEC on August 13, 1999.
Any statement contained in a document incorporated by reference into this
prospectus supplement shall be modified or superseded for the purposes of this
prospectus supplement to the extent that a statement contained in this
prospectus supplement by reference also modifies or supersedes that particular
statement. Any modified or superseded statement shall not be deemed, except as
so modified or superseded, to constitute a part of this prospectus supplement.
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All financial statements of the securities insurer and subsidiaries
included in documents filed by Ambac Financial Group, Inc. with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as
amended, subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the Class A certificates shall be deemed to be
incorporated by reference into this prospectus supplement from the respective
dates of filing those documents.
The following table sets forth the capitalization of the securities
insurer as of December 31, 1996, December 31, 1997, December 31, 1998 and June
30, 1999, respectively, in conformity with generally accepted accounting
principles.
AMBAC ASSURANCE CORPORATION
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30,
1996 1997 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
(UNAUDITED)
Unearned premiums...................... $995 $1,184 $1,303 $1,349
Other liabilities...................... 259 562 548 413
------ ------ ------ ------
Total Liabilities...................... $1,254 $1,746 $1,851 $1,762
====== ====== ====== ======
Stockholder's equity
Common stock........................ $82 $82 $82 $82
Additional paid-in capital.......... 515 521 541 644
Accumulated other comprehensive
income.............................. 66 118 138 39
Retained earnings................... 992 1,180 1,405 1,530
------ ------ ------ ------
Total stockholder's equity............. $1,655 $1,901 $2,166 $2,295
------ ------ ------ ------
Total liabilities and stockholder's
equity................................. $2,909 $3,647 $4,017 $4,057
====== ====== ====== ======
</TABLE>
Components of stockholder's equity have been restated for all periods
presented to reflect "accumulated other comprehensive income" in accordance with
the Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive
Income" adopted by the securities insurer effective January 1, 1998. As this new
standard only requires additional information in the financial statements, it
does not affect the securities insurer's financial position or results of
operations.
For additional financial information concerning the securities insurer,
see the audited and unaudited financial statements of the securities insurer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the securities insurer incorporated by reference into this
prospectus supplement and copies of the securities insurer's annual statement
for the year ended December 31, 1998 prepared in accordance with statutory
accounting standards are available, without charge, from the securities insurer.
The address of the securities insurer's administrative offices and its telephone
number are One State Street Plaza, 17th Floor, New York, New York 10004 and
(212) 668-0340.
The securities insurer makes no representation regarding certificates or
the advisability of investing in the certificates. In addition, the securities
insurer makes no representation regarding, nor has it participated in the
preparation of, this prospectus supplement other than the information
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supplied by the securities insurer and presented under the headings "Description
of Credit Enhancement--The Financial Guaranty Policy" and "--The Securities
Insurer" in this prospectus supplement, the definitions for "Due for Payment",
"Insured Amounts", "Insured Payments", "Nonpayment", "Notice" and "Preference
Amount" contained in the "Glossary of Terms" in this prospectus supplement, and
in the financial statements incorporated by reference in this prospectus
supplement.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the Transfer and Servicing Agreements. A
copy of the Pooling and Master Servicing Agreement and the Servicing Agreement
will be filed with the SEC following the issuance of the certificates. 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
with the Transfer and Servicing Agreements, replaces, the description of the
general terms and provisions of the Transfer and Servicing Agreements set forth
under the heading "Description of the Securities" in the accompanying
prospectus, to which description reference is made by this prospectus
supplement.
SALE AND ASSIGNMENT OF THE LOANS
On the closing date, all of the transferor's right, title and interest in
and to the Initial Loans will be conveyed from the transferor to the depositor
and then from the depositor to the trust. During the Pre-Funding Period,
Subsequent Loans may be conveyed by the transferor to the depositor and by the
depositor to the trust.
In addition, the transferor will, as to each loan, deliver to the
custodian,
o the related note endorsed in blank or to the order of the trustee
without recourse,
o any assumption and modification agreements,
o the mortgage, deed of trust, or other similar security instruments,
with evidence of recording indicated on the instrument, except for
any mortgage not returned from the public recording office,
o an assignment of the Mortgage, if any, in the name of the trustee,
or in blank, in recordable form,
o a title insurance policy or, if the policy has not yet been issued,
a written commitment or interim binder or preliminary report of
title issued and
o any intervening assignments of the Mortgage.
Subject to the confirmation by the rating agencies and to the approval of
the securities insurer, with respect to the loans secured by mortgaged
properties located in particular states, the transferor will not be required to
record assignments of the Mortgages to the trustee in the real property records
of the related states. In these circumstances, the transferor will deliver to
the trustee the assignments of the Mortgages in the name of the trustee, or in
blank, and in recordable form. The transferor, in its capacity as the master
servicer, will retain the record title to these Mortgages under the applicable
real property records, on behalf of the trustee and the holders of the notes. In
all other circumstances,
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pursuant to the direction of the rating agencies or the securities insurer,
assignments of the Mortgages to the trustee will be recorded in the real
property records for those states in which this type of recording is deemed
necessary to protect the trustee's interest in the loans against the claims of
creditors of the transferor or subsequent purchasers. In these circumstances,
the transferor will deliver to the custodian after recordation the assignments
of the Mortgages in the name of the trustee.
The trustee or its custodian will agree, for the benefit of the holders of
the certificates, to review each Trustee's Loan File delivered to it within 45
days after the transfer of the related loan to the trustee to ascertain that all
required documents have been executed and received. Subject to the 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.
The recordation of the assignments of the mortgages in favor of the
trustee is generally not necessary to effect a transfer of the loans to the
trustee. However, if the transferor or the depositor were to sell, assign,
satisfy or discharge any loan prior to recording the related assignment in favor
of the trustee, the other parties to this sale, assignment, satisfaction or
discharge may have rights superior to those of the trustee. In some states, in
the absence of this type of recordation of the assignments of the mortgages, the
transfer to the trustee of the loans may not be effective against creditors or
purchasers from the transferor or a trustee in bankruptcy of the transferor. If
these other parties, creditors or purchasers have rights to the loans that are
superior to those of the trustee, you could lose the right to future payments of
principal and interest from the loans. As a result, you could suffer a loss of
principal and interest to the extent that the related loss is not otherwise
covered by the applicable credit enhancement. See "Risk Factors--Credit
Enhancement May Not Be Adequate" in this prospectus supplement.
REPRESENTATIONS AND WARRANTIES
In the Pooling and Master Servicing Agreement, the transferor will
represent and warrant, among other things, that:
(1) the information with respect to each loan set forth in the schedule
appearing as an exhibit to the Pooling and Master Servicing
Agreement is true and correct in all material respects;
(2) 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;
(3) as of the applicable Cut-Off Date,
(a) no more than approximately 1.50% of the loans were 30-59 days
past due;
(b) no more than approximately 0.50% of the loans were 60-89 days
past due; and
(c) none of the loans were more than 89 days past due; and
(4) at origination, each loan complied in all material respects with
applicable state and federal laws.
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REPURCHASE OF LOANS
The transferor will have a limited option after the closing date to
repurchase any Defaulted Loan. Each purchase of a Defaulted Loan will be
conducted in the same manner as a repurchase of a Defective Loan as described
below. The transferor will also be obligated either to repurchase any Defective
Loan or to remove the Defective Loan and substitute a Qualified Substitute Loan.
The repurchase of any loan, rather than the replacement of the loan through
substitution, will result in accelerated principal payments on the offered
certificates.
Unless waived by the securities insurer, the transferor is required:
(1) within 60 days after discovery or notice of a breach or defect, to
cure in all material respects any breach of the representations or
warranties which materially and adversely affects the value of a
loan or the interests of the securities insurer or the trustee in
that loan or as to which a material document deficiency exists, or
(2) on or before the Determination Date immediately succeeding the end
of this 60 day period, to repurchase the Defective Loan at a price
equal to:
(a) the principal balance of the Defective Loan as of the date of
repurchase,
(b) plus all accrued and unpaid interest on the Defective Loan
from the date to which interest was last paid to but not
including the date of repurchase computed at the applicable
loan interest rate,
(c) plus the amount of any unreimbursed Servicing Advances and
Monthly Advances made by the servicer, the master servicer and
the trustee, respectively, with respect to the Defective Loan.
Instead of repurchasing a Defective Loan, the transferor may replace the
Defective Loan with one or more Qualified Substitute Loans. If the aggregate
outstanding principal balance plus all accrued and unpaid interest of the
Qualified Substitute Loan(s) is less than the outstanding principal balance of
the Defective Loan(s) plus all accrued and unpaid interest, the transferor will
also remit for distribution to the holders of the related class of certificates
an amount equal to the shortfall. This will result in a prepayment of principal
on the related class of offered certificates for the amount of the shortfall.
At any time, the transferor may not be capable, financially or otherwise,
of repurchasing Defective Loans or substituting Qualified Substitute Loans for
Defective Loans in the manner described in this section. Events relating to the
transferor and its operations may occur that would adversely affect the ability
of the transferor to repurchase or replace Defective Loans. These events include
the sale or other disposition of all or any significant portion of the assets of
the transferor. If the transferor is unable to repurchase or replace a Defective
Loan, the servicer will utilize other accepted servicing procedures to realize
any reasonable recovery of net proceeds from the Defective Loan.
FEES AND EXPENSES
The Trust Fees and Expenses consist of the following:
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(1) as compensation for its services pursuant to the Pooling and Master
Servicing Agreement and the Servicing Agreement, the servicer is
entitled to the Servicing Compensation, including the Servicing Fee
which is payable from the Master Servicer Fee, and reimbursement as
described under "--Servicing" below, and the master servicer is
entitled to the Master Servicer Compensation as described under the
caption "Master Servicer" in this prospectus supplement;
(2) as compensation for its services pursuant to the Pooling and Master
Servicing Agreement, the trustee is entitled to a monthly fee. The
amount of this fee is equal to one-twelfth of the product of .0075%
and the principal balance of the loans as of the first day of the
immediately preceding Due Period, or as of the Cut-Off Date, with
respect to the first Due Period, and reimbursement of expenses;
(3) as compensation for issuing the Guaranty Policy, the security
insurer is entitled to a Guaranty Insurance Premium.
SERVICING
In consideration for the performance of the daily loan servicing functions
for the loans, the servicer is entitled to receive a monthly servicing fee as to
each loan. The Servicing Fee for each loan will be an amount up to, and payable
from, the Master Servicing Fee. See "--Servicer Determinations and Events of
Defaults" below. The servicer may subcontract its servicing obligations pursuant
to a subservicing agreement. However, the servicer will not be relieved of its
servicing obligations and duties with respect to any subserviced loans. The
servicer will pay the fees of any subservicer out of the amounts it receives as
the Servicing Fee. In addition to the Servicing Fee, the servicer is entitled to
retain additional servicing compensation in the form of assumption, modification
and other administrative fees, insufficient funds charges, and some other
servicing-related penalties, excluding prepayment penalties, and fees.
If a delinquency or default with respect to a loan occurs, the servicer
will have no obligation to advance scheduled monthly payments of principal or
interest with respect to the loan. However, the master servicer will advance
Monthly Advances. In the event the master servicer fails to make any required
Monthly Advance, the trustee will be required to make the Monthly Advance. The
servicer will make reasonable and customary expense advances with respect to the
loans in accordance with accepted servicing procedures. These advances are
referred to in this prospectus supplement as Servicing Advances. For example,
the Servicing Advances with respect to a loan may include costs and expenses
advanced for the preservation, restoration and protection of the related
mortgaged property. These expenses include advances to pay delinquent real
estate taxes and assessments, or for any collection, enforcement or judicial
proceedings. The servicer need not make this advance if it determines there is
no reasonable likelihood of:
(1) recovering the Servicing Advance, together with any prior or
expected future Servicing Advances for the related loan, and
(2) recovering an economically significant amount from the interest and
principal owing on the related loan in excess of the costs and
expenses to obtain this recovery.
The servicer will be entitled to receive reimbursement for a Servicing Advance
from the related borrower or any proceeds realized from the liquidation of the
related loan or mortgaged property. Any Servicing Advances previously made and
determined by the servicer in accordance with
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accepted servicing procedures to be nonrecoverable will be reimbursable from
amounts in the Distribution Account after distributions are made to the holders
of the offered certificates.
COLLECTION ACCOUNT AND DISTRIBUTION ACCOUNT
The servicer is required to use its best efforts to deposit in the
Collection Account, within one business day, but in no event later than two
business days, after receipt, all payments on the related loans received after
the Cut-Off Date on account of:
(1) principal and interest,
(2) all Net Liquidation Proceeds, Insurance Proceeds and Released
Mortgaged Property Proceeds,
(3) any amounts payable in connection with the repurchase or
substitution of any loan,
(4) any amount required to be deposited in the Collection Account in
connection with the termination of the certificates.
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 Pooling and Master
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 Pooling and Master Servicing Agreement.
The trustee will establish and maintain a Distribution Account. The
Distribution Account will be in the name of the trustee on behalf of the holders
of the certificates. Deposits into the Distribution Account will be from amounts
released from the Collection Account in respect of distributions on the loans,
amounts transferred from the Pre-Funding Account and Capitalized Interest
Account to the Collection Account, and any proceeds from the Guaranty Policy for
distribution to the holders of certificates.
On the fourth business day before each distribution date, the servicer
will remit to the trustee for deposit into the Distribution Account the
applicable portions of the Available Collection Amount by making the appropriate
withdrawals from the Collection Account in respect of payments on the loans.
INCOME FROM ACCOUNTS
So long as no event of default with respect to the master servicer has
occurred and is continuing, amounts on deposit in the Distribution Account and
the Collection Account, will be invested by the trustee in one or more
investments permitted under the Pooling and Master Servicing Agreement bearing
interest or sold at a discount. The master servicer will direct the trustee with
respect to investing the funds in the Collection Account and the Distribution
Account. No related investment in any of these accounts will mature later than
the business day immediately preceding the next distribution date. All income or
other gain from investments in the Collection Account and the Distribution
Account will be paid to the master servicer as part of the Master Servicer
Compensation. The master servicer will be obligated to reimburse the Collection
Account and the Distribution Account for any realized investment losses that are
incurred in respect of investments of amounts in those accounts.
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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 Servicing Agreement. In performing these obligations, the servicer is
required to act in good faith in a commercially reasonable manner and in
accordance with the terms of the Servicing Agreement. The servicer has full
power and authority, subject only to the specific requirements and prohibitions
of the Servicing Agreement and the respective loans, to do any and all things in
connection with servicing and administration which are consistent with its
accepted servicing procedures. Under the Servicing Agreement, the servicer's
"accepted servicing procedures" shall mean those servicing procedures that:
(1) meet at least the same standards the servicer would follow in
exercising reasonable care in servicing mortgage loans held for its
own account,
(2) comply with applicable state and federal law,
(3) comply with the provisions of the related notes and Mortgages, and
(4) give due consideration to the accepted standards of practice of
prudent mortgage loan servicers that service comparable loans and
the reliance placed by the holders of the certificates and the
securities insurer on the servicer for the servicing of the loans.
If any payment due under any loan is not paid when the payment becomes due
and payable, or if the related borrower fails to perform any other covenant or
obligation under the loan and this failure continues beyond any applicable grace
period, the servicer, in accordance with the accepted servicing procedures, must
take the action as it shall deem to be in the best interest of the
certificateholders. In determining whether to undertake certain servicing
actions with respect to one or more delinquent or Defaulted Loans, the servicer
is expected to consider the reasonable likelihood of:
(1) recovering an economically significant amount attributable to the
unpaid principal and interest owing on the related loan as a result
of those actions, in excess of
(2) the costs and expenses to obtain the recovery, including without
limitation any Servicing Advances, and in relation to
(3) the expected timing of the recovery from the loan.
MAINTENANCE OF HAZARD INSURANCE POLICIES AND ERRORS AND OMISSIONS AND FIDELITY
COVERAGE
The servicer will be required to monitor the existence and/or maintenance
of hazard and, if applicable, flood insurance, condominium or planned unit
development insurance. The servicer will be required to cause this insurance to
be maintained with respect to the loans, as necessary. If the servicer discovers
that the borrower does not have adequate insurance coverage, the servicer will
be required to obtain and maintain as a Servicing Advance the required insurance
coverage on the related mortgaged property. Further, with respect to each
mortgaged property acquired by foreclosure or by deed in lieu of foreclosure,
the servicer will be required to maintain or cause to be maintained insurance on
the property to the extent required by the Servicing Agreement to protect the
property and will be required to pay insurance premiums that become due to the
extent permitted by law. No pool insurance policy, blanket hazard insurance
policy, special hazard insurance policy, bankruptcy bond or repurchase bond will
be required to be maintained with respect to the loans, nor will any loan be
insured by any government or government agency.
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The servicer will also be required to obtain and maintain in effect a
blanket fidelity bond or similar form of insurance coverage insuring against
loss occasioned by fraud, theft or other intentional misconduct of the officers,
employees and agents of the servicer. The servicer will also be required to
obtain and maintain in effect an errors and omissions policy insuring against
loss occasioned by the errors and omissions of the officers, employees and
agents of the master servicer and the servicer.
REALIZATION ON DEFAULTED LOANS
The servicer may modify any provision of any loan if, in the servicer's
good faith judgment, the modification would minimize the loss that might
otherwise be experienced with respect to the loan. This modification is subject
to limitations in the Pooling and Master Servicing Agreement and is permitted
only if a payment default with respect to the loan exists or is reasonably
foreseeable by the servicer. For example, the servicer must obtain the prior
consent of the securities insurer to effect modifications, or dispositions of
loans through short sales or short pay-offs, if the aggregate of the principal
balances of the related modified loans exceeds 3.0% of the aggregate of the
Maximum Collateral Amount for each pool.
With respect to any loan in default, the servicer may, among other things:
o accept short pay-offs or short sales,
o enter into assumptions and modifications,
o refer to a collection agency or attorney,
o pursue collection litigation or alternative court proceedings to
foreclosure actions,
o sell the related loan to another person,
o institute foreclosure proceedings,
o exercise any power of sale to the extent permitted by law,
o obtain a deed in lieu of foreclosure, or
o otherwise acquire possession of or title to any mortgaged property,
by operation of law or otherwise.
The Pooling and Master Servicing Agreement may require that the servicer
obtain the consent of the master servicer prior to taking some of the
above-referenced actions.
The servicer will be acting in the best interests of the holders of the
certificates, when the servicer undertakes actions to collect a Defaulted Loan
that have a higher likelihood of a reasonable recovery within a shorter time
period, and foregoes taking actions that have a lower likelihood of a larger
recovery over a longer time period. See "Risk Factors--Inadequacy of Value of
Properties Could Affect Severity of Losses" in this prospectus supplement.
If a borrower is selling its mortgaged property in a distressed situation
or a situation involving compensating factors, then the servicer, in a manner
consistent with the accepted servicing procedures, may:
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(1) accept a partial payment for the release of the lien on the
mortgaged property. This release will leave the related loan
unsecured, i.e., a short sale, or
(2) accept a settlement involving a partial payment for the release of
the lien on the mortgaged property and the cancellation of the loan.
This settlement will result in a net loan loss from any unpaid
principal shortfall, i.e., a short payoff.
In connection with any applicable 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 Pooling and Master Servicing
Agreement. These requirements include the requirement that the servicer follow
the accepted servicing procedures for foreclosure and operation of foreclosed
property.
If the trust acquires any mortgaged property, that mortgaged property will
be required to be disposed of by or on behalf of the trust prior to the close of
the third calendar year after its acquisition by the trust fund unless:
(1) the trustee and the securities insurer receives an opinion of
counsel to the effect that the holding by the trust of that
mortgaged property subsequent to that period, and specifying the
period for which the mortgaged property may be held, will not
(a) cause any trust REMIC to be subject to the tax on prohibited
transactions imposed by Code Section 860F(a)(1),
(b) otherwise subject the trust or any trust REMIC to tax or
(c) cause any trust REMIC to fail to qualify as a REMIC at any
time that any certificates are outstanding, or
(2) the trustee or the servicer applied for, prior to the expiration of
that period, an extension of the period in the manner contemplated
by Code Section 856(e)(3), in which case the original period shall
be extended by the applicable extension period.
The servicer will also be required to ensure that the mortgaged property
is administered so that:
(a) it constitutes "foreclosure property" within the meaning of
Code Section 860G(a)(8) at all times,
(b) the sale of the mortgaged property does not result in the
receipt by the trust of any income from non-permitted assets
as described in Code Section 860F(a)(2)(B), and
(c) the trust does not derive any "net income from foreclosure
property" within the meaning of Code Section 860G(c)(2), with
respect to the mortgaged property.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides that the servicer shall deliver to the
master servicer an annual statement signed by an officer of the servicer. The
Pooling and Master Servicing Agreement provides that the master servicer shall
provide this statement to the trustee, the trust, the depositor, the securities
insurer and the rating agencies. In this statement, the servicer is required to
certify that
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it has fulfilled its obligations under the Servicing Agreement throughout the
preceding year, except as specified in the statement.
Each year, within 90 days following the end of the servicer's fiscal year,
beginning in 2001, the servicer will furnish to the master servicer, and the
master servicer shall provide to the trustee, the rating agencies, the
securities insurer and the depositor a report prepared by a firm of nationally
recognized independent public accountants. This report is required to state that
the firm has examined the documents and the records relating to servicing of the
loans as specified in the Pooling and Master Servicing Agreement and the
Servicing Agreement. The report must further set forth the firm's conclusion as
to whether the servicer is in compliance with the agreements.
The servicer's fiscal year begins on March 1 and ends on February 28.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Pooling and Master Servicing Agreement provides that the master
servicer may not resign from its obligations and duties except:
(1) with the consent of the securities insurer and trustee or
(2) if the performance of its duties under the Pooling and Master
Servicing Agreement is determined to be no longer permissible under
applicable law.
Any related determination permitting the resignation of the master servicer
pursuant to clause (2) of the immediately preceding sentence shall be evidenced
by an opinion of counsel to that effect delivered and acceptable to the
securities insurer and the trustee. No resignation of the master servicer will
become effective until a successor master servicer acceptable to the securities
insurer, the rating agencies and the trustee has assumed the master servicer's
responsibilities and obligations.
The master servicer has agreed not to merge or consolidate with any other
company or permit any other company to become the successor to the master
servicer's business unless, after the merger or consolidation, the successor or
surviving entity:
(1) is a servicer meeting the criteria specified in the Pooling and
Master Servicing Agreement, acceptable to the securities insurer,
and
(2) is capable of fulfilling the duties of the master servicer contained
in the Pooling and Master Servicing Agreement.
Any company into which the master servicer may be merged or consolidated will be
the successor to the master servicer under the Pooling and Master Servicing
Agreement without the execution or filing of any paper or any further act.
The Pooling and Master Servicing Agreement provides that neither the
master servicer nor any of its directors, officers, employees or agents will
have any liability to the trust or to the holders of the certificates for any
action taken, or for refraining from taking any action, in good faith pursuant
to the Pooling and Master Servicing Agreement or for errors in judgment.
However, neither the master servicer nor any of its directors, officers,
employees or agents will be relieved of liability that would otherwise be
imposed by reason of willful misfeasance, bad faith, negligence or reckless
disregard in performing the master servicer's duties or failure to perform its
duties.
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The master servicer may replace the servicer in accordance with the terms
of the Servicing Agreement and with the prior consent of the securities insurer.
MASTER SERVICER EVENTS OF DEFAULT
"Master Servicer Events of Default" will consist of, among other things:
(1) (a) any failure of the servicer to deposit in the Collection
Account any amount required to be deposited under the
Servicing Agreement or the Pooling and Master Servicing
Agreement, which failure continues unremedied for two business
days,
(b) any failure of the servicer to pay when due any amount
required under the Servicing Agreement or the Pooling and
Master Servicing Agreement and that failure results in a draw
under the Guaranty Policy and
(c) the occurrence and continuance of an event of default by the
servicer under the Servicing Agreement that continues
unremedied for 30 days after notices have been given;
(2) any failure by the master servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the
Pooling and Master Servicing Agreement or Servicing Agreement, which
failure continues unremedied for 30 days after notice;
(3) the occurrence of certain events of insolvency, bankruptcy,
receivership or reorganization affecting the master servicer; or
(4) events established by the securities insurer, including:
(a) the occurrence of particular events which have a material
adverse effect on the master servicer's business, financial
condition, operations or prospects;
(b) a default by the master servicer or any of its affiliates on a
material obligation;
(c) the master servicer is no longer able to discharge its duties
under the Pooling and Master Servicing Agreement;
(d) the master servicer has ceased to conduct its business in the
ordinary course; and
(e) other events of default established by the securities insurer
as further described in the Insurance Agreement.
Some events of default may be eliminated with the consent of the
securities insurer.
If a Master Servicer Event of Default occurs and is continuing, the
securities insurer, or the trustee, or the holders of certificates representing
more than 50% of the aggregate voting interests of the certificates, in each
case, with the prior written consent of the securities insurer, may terminate
all of the rights and obligations of the master servicer under the Pooling and
Master Servicing Agreement. If a termination occurs, another entity acceptable
to the securities insurer will become the successor master servicer. This
termination may only be effected by notice given in writing to the master
servicer, and to the trustee, if given by the holders of certificates. If the
master servicer is terminated, the trustee is obligated to fulfill the duties of
master servicer until a successor is appointed. On or after the receipt by the
master servicer of this written notice, and the appointment
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of and acceptance of appointment by a successor master servicer, all authority,
power, obligations and responsibilities of the master servicer under the Pooling
and Master Servicing Agreement will become obligations and responsibilities of
the successor master servicer.
If the master servicer is terminated, the master servicer will execute and
deliver the documents reasonably requested in order to orderly transfer the
master servicing of the loans. Any successor master servicer will be entitled to
the same compensation as the master servicer would have been entitled to under
the Pooling and Master Servicing Agreement if the master servicer had not
resigned or been terminated.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement provides that the servicer shall not resign from
its obligations and duties except if its duties under the Servicing Agreement
are determined to be no longer permissible under applicable law and that this
incapacity cannot be cured by the servicer. Any determination permitting the
resignation of the servicer under the Servicing Agreement shall be evidenced by
an opinion of counsel delivered to the master servicer and the securities
insurer in form and substance reasonably acceptable to the master servicer and
the securities insurer. The servicer's resignation will not become effective
until the master servicer or another successor acceptable to the securities
insurer has assumed the servicer's responsibilities and obligations under the
Servicing Agreement.
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
will:
o meet the qualifications of the servicer set forth in the Servicing
Agreement, and
o be capable of fulfilling the obligations of the servicer under the
Servicing Agreement.
SERVICER DETERMINATIONS AND EVENTS OF DEFAULT
Under the Pooling and Master Servicing Agreement and the Servicing
Agreement after an initial term, the term of the servicer shall be extendable
for successive 90 day terms until the certificates are paid in full, provided
that prior to the expiration of each term the securities insurer delivers
written notice of renewal to the servicer. If the renewal notice is not
delivered on or before the last day of the servicing term, the servicer's term
will be terminated.
"Servicer Events of Default" will consist of, among other things:
(1) a failure by the servicer to make any deposit or payment, or to
remit any payment, required to be made under the terms of the
Servicing Agreement and the Pooling and Master Servicing Agreement
which continues unremedied for a period of two business days;
(2) any failure on the part of the servicer to remit particular reports
and certificates required under the terms of the Servicing
Agreement, and this failure continues for two business days after
the date on which either the securities insurer or the master
servicer has given the servicer written notice of this failure and
demanding that this failure be cured;
(3) any failure on the part of the servicer duly to observe or perform
in any material respect particular covenants and agreements in the
Servicing Agreement, or any breach of particular representations or
warranties, which continues uncured for a period of 10 days
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after the date on which either the securities insurer or the master
servicer shall have given to the servicer written notice of this
failure or breach and demanding that this default be cured;
(4) the occurrence of certain events of insolvency, bankruptcy,
receivership or reorganization affecting the servicer;
(5) the servicer assigns or attempts to assign its rights to the
Servicing Compensation or attempts to assign the Servicing Agreement
or the servicing responsibilities under the Servicing Agreement or
in the Pooling and Master Servicing Agreement without the consent of
the master servicer and the securities insurer except as otherwise
expressly permitted by the terms of the Servicing Agreement; or
(6) the servicer fails to remain qualified as a mortgage servicer for
FHLMC loans and/or the servicer disposes of substantially all of its
assets.
In case of any Servicer Event of Default, the securities insurer, or in
some instances, the master servicer, may provide the servicer with written
notice of the termination of all of the servicer's authority, powers, and rights
under the Servicing Agreement. On or after the receipt by the servicer of this
written notice, all authority and power of the servicer under the Servicing
Agreement and the Pooling and Master Servicing Agreement will terminate. The
Servicing Agreement provides that in this case either of the securities insurer
or the master servicer may execute and deliver on behalf of the servicer, as the
servicer's attorney-in-fact, all documents, and to do or accomplish all acts
that in the securities insurer's judgment may be necessary or appropriate to
effect terminations with or without cause.
If the servicer is terminated, the master servicer is obligated to perform
the duties of servicer under the Servicing Agreement until a successor is
appointed. The servicer will continue to provide services in accordance with the
Servicing Agreement and the Pooling and Master Servicing Agreement until
terminated. The servicer will also in good faith cooperate fully to transfer the
servicing and the management of the loans. The Servicing Agreement requires that
the servicer cooperate with the master servicer to effect the termination of its
responsibilities, rights, and powers under the Servicing Agreement. This
cooperation includes providing to the master servicer all documents and records
reasonably requested to enable the master servicer or its designee to assume and
carry out the duties and obligations of the servicer.
RESTRICTIONS ON CERTIFICATEHOLDERS' RIGHTS
So long as:
(1) there does not exist a continuing failure by the securities insurer
to make a required payment under the Guaranty Policy and
(2) some bankruptcy-related events specified in the Pooling and Master
Servicing Agreement have not occurred with respect to the securities
insurer,
the securities insurer will have the right to exercise all rights, including
voting rights, which the certificateholders are entitled to exercise pursuant to
the Pooling and Master Servicing Agreement, without any consent of the
certificateholders. However, without the consent of each holder of the
certificates affected by the securities insurer's exercise, the securities
insurer will not be entitled to
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exercise those rights of the certificateholders to amend the Pooling and Master
Servicing Agreement in any manner that would:
(1) reduce the amount of, or delay the timing of, collections of
payments on the loans or distributions which are required to be made
on any certificate,
(2) adversely affect in any material respect the interests of the
holders of the certificates or
(3) alter the rights of any certificateholder to consent to this type of
amendment.
THE TRUSTEE
The trustee will be The Bank of New York, a New York banking corporation.
Its principal office is located at 101 Barclay Street - 12E, New York, New York
10286, telephone number (212) 815-8727.
The trustee and any of its respective affiliates may hold certificates in
its own name or as pledgee.
For the purpose of meeting the legal requirements of various
jurisdictions, the servicer and the trustee will have the power to appoint
co-trustees or separate trustees of all or any part of the trust. In any
jurisdiction in which the trustee will be incompetent or unqualified to perform
certain acts, all rights, powers, duties and obligations conferred or imposed on
the trustee will be conferred singly on this separate trustee or co-trustee. In
each case, this separate trustee or co-trustee will exercise and perform its
rights, powers, duties and obligations solely at the direction of the trustee.
The trustee may resign at any time, in which event the master servicer
will be obligated to appoint a successor acceptable to the securities insurer.
The holders of a majority in outstanding amount of the certificates with the
prior written consent of the securities insurer, may remove the trustee and may
appoint a successor acceptable to the securities insurer. The master servicer,
with the prior written consent of the securities insurer, will be obligated to
remove the trustee if the trustee ceases to be eligible to continue as trustee
under the Pooling and Master Servicing Agreement or becomes legally unable to
act or becomes insolvent. In these circumstances, the master servicer will be
obligated to appoint a successor acceptable to the securities insurer. Any
resignation or removal and appointment of a successor will not become effective
until acceptance of the appointment by the successor and approval by the
securities insurer.
The Pooling and Master Servicing Agreement will provide that the
applicable trustee will be entitled to indemnification by the transferor, and
will be held harmless against, any loss, liability or expense incurred by them
not resulting from its own willful misfeasance, bad faith or negligence.
However, trustee will not be held harmless from a breach of any of its
representations or warranties to be set forth in the Pooling and Master
Servicing Agreement.
DUTIES OF THE TRUSTEE
The trustee will make no representations as to the validity or sufficiency
of the Pooling and Master Servicing Agreement, the certificates, other than the
authentication of the certificates, or of any loans or related documents. The
trustee 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 certificates or the loans, or the investment of any monies by the servicer
before these monies are deposited into the trust accounts. The trustee will be
required to perform only those duties specifically required of it
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under the Pooling and Master Servicing Agreement. Generally, those duties will
be limited to the receipt of the various certificates, reports or other
instruments required to be furnished to the trustee under the Pooling and Master
Servicing Agreement. Accordingly, the trustee will only be required to examine
them to determine whether they conform to the requirements of the Pooling and
Master Servicing Agreement and to the making of monthly distributions to the
certificateholders and the filing of claims under the Guaranty Policy. The
trustee will not be charged with knowledge of a failure by the servicer or the
master servicer to perform its duties under the Pooling and Master Servicing
Agreement unless the trustee obtains the actual knowledge of a failure as
specified in the Pooling and Master Servicing Agreement.
The trustee will be under no obligation, at the request, order or
direction of any of the holders of certificates, to
(1) exercise any of the rights or powers vested in it by the Pooling and
Master Servicing Agreement,
(2) make any investigation of matters arising under the Pooling and
Master Servicing Agreement or
(3) institute, conduct or defend any litigation under or in relation to
the Pooling and Master Servicing Agreement,
unless the applicable holders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred as a
result.
No holder of certificates will have any right under the Pooling and Master
Servicing Agreement to institute any proceeding with respect to the Pooling and
Master Servicing Agreement, unless the applicable holder has obtained the prior
written consent of the securities insurer and the applicable holder gave to the
trustee prior written notice of the occurrence of an event of default under the
Pooling and Master Servicing Agreement and:
(1) the event of default arises from the servicer's failure to remit
payments when due or
(2) holders of certificates representing more than 25% of the aggregate
voting interests of the certificates then outstanding have made
written request of the trustee to institute a proceeding in its own
name as the trustee under the Pooling and Master Servicing Agreement
and have offered to the trustee reasonable indemnity and the trustee
has for 30 days neglected or refused to institute any proceedings.
To the extent consistent with its fiduciary obligations under the Pooling
and Master Servicing Agreement, the trustee intends to appoint First Union
National Bank, a national banking association, as its agent to perform many of
the duties of the trustee, including the duties of certificate registrar and
paying agent under the Pooling and Master Servicing Agreement. First Union
National Bank will also act as custodian of the Trustee Loan Files.
REPORTS TO CERTIFICATEHOLDERS
On each distribution date, the trustee is required to distribute, based on
information provided by the servicer, a monthly distribution statement to the
depositor, the holders of each class of certificates, the securities insurer,
and the rating agencies, stating the date of original issuance of the
certificates and various other information, including the following:
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(1) the Reserve Account Requirement;
(2) the Available Collection Amount and Available Distribution Amount,
the Regular Distribution Amount, the Insured Payment and the Excess
Spread for the related distribution date with respect to each class
of certificates;
(3) the principal balance of each class of offered certificates before
and after giving effect to distributions made to the holders of the
offered certificates on the related distribution date, and the
principal balance of all the loans as of the first and last day of
the related Due Period;
(4) the certificate factor with respect to each class of offered
certificates then outstanding. "Certificate factor" means with
respect to each class of offered certificates and any date of
determination, the then applicable principal balance of the class of
offered certificates divided by its initial principal balance;
(5) the amount of principal, if any, and interest to be distributed to
each class of offered certificates on the related distribution date;
(6) as of the related distribution date and for each related pool, the
Overcollateralization Amount, the Overcollateralization Target
Amount, any Overcollateralization Deficit and any
Overcollateralization Deficiency Amount, or any
Overcollateralization Reduction Amount, and any of these amounts to
be distributed to the holders of each class of offered certificates
or distributed to the holders of the Class X and Class R
certificates on the distribution date;
(7) the Servicing Compensation, the Master Servicer Compensation and the
Trustee fee, if any, for the appropriate distribution date and the
Guaranty Insurance Premium;
(8) for each pool, the weighted average maturity of the loans and the
weighted average loan interest rate of the loans;
(9) for each pool, performance information with respect to the related
Due Period, including, without limitation, delinquency and
foreclosure information with respect to the loans;
(10) for each pool, the number of and aggregate principal balance of all
loans in foreclosure proceedings and the percent of the aggregate
principal balances of those loans to the aggregate principal
balances of all loans, all as of the close of business on the last
day of the related Due Period;
(11) for each pool, the number of and the aggregate principal balance of
the loans in bankruptcy proceedings and the percent of the aggregate
principal balances of those loans to the aggregate principal
balances of all loans, all as of the close of business on the last
day of the related Due Period;
(12) for each pool, the number of foreclosure properties, the aggregate
principal balance of the related loans, the book value of those
foreclosure properties and the percent of the aggregate principal
balances of those 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;
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(13) for each pool, 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 Loans,
(c) that became Deleted Loans as a result of the Deleted Loans
being Defective Loans, and
(d) that became Deleted Loans as a result of the Deleted Loans
being a loan in default or imminent default;
(14) for each pool, the scheduled principal payments and the principal
prepayments received with respect to the loans during the Due
Period;
(15) for each pool, 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; and
(16) for each pool, the related amounts on deposit in the Pre-Funding
Account and the Capitalized Interest Account.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The trustee will make an election to treat designated portions of the
trust as two REMICs for federal income tax purposes. The remaining portion of
the trust will be treated as a grantor trust consisting generally of the rights
of the offered certificates to receive interest to the extent their respective
Pass-Through Rates, without regard to the applicable Net Interest Rate,
currently exceed or previously exceeded a rate equal to their Pass-Through Rate
capped at the weighted average interest rate on the loans, net of the Interest
Reduction Amount for both pools.
The right of each class of offered certificates to receive the excess
interest described in the preceding paragraph is referred to as a "Basis Risk
Arrangement" and is payable from amounts otherwise distributable on or in
respect of the Class X and Class R certificates. The offered certificates will
represent the "regular interests" in a REMIC and the right to receive payments
under the related Basis Risk Arrangement to the extent of funds available. See
"--Taxation of Basis Risk Arrangements" below. The Class R certificates will
represent the "residual interest" in each REMIC. Cadwalader, Wickersham & Taft,
special tax counsel to the depositor, will deliver an opinion when the offered
certificates are issued. This opinion will generally be to the effect that,
assuming compliance with all provisions of the Pooling and Master Servicing
Agreement, for federal income tax purposes, each portion of the trust as to
which a REMIC election is made will qualify as a REMIC under the Code. See "
Federal Income Tax Consequences--REMICs" in the accompanying prospectus.
The regular interests represented by the offered certificates generally
will be treated as newly originated debt instruments for federal income tax
purposes. Beneficial owners of the offered certificates will be required to
report income on the related regular interests in accordance with the accrual
method of accounting. As a result of the allocation of a portion of a holder's
purchase price
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to the related Basis Risk Arrangement, the related regular interest may be
treated as issued with original issue discount based on the portion of the
investor's purchase price for the offered certificate allocable to the regular
interest. The portion of the purchase price that may be allocated to the Basis
Risk Arrangement related to the applicable offered certificate is amortizable
over the life of the offered certificate as an offset to the additional original
issue discount. See "--Taxation of Basis Risk Arrangements." Any amortization of
the purchase price that may be allocated to a Basis Risk Arrangement would be
treated as a miscellaneous itemized deduction that is subject to limitations on
deductibility by individuals. Accordingly, the offered certificates may not be
suitable investments for individual investors.
A prepayment rate of 27% CPR will be used for purposes of accruing
original issue discount, determining whether the original issue discount is de
minimis and amortizing any premium. See "Prepayment and Yield
Considerations--General" in this prospectus supplement. No representation is
made as to the rate, if any, at which the loans will prepay.
CHARACTERIZATION OF INVESTMENTS IN THE OFFERED CERTIFICATES
Generally, except to the extent noted below, the regular interests
represented by the offered certificates will be "real estate assets" within the
meaning of Section 856(c)(4)(A) of the Code in the same proportion that the
assets of the trust would be so treated. In addition, interest, including
original issue discount, if any, on the offered certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that the
certificates are treated as "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code. The offered certificates will also generally be
considered loans secured by an interest in real property which is residential
real property as described in Section 7701(a)(19)(C) of the Code. If 95% or more
of the loans are treated as assets described in Section 856(c)(4)(A) or Section
7701(a)(19)(C) of the Code, the regular interests represented by the offered
certificates will be treated as assets described in these sections in their
entirety.
Furthermore, the offered certificates will not be treated as meeting the
foregoing real estate asset and income tests to the extent of an investor's
basis, if any, allocable to, or amounts received under, a Basis Risk
Arrangement. As a result of the Basis Risk Arrangements, the offered
certificates will not be treated as "qualified mortgages" for another REMIC
under Section 860G(a)(3)(C) of the Code. However, the offered certificates
should be treated as "permitted assets" for a financial asset securitization
investment trust under Section 860L(c) of the Code. See "Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Securities" in
the accompanying prospectus.
TAXATION OF BASIS RISK ARRANGEMENTS
Generally, except to the extent noted below, each holder of an offered
certificate will be treated for federal income tax purposes as having entered
into a notional principal contract pursuant to its right to receive payments
with respect to interest under the applicable Basis Risk Arrangement on the date
it purchases its Certificate. The IRS has issued final regulations under Section
446 of the Code relating to notional principal contracts. These regulations are
known as the Swap Regulations.
In general, the holders of the offered certificates must allocate the
price they pay for their certificates between their regular interest and the
related Basis Risk Arrangement. The portion of the purchase price allocable to
the Basis Risk Arrangement would be treated as a cap premium paid by the related
certificateholders. A beneficial owner of an offered certificate would be
required to amortize the cap premium under a level payment method as if the cap
premium represented the
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present value of a series of equal payments made over the life of the applicable
Basis Risk Arrangement. These payments would have to be adjusted to take into
account decreases in notional principal amount, if any, discounted at a rate
equal to the rate used to determine the amount of the cap premium, or some other
reasonable rate. Prospective purchasers of offered certificates should consult
their own tax advisors regarding the appropriate method of amortizing any cap
premium. The Swap Regulations treat a nonperiodic payment made under a cap
contract as a loan for federal income tax purposes if the payment is
"significant." It is not known whether any cap premium , would be treated in
whole or in part as a loan under the Swap Regulations.
Under the Swap Regulations:
(1) all taxpayers must recognize periodic payments with respect to a
notional principal contract under the accrual method of accounting;
and
(2) any periodic payments received under the applicable Basis Risk
Arrangement must be netted against payments, if any, deemed made as
a result of the cap premiums over the recipient's taxable year,
rather than accounted for on a gross basis.
Net income or deduction with respect to net payments under a notional principal
contract for a taxable year should constitute ordinary income or ordinary
deduction. The IRS could contend the amount is capital gain or loss, but this
treatment is unlikely, at least in the absence of further regulations. Any
regulations requiring capital gain or loss treatment presumably would apply only
prospectively.
Any amount of proceeds from the sale, redemption or retirement of an
offered certificate that is considered to be allocated to rights under the
applicable Basis Risk Arrangement, would be considered a "termination payment"
under the Swap Regulations. It is anticipated that the trustee will account for
any termination payments for reporting purposes in accordance with the Swap
Regulations, as described below.
Termination Payments. Any amount of sales proceeds that is considered to
be allocated to the selling beneficial owner's rights under the applicable Basis
Risk Arrangement in connection with the sale or exchange of an offered
certificate would be considered a "termination payment" under the Swap
Regulations allocable to the related offered certificate. A certificateholder
will have gain or loss from such a termination of the applicable Basis Risk
Arrangement equal to:
(1) any termination payment it received or is deemed to have received
minus
(2) the unamortized portion of any cap premium paid, or deemed paid, by
the beneficial owner when first entering into or acquiring its
interest in the related Basis Risk Arrangement.
Gain or loss realized on the termination of the applicable Basis Risk
Arrangement will generally be treated as capital gain or loss. Moreover, in the
case of a bank or thrift institution, Code Section 582(c) would likely not apply
to treat this gain or loss as ordinary.
Application of the Straddle Rules. An offered certificate representing
beneficial ownership of the corresponding regular interest and the related Basis
Risk Arrangement may constitute positions in a straddle. In this case, the
straddle rules of Code Section 1092 would apply. A selling beneficial owner's
capital gain or loss with respect to this regular interest would be short-term
because the holding period would be tolled under the straddle rules. Similarly,
capital gain or loss realized in connection with the termination of the
applicable Basis Risk Arrangement would be short-term. If
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the holder of an offered certificate incurred or continued indebtedness to
acquire to hold their certificate, the holder would generally be required to
capitalize a portion of the interest paid on this indebtedness until termination
of the applicable Basis Risk Arrangement.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Federal Income Tax
Consequences--REMICs" in the accompanying prospectus.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended, and the
Code impose certain restrictions on:
(1) employee benefit plans as defined in Section 3(3) of ERISA,
(2) plans described in section 4975(e)(1) of the Code, including
individual retirement accounts or Keogh plans,
(3) any entities whose underlying assets include plan assets by reason
of a plan's investment in the entities set forth in clauses (1) and
(2) above, and
(4) persons who have certain specified relationships to the Plans, i.e.,
"Parties-in-Interest" under ERISA and "Disqualified Persons" under
the Code.
Moreover, based on the reasoning of the United States Supreme Court in
John Hancock Life Ins. Co. v. Harris Trust and Savings Bank, 114 S. Ct. 517
(1993), an insurance company's general account may be deemed to include assets
of the Plans investing in the general account, e.g., through the purchase of an
annuity contract. As a result, the insurance company might be treated as a
Party-in-Interest with respect to a Plan by virtue of the investment. ERISA also
imposes certain duties on persons who are fiduciaries of Plans subject to ERISA
and prohibits certain transactions between a Plan and Parties-in-Interest or
Disqualified Persons with respect to Plans. There are certain exemptions issued
by the United States Department of Labor that may be applicable to an investment
by a Plan in the certificates, including Prohibited Transaction Class Exemption
83-1. For further discussion of PTE 83-1, including the necessary conditions to
its applicability and other important factors to be considered by a Plan
contemplating investing in the offered certificates, see "ERISA Considerations"
in the prospectus.
The U.S. Department of Labor has granted PaineWebber Incorporated
Prohibited Transaction Exemption 90-36, 55 Fed. Reg. 25903 (1990). This
Prohibited Transaction Exemption exempts from certain of the prohibited
transaction rules of ERISA transactions with respect to the initial purchase,
the holding and the subsequent resale by a Plan of certificates in pass-through
trusts that meet the conditions and requirements of the exemption. Among the
conditions that must be satisfied for the exemption to apply are the following:
(1) The acquisition of the offered certificates by a Plan is on terms
including the price for the offered certificates that are at least
as favorable to the Plan as they would be in an arm's length
transaction with an unrelated party;
(2) The rights and interests evidenced by the offered certificates
acquired by the Plan are not subordinated to the rights and
interests evidenced by other certificates of the trust;
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(3) The offered certificates acquired by the Plan have received a rating
at the time of the acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's, Duff &
Phelps Credit Rating Co. or Moody's Investors Service, Inc.;
(4) The sum of all payments made to the underwriters in connection with
the distribution of the offered certificates represents not more
than reasonable compensation for underwriting the offered
certificates. The sum of all payments made to and retained by the
master servicer represents not more than reasonable compensation for
the master servicer's services under the Pooling and Master
Servicing Agreement and reimbursement of the master servicer's
reasonable expenses in connection with its services. The sum of all
payments made to and retained by the servicer represents not more
than reasonable compensation for the servicer's services under the
Servicing Agreement and reimbursement of the master servicer's
reasonable expenses in connection with its services;
(5) The trustee must not be an affiliate of any other member deemed to
be a "sponsor" of the trust; and
(6) The Plan investing in the offered certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities Act of 1933, as amended.
The trust also must meet the following requirements:
(1) The corpus of the trust must consist solely of assets of the type
which have been included in other investment pools,
(2) certificates in the other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's,
Moody's Investors Services, Inc., Fitch IBCA, Inc. or Duff & Phelps
Credit Rating Co. for at least one year prior to the Plan's
acquisition of certificates, and
(3) certificates evidencing interests in the other investment pools must
have been purchased by investors other than plans for at least one
year prior to any Plan's acquisition of the offered certificates.
In order for the exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire offered certificates, the exemption requires, among other
matters, that:
(1) in the case of an acquisition in connection with the initial
issuance of offered certificates, at least fifty percent of each
class of offered certificates in which Plans have invested is
acquired by persons independent of the "restricted group" and at
least fifty percent of the aggregate interest in the trust fund is
acquired by persons independent of the "restricted group."
"Restricted group" means any underwriter of the offered
certificates, the trustee, the servicer, the master servicer, any
obligor with respect to the loans included in the trust, any entity
deemed to be a "sponsor" of the trust as that term is defined in the
exemptions, or any affiliate of that party;
(2) the fiduciary, or its affiliate, is an obligor with respect to 5
percent or less of the fair market value of the obligations
contained in the trust;
(3) the Plan's investment in offered certificates does not exceed 25% of
all of the certificates outstanding at the time of the acquisition;
and
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(4) immediately after the acquisition, no more than 25% of the assets of
the Plan are invested in certificates representing an interest in
one or more trusts containing assets sold or serviced by the same
entity.
Subject to the foregoing, the depositor believes that the exemption will
apply to the acquisition and holding of the Class A certificates, but not the
Class B Certificates, by Plans and that all conditions of that exemption other
than those within the control of the investors have been met.
Before purchasing a Class A certificate, a fiduciary of a Plan should make
its own determination as to the availability of the exemptive relief provided in
the exemption or the availability of any other prohibited transaction
exemptions, including PTE 83-1, and whether the conditions of any exemption will
be applicable to the Class A certificates. Any fiduciary of a Plan considering
whether to purchase a Class A certificate should also carefully review with its
own legal advisors the applicability of the fiduciary duty and prohibited
transaction provisions of ERISA and the Code to the investment. See "ERISA
Considerations" in the prospectus.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, a governmental plan may be subject to a
federal, state or local law, which is, to a material extent, similar to the
provisions of ERISA or Code Section 4975. A fiduciary of a governmental plan
should make its own determination as to the need for and the availability of any
exemptive relief under a law similar to ERISA.
Because the Class B certificates are subordinated to the Class A
certificates with respect to certain losses, the purchase and holding of the
Class B certificates by or on behalf of a Plan may result in "prohibited
transactions" within the meaning of ERISA and Code Section 4975. Any transferee
of the Class B certificates will be deemed to represent that (a) it is not a
Plan and is not acting on behalf of a Plan or using the assets of a Plan to
effect the purchase or (b) if it is an insurance company, that the source of
funds used to purchase the Class B certificates is an "insurance company general
account," as that term is defined in Section V(e) of Prohibited Transaction
Class Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995), there is no Plan with
respect to which the amount of the general account's reserves and liabilities
for the contracts held by or on behalf of that Plan and all other Plans
maintained by the same employer or affiliate thereof or by the same employee
organization exceeds 10 percent of the total of all reserves and liabilities of
that general account at the date of acquisition and the purchase and holding of
the Class B certificates by the transferee are covered by Sections I and III of
PTE 95-60. The Pooling and Master 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.
The sale of certificates to a Plan is not a representation by the
depositor or the underwriters, that this investment meets all relevant legal
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
The certificates will not constitute "mortgage related securities" for
purposes of SMMEA.
No representation is made as to the proper characterization of the
certificates for legal investment purposes, financial institution regulatory
purposes, or other purposes, or as to the ability of particular investors to
purchase the certificates under applicable legal investment restrictions. These
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uncertainties may adversely affect the liquidity of the certificates.
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 certificates constitute a legal
investment or are subject to investment, capital or other restrictions. See
"Legal Investment" in the prospectus.
USE OF PROCEEDS
The depositor intends to use the net proceeds to be received from the sale
of the offered certificates to acquire the Initial Loans, to fund the
Pre-Funding Account and the Capitalized Interest Account and to pay other
expenses associated with the pooling of the loans and the issuance of the
certificates.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement between the depositor and PaineWebber Incorporated, Credit Suisse
First Boston Corporation, Chase Securities Inc., Deutsche Bank Securities Inc.,
First Union Capital Markets Corp. and Banc One Capital Markets, Inc., the
depositor has agreed to sell to the underwriters, and the underwriters have
agreed to purchase from the depositor the principal amount of the offered
certificates set forth opposite its name in the tables below.
CLASS A-1 CLASS A-2 CLASS B
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------
PaineWebber Incorporated $126,750,000 $ 62,790,000 $14,257,334
Credit Suisse First Boston
Corporation 71,500,000 35,420,000
First Union Capital Markets Corp. 55,250,000 27,370,000
Banc One Capital Markets, Inc. 26,000,000 12,880,000
Chase Securities Inc. 22,750,000 11,270,000
Deutsche Bank Securities Inc. 22,750,000 11,270,000
------------ ------------ -----------
Total.................. $325,000,000 $161,000,000 $14,257,334
============ ============ ===========
The depositor has been advised by the underwriters that they propose
initially to offer the Class A-1 and Class A-2 certificates to the public at the
prices set forth below, and to certain dealers at those prices less the initial
concession set forth below for each class. The underwriters may allow, and the
dealers may reallow, a concession not in excess of that set forth below for each
class of offered certificates. After the initial public offering of the offered
certificates, the public offering price and the concessions and reallowances may
be changed.
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CLASS A-1 CLASS A-2 CLASS B
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
Price to Public.................. 100.000% 100.000% *
Underwriting Discount............ 0.225% 0.225% 0.750%
Concessions...................... 0.135% 0.135% 0.450%
Reallowances..................... 0.0945% 0.0945% 0.315%
- ---------------
* The depositor has been advised by the underwriters that the Class B
certificates will be offered at negotiated prices determined at the time of
sale.
Until the distribution of the offered certificates is completed, rules of
the Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase the offered certificates. As
an exception to these rules, the underwriters are permitted to engage in
transactions that stabilize the price of the offered certificates. These
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the offered certificates.
If the underwriters create a short position in the offered certificates in
connection with the offering, the underwriters may reduce that short position by
purchasing offered certificates in the open market. A short position will result
if the underwriters sell more offered certificates than are set forth in the
second preceding table.
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 those purchases.
The transferor has the option to purchase the Class B certificates from
PaineWebber Incorporated after September 30, 1999 at the price that PaineWebber
Incorporated purchased the Class B certificates from the depositor, less certain
costs and expenses of PaineWebber Incorporated. This option will expire on the
date that occurs one year after the closing date. If PaineWebber Incorporated
sells the Class B certificates to a purchaser other than the transferor, it has
agreed to pay to the depositor the sales price, less an amount equal to the
price that PaineWebber Incorporated purchased the Class B certificates from the
depositor and less an underwriting discount of 0.75% of the Class B principal
balance and certain other costs and expenses of PaineWebber Incorporated.
Neither the depositor nor the underwriters make 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 certificates. In addition,
neither the depositor nor the underwriters make any representation that the
underwriters will engage in those transactions or that those transactions, once
commenced, will not be discontinued without notice.
There is currently no secondary market for the offered certificates. There
can be no assurance that a secondary market for the offered certificates 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 liabilities, including
liabilities under the Securities Act of 1933, as amended.
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In addition to the purchase of the offered certificates pursuant to the
underwriting agreement, the underwriters and some of their affiliates may have
financing relationships with the transferor.
The depositor is an affiliate of PaineWebber Incorporated. Any obligations
of PaineWebber Incorporated are the sole responsibility of PaineWebber
Incorporated and do not create any obligations on the part of any of its
affiliates.
EXPERTS
The consolidated financial statements of Ambac Assurance Corporation and
subsidiaries as of December 31, 1998 and December 31, 1997 and for each of the
years in the three year period ended December 31, 1998, incorporated by
reference in this prospectus supplement and in the registration statement of the
depositor, have been incorporated in this prospectus supplement and in the
registration statement in reliance on the report of KPMG LLP, independent
certified public accountants, given on the authority of that firm as experts in
accounting and auditing.
LEGAL MATTERS
The validity of the offered certificates and certain federal income tax
matters will be passed on for the depositor and for the underwriters by
Cadwalader, Wickersham & Taft, New York, New York. Certain matters will be
passed upon for the transferor and master servicer by Hunton & Williams,
Richmond, Virginia.
RATINGS
It is a condition to the issuance of the offered certificates that the
offered certificates be rated by Moody's Investors Service, Inc., Standard &
Poor's, a division of The McGraw-Hill Companies, Inc. and Duff & Phelps Credit
Rating Co. as follows:
CLASS MOODY'S S&P DCR
----- ------- --- ---
A-1 Aaa AAA AAA
A-2 Aaa AAA AAA
B NR BBB- BBB
The ratings on the offered certificates do not address the ability of the trust
to acquire Subsequent Loans, any potential redemption with respect to the
Subsequent Loans or the effect to yield resulting from the Subsequent Loans.
The ratings assigned to the Class A certificates will be based on, among
other things, the financial strength rating of the securities insurer.
Explanations of the significance of these ratings may be obtained from Standard
& Poor's, a division of The McGraw-Hill Companies, Inc., 55 Water Street, New
York, New York 10041, Moody's Investors Service Inc., 99 Church Street, New
York, New York 10007, and Duff & Phelps Credit Rating Co., 17 State Street, New
York, New York 10004. There is no assurance that any of these ratings will
continue for any period of time or that these ratings will not be revised or
withdrawn.
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The ratings on the offered certificates address the likelihood of the
receipt by the holders of the offered certificates of all payments on the loans
to which they are entitled. The ratings on the offered certificates also address
the structural, legal and trust-related aspects of the offered certificates,
including the nature of the loans. In general, the ratings on the offered
certificates address credit risk and not prepayment risk. The ratings on the
offered certificates 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 the related prepayments might differ from that originally
anticipated. As a result, the initial ratings assigned to the offered
certificates do not address the possibility that holders of the offered
certificates might suffer a lower than anticipated yield in the event of
principal distributions on the offered certificates resulting from rapid
prepayments of the loans, funds remaining in the Pre-Funding Account at the end
of the Pre-Funding Period, the distribution of any Certificateholders' Interest
Carry-Forward Amount, or the application of Excess Spread as described in this
prospectus supplement.
The depositor has not solicited ratings on the offered certificates 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
certificates or, if it does, what rating would be assigned by that rating
agency. Any rating on the offered certificates by another rating agency, if
assigned at all, may be lower than the ratings assigned to the offered
certificates by the rating agencies.
A security rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. If the ratings initially assigned to any of the offered
certificates 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 those offered certificates.
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GLOSSARY OF TERMS
"ACCRUAL PERIOD" means with respect to any distribution date and:
(1) with respect to the Class A certificates, the period from and
including the immediately preceding distribution date, or, in the case of the
first distribution date, from the closing date, through but excluding the
related distribution date; and
(2) with respect to the Class B certificates, the prior calendar
month.
"ALLOCATION PERCENTAGE" means with respect to any distribution date and:
(1) with respect to Pool 1 Loans, the percentage expressed as a
fraction,
(a) the numerator of which is the Overcollateralization Amount
for the Class A-1 certificates for that distribution date; and
(b) the denominator of which is the aggregate of the
Overcollateralization Amount for the Class A-1 and Class A-2
certificates for that distribution date; and
(2) with respect to Pool 2 Loans, the percentage equal to 100% minus
the Allocation Percentage for the Pool 1 Loans.
For purposes of this definition, the Overcollateralization Amounts may not be
less than zero.
"AVAILABLE COLLECTION AMOUNT" means, with respect to each distribution
date and each pool of loans, the sum of:
(1) all amounts received on the loans in the related pool or paid by
the master servicer, the servicer, the trustee or the transferor during the
related Due Period with respect to these loans, exclusive of:
(a) amounts not required to be deposited by the servicer in
the Collection Account; and
(b) amounts permitted to be withdrawn by the trustee or the
servicer from the Collection Account;
(2) the Purchase Price paid for any related loans required to be
repurchased and the Substitution Adjustment to be deposited in the Collection
Account in connection with any substitution of a loan, in each case before the
related Determination Date; and
(3) after the exercise of an optional termination by the holders of
a majority of the percentage interest of the Class R certificates, the servicer
or the securities insurer, the Termination Price allocable to the related loans.
"AVAILABLE DISTRIBUTION AMOUNT" means, with respect to each distribution
date and pool of loans, the related Available Collection Amount deposited into
the Distribution Account and remaining after providing for the distribution of
all Trust Fees and Expenses for that distribution date allocated to that pool,
to the extent not previously paid or taken into account in determining the
related Available Collection Amount. The "Available Distribution Amount" will
also include, on or
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prior to the distribution date in December 1999, the amount, if any, withdrawn
from the Capitalized Interest Account that relates to the pool as described
under "Description of the Certificates--Capitalized Interest Account" in this
prospectus supplement.
"CAPITALIZED INTEREST ACCOUNT" means a segregated trust account
established and maintained for the benefit of the certificateholders. Funds in
this account will be applied by the trustee if there are shortfalls in interest
distributions to the offered certificates caused by the Pre-Funding Account.
"CERTIFICATEHOLDERS' INTEREST CARRY-FORWARD AMOUNT" means, with respect to
any distribution date and any class of certificates:
(1) if on that distribution date the Pass-Through Rate for the
related class of certificates is capped at the applicable Net Interest Rate, the
excess, if any, of the amount of interest that would have accrued on that class
of certificates for the immediately preceding distribution date if the
Pass-Through Rate were not capped over the amount of interest that is due on
that class of certificates for that distribution date at the capped interest
rate, plus
(2) any outstanding Certificateholders' Interest Carry-Forward
Amount for that class remaining unpaid from prior distribution dates, together
with interest at the applicable Pass-Through Rate for that class without giving
effect to the applicable Net Interest Rate cap.
"CERTIFICATEHOLDERS' INTEREST DISTRIBUTION AMOUNT" means, with respect to
any distribution date and any class of certificates, the sum of the
Certificateholders' Monthly Interest Distribution Amount and the
Certificateholders' Interest Shortfall Amount for that class on that
distribution date.
"CERTIFICATEHOLDERS' INTEREST SHORTFALL AMOUNT" means, with respect to any
distribution date and any class of certificates, the excess, if any, of the
Certificateholders' Monthly Interest Distribution Amount for that class for the
preceding distribution date over the amount in respect of interest that is
actually distributed to that class on the preceding distribution date.
"CERTIFICATEHOLDERS' MONTHLY INTEREST DISTRIBUTION AMOUNT" means, with
respect to any distribution date and any class of certificates, interest accrued
for the related Accrual Period on that class at the applicable Pass-Through Rate
on the principal balance of that class immediately preceding that distribution
date, or, in the case of the first distribution date, on the closing date, after
giving effect to all payments of principal to the holders of that class of
certificates on or before the applicable preceding distribution date.
"CERTIFICATEHOLDERS' PRINCIPAL DEFICIENCY AMOUNT" means,
(1) with respect to any distribution date, other than as set forth
in clause (2) below, the excess, if any, of:
(a) the aggregate principal balance of all classes of Class A
certificates as of the related distribution date, after giving
effect to all distributions of principal on the Class A certificates
on the related distribution date, but without giving effect to the
application of any Insured Payment to be made on the related
distribution date, over
(b) the aggregate principal balance of all the loans as of the
end of the related Due Period and
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(2) with respect to the final distribution date of the certificates,
the aggregate principal balance of all classes of Class A certificates, after
giving effect to all distributions of principal on the Class A certificates on
the final distribution date, but without giving effect to the application of any
Insured Payment to be made on the final distribution date.
"CLASS A CERTIFICATES" means any of the Class A-1 certificates and the
Class A-2 certificates.
"CLASS B PRINCIPAL DISTRIBUTION AMOUNT" means for each pool of loans and
any distribution date, an amount equal to the related Overcollateralization
Reduction Amount. If on any distribution date the aggregate of the
Overcollateralization Reduction Amounts for both pools is greater than the
current principal balance of the Class B certificates, the Class B Principal
Distribution Amount will be distributable in an amount up to the current
principal balance of the Class B certificates and from the related
Overcollateralization Reduction Amounts, pro rata, based on the
Overcollateralization Reduction Amount for each pool.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTION ACCOUNT" means an account established and maintained for the
benefit of the certificateholders into which the servicer is required to deposit
certain amounts, including payments and collections on the loans.
"COMPENSATING INTEREST" means an amount, up to the Master Servicer Fee,
paid by the master servicer to cover interest shortfalls which results from a
borrower's prepayment on a loan.
"CPR" means the constant prepayment rate. This is the model used to
measure prepayments of the loans in this prospectus supplement.
"CUT-OFF DATE" means the close of business on September 1, 1999 with
respect to the Initial Loans transferred to the trust on the closing date. With
respect to the Subsequent Loans transferred to the trust after the closing date,
the date specified in the applicable transfer agreement.
"DEFAULTED LOANS" means loans to which an event of default has occurred
under the related note or Mortgage.
"DEFECTIVE LOAN" means a loan which has a material document deficiency or
as to which the transferor has breached a representation or warranty with
respect to the loan which materially and adversely affects the value of the
loan.
"DELETED LOAN" means a Defective Loan that is replaced by a Qualified
Substitute Loan.
"DETERMINATION DATE" means the 18th calendar day of each month or, if that
day is not a business day, then the preceding business day.
"DISTRIBUTION ACCOUNT" means an account established and maintained for the
benefit of the certificateholders from which the trustee will make distributions
to the certificateholders.
"DUE FOR PAYMENT" means with respect to:
(1) an Insured Amount, the distribution date on which Insured
Amounts are due or,
(2) an Insured Payment which is a Preference Amount, the business
day on which the documentation required by the securities insurer has been
received by the securities insurer.
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"DUE PERIOD" means a period commencing on the 2nd day of the calendar
month preceding the month in which the related distribution date occurs and
ending on the 1st day of the month in which the related distribution date
occurs.
"EXCESS SPREAD" means, with respect to any distribution date and each pool
of loans, the excess, if any, of:
(1) the related Available Distribution Amount, over
(2) the sum of the related Regular Distribution Amount and the
related pool's allocation of the Certificateholders' Interest Distribution
Amount for the Class B certificates.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"FREMONT" means Fremont Investment & Loan, a thrift and loan organized as
a California industrial loan company.
"GROSS MARGIN" means the number of basis points stated in the mortgage
note that will be added to Six-Month LIBOR when determining the loan interest
rate.
"GUARANTY INSURANCE PREMIUM" means the monthly amount payable to the
securities insurer under the Guaranty Policy.
"GUARANTY POLICY" means the guaranty policy issued by the securities
insurer, guaranteeing the timely payment of interest and ultimate payment of
principal on the certificates.
"HOME LOAN PURCHASE AGREEMENT" means the agreement between the depositor
and the transferor. The loans will be conveyed by the transferor to the
depositor under this agreement.
"INITIAL LOANS" means any of the Initial Pool 1 Loans or Initial Pool 2
Loans.
"INITIAL POOL 1 ACCELERATION" means an amount equal to the Maximum
Collateral Amount for the Pool 1 Loans multiplied by 2.3%.
"INITIAL POOL 1 LOANS" means the loans conveyed to the trust on the
Closing Date and made part of the Pool 1 Loans.
"INITIAL POOL 2 LOANS" means the loans conveyed to the trust on the
Closing Date and made part of the Pool 2 Loans.
"INSURANCE AGREEMENT" means the Insurance and Indemnity Agreement among
the security insurer, the depositor, the transferor and the trustee.
"INSURANCE PROCEEDS" means, with respect to any distribution date, the
proceeds paid to the servicer by any insurer under 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 servicer in
connection with the collection of those proceeds and not otherwise reimbursed to
the servicer. Insurance Proceeds do not include Insured Payments or the proceeds
of any insurance policy that are to be applied to the restoration or repair of
the mortgaged property or released to the borrower in accordance with the
accepted servicing procedures.
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"INSURED AMOUNTS" means, for any distribution date and for any class of
Class A certificates, the sum of:
(1) any insufficiency resulting from:
(a) the sum of the Available Distribution Amount for the
related pool and the excess, if any, of the Available Distribution
Amount for the other pool over the Certificateholders' Interest
Distribution Amount for the other class of Class A certificates for
that distribution date, being less than
(b) the Certificateholders' Interest Distribution Amount for
that class of Class A certificates, less any shortfalls incurred by
the imposition of the Soldiers' and Sailors' Relief of 1940, as
amended, and
(2) any Certificateholders' Principal Deficiency Amount.
"INSURED PAYMENTS" means, for any class of Class A certificates, the
aggregate amount actually paid by the securities insurer to the trustee in
respect of:
(1) Insured Amounts for a distribution date for that class of
certificates and
(2) Preference Amounts for any given business day for that class of
certificates.
If on a distribution date one class of Class A certificates has an
Overcollateralization Deficit and the other class of Class A certificates does
not, after giving effect to all distributions on that distribution date other
than any Insured Payment, then any principal portion of any Insured Payment for
that distribution date will be distributable to the class of Class A
certificates having the Overcollateralization Deficit. If both classes of Class
A certificates have an Overcollateralization Deficit, after giving effect to all
payments on that distribution date other than any Insured Payments, then any
principal portion of any Insured Payment for that distribution date will be
distributable to each class of Class A certificates to the extent of the amount
necessary to eliminate the Overcollateralization Deficit for that class.
"INTEREST REDUCTION AMOUNT" means, for any distribution date with respect
to any pool, the amount equal to the sum of the Servicing Fee, the Master
Servicing Fee and the Trustee Fee on the loans in that pool for the related Due
Period and the Guaranty Insurance Premium payable with respect to that pool for
that distribution date.
"LIBOR DETERMINATION DATE" means, for each Accrual Period, the second
business day preceding the first day of that Accrual Period.
"LIFETIME CAP" means the maximum loan rate that may be charged for a loan.
"LIFETIME FLOOR" means the minimum loan rate that may be charged for a
loan.
"LIQUIDATED LOAN" means any loan with a monthly payment more than 30 days
past due and which the servicer has determined that all recoverable Net
Liquidation Proceeds and Insurance Proceeds have been received. A loan will be
deemed to be a Liquidated Loan on the earliest to occur of:
(1) the liquidation of the related mortgaged property acquired
through foreclosure or similar proceedings or
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(2) the servicer's determination in accordance with the accepted
servicing procedures that there is not a reasonable likelihood of an
economically significant recovery from the borrower or the related mortgaged
property in excess of the costs and expenses in obtaining that recovery and in
relation to the expected timing of that recovery.
"LOAN CLASS" means the risk category assigned to each loan pursuant to the
underwriting standards of Fremont.
"LOAN-TO-VALUE RATIO" means the ratio, expressed as a percentage of:
(a) the principal balance of the loan at origination, over
(b) the lesser of the sales price or the appraisal value of
the related mortgaged property at origination, or in the case of a
refinanced or modified loan, either the appraised value determined
at origination or, if applicable, at the time of the refinancing or
modification.
"MASTER SERVICER COMPENSATION" means the aggregate of:
(1) the investment earnings of funds in the Collection Account and
Distribution Account,
(2) late payment charges and prepayment penalties collected on the
loans and
(3) the Master Servicer Fee, less the Servicing Fee required to be
paid from the Master Servicer Fee.
"MASTER SERVICER FEE" means the monthly fee payable to the master servicer
with respect to each loan equal to one-twelfth of 0.50% multiplied by the unpaid
principal of the loan as of the first day of the immediately preceding Due
Period, or as of the Cut-Off Date with respect to the first Due Period. All or a
portion of the Master Servicer Fee will be used to pay the Servicing Fee.
"MAXIMUM COLLATERAL AMOUNT" means, with respect to any pool of loans, the
sum of:
(1) the principal balance of the Initial Loans in that pool as of
the Cut-Off Date and
(2) the principal balance of the Subsequent Loans in that pool as of
the applicable Cut-Off Date.
"MONTHLY ADVANCE" means an advance required to be made by the master
servicer of delinquent interest and principal on a loan, net of the Servicing
Fee and Master Servicer Fee.
"MORTGAGE" means, with respect to any loan, the mortgage, deed of trust or
other similar security interest.
"NET INTEREST RATE" means,
(1) for any distribution date and each class of Class A
certificates, the annualized percentage, expressed on an actual/360 basis,
derived from the fraction,
(a) the numerator of which is the aggregate amount of all
interest due on the loans in both pools during the related Due
Period, minus the Certificateholders' Interest Distribution Amount
for the Class B certificates for that distribution date and minus
the aggregate Interest Reduction Amount for both pools, and
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(b) the denominator of which is the aggregate principal
balance of the Class A-1 and Class A-2 certificates immediately
prior to the related distribution date; and
(2) for any distribution date and the Class B certificates, the
annualized percentage, expressed on a 30/360 basis, derived from the fraction,
(a) the numerator of which is the aggregate amount of all
interest due on the loans in both pools during the related Due
Period, minus the aggregate Interest Reduction Amount for both
pools, and
(b) the denominator of which is the aggregate principal
balance of the loans in both pools as of the first day of the
related Due Period.
On or after the distribution date occurring in April 2000, the Net
Interest Rate for the Class A-1 and Class A-2 certificates will be decreased by
an amount equal to 0.50% per annum.
"NET LIQUIDATION PROCEEDS" means, with respect to any distribution date:
(1) any cash amounts received from Liquidated Loans, whether through
trustee's sale, foreclosure sale, disposition of mortgaged properties or
otherwise, other than Insurance Proceeds and Released Mortgaged Property
Proceeds, and
(2) any other cash amounts received in connection with the
management of the mortgaged properties from defaulted loans.
The amounts set forth in clauses (1) and (2) will be net of:
(a) any reimbursements to the servicer, the master servicer or
the trustee, as applicable, made from those amounts for any
unreimbursed Servicing Compensation, Master Servicer Compensation,
Servicing Advances and Monthly Advances, as applicable, and
(b) any other fees and expenses paid in connection with the
foreclosure, conservation and liquidation of the related Liquidated
Loans or mortgaged properties.
"NONPAYMENT" means, with respect to any distribution date, an Insured
Amount owing in respect of that distribution date that has not been paid.
"NOTICE" means the notice sent in writing by telecopy, in the form
acceptable to the securities insurer, from the trustee specifying the Insured
Amount which is due and owing on the applicable distribution date. The original
of this notice must subsequently be delivered by registered or certified mail.
"ONE-MONTH LIBOR" means the London interbank offered rate for one-month
United States dollar deposits.
"OPTIONAL TERMINATION DATE" means the first distribution date on or after
any distribution date on which the outstanding aggregate principal balance of
the loans declines to 10% or less of the aggregate of the principal balance of
the Initial Loans and the Subsequent Loans for both pools, as of the applicable
Cut-Off Date.
"ORIGINAL AGGREGATE PRE-FUNDING AMOUNT" means an amount equal to the sum
of (i) the Original Pool 1 Pre-Funding Amount and (ii) the Original Pool 2
Pre-Funding Amount.
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"ORIGINAL POOL 1 PRE-FUNDING AMOUNT" means an amount equal to $81,033,795,
subject to a variance of plus or minus 5%. This amount will be deposited into
the Pre-Funding Account on the Closing Date and will be used by the trustee to
acquire Subsequent Pool 1 Loans during the Pre-Funding Period.
"ORIGINAL POOL 2 PRE-FUNDING AMOUNT" means an amount equal to $40,074,193,
subject to a variance of plus or minus 5%. This amount will be deposited into
the Pre-Funding Account on the Closing Date and will be used by the trustee to
acquire Subsequent Pool 2 Loans during the Pre-Funding Period.
"ORIGINAL PRE-FUNDING AMOUNT" means either the Original Pool 1 Pre-Funding
Amount or the Original Pool 2 Pre-Funding Amount, as applicable.
"OVERCOLLATERALIZATION AMOUNT" means with respect to any distribution date
and any class of Class A certificates, the amount equal to the excess, if any,
of:
(1) the sum of the principal balance of the related pool of loans as
of the end of the preceding Due Period and the Pre-Funding Amount for the
related pool of loans of the end of the preceding Due Period, over
(2) the principal balance of that class of Class A certificates.
"OVERCOLLATERALIZATION CALCULATION AMOUNT" means, with respect to any
distribution date, an amount equal to the greatest of:
(a) (1) with respect to any distribution date occurring prior to
the Stepdown Date, an amount equal to 5.15% of the aggregate
of the Maximum Collateral Amounts for both pools; and
(2) with respect to any other distribution date occurring on
or after the Stepdown Date, an amount equal to 10.30% of the
aggregate principal balance of the loans in both pools as of
the end of the related Due Period;
(b) 0.50% of the aggregate of the Maximum Collateral Amounts;
(c) an amount equal to the product of:
(I) 2 and
(II) an amount equal to the difference between:
(A) 50% of the principal balance of the loans in both
pools that are more than 90 days delinquent; and
(B) 4 multiplied by the aggregate of the Excess Spread
for both pools for that distribution date; and
(d) an amount equal to the aggregate principal balance then
outstanding of the three largest loans included in any pool of loans.
However, with respect to any distribution date, the Overcollateralization
Calculation Amount will not exceed the principal balance of both classes of
Class A certificates. The securities insurer may
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reduce the Overcollateralization Calculation Amount for any class of Class A
certificates, at any time. However, the securities insurer may only reduce the
Overcollateralization Calculation Amount if the reduction will not cause a
downgrade, withdrawal or qualification by the rating agencies of the then
current ratings on the Class A certificates.
"OVERCOLLATERALIZATION DEFICIENCY AMOUNT" means, with respect to any
distribution date and any class of Class A certificates, the excess, if any, of
the related Overcollateralization Target Amount over the related
Overcollateralization Amount.
"OVERCOLLATERALIZATION DEFICIT" means, with respect to any distribution
date and any class of Class A certificates, the amount, if any, by which:
(1) the principal balance of that class of Class A certificates,
after taking into account all distributions to be made on the distribution date
but without regard to the application of any related Insured Payment or Excess
Spread on the distribution date, exceeds
(2) the sum of:
(a) the aggregate principal balance of the related pool of
loans as of the close of business on the last day of the related Due
Period and
(b) the Pre-Funding Amount as of that distribution date for
the related pool.
"OVERCOLLATERALIZATION REDUCTION AMOUNT" means, with respect to any
distribution date that occurs on or after the Stepdown Date and each pool, the
lesser of:
(1) the excess, if any, of:
(a) the related Overcollateralization Amount, assuming
principal payments distributed to that class on that distribution
date are equal to the related Regular Principal Distribution Amount,
without regard to this Overcollateralization Reduction Amount, over
(b) the related Overcollateralization Target Amount and
(2) the related Regular Principal Distribution Amount, as determined
without the deduction of this Overcollateralization Reduction Amount from that
amount, on that distribution date.
Prior to the occurrence of the Stepdown Date, the Overcollateralization
Reduction Amount will be zero.
"OVERCOLLATERALIZATION TARGET AMOUNT" means, with respect to any
distribution date and:
(1) with respect to the Class A-1 certificates, an amount equal to
the Overcollateralization Calculation Amount multiplied by the Pool 1
Percentage, and
(2) with respect to the Class A-2 certificates, an amount equal to
the Overcollateralization Calculation Amount multiplied by the Pool 2
Percentage.
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"PASS-THROUGH RATE" means,
(1) with respect to the Class A-1 certificates, a per annum rate
equal to the lesser of:
(a) One-Month LIBOR plus 0.355%, or from and after the first
day of the Accrual Period in which the Optional Termination Date
occurs, One-Month LIBOR plus 0.710% and
(b) the Net Interest Rate for the Class A certificates;
(2) with respect to the Class A-2 certificates, a per annum rate
equal to the lesser of:
(a) One-Month LIBOR plus 0.395%, or from and after the first
day of the Accrual Period in which the Optional Termination Date
occurs, One-Month LIBOR plus 0.790% and
(b) the Net Interest Rate for the Class A certificates; and
(3) with respect to the Class B certificates, a per annum rate equal
to the lesser of:
(a) 9.250%, or from and after the first day of the Accrual
Period in which the Optional Termination Date occurs, 9.750%, and
(b) the Net Interest Rate for the Class B certificates.
"PERIODIC RATE CAP" means the maximum loan interest rate that may be
charged on a loan on a particular date.
"PLANS" means retirement plans and other employee benefit plans or
arrangements subject to Title I of ERISA and Section 4975 of the Code.
"POOL 1 LOANS" means the pool of loans conveyed to the trust that back the
Class A-1 certificates. Pool 1 Loans include the Subsequent Pool 1 Loans.
"POOL 1 PERCENTAGE" means,
(1) with respect to any distribution date prior to the Stepdown
Date, the percentage expressed as a fraction,
(a) the numerator of which is equal to the sum of:
(I) the aggregate unpaid principal balance of the
Initial Pool 1 Loans as of the Cut-Off Date and
(II) the Original Pool 1 Pre-Funding Amount; and
(b) the denominator of which is equal to the sum of:
(I) the aggregate unpaid principal balances of the
Initial Pool 1 Loans and the Initial Pool 2 Loans
as of the Cut-Off Date and
(II) the Original Aggregate Pre-Funding Amount; and
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(2) with respect to any distribution date on or after the Stepdown
Date, the percentage expressed as a fraction,
(a) the numerator of which is the aggregate unpaid principal
balance of the Pool 1 Loans as of the last day of the related Due
Period and
(b) the denominator of which is the aggregate unpaid principal
balances of the Pool 1 Loans and the Pool 2 Loans as of the last day
of the related Due Period.
"POOL 1 PRE-FUNDING AMOUNT" means, with respect to any date of
determination, the portion of the Original Pool 1 Pre-Funding Amount that
remains on deposit in the Pre-Funding Account, net of investment earnings on
that amount. During the Pre-Funding Period, the Pool 1 Pre-Funding Amount will
be reduced by the amount of funds from the Pre-Funding Account used by the trust
to purchase Subsequent Pool 1 Loans.
"POOL 1 PRE-FUNDING PERCENTAGE" means, 97.15% with respect to the Class
A-1 certificates and 2.85% with respect to the Class B certificates.
"POOL 2 LOANS" means the pool of loans conveyed to the trust that back the
Class A-2 certificates. Pool 2 Loans include Subsequent Pool 2 Loans.
"POOL 2 PERCENTAGE" means,
(1) with respect to any distribution date prior to the Stepdown
Date, the percentage expressed as a fraction,
(a) the numerator of which is equal to the sum of:
(I) the principal balance of the Initial Pool 2 Loans
as of the Cut-Off Date and
(II) the Original Pool 2 Pre-Funding Amount; and
(b) the denominator of which is equal to the sum of:
(I) the aggregate of the principal balances of the
Initial Pool 1 Loans and the Initial Pool 2 Loans
as of the Cut-Off Date and
(II) the Original Aggregate Pre-Funding Amount; and
(2) with respect to any distribution date on or after the Stepdown
Date, the percentage expressed as a fraction,
(a) the numerator of which is the principal balance of the
Pool 2 Loans as of the last day of the related Due Period and
(b) the denominator of which is the aggregate of the principal
balances of the Pool 1 Loans and the Pool 2 Loans as of the last day
of the related Due Period.
"POOL 2 PRE-FUNDING AMOUNT" means, with respect to any date of
determination, the portion of the Original Pool 2 Pre-Funding Amount that
remains on deposit in the Pre-Funding Account, net of
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investment earnings on that amount. During the Pre-Funding Period, the Pool 2
Pre-Funding Amount will be reduced by the amount of funds from the Pre-Funding
Account used by the trust to purchase Subsequent Pool 2 Loans.
"POOL 2 PRE-FUNDING PERCENTAGE" means, 97.15% with respect to the Class
A-2 certificates and 2.85% with respect to the Class B certificates.
"POOLING AND MASTER SERVICING AGREEMENT" means the Pooling and Master
Servicing Agreement by and among the master servicer, the transferor, the
depositor and the trustee.
"PRE-FUNDING ACCOUNT" means a segregated trust account established and
maintained for the benefit of the certificateholders. The Original Aggregate
Pre-Funding Amount will be deposited into the Pre-Funding Account on the Closing
Date. Funds on deposit in this account will be used by the trustee to acquire
Subsequent Loans for the trust during the Pre-Funding Period.
"PRE-FUNDING AMOUNT" means any of the Pool 1 Pre-Funding Amount or the
Pool 2 Pre-Funding Amount, as applicable.
"PRE-FUNDING PERIOD" means, with respect to any pool of loans, the period
commencing on the closing date and ending on the earlier to occur of:
(1) the date on which the Pre-Funding Amount for that pool, net of
any investment earnings on that amount, is less than $50,000 and
(2) December 23, 1999.
"PREFERENCE AMOUNT" means any distribution of principal or interest on a
Class A certificate which:
(1) has become Due for Payment, and
(2) is made to a holder of a Class A certificate by or on behalf of
the trustee which has been deemed a preferential transfer and was previously
recovered from the holder pursuant to the United States Bankruptcy Code in
accordance with a final, nonappealable order of a court of competent
jurisdiction.
"PURCHASE PRICE" means the amount required to be paid for any Defective
Loans which must be repurchased by the transferor. This amount is equal to:
(a) the principal balance of the Defective Loan as of the date
of repurchase, plus
(b) all accrued and unpaid interest on the Defective Loan from
the date to which interest was last paid up to but not including the
date of repurchase computed at the applicable loan interest rate,
plus
(c) the amount of any unreimbursed Servicing Advances and
Monthly Advances made by the servicer, the master servicer and the
trustee, respectively, with respect to the Defective Loan.
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"QUALIFIED SUBSTITUTE LOAN" means a loan that:
(1) has an interest rate which differs from the loan interest rate
for the Defective Loan which it replaces by no more than two percentage points
in excess of the related loan interest rate and no lower than the interest rate
of the Deleted Loan, and pays interest in the same manner as the Deleted Loan,
i.e., adjustable-rate or fixed rate,
(2) matures not more than one year later than, and not more than one
year earlier than, the Maturity Date of the Deleted Loan, and in any case prior
to January 1, 2030,
(3) has a principal balance, after application of all payments
received on or before the date of this substitution, equal to or less than the
principal balance of the Deleted Loan as of that date,
(4) has a lien priority no lower than the Deleted Loan,
(5) complies as of the date of substitution with each representation
and warranty set forth in the Pooling and Master Servicing Agreement with
respect to the loans and is not more than 89 days delinquent as of the date of
substitution for the Deleted Loan,
(6) has a borrower with a debt-to-income ratio no higher than the
debt-to-income ratio of the borrower with respect to the Deleted Loan, and
(7) is otherwise acceptable to the securities insurer provided that
with respect to a substitution of multiple loans, items (1), (2) and (3) above
may be considered on an aggregate or weighted average basis.
"REGULAR DISTRIBUTION AMOUNT" means, with respect to any distribution date
and any class of Class A certificates, the lesser of:
(1) the Available Distribution Amount for the related pool and
(2) the sum of:
(a) the related Certificateholders' Interest Distribution
Amount and
(b) the lesser of the related Regular Principal Distribution
Amount and the principal balance of that class of Class A
certificates immediately before the distribution date.
"REGULAR PRINCIPAL DISTRIBUTION AMOUNT" means, with respect to any
distribution date and any pool of loans, an amount equal to the sum of:
(1) each scheduled distribution of principal collected by the
servicer or advanced by the master servicer or the trustee in the related Due
Period with respect to that pool,
(2) all full and partial principal prepayments received by the
servicer during the related Due Period with respect to that pool,
(3) the principal portion of all Net Liquidation Proceeds, Insurance
Proceeds and Released Mortgaged Property Proceeds received during the related
Due Period with respect to that pool,
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(4) the principal portion of the Purchase Price of any repurchased
loan in that pool received before the related Determination Date,
(5) the principal portion of any Substitution Adjustments deposited
in the Collection Account as of the related Determination Date with respect to
that pool, and
(6) on the distribution date on which the optional termination of
the certificates is to occur, the Termination Price received by the servicer
allocable to principal of the loans in that pool.
If the distribution date occurs on or after the Stepdown Date, then the related
Regular Principal Distribution Amount may be reduced, but not less than zero, by
the related Overcollateralization Reduction Amount, if any, for that
distribution date.
"RELEASED MORTGAGED PROPERTY PROCEEDS" means, with respect to any loan,
the proceeds received by the servicer in connection with:
(1) a taking of an entire mortgaged property by exercise of the
power of eminent domain or condemnation or
(2) any release of part of the mortgaged property from the lien of
the related Mortgage, whether by partial condemnation, sale or otherwise, if the
proceeds are not released to the borrower in accordance with applicable law,
accepted servicing procedures and the Pooling and Master Servicing Agreement.
"RESERVE ACCOUNT" means the segregated trust account established and
maintained for the benefit of the certificateholders and the securities insurer.
Portions of Excess Spread on each distribution date will be deposited into the
Reserve Account as described in clause (b)(9)(A) under "Description of the
Certificates--Priority of Distributions" in this prospectus supplement.
"RESERVE ACCOUNT REQUIREMENT" means for any distribution date, an amount
equal to 2.3% of the Maximum Collateral Amount for the Pool 1 Loans less all
amounts distributed to the Class A-1 certificates in clause (a)(6) and (a)(8)
under "Description of the Certificates--Priority of Distributions" in this
prospectus supplement. The Reserve Account Requirement may not be less than
zero.
"SECURITIES INSURER DEFAULT" means a continuing failure by the securities
insurer to make a required payment under the Guaranty Policy or some
bankruptcy-related events have occurred with respect to the securities insurer.
"SECURITIES INSURER REIMBURSEMENT AMOUNT" means an amount equal to any
unreimbursed Insured Payments in respect of the certificates not previously
reimbursed and any other amounts owed to the securities insurer under the
Insurance Agreement, including legal fees and other expenses incurred by the
securities insurer, together with interest on the unpaid amounts at the rate
specified in the Insurance Agreement.
"SERVICING ADVANCES" means the reasonable and customary expense advances
with respect to the loans required to be made by the servicer in accordance with
accepted servicing procedures.
"SERVICING AGREEMENT" means the servicing agreement between the master
servicer and the servicer.
S-129
<PAGE>
"SERVICING COMPENSATION" means for any distribution date, the Servicing
Fee and the additional servicing compensation payable to the servicer in the
form of assumption, modification and other administrative fees, insufficient
funds charges, and certain other servicing-related penalties and fees, excluding
prepayment penalties.
"SERVICING FEE" means, for any distribution date and for each loan, the
monthly fee payable to the Servicer equal to an amount up to, and payable from,
the Master Servicer Fee.
"SIX-MONTH LIBOR" means the London interbank offered rate for six-month
United States dollar deposits.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"STATISTICAL CALCULATION DATE" means August 25, 1999.
"STATISTICAL POOL PRINCIPAL BALANCE" means,
(1) with respect to the Initial Pool 1 Loans, $250,394,077 and
(2) with respect to the Initial Pool 2 Loans, $115,584,286.
"STEPDOWN DATE" means the first distribution date occurring on the later
of:
(1) April 25, 2002; or
(2) the distribution date on which the aggregate principal balance
of the loans in both pools as of the end of the related Due Period has been
reduced to 50% of the aggregate of the Maximum Collateral Amounts for both
pools.
"SUBSEQUENT LOANS" means the Subsequent Pool 1 Loans or Subsequent Pool 2
Loans, as applicable.
"SUBSEQUENT POOL 1 LOANS" means the additional loans that the trust may
acquire with the Pool 1 Pre-Funding Amount on deposit in the Pre-Funding Account
during the Pre-Funding Period. The trustee may acquire Subsequent Pool 1 Loans
having an aggregate unpaid principal balance up to the Original Pool 1
Pre-Funding Amount.
"SUBSEQUENT POOL 2 LOANS" means the additional loans that the trust may
acquire with the Pool 2 Pre-Funding Amount on deposit in the Pre-Funding Account
during the Pre-Funding Period. The trustee may acquire Subsequent Pool 2 Loans
having an aggregate unpaid principal balance up to the Original Pool 2
Pre-Funding Amount.
"SUBSTITUTION ADJUSTMENT" means, in connection with the substitution of a
Qualified Substitute Loan for a Defective Loan, an amount equal to the shortfall
caused by the substitute loan having an unpaid principal balance that is less
than the Defective Loan plus all accrued and unpaid interest on, and any
unreimbursed Servicing Advances for, the Defective Loan.
S-130
<PAGE>
"TERMINATION PRICE" means, with respect to any distribution date, an
amount equal to the greater of:
(1) the sum of:
(a) the principal balance for each class of offered
certificates outstanding and all accrued and unpaid interest on
those balances for each class at the applicable Pass-Through Rate
and all unpaid Certificateholders' Interest Carry-Forward Amounts
for each class of offered certificates through the last day of the
Accrual Period relating to that distribution date. For purposes of
determining accrued interest in this clause (a), the Pass-Through
Rate will be determined without giving effect to the Net Interest
Rate cap;
(b) the aggregate amount of unreimbursed realized losses
allocated to the Class B certificates as a reduction of their
principal balance, together with interest on those amounts at the
Pass-Through Rate for the Class B certificates. For purposes of
determining accrued interest in this clause (a), the Pass-Through
Rate will be determined without giving effect to the Net Interest
Rate cap;
(c) any Trust Fees and Expenses due and unpaid on the
distribution date;
(d) any unreimbursed Servicing Advances and unreimbursed
Monthly Advances including advances deemed to be nonrecoverable; and
(e) any unpaid Securities Insurer Reimbursement Amount; and
(2) the sum of:
(a) the principal balance of each loan in both pools as of the
close of business on the first day of the month of that distribution
date;
(b) all unpaid interest accrued on the principal balance of
each loan at the related loan interest rate to the close of business
on the first day of the month of that distribution date;
(c) the aggregate fair market value of each foreclosure
property on the close of business on the first day of the month of
that distribution date. The fair market value must be determined by
an independent appraiser acceptable to the trustee as of a date not
more than 30 days before this date; and
(d) any unpaid Securities Insurer Reimbursement Amount.
"TRANSFER AND SERVICING AGREEMENTS" means the Pooling and Master Servicing
Agreement, the Servicing Agreement, and the Home Loan Purchase Agreement.
"TRUST FEES AND EXPENSES" consists of the following:
(1) the Servicing Compensation,
(2) the Master Servicer Compensation,
(3) the Trustee Fee and reimbursement of certain expenses, and
(4) the Guaranty Insurance Premium.
S-131
<PAGE>
"TRUSTEE FEE" means, for any distribution date, the fee payable to the
trustee on each loan, which is an amount equal to one-twelfth of the Trustee Fee
Rate on the unpaid principal balance of the loan as of the first day of the
immediately preceding related Due Period, or as of the Cut-Off Date, with
respect to the first Due Period.
"TRUSTEE FEE RATE" means 0.0075% per annum.
"TRUSTEE LOAN FILE" means for each loan:
(1) the related note endorsed in blank or to the order of the
trustee or in blank without recourse;
(2) any assumption and modification agreements;
(3) the Mortgage, with evidence of recording indicated on the
Mortgage, except for any Mortgage not returned from the public recording office;
(4) an assignment of the Mortgage, if any, in the name of the
trustee in recordable form;
(5) a title insurance policy, or, if the policy has not been issued,
a written commitment or interim binder or preliminary report of title issued;
and
(6) any intervening assignments of the Mortgage.
"U.S. PERSON" means an entity meeting the following characteristics:
(1) a citizen or resident of the United States,
(2) a corporation or partnership or other entity created or
organized in or under the laws of the United States, any State of the United
States or the District of Columbia, unless, in the case of a partnership,
Treasury regulations are adopted that provide otherwise, including any entity
treated as a corporation or partnership for federal income tax purposes,
(3) an estate that is subject to U.S. federal income tax regardless
of the source of its income, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of that trust, and one or more U.S.
Persons have the authority to control all substantial decisions of that trust
or, to the extent provided in applicable Treasury regulations, trusts in
existence on August 20, 1996, which are eligible to elect to be treated as U.S.
Persons.
S-132
<PAGE>
================================================================================
YOU SHOULD RELY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS SUPPLEMENT AND THE ATTACHED PROSPECTUS. WE HAVE NOT AUTHORIZED
ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION.
WE ARE NOT OFFERING THESE CERTIFICATES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED.
--------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Important Notice About Information Presented in this Prospectus
Supplement and the Prospectus............................................S-2
Summary......................................................................S-5
Risk Factors................................................................S-16
Forward-Looking Statements..................................................S-25
Defined Terms...............................................................S-25
The Pools...................................................................S-25
Fremont Investment & Loan...................................................S-48
Master Servicer.............................................................S-48
Servicer....................................................................S-50
Underwriting Criteria.......................................................S-54
Prepayment and Yield Considerations.........................................S-59
Description of the Certificates.............................................S-75
Description of Credit Enhancement...........................................S-85
Description of the Transfer and Servicing Agreements........................S-91
Federal Income Tax Consequences............................................S-106
ERISA Considerations.......................................................S-109
Legal Investment...........................................................S-111
Use of Proceeds............................................................S-112
Underwriting...............................................................S-112
Experts....................................................................S-114
Legal Matters..............................................................S-114
Ratings....................................................................S-114
Glossary of Terms..........................................................S-116
PROSPECTUS
Prospectus Supplement or Current Report on Form 8-K............................3
Summary of Terms...............................................................6
Risk Factors..................................................................16
The Trust Funds...............................................................26
Use of Proceeds...............................................................40
Yield Considerations..........................................................40
Maturity and Prepayment Considerations........................................42
The Depositor.................................................................45
Residential Loans.............................................................45
Description of the Securities.................................................47
Description of Primary Insurance Coverage.....................................79
Description of Credit Support.................................................84
Certain Legal Aspects of Residential Loans....................................91
Federal Income Tax Consequences..............................................114
State and Other Tax Consequences.............................................156
ERISA Considerations.........................................................156
Legal Investment.............................................................161
Plans of Distribution........................................................163
Incorporation of Certain Information by Reference............................165
Legal Matters................................................................166
Financial Information........................................................166
Rating.......................................................................166
Glossary of Terms............................................................168
DEALERS WILL BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS OF THESE CERTIFICATES AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS. IN ADDITION, ALL DEALERS SELLING THESE CERTIFICATES
WILL DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS UNTIL DECEMBER 19, 1999.
================================================================================
<PAGE>
================================================================================
$500,257,334 (APPROXIMATE)
[FREMONT LOGO]
HOME LOAN ASSET
BACKED CERTIFICATES
SERIES 1999-3
FREMONT
HOME LOAN
TRUST 1999-3
Issuer
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
Depositor
FREMONT INVESTMENT & LOAN
Transferor and Master Servicer
COUNTRYWIDE HOME LOANS, INC.
Servicer
[AMBAC LOGO]
---------------
PROSPECTUS SUPPLEMENT
---------------
PAINEWEBBER INCORPORATED
CREDIT SUISSE FIRST BOSTON
FIRST UNION CAPITAL MARKETS CORP.
BANC ONE CAPITAL MARKETS, INC.
CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN
SEPTEMBER 20, 1999
================================================================================
<PAGE>
PROSPECTUS
AUGUST 20, 1999
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
Depositor
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(Issuable in Series)
PaineWebber Mortgage Acceptance Corporation IV from time to time will offer
asset-backed pass-through certificates or asset-backed notes. We will offer the
certificates or notes through this prospectus and a separate prospectus
supplement for each series.
For each series we will establish a trust fund consisting primarily of
o 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 or beneficial interests in them; or
o pass-through or participation certificates issued or guaranteed by the
Government National Mortgage Association, the Federal National Mortgage
Association or the Federal Home Loan Mortgage Corporation.
The certificates of a series will evidence beneficial ownership interests in
the trust fund. The notes of a series will evidence indebtedness of the trust
fund. The certificates or notes of a series may be divided into two or more
classes which may have different interest rates and which may receive principal
payments in differing proportions and at different times. In addition, the
rights of certain holders of classes may be subordinate to the rights of holders
of other classes to receive principal and interest.
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 16 IN THIS
PROSPECTUS AND IN THE RELATED PROSPECTUS SUPPLEMENT.
The securities will not represent obligations of PaineWebber Mortgage
Acceptance Corporation IV or any of its affiliates. No governmental agency will
insure the certificates or the collateral securing the securities.
You should consult with your own advisors to determine if the offered
securities are appropriate investments for you and to determine the applicable
legal, tax, regulatory and accounting treatment of the offered securities.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THE OFFERED CERTIFICATES OR NOTES OR DETERMINED
IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
No secondary market will exist for a series of certificates or notes prior to
its offering. We cannot assure you that a secondary market will develop for the
certificates or notes, as applicable, of any series, or, if it does develop,
that it will continue.
PAINEWEBBER INCORPORATED
<PAGE>
We may offer the certificates or notes, as applicable, through one or more
different methods, including offerings through underwriters, as more fully
described under "Plans of Distribution" in this prospectus and in the related
prospectus supplement. Our affiliates may from time to time act as agents or
underwriters in connection with the sale of the offered certificates or notes,
as applicable. We may retain or hold for sale, from time to time, one or more
classes of a series of certificates or notes, as applicable. We may offer
certain classes of the certificates or notes, as applicable, if so specified in
the related prospectus supplement, in one or more transactions exempt from the
registration requirements of the Securities Act of 1933, as amended. These
offerings will not be made pursuant to this prospectus or the related
registration statement.
---------------------------
This prospectus may not be used to consummate sales of the offered
certificates or notes, as applicable, unless accompanied by a prospectus
supplement.
<PAGE>
TABLE OF CONTENTS
PAGE
----
Important Notice about Information Presented in this Prospectus and
Each Accompanying Prospectus Supplement.............................5
Summary of Terms.......................................................6
Risk Factors..........................................................16
Limited Liquidity of Securities May Adversely Affect
Market Value of Securities......................................16
Assets of Trust Fund Are Limited...................................16
Credit Enhancement Is Limited in Amount and Coverage...............16
Yield Is Sensitive to Rate of Principal Prepayment.................17
Borrower May Be Unable to Make Balloon Payment.....................17
Nature of Mortgages Could Adversely Affect Value of Properties.....18
Violations of Environmental Laws May Reduce Recoveries on
Properties......................................................20
Violations of Federal Laws May Adversely Affect Ability to
Collect on Loans................................................20
Rating of the Securities Are Limited and May be Withdrawn or
Lowered.........................................................21
Adverse Conditions in the Residential Real Estate Markets May
Result in a Decline in Property Values..........................23
Book-Entry System for Certain Classes May Decrease Liquidity and
Delay Payment...................................................23
Unsecured Home Improvement Contracts May Experience Relatively
Higher Losses...................................................24
Mortgage Loans Underwritten as Non-Conforming Credits May
Experience Relatively Higher Losses.............................24
Assets of the Trust Fund May Include Delinquent and
Sub-Performing Residential Loans................................25
Changes in the Market Value of Properties May Adversely Affect
Payments on the Securities......................................25
Year 2000 Non-Compliance May Adversely Affect Payments on the
Securities......................................................25
The Trust Funds.......................................................26
Residential Loans..................................................26
Agency Securities..................................................33
Stripped Agency Securities.........................................37
Additional Information Concerning the Trust Funds..................38
Use of Proceeds.......................................................40
Yield Considerations..................................................40
Maturity and Prepayment Considerations................................42
The Depositor.........................................................45
Residential Loans.....................................................45
Underwriting Standards.............................................45
Representations by Unaffiliated Sellers; Repurchases...............45
Sub-Servicing......................................................47
Description of the Securities.........................................47
General............................................................47
Assignment of Assets of the Trust Fund.............................49
Deposits to the Trust Account......................................52
Pre-Funding Account................................................52
Payments on Residential Loans......................................52
Payments on Agency Securities......................................53
Distributions......................................................54
Principal and Interest on the Securities...........................55
Available Distribution Amount......................................57
Subordination......................................................57
Advances...........................................................60
Statements to Holders of Securities................................60
Book-Entry Registration of Securities..............................62
Collection and Other Servicing Procedures..........................65
Realization on Defaulted Residential Loans.........................66
Retained Interest, Administration Compensation and Payment of
Expenses........................................................67
Evidence as to Compliance..........................................68
Certain Matters Regarding the Master Servicer, the Depositor and
the Trustee.....................................................69
Deficiency Events..................................................72
Events of Default..................................................73
Amendment..........................................................77
Termination........................................................78
Voting Rights......................................................79
Description of Primary Insurance Coverage.............................79
Primary Credit Insurance Policies..................................79
FHA Insurance and VA Guarantees....................................80
Primary Hazard Insurance Policies..................................82
Description of Credit Support.........................................84
Pool Insurance Policies............................................85
Special Hazard Insurance Policies..................................87
Bankruptcy Bonds...................................................90
Reserve Funds......................................................90
Cross-Support Provisions...........................................90
Letter of Credit...................................................91
Insurance Policies and Surety Bonds................................91
Excess Spread......................................................91
Overcollateralization..............................................91
Certain Legal Aspects of Residential Loans............................91
General............................................................92
Mortgage Loans.....................................................92
Cooperative Loans..................................................93
Tax Aspects of Cooperative Ownership...............................94
Manufactured Housing Contracts Other Than Land Contracts...........95
Foreclosure on Mortgages...........................................97
Foreclosure on Cooperative Shares.................................100
-3-
<PAGE>
Repossession with respect to Manufactured Housing Contracts that
are not Land Contracts.........................................101
Rights of Redemption with respect to Residential Properties.....103
Notice of Sale; Redemption Rights with respect to Manufactured
Homes..........................................................103
Anti-Deficiency Legislation, Bankruptcy Laws and Other
Limitations on Lenders.........................................103
Junior Mortgages..................................................107
Consumer Protection Laws..........................................107
Enforceability of Certain Provisions..............................108
Prepayment Charges and Prepayments................................110
Subordinate Financing.............................................110
Applicability of Usury Laws...111
Alternative Mortgage Instruments111
Environmental Legislation.....112
Soldiers' and Sailors' Civil Relief Act of 1940...................113
Federal Income Tax Consequences......................................114
General...........................................................114
REMICS............................................................115
Taxation of Owners of Regular Securities..........................118
Taxation of Owners of Residual Securities.........................127
Taxes That May Be Imposed on the REMIC Pool.......................136
Taxation of Certain Foreign Investors.............................138
Grantor Trust Funds...............................................141
Standard Securities...............................................141
Stripped Securities...............................................145
Partnership Trust Funds...........................................149
Taxation of Owners of Partnership Securities......................150
State and Other Tax Consequences.....................................156
ERISA Considerations.................................................156
Legal Investment.....................................................161
Plans of Distribution................................................164
Incorporation of Certain Information by Reference....................165
Legal Matters........................................................166
Financial Information................................................166
Rating...............................................................166
Glossary of Terms....................................................168
-4-
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS AND EACH ACCOMPANYING PROSPECTUS SUPPLEMENT
Two separate documents contain information about the offered certificates
or notes, as applicable. These documents progressively provide more detail:
(1) this prospectus, which provides general information, some of which may
not apply to the offered securities; and
(2) the accompanying prospectus supplement for each series, which
describes the specific terms of the offered securities.
IF THE TERMS OF THE OFFERED SECURITIES VARY BETWEEN THIS PROSPECTUS AND
THE ACCOMPANYING PROSPECTUS SUPPLEMENT, YOU SHOULD RELY ON THE INFORMATION IN
THE PROSPECTUS SUPPLEMENT.
You should rely only on the information contained in this prospectus and
the accompanying prospectus supplement. We have not authorized anyone to provide
you with information that is different from that contained in this prospectus
and the related prospectus supplement. The information in this prospectus is
accurate only as of the date of this prospectus.
--------------------------------
If you require additional information, the mailing address of our
principal executive offices is PaineWebber Mortgage Acceptance Corporation IV,
1285 Avenue of the Americas, New York, NY 10019 and the telephone number is
(212) 713-2000. For other means of acquiring additional information about us or
a series of securities, see "Incorporation of Certain Information by Reference"
in this prospectus.
-5-
<PAGE>
SUMMARY OF TERMS
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT. IT DOES NOT
CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING AN INVESTMENT
DECISION. PLEASE READ THIS ENTIRE PROSPECTUS AND THE ACCOMPANYING PROSPECTUS
SUPPLEMENT AS WELL AS THE TERMS AND PROVISIONS OF THE RELATED POOLING AND
SERVICING AGREEMENT OR TRUST AGREEMENT CAREFULLY TO UNDERSTAND ALL OF THE TERMS
OF A SERIES OF SECURITIES.
RELEVANT PARTIES
Depositor..................PaineWebber Mortgage Acceptance Corporation IV,
the depositor, is a corporation organized under
the laws of the State of Delaware. The depositor
is a wholly owned limited purpose finance
subsidiary of PaineWebber Group Inc.
Master Servicer............The entity or entities named as master servicer
in the related prospectus supplement.
Trustees...................The trustee or indenture trustee named as trustee
in the related prospectus supplement. The owner
trustee named as owner trustee in the related
prospectus supplement.
Issuer of Notes............The depositor or an owner trust established for
the purpose of issuing the series of notes will
issue each series of notes through a separate
trust. The depositor, and the owner trustee will
enter into a separate trust agreement to form
each owner trust.
SECURITIES
Description of Securities..The depositor will offer asset-backed
pass-through certificates or asset-backed notes
from time to time. The depositor will offer these
securities in one or more series. Each series of
securities will include one or more classes
representing either a beneficial ownership
interest in, or indebtedness secured by, a trust
fund. The trust fund will consist of a segregated
pool of residential loans or agency securities,
or beneficial interests in them, and certain
other assets described below.
A series of securities may include one or more
classes of securities that may be entitled to,
among other things:
o principal distributions, with disproportionate
nominal or no interest distributions;
o interest distributions, with disproportionate,
nominal or no principal distributions;
-6-
<PAGE>
o distributions only of prepayments of principal
throughout the lives of the securities or
during specified periods;
o subordinated distributions of scheduled
payments of principal, prepayments of
principal, interest or any combination of
these payments;
o distributions only after the occurrence of
events specified in the related prospectus
supplement;
o 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;
o interest at a fixed rate or a rate that is
subject to change from time to time;
o distributions allocable to interest only after
the occurrence of events specified in the
related prospectus supplement and may accrue
interest until these events occur.
The related prospectus supplement will specify
these entitlements.
The timing and amounts of these distributions may
vary among classes, over time. 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.
The related prospectus supplement will specify
if each class of securities
o has a stated principal amount; and
o is entitled to distributions of interest on
the security principal balance based on a
specified security interest rate.
Interest...................Interest on each class of securities for a
series:
o will accrue at the applicable security
interest rate on its outstanding security
principal balance;
o will be distributed to holders of the
securities as provided in the related
prospectus supplement on the related
distribution date; and
o may be reduced to the extent of certain
delinquencies or other contingencies described
in the related prospectus supplement.
-7-
<PAGE>
Distributions with respect to accrued interest on
accrual securities will be identified in the
related prospectus supplement. This accrued
interest will not be distributed but rather will
be added to the security principal balance of each
series prior to the time when accrued interest
becomes payable.
Distributions with respect to interest on
interest-only 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 in this prospectus
and in the related prospectus supplement.
See "Yield Considerations," "Maturity and
Prepayment Considerations" and "Description of the
Securities" in this prospectus.
Principal..................The security principal balance of a security
represents the maximum dollar amount, exclusive
of interest, which you are entitled to receive
as principal from future cash flow on the
assets in the related trust fund. The related
prospectus supplement will set forth the
initial security principal balance of each
class of securities.
Generally, distributions of principal will be
payable as set forth in the related prospectus
supplement, which may be on a pro rata basis among
all of the securities of the same class, in
proportion to their respective outstanding
security principal balances.
If an interest-only security does not have a
security principal balance, it will not receive
distributions of principal. See "The Trust Funds,"
"Maturity and Prepayment Considerations" and
"Description of the Securities" in this
prospectus.
ASSETS
The Trust Funds............Each trust fund will consist of:
o a segregated pool of residential loans, agency
securities and/or mortgage securities; and
o certain other assets as described in this
prospectus and in the related prospectus
supplement.
The depositor will purchase all assets of the
trust fund, either directly or through an
affiliate, from unaffiliated sellers. The
depositor will generally deposit the assets into
the related trust fund as of the first day of the
month in which the securities evidencing interests
in the trust fund or collateralized by the assets
of the trust fund are initially
-8-
<PAGE>
issued. See "Description of the
Securities-Pre-Funding Account" in this
prospectus.
A. Residential Loans..........The residential loans will consist of any
combination of:
o mortgage loans secured by first or junior
liens on one- to four-family residential
properties;
o mortgage loans secured by first or junior
liens on multifamily residential properties
consisting of five or more dwelling units;
o home improvement installment sales contracts
and installment loan agreements which may be
unsecured or secured by a lien on the related
mortgaged property;
o a manufactured home, which may have a
subordinate lien on the related mortgaged
property, as described in the related
prospectus supplement;
o one- to four-family first or junior lien
closed end home equity loans for property
improvement, debt consolidation or home equity
purposes;
o cooperative loans secured primarily by shares
in a private cooperative housing corporation.
The shares, together with the related
proprietary lease or occupancy agreement give
the owner of the shares the right to occupy a
particular dwelling unit in the cooperative
housing corporation; or
o manufactured housing conditional sales
contracts and installment loan agreements
which may be secured by either liens on:
o new or used manufactured homes; or
o the real property and any improvements on
it 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; and
o in certain cases, new or used manufactured
homes which are not deemed to be a part of
the related real property under applicable
state law.
The mortgage properties, cooperative shares,
together with the right to occupy a particular
dwelling unit, and manufactured homes may be
located in any one of the fifty states, the
District of Columbia or the Commonwealth of Puerto
Rico.
-9-
<PAGE>
Each trust fund may contain any combination of the
following types of residential loans:
o fully amortizing loans
o with a fixed rate of interest and
o level monthly payments to maturity;
o fully amortizing loans with
o a fixed interest rate providing for level
monthly payments, or
o for payments of interest that increase
annually at a predetermined rate until the
loan is repaid or for a specified number of
years,
o after which level monthly payments resume;
o fully amortizing loans
o 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,
o 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,
o followed by level monthly payments;
o fixed interest rate loans providing for
o level payments of principal and interest on
the basis of an assumed amortization
schedule and
o a balloon payment of principal at the end
of a specified term;
o fully amortizing loans with
o an interest rate adjusted periodically, and
o 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.
These loans may provide for an election, at
the borrower's option during a specified
period after origination of the loan, to
convert the adjustable
-10-
<PAGE>
interest rate to a fixed interest rate, as
described in the related prospectus
supplement;
o fully amortizing loans with an adjustable
interest rate providing for monthly payments
less than the amount of interest accruing on
the loan and for the amount of interest
accrued but not paid currently to be added to
the principal balance of the loan;
o adjustable interest rate loans providing for
an election at the borrower's option to
extend the term to maturity for a period that
will result in level monthly payments to
maturity if an adjustment to the interest
rate occurs resulting in a higher interest
rate than at origination; or
o other types of residential loans as may be
described in the related prospectus
supplement.
The related prospectus supplement may specify that
the residential loans are covered by:
o primary mortgage insurance policies;
o insurance issued by the Federal Housing
Administration; or
o partial guarantees of the Veterans
Administration.
See "Description of Primary Insurance Coverage" in
this prospectus.
B. Agency Securities........The agency securities may consist of any
combination of:
o "fully modified pass-through" mortgage-backed
certificates guaranteed by the Government
National Mortgage Association;
o guaranteed mortgage pass-through securities
issued by the Federal National Mortgage
Association; and
o mortgage participation certificates issued by
the Federal Home Loan Mortgage Corporation.
C. Mortgage Securities........A trust fund may include previously issued:
o asset-backed certificates;
o collateralized mortgage obligations; or
o participation certificates evidencing
interests in, or collateralized by,
residential loans or agency securities.
D. Trust Account..............Each trust fund will include one or more trust
accounts established and maintained on behalf of
the holders of securities. To the extent
described in this prospectus and in
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the related prospectus supplement, the master
servicer or the trustee will deposit into the
trust account all payments and collections
received or advanced with respect to assets of
the related trust fund. A trust account may be
maintained as an interest bearing or a
non-interest bearing account. Alternatively,
funds held in the trust account may be invested
in certain short-term high-quality obligations.
See "Description of the Securities -- Deposits to
the Trust Account" in this prospectus.
E. Credit Support...........One or more classes of securities within any
series may be covered by any combination of:
o a surety bond;
o a guarantee;
o letter of credit;
o an insurance policy;
o a bankruptcy bond;
o a reserve fund;
o a cash account;
o reinvestment income;
o overcollateralization;
o 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;
o cross-support between securities backed by
different asset groups within the same trust
fund; or
o another type of credit support to provide
partial or full coverage for certain defaults
and losses relating to the residential loans.
The related prospectus supplement may provide that
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 this credit support relates.
The related prospectus supplement will also
specify the manner of determining the amount of
the coverage provided by the credit support and
the application of this coverage to the identified
trust funds. See "Description of Credit Support"
and "Description of the Securities --
Subordination" in this prospectus.
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PRE-FUNDING ACCOUNT...........The related prospectus supplement may specify
that funds on deposit in an account a pre-funding
account will be used to purchase additional
residential loans during the period specified in
the related prospectus supplement.
SERVICING AND ADVANCES........The master servicer, directly or through
sub-servicers:
o will service and administer the residential
loans included in a trust fund; and
o if and to the extent the related prospectus
supplement so provides, will be obligated to
make certain cash advances with respect to
delinquent scheduled payments on the
residential loans. This advancing obligation
will be limited to the extent that the master
servicer determines that the advances will be
recoverable.
Advances made by the master servicer will be
reimbursable to the extent described 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 borrower on
any surety bond will be named, and the terms
applicable to a cash advance reserve fund will be
described in the related prospectus supplement.
See "Description of the Securities -- Advances."
in this prospectus.
OPTIONAL TERMINATION..........The related prospectus supplement may specify
that the assets in the related trust fund may be
sold, causing an early termination of a series of
securities in the manner set forth in the related
prospectus supplement. See "Description of the
Securities -- Termination" in this prospectus and
the related section in the related prospectus
supplement.
TAX STATUS....................The treatment of the securities for federal
income tax purposes will depend on:
o whether a REMIC election is made with respect
to a series of certificates; and
o if a REMIC election is made, whether the
certificates are "regular" interest
securities or "residual" interest securities.
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Notes will represent indebtedness of the related
trust fund. You are advised to consult your tax
advisors.
See "Federal Income Tax Consequences" in this
prospectus and in the related prospectus
supplement.
ERISA CONSIDERATIONS..........If you are a fiduciary of any employee benefit
plan subject to the fiduciary responsibility
provisions of the Employee Retirement Income
Security Act of 1974, as amended, you should
carefully review with your own legal advisors
whether the purchase or holding of securities
could give rise to a transaction prohibited or
otherwise impermissible under ERISA or the
Internal Revenue Code.
See "ERISA Considerations" in this prospectus and
in the related prospectus supplement.
LEGAL INVESTMENT..............The applicable prospectus supplement will specify
whether the securities offered will constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of
1984, as amended. If your investment activities
are subject to review by federal or state
authorities, you should consult with your counsel
or the applicable authorities to determine
whether and to what extent a class of securities
constitutes a legal investment for you.
See "Legal Investment" in this prospectus and in
the related prospectus supplement.
USE OF PROCEEDS...............The depositor will use the net proceeds from the
sale of each series for one or more of the
following purposes:
o to purchase the related assets of the trust
fund;
o to repay indebtedness which was incurred to
obtain funds to acquire the assets of the
trust fund;
o to establish any reserve funds described in
the related prospectus supplement; and
o to pay costs of structuring, guaranteeing and
issuing the securities.
See "Use of Proceeds" in this prospectus and in
the related prospectus supplement.
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RATINGS.......................Prior to offering securities pursuant to this
prospectus and the related prospectus supplement,
each offered class must be rated upon issuance in
one of the four highest applicable rating
categories of at least one nationally recognized
statistical rating organization. The rating or
ratings applicable to the securities of each
series offered by this prospectus and by the
related prospectus supplement will be set forth in
the related prospectus supplement.
o A security rating is not a recommendation to
buy, sell or hold the securities of any
series.
o A security rating is subject to revision or
withdrawal at any time by the assigning
rating agency.
o A security rating does not address the effect
of prepayments on the yield you may
anticipate when you purchase your securities.
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RISK FACTORS
Before making an investment decision, you should carefully consider the
following risks and the risks described under "Risk Factors" in the prospectus
supplement for the applicable series of securities. We believe these sections
describe the principal factors that make an investment in the securities
speculative or risky. In particular, distributions on your securities will
depend on payments received on and other recoveries with respect to the loans.
Therefore, you should carefully consider the risk factors relating to the loans
and the properties.
LIMITED LIQUIDITY OF SECURITIES MAY ADVERSELY AFFECT MARKET VALUE OF
SECURITIES
We cannot assure you that a secondary market for the securities of any series
will develop or, if it does develop, that it will provide you with liquidity of
investment or will continue for the life of your securities. The market value of
your securities will fluctuate with changes in prevailing rates of interest.
Consequently, if you sell your security in any secondary market that develops,
you may sell it for less than par value or for less than your purchase price.
You will have optional redemption rights only to the extent the related
prospectus supplement so specifies. The prospectus supplement for any series may
indicate that an underwriter intends to establish a secondary market in the
securities, but no underwriter must do so.
ASSETS OF TRUST FUND ARE LIMITED
The trust fund for your series constitutes the sole source of payment for
your securities. The trust fund will consist of, among other things:
o payments with respect to the assets of the trust fund; and
o any amounts available pursuant to any credit enhancement for your series,
for the payment of principal of and interest on the securities of your
series.
You will have no recourse to the depositor or any other person if you do not
receive distributions on your securities. Furthermore, certain assets of the
trust fund and/or any balance remaining in the trust account may be promptly
released or remitted to the depositor, the master servicer, any credit
enhancement provider or any other person entitled to these amounts immediately
after making
o all payments due on the securities of your series;
o adequate provision for future payments on certain classes of securities;
and
o any other payments specified in the related prospectus supplement.
You will no longer receive payments from these trust fund assets.
The securities will not represent an interest in or obligation of the
depositor, the master servicer or any of their respective affiliates.
CREDIT ENHANCEMENT IS LIMITED IN AMOUNT AND COVERAGE
Credit enhancement reduces your risk of delinquent payments or losses.
However, the amount of credit enhancement will be limited, as set forth in the
related prospectus supplement, and may decline and could be depleted under
certain circumstances before payment in full of
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your securities. As a result, you may suffer losses. Moreover, the credit
enhancement may not cover all potential losses or risks. For example, it may or
may not fully cover fraud or negligence by a loan originator or other parties.
See "Description of Credit Support" in this prospectus.
YIELD IS SENSITIVE TO RATE OF PRINCIPAL PREPAYMENT
The yield on the securities of each series will depend in part on the rate of
principal payment on the assets of the trust fund. In particular, variations on
this rate will include:
o the extent of prepayments of the residential loans and, in the case of
agency securities, the underlying loans, comprising the trust fund;
o the allocation of principal and/or payment among the classes of securities
of a series as specified in the related prospectus supplement;
o the exercise of any right of optional termination; and
o the rate and timing of payment defaults and losses incurred with respect
to the assets of the trust fund.
Material breaches of representations and warranties by sellers of residential
loans not affiliated with the depositor, the originator or the master servicer
may result in repurchases of assets of the trust fund. These repurchases may
lead to prepayments of principal. The rate of prepayment of the residential
loans comprising or underlying the assets of the trust fund may affect the yield
to maturity on your securities. See "Yield Considerations" and "Maturity and
Prepayment Considerations" in this prospectus.
The rate of prepayments is influenced by a number of factors, including:
o prevailing mortgage market interest rates;
o local and national interest rates;
o homeowner mobility; and
o the ability of the borrower to obtain refinancing.
Interest payable on the securities on each distribution date will include all
interest accrued during the period specified in the related prospectus
supplement. If interest accrues over a period ending two or more days before a
distribution date, your effective yield will be reduced from the yield you would
have obtained if interest payable on the securities accrued through the day
immediately before each distribution date. Consequently, your effective yield,
at par, will be less than the indicated coupon rate. See "Description of the
Securities -- Distributions" and "-- Principal Interest on the Securities" in
this prospectus.
BORROWER MAY BE UNABLE TO MAKE BALLOON PAYMENT
Some of the residential loans may not fully amortize over their terms to
maturity and, thus, may require principal payments, i.e. balloon payments, at
their stated maturity. Residential loans with balloon payments involve greater
risk because a borrower's ability to make a balloon payment typically will
depend on its ability to:
o timely refinance the loan; or
o timely sell the related residential property.
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A number of factors will affect a borrower's ability to accomplish either of
these goals, including:
o the level of available mortgage rates at the time of sale or refinancing;
o the borrower's equity in the related residential property;
o the financial condition of the borrower; and
o the tax laws.
A borrower's failure to make a balloon payment would increase the risk that you
might not receive all payments to which you are entitled.
NATURE OF MORTGAGES COULD ADVERSELY AFFECT VALUE OF PROPERTIES
Several factors could adversely affect the value of the residential
properties. As a result, the outstanding balance of the related residential
loans, together with any senior financing on the residential properties, if
applicable, may equal or exceed the value of the residential properties.
Among these factors are:
o an overall decline in the residential real estate market in the areas in
which the residential properties are located;
o a decline in the general condition of the residential properties as a
result of failure of borrowers to adequately maintain the residential
properties; or
o a decline in the general condition of the residential properties as a
result of natural disasters that are not necessarily covered by insurance,
such as earthquakes and floods.
A decline that affects residential loans secured by junior liens 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 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 if the residential properties provide adequate security for the
residential loans, the master servicer could encounter substantial delays in
liquidating the defaulted residential loans. These delays in liquidating the
loans could lead to delays in receiving your proceeds because:
o foreclosures on residential properties securing residential loans are
regulated by state statutes and rules;
o foreclosures on residential properties are also subject to delays and
expenses of other types of lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete; and
o in some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of residential properties.
Therefore, if a borrower defaults, the master servicer may be unable to
foreclose on or sell the residential property or 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
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defaulted residential loans and not yet reimbursed. These expenses may include
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 on 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 larger
defaulted loan having a large remaining principal balance. The mortgages and
deeds of trust securing certain mortgage loans, multifamily loans and home
improvement contracts may be junior liens subordinate to the rights of the
senior lienholder. Consequently, the proceeds from the liquidation, insurance or
condemnation proceeds will be available to satisfy the junior loan amount 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. If a junior
mortgagee forecloses, it must either pay the entire amount due on any senior
mortgage at or prior to the foreclosure sale or undertake the obligation to make
payments on the senior mortgage if the borrower defaults under the senior
mortgage. The trust fund will not have any source of funds to satisfy any senior
mortgages or make payments due to any senior mortgagees. However, the master
servicer or sub-servicer may, at its option, advance these amounts to the extent
deemed recoverable and prudent.
If proceeds from a foreclosure or similar sale of the related mortgaged
property are insufficient to satisfy all senior liens and the junior lien 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:
o incur losses in jurisdictions in which a deficiency judgment against the
borrower is not available; and
o incur losses if any deficiency judgment obtained is not realized on.
In addition, the rate of default of junior loans may be greater than that of
mortgage loans secured by first liens on comparable properties.
Applicable state laws generally:
o regulate interest rates and other charges;
o require certain disclosures; and
o require licensing of certain originators and servicers of residential
loans.
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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. Violations of these laws, policies and
principles:
o may limit the ability of the master servicer to collect all or part of the
principal of or interest on the residential loans;
o may entitle the borrower to a refund of amounts previously paid; and
o could subject the master servicer to damages and administrative sanctions.
See "Certain Legal Aspects of Residential Loans" in this prospectus.
VIOLATIONS OF ENVIRONMENTAL LAWS MAY REDUCE RECOVERIES ON PROPERTIES
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 result in a lien on the property to assure the costs of cleanup. In
several states, this lien has priority over the lien of an existing mortgage
against the property. In addition, under the laws of some states and under the
federal Comprehensive Environmental Response, Compensation and Liability Act of
1980, 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. This liability could result 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 this liability on foreclosure of the related
property. If this liability is imposed on the trust fund there would be an
increased risk that you might not receive all payments to which you are
entitled. See "Certain Legal Aspects of Residential Loans -- Environmental
Legislation" in this prospectus.
VIOLATIONS OF FEDERAL LAWS MAY ADVERSELY AFFECT ABILITY TO COLLECT ON LOANS
The residential loans may also be subject to federal laws, including:
o the Federal Truth in Lending Act and Regulation Z promulgated under that
act, which require certain disclosures to the borrowers regarding the
terms of the residential loans;
o the Equal Credit Opportunity Act and Regulation B promulgated under that
act, 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;
o the Fair Credit Reporting Act, which regulates the use and reporting of
information related to the borrower's credit experience; and
o 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. This Act also restricts a
lender's ability to declare a default or to suspend or reduce a borrower's
credit limit to certain enumerated events.
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Certain mortgage loans are subject to the Riegle Community Development and
Regulatory Improvement Act of 1994 which incorporates the Home Ownership and
Equity Protection Act of 1994. These provisions may:
o 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;
o apply on a mandatory basis to all mortgage loans originated on or after
October 1, 1995;
o impose specific statutory liabilities on creditors who fail to comply with
their provisions; and
o 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. These laws
o protect the homeowner from defective craftsmanship or incomplete work by a
contractor;
o permit the obligated party to withhold payment if the work does not meet
the quality and durability standards agreed to by the homeowner and the
contractor; and
o subject any person to whom the seller assigns its consumer credit
transaction to all claims and defenses which the obligated party in a
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. In addition, violations could subject the trust fund to
damages and administrative enforcement. Accordingly, violations of these federal
laws would increase the risk that you might not receive all payments to which
you are entitled. See "Certain Legal Aspects of Residential Loans" in this
prospectus.
RATING OF THE SECURITIES ARE LIMITED AND MAY BE WITHDRAWN OR LOWERED
Each class of securities offered by this prospectus and the related
prospectus supplement must be rated upon issuance in one of the four highest
rating categories by one or more rating agencies. The rating will be based on,
among other things:
o the adequacy of the value of the assets of the trust fund;
o any credit enhancement with respect to the class; and
o the likelihood that you will receive payments to which you are entitled
under the terms of your securities.
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The rating will not be based on:
o the likelihood that principal prepayments on the related residential loans
will be made;
o the degree to which prepayments might differ from those originally
anticipated; or
o the likelihood of early optional termination of the series of securities.
You should not interpret the rating as a recommendation to purchase, hold or
sell securities, because it does not address market price or suitability for a
particular investor. The rating will not address:
o the possibility that prepayment at higher or lower rates than you
anticipate may cause you to experience a lower than anticipated yield; or
o the possibility that if you purchase your security at a significant
premium, then you might fail to recoup your initial investment under
certain prepayment scenarios.
We cannot assure you that any rating will remain in effect for any given
period of time or that a rating agency will not lower or withdraw its rating
entirely in the future due to, among other reasons:
o if in the judgment of the rating agency, circumstances in the future so
warrant;
o any erosion in the adequacy of the value of the assets of the trust fund
or any credit enhancement with respect to a series; or
o an adverse change in the financial or other condition of a credit
enhancement provider or a change in the rating of the credit enhancement
provider's long term debt.
Each rating agency rating the securities will establish criteria to determine
the amount, type and nature of credit enhancement, if any, established with
respect to a class of securities. Rating agencies often determine the amount of
credit enhancement required with respect to each class based on an actuarial
analysis of the behavior of similar loans in a larger group. With respect to the
rating, we cannot assure you:
o that the historical data supporting the actuarial analysis will accurately
reflect future experience;
o 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; or
o 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. See "Rating" in this prospectus.
A rating agency's withdrawal or reduction of a rating on your securities would
increase the risk that the market value of your securities will decrease.
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ADVERSE CONDITIONS IN THE RESIDENTIAL REAL ESTATE MARKETS MAY RESULT IN A
DECLINE IN PROPERTY VALUES
The residential real estate markets may experience an overall decline in
property values. This decline could lead to a number of adverse results:
o the outstanding principal balances of the residential loans in a
particular trust fund are equal to or greater than the value of the
residential properties;
o any secondary financing on the related residential properties are equal to
or greater than the value of the residential properties; and
o the rate of delinquencies, foreclosures and losses are 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. Accordingly, these
factors may also affect the rates of delinquencies, foreclosures and losses with
respect to any trust fund. To the extent that these losses are not covered by
credit enhancement, these losses may be borne, at least in part, by you.
BOOK-ENTRY SYSTEM FOR CERTAIN CLASSES MAY DECREASE LIQUIDITY AND DELAY PAYMENT
Transactions in the classes of book-entry securities of any series generally
can be effected only through The Depository Trust Company, participating
organizations, financial intermediaries and certain banks. Therefore:
o the liquidity of book-entry securities in the secondary trading market
that may develop may be limited because investors may be unwilling to
purchase securities for which they cannot obtain physical securities;
o your ability to pledge a security to persons or entities that do not
participate in the DTC system, or otherwise to take action in respect of
the securities, may be limited due to lack of a physical security
representing the securities; and
o you may experience some delay in receiving distributions of interest and
principal on your securities because the trustee will make distributions
to DTC. DTC will then be required to credit the distributions to the
accounts of the participating organizations. Only then will they be
credited to your account either directly or indirectly through Financial
Intermediaries.
See "Description of the Securities-- Book-Entry Registration of Securities"
in this prospectus.
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UNSECURED HOME IMPROVEMENT CONTRACTS MAY EXPERIENCE RELATIVELY HIGHER LOSSES
A borrower's obligations under an unsecured home improvement contract will
not be secured by an interest in the related real estate or otherwise. A
borrower's loan being unsecured would increase the risk that you might not
receive all payments to which you are entitled because:
o the related trust fund, as the owner of the unsecured home improvement
contract, will be a general unsecured creditor to these obligations;
o if a default occurs under an unsecured home improvement contract, the
related trust fund will have recourse only against the borrower's assets
generally, along with all other general unsecured creditors of the
borrower;
o in a bankruptcy or insolvency proceeding relating to a borrower on an
unsecured home improvement contract, the borrower's obligations under this
unsecured home improvement contract may be discharged in their entirety.
This discharge may occur even if the portion of the borrower's assets made
available to pay the amount due and owing to the related trust fund as a
general unsecured creditor are sufficient to pay these amounts in whole or
part; and
o the borrower may not demonstrate the same degree of concern over
performance of the borrower's obligations as if these obligations were
secured by the real estate owned by the borrower.
MORTGAGE LOANS UNDERWRITTEN AS NON-CONFORMING CREDITS MAY EXPERIENCE
RELATIVELY HIGHER LOSSES
The single family mortgage loans assigned and transferred to a trust fund may
include mortgage loans underwritten in accordance with the underwriting
standards for "non-conforming credits." These borrowers may include those 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:
o 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;
o made to a borrower whose creditworthiness and repayment ability do not
satisfy the FNMA or FHLMC underwriting guidelines; or
o made to 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.
Mortgage loans made to borrowers who are characterized as "non-conforming
credits" may experience greater delinquency and foreclosure rates than loans
originated in accordance with the FNMA or FHLMC underwriting guidelines. This
may occur because these borrowers are less creditworthy than borrowers who meet
the FNMA or FHLMC underwriting guidelines. As a result, if the values of the
mortgaged properties decline, then the rates of loss on mortgage loans made to
"non-conforming credits" are more likely to increase than the rates of loss on
mortgage loans made in accordance with the FNMA or FHLMC guidelines and this
increase may be
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substantial. As a result you may suffer losses. See "Residential Loans --
Underwriting Standards" in this prospectus.
ASSETS OF THE TRUST FUND MAY INCLUDE DELINQUENT AND SUB-PERFORMING
RESIDENTIAL LOANS
The assets of the trust fund may include residential loans that are
delinquent or sub-performing. The credit enhancement provided with respect to
your series of securities may not cover all losses related to these delinquent
or sub-performing residential loans. You should consider the risk that including
these residential loans in the trust fund could increase the risk that you will
suffer losses because:
o the rate of defaults and prepayments on the residential loans to increase;
and
o in turn, losses may exceed the available credit enhancement for the series
and affect the yield on your securities.
See "The Trust Funds -- Residential Loans" in this prospectus.
CHANGES IN THE MARKET VALUE OF PROPERTIES MAY ADVERSELY AFFECT PAYMENTS ON
THE SECURITIES
We cannot assure you that the market value of the assets of the trust fund 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 on it. If the assets in the trust fund have to be sold for
any reason, the net proceeds from the sale, after paying expenses of sale and
unpaid fees and other amounts owing to the master servicer and the trustee, may
be insufficient to pay in full the principal of and interest on your securities.
YEAR 2000 NON-COMPLIANCE MAY ADVERSELY AFFECT PAYMENTS ON THE SECURITIES
The depositor is aware of the issues associated with the programming code in
existing computer systems as year 2000 approaches, the "year 2000 problem" is
pervasive and complex. Virtually every computer operation will be affected in
some way by the rollover of the two digit year value to 00. The issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize this information
could generate erroneous data or cause a system to fail. You could be adversely
affected if the computer systems of the master servicer or any special servicer
are not fully year 2000 compliant and this non-compliance disrupts the
collection or distribution of receipts on the related mortgage loans.
DTC has informed members of the financial community that it has developed and
is implementing a program for the year 2000 problem. The purpose of this program
is to make its systems, as they relate to the timely payment of distributions,
including principal and interest payments, to holders of securities, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately on and after January 1, 2000. This program includes a technical
assessment and a remediation plan, each of which is complete. Additionally,
DTC's plan includes a testing phase, which is expected to be completed within
appropriate time frames.
However, DTC's ability to perform its services properly is also dependent on
other parties, including but not limited to, its participating organizations,
through which you will hold your certificates, as well as the computer systems
of third party service providers. DTC has informed
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the financial community that it is contacting and will continue to contact third
party vendors from whom DTC acquires services to:
o impress on them the importance of these services being year 2000
compliant; and
o determine the extent of their efforts for year 2000 remediation, and, as
appropriate, testing, of their services.
In addition, DTC stated that it is in the process of developing contingency
plans as it deems appropriate.
If problems associated with the year 2000 problem arose with respect to DTC
and the services described above, you could experience delays or shortfalls in
the payments due on your securities.
DEFINED TERMS
We define and use capitalized terms in this prospectus to assist you in
understanding the terms of the offered securities and this offering. We define
the capitalized terms used in this prospectus are defined under the caption
"Glossary of Terms" in this prospectus on page 167.
THE TRUST FUNDS
The depositor will select each asset of the trust fund to include in a trust
fund from among those purchased, either directly or through affiliates, from
unaffiliated sellers, or, from sellers affiliated with the depositor, as
provided in the related prospectus supplement.
RESIDENTIAL LOANS
The residential loans may consist of any combination of:
o Mortgage loans secured by first or junior liens on one-to four-family
residential properties;
o Multifamily Loans;
o Home Improvement Contracts;
o Home Equity Loans;
o Cooperative Loans; or
o Manufactured Housing Contracts
The mortgaged properties, cooperative shares, the right to occupy a
particular cooperative unit in any of these cooperative shares and manufactured
homes may be located in any one of the fifty states, the District of Columbia or
the Commonwealth of Puerto Rico. Each trust fund may contain, and any
participation interest in any of the foregoing will relate to, any combination
of the following types of residential loans:
(1) Fully amortizing loans with a fixed rate of interest 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
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monthly payments of principal and interest that increase annually at a
predetermined rate until the loan is repaid or for a specified number of
years, after which level monthly payments resume;
(3) Fully amortizing loans with a fixed interest rate providing for
monthly payments during the early years of the term that are calculated on
the basis of an interest rate below the interest rate, followed by monthly
payments of principal and interest that increase annually by a predetermined
percentage over the monthly payments payable in the previous year until the
loan is repaid or for a specified number of years, followed by level monthly
payments;
(4) Fixed interest rate loans providing for level payments of principal
and interest on the basis of an assumed amortization schedule and a balloon
payment of principal at the end of a specified term;
(5) Fully amortizing loans with an interest rate adjusted periodically,
with corresponding adjustments in the amount of monthly payments, to equal
the sum, that may be rounded, of a fixed margin and an index as described in
the related prospectus supplement. These loans may provide for an election,
at the borrower'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 the loan and
for the amount of interest accrued but not paid currently to be added to the
principal balance of the loan;
(7) Fully amortizing loans with an adjustable interest rate providing for
an election at the borrower's option, if an adjustment to the interest rate
occurs resulting in an interest rate in excess of the interest rate at
origination of the loan, to extend the term to maturity for a period as will
result in level monthly payments to maturity; or
(8) Any other types of residential loans as may be described in the
related prospectus supplement.
The related prospectus supplement may specify that the trust fund underlying
a series of securities may include mortgage securities consisting of previously
issued asset-backed certificates, collateralized mortgage obligations or
participation certificates. The mortgage securities may:
o evidence interests in, or be collateralized by, residential loans or
agency securities as described in this prospectus and in the related
prospectus supplement; or
o have been issued previously by:
o the depositor or an affiliate of the depositor;
o a financial institution; or
o another 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 the
trusts, and selling beneficial interests in these trusts.
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If the mortgage securities were issued by an entity other than the depositor
or its affiliates, the mortgage securities will have been:
o acquired in bona fide secondary market transactions from persons other
than the issuer of the mortgage securities or its affiliates; and
(1) offered and distributed to the public pursuant to an effective
registration statement or
(2) purchased in a transaction not involving any public offering from a
person who is not an affiliate of the issuer of those securities at the
time of sale nor an affiliate of the issuer at any time during the
preceding three months. However, a period of two years must have elapsed
since the later of the date the securities were acquired from the issuer
or from an affiliate of the issuer.
Generally, the mortgage securities will be similar to securities offered by
this prospectus. As to any series of securities that the Trust Fund includes
mortgage securities, the related prospectus supplement will include a
description of:
o the mortgage securities;
o any related credit enhancement;
o the residential loans underlying the mortgage securities; and
o any other residential loans included in the trust fund relating to the
series.
References to advances to be made and other actions to be taken by the master
servicer in connection with the residential loans underlying the mortgage
securities, may include the advances made and other actions taken pursuant to
the terms of the mortgage securities.
The related prospectus supplement may specify that residential loans contain
provisions prohibiting prepayments for a specified Lockout Period.
The related prospectus supplement may specify that the assets of a trust fund
will include residential loans that are delinquent or sub-performing. The
inclusion of these residential loans in the trust fund for a series may cause
the rate of defaults and prepayments on the residential loans to increase. This,
in turn, may cause losses to exceed the available credit enhancement for the
series and affect the yield on the securities of the series.
MORTGAGE LOANS. The mortgage loans will be evidenced by promissory notes
secured by mortgages or deeds of trust creating first or junior liens on the
mortgaged properties. The mortgage loans will be secured by one- to four-family
residences, including:
o detached and attached dwellings;
o townhouses;
o rowhouses;
o individual condominium units;
o individual units in planned-unit developments; and
o individual units in de minimus planned-unit developments.
The related prospectus supplement may specify that the mortgage loans will be
insured by the FHA or partially guaranteed by the VA. See "The Trust Funds --
Residential Loans -- FHA
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Loans and VA Loans" and "Description of Primary Insurance Coverage -- FHA
Insurance and VA Guarantees" in this prospectus.
Certain of the mortgage loans may be secured by junior liens, and the related
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 lien to satisfy fully both the senior lien and the junior lien.
This possibility could arise under any of a number of different circumstances:
o If a holder of a senior lien forecloses on a mortgaged property, the
proceeds of the foreclosure or similar sale will be applied:
o first, to the payment of court costs and fees in connection with the
foreclosure;
o second, to real estate taxes; and
o third, in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to the
holder of the senior lien.
The claims of the holders of senior liens will be satisfied in full out of
proceeds of the liquidation of the mortgage loan, if the proceeds are
sufficient, before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
o If the master servicer forecloses on any mortgage loan, it would do so
subject to any related senior liens.
o In order for the debt related to the mortgage loan included in the
Trust Fund to be paid in full at the sale, a bidder at the foreclosure
sale of the mortgage loan would have to bid an amount sufficient to pay
off all sums due under the mortgage loan and any senior liens or
purchase the related mortgaged property subject to any senior liens.
o If the proceeds from a foreclosure or similar sale of the related
mortgaged property are insufficient to satisfy all senior liens and the
junior lien in the aggregate, the trust fund, as the holder of the
junior lien. As a result, holders of one or more classes of the
securities bear:
o the risk of delay in distributions while a deficiency judgment
against the borrower is obtained;
o the risk of loss if the deficiency judgment is not realized on; and
o the risk that deficiency judgments may not be available in certain
jurisdictions.
o In addition, a junior mortgagee may not foreclose on the property securing
a junior mortgage unless it forecloses subject to the senior mortgage.
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 on
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 of a loan with a
smaller remaining balance would be smaller as a percentage of the loan amount
than would be the case with the defaulted mortgage loan having a larger
remaining balance.
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MULTIFAMILY LOANS. The Multifamily Loan 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. The related
prospectus supplement will specify the original terms to stated maturity of the
Multifamily Loans, which are generally not more than 30 years. The related
prospectus supplement may specify that the Multifamily Loans are 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" in this prospectus.
The related prospectus supplement may specify that the Multifamily Loans:
o contain a Lockout Period;
o prohibit prepayments entirely; or
o require the payment of a prepayment penalty if prepayment in full or in
part occurs.
If you are 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. 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. The Home
Improvement Contracts may be fully amortizing or may have substantial balloon
payments due at maturity. They may also have fixed or adjustable rates of
interest and may provide for other payment characteristics. The related
prospectus supplement may specify that the Home Improvement Contracts are FHA
loans. See "The Trust Funds -- Residential Loans -- FHA Loans and VA Loans" and
"Description of Primary Insurance Coverage -- FHA Insurance and VA Guarantees"
in this prospectus.
COOPERATIVE LOANS. The Cooperative Loans will be evidenced by promissory
notes secured by security interests in shares issued by cooperative housing
corporations 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). Under Section 5402(6), a "manufactured home" is defined
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
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permanent foundation when connected to the required utilities, and includes the
plumbing, heating, air conditioning, and electrical systems contained in the
manufactured home. However, the term "manufactured home" shall include any
structure which meets all the requirements of this paragraph except the size
requirements and with respect to which the manufacturer voluntarily files a
certification required by the Secretary of Housing and Urban Development and
complies with the standards established under this chapter."
The related prospectus supplement may specify that the Manufactured Housing
Contracts are 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" in this prospectus.
BUYDOWN LOANS. The related prospectus supplement may specify that residential
loans are subject to temporary buydown plans. The monthly payments made by the
borrower in the early years of these loans, known as the buydown period, will be
less than the scheduled payments on these loans. The resulting difference will
be recovered from:
o an amount contributed by the borrower, the seller of the residential
property or another source and placed in a custodial account; and
o investment earnings on the buydown funds to the extent that the related
prospectus supplement provides for these earnings.
Generally, the borrower under each of these loans will be eligible for at a
reduced interest rate. Accordingly, the repayment of these loans is dependent on
the ability of the borrowers to make larger monthly payments after the buydown
funds have been depleted and, for certain buydown loans, during the buydown
period. See "Residential Loans -- Underwriting Standards" in this prospectus.
FHA LOANS AND VA LOANS. FHA loans will be insured by the FHA as authorized
under the National Housing Act of 1934, as amended, 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. The 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 the FHA loan. See
"Description of Primary Insurance Coverage -- FHA Insurance and VA Guarantees"
in this prospectus.
Home Improvement Contracts and Manufactured Housing Contracts that are FHA
loans are insured by the FHA pursuant to Title I of the Housing Act. As
described in the related prospectus supplement, these loans are insured 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.
There are two primary FHA insurance programs that are available for
Multifamily Loans:
o 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 the loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-
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insurer. Generally the term of these Multifamily Loans may be up to 40
years and the ratio of the loan amount to property replacement cost can be
up to 90%.
o 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. However,
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 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 the VA loan. The maximum guarantee that may be issued
by the VA under this program will be set forth in the related prospectus
supplement. See "Description of Primary Insurance Coverage -- FHA Insurance and
VA Guarantees" in this prospectus.
LOAN-TO-VALUE RATIO. The prospectus supplement for a series backed by
residential loans will describe the Loan-to-Value Ratios of the loans.
o Generally, 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
(1) 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, plus
(2) 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.
o Generally, 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 on 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.
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We cannot assure you 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
experiences 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 the losses are not covered by the applicable insurance policies and
other forms of credit support described in this prospectus and in the related
prospectus supplement, the losses will be borne, at least in part, by you. See
"Description of the Securities" and "Description of Credit Support" in this
prospectus.
AGENCY SECURITIES
The agency securities will consist of any combination of "fully modified
pass-through" mortgage-backed certificates guaranteed by the GNMA, guaranteed
mortgage pass-through securities issued by the FNMA and mortgage participation
certificates issued by the FHLMC.
GNMA. Government National Mortgage Association 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 the 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. 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:
o the GNMA guaranty program;
o the characteristics of the pool underlying the GNMA Certificates;
o the servicing of the related pool;
o the payment of principal and interest on GNMA Certificates to the extent
not described in this prospectus; and
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o other relevant matters with respect to the GNMA Certificates.
Generally, 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 the GNMA Certificates. Generally, this payment shall be in an amount
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 the 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
the holder of any prepayments of principal of the FHA loans or VA loans
underlying the GNMA Certificates and the holder's proportionate interest in the
remaining principal balance if a foreclosure or other disposition of any the FHA
loan or VA loan occurs.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the GNMA Certificates, the depositor or any of
their affiliates. 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 the GNMA Certificates. Pursuant to the agreement,
the issuer, in its capacity as servicer, is required to perform customary
functions of a servicer of FHA loans and VA loans, including:
o collecting payments from borrowers and remitting the collections to the
registered holder;
o maintaining escrow and impoundment accounts of borrowers for payments of
taxes, insurance and other items required to be paid by the borrower;
o maintaining primary hazard insurance; and
o advancing from its own funds in order to make timely payments of all
amounts due on the GNMA Certificates, even if the payments received by the
issuer on the loans backing the GNMA Certificates are less than the
amounts due on the loans.
If the issuer is unable to make payments on GNMA Certificates as they become
due, it must promptly notify GNMA and request GNMA to make the payment. After
the notification and request, GNMA will make the payments directly to the
registered holder of the GNMA Certificate. If no payment is made by the issuer
and the issuer fails to notify and request GNMA to make the payment, the
registered holder of the GNMA Certificate has recourse against only GNMA to
obtain the payment. The trustee or its nominee, as registered holder of the GNMA
Certificates included in a trust fund, is entitled to proceed directly against
GNMA under the terms of the guaranty agreement or contract relating to the 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 the GNMA Certificates
and underlying residential loans meet the criteria of the rating agency or
agencies. The GNMA Certificates and underlying residential loans will be
described in the related prospectus supplement.
FNMA. The Federal National Mortgage Association is a federally chartered and
stockholder-owned corporation organized and existing under the Federal National
Mortgage Association Charter Act, as amended. FNMA was originally established in
1938 as a United
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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, thus 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:
o must meet the applicable standards of the FNMA purchase program;
o is either provided by FNMA from its own portfolio or purchased pursuant to
the criteria of the FNMA purchase program; and
o is either a conventional mortgage loan, an FHA loan or a VA loan.
The prospectus supplement for securities of each series evidencing interests in
a trust fund including FNMA Certificates will set forth additional information
regarding:
o the FNMA program;
o the characteristics of the pool underlying the FNMA Certificates;
o the servicing of the related pool;
o payment of principal and interest on the FNMA Certificates to the extent
not described in this prospectus; and
o 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 the holder's proportionate share of scheduled
principal and interest at the applicable pass-through rate provided for by the
FNMA Certificate on the underlying mortgage loans, whether or not received. In
addition, FNMA will distribute the holder's proportionate share of the full
principal amount of any prepayment or foreclosed or other finally liquidated
mortgage loan, whether or not that 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 its obligations, distributions to the
holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying loans. Accordingly, monthly distributions to the
holders of FNMA Certificates would be affected by delinquent payments and
defaults on these 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
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mortgage loans or Multifamily Loans, are available in book-entry form only. With
respect to a FNMA Certificate issued in book-entry form, distributions on that
certificate will be made by wire. With respect to a fully registered FNMA
Certificate, distributions on that certificate 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 the FNMA
Certificates and underlying mortgage loans meet the criteria of the rating
agency or rating agencies rating the certificates of the related series. These
FNMA Certificates and underlying mortgage loans will be described in the related
prospectus supplement.
FHLMC. The Federal Home Loan Mortgage Corporation is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended. 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 purchasing first lien, conventional residential mortgage
loans or participation interests in the mortgage loans and reselling 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 in those mortgage loans which it deems to be
of a 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. Each mortgage loan securing an FHLMC
Certificate must meet the applicable standards set forth in Title III of the
Emergency House Finance Act of 1970, as amended. A group of FHLMC Certificates
may include whole loans, participation interests in whole loans and undivided
interests in whole loans and/or participations comprising another group of FHLMC
Certificates. The prospectus supplement for securities of each series evidencing
interests in a trust fund including FHLMC Certificates will set forth additional
information regarding:
o the FHLMC guaranty program;
o the characteristics of the pool underlying the FHLMC Certificate;
o the servicing of the related pool;
o payment of principal and interest on the FHLMC Certificate to the extent
not described in this prospectus; and
o other relevant matters with respect to the FHLMC Certificates.
Except as described below with respect to Stripped Agency Securities:
o FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest on the underlying mortgage loans. This
guarantee is only 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 group of FHLMC
Certificates represented by the FHLMC Certificate, whether or not
received.
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o FHLMC also guarantees to each registered holder of a FHLMC Certificate
collection by the holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of the holder's pro
rata share. FHLMC's guarantee of timely payment of scheduled principal
will be limited to the extent set forth in the prospectus supplement.
o 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:
o foreclosure sale;
o payment of the claim by any mortgage insurer; and
o the expiration of any right of redemption; but in any event no later than
one year after demand has been made of the borrower for accelerated
payment of principal.
In taking actions regarding the collection of defaulted mortgage loans
underlying FHLMC Certificates, including the timing of demand for acceleration,
FHLMC reserves the right to exercise its servicing judgment in the same manner
used 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 borrower. 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. FHLMC Certificates do not constitute debts or obligations of the
United States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee are obligations solely of FHLMC and are not backed by, nor entitled
to, the full faith and credit of the United States. If FHLMC were unable to
satisfy the obligations, distributions to holders of FHLMC Certificates would
consist solely of payments and other recoveries on the underlying mortgage
loans. Accordingly, monthly distributions to holders of FHLMC Certificates would
be affected by delinquent payments and defaults on the mortgage loans.
The FHLMC Certificates included in a trust fund may have other
characteristics and terms, different from those described above, so long as
those FHLMC Certificates and underlying mortgage loans meet the criteria of the
rating agency or rating agencies rating the securities of the related series.
The 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, known as Stripped Agency Securities, which
represent:
o 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
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o in some specified portion of the principal or interest distributions but
not all of the distributions, on an underlying pool of mortgage loans or
certain other GNMA Certificates, FNMA Certificates or FHLMC Certificates.
To the extent set forth in the related Prospectus Supplement, GNMA, FNMA or
FHLMC, as applicable, will guarantee each Stripped Agency Security to the same
extent as the entity guarantees the underlying securities backing the Stripped
Agency Securities or to the extent described above with respect to a Stripped
Agency Security backed by a pool of mortgage loans. The prospectus supplement
for each series of Stripped Agency Securities will set forth
o additional information regarding the characteristics of the assets
underlying the Stripped Agency Securities,
o the payments of principal and interest on the Stripped Agency Securities
and
o 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 the 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:
o the aggregate outstanding principal balance and the average outstanding
principal balance of the assets of the trust fund as of the applicable
Cut-Off Date;
o the types of related residential properties--e.g.,
o one- to four-family dwellings,
o multifamily residential properties,
o shares in cooperative housing corporations and the related proprietary
leases or occupancy agreements,
o condominiums and planned-unit development units,
o vacation and second homes and
o new or used manufactured homes;
o the original terms to maturity;
o the outstanding principal balances;
o the years in which the loans were originated;
o with respect to Multifamily Loans, the Lockout Periods and prepayment
penalties;
o the Loan-To-Value ratios or, with respect to residential loans secured by
a junior lien, the combined Loan-To-Value ratios at origination;
o the interest rates or range of interest rates borne by the residential
loans or residential loans underlying the agency securities;
o the geographical distribution of the residential properties on a
state-by-state basis;
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o with respect to fully amortizing loans with an adjustable interest rate,
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 these loans; and
o information as to the payment characteristics of the residential loans.
If specific information respecting the assets of the trust fund 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. In addition, specific information will be set
forth in a report made available at or before the issuance of those securities.
This information will be included in a report on Form 8-K and will be available
to purchasers of the related securities at or before the initial issuance of
those securities. This report on Form 8-K will be filed with the SEC within
fifteen days after the initial issuance of those securities.
The depositor will cause the residential loans comprising each trust fund, or
mortgage securities evidencing interests in the residential loans to be assigned
to the trustee for the benefit of the holders of the securities 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, the trustee and the other parties
specified in the related prospectus supplement, and will receive a fee for these
services. See "Residential Loans" and "Description of the Securities" in this
prospectus. 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 the
residential loans, unless the related prospectus supplement provides otherwise.
The depositor will assign the residential loans to the related trustee on a
non-recourse basis. The obligations of the depositor with respect to the
residential loans will be limited to certain representations and warranties made
by it, unless the related prospectus supplement provides that another party will
make the representations and warranties. See "Description of the Securities --
Assignment of Assets of the Trust Fund" in this prospectus. 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 purchases and other obligations
of sub-servicers or Unaffiliated Sellers, or both, as more fully described in
this prospectus under "Residential Loans -- Representations by Unaffiliated
Sellers; Repurchases"; "-- Sub-Servicing" and "Description of the Securities --
Assignment of Assets of the Trust Fund." In addition, the related prospectus
supplement may specify that the master servicer has an obligation to make
certain cash advances in the event of delinquencies in payments on or with
respect to the residential loans in amounts described in this prospectus under
"Description of the Securities -- 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 in this prospectus 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. The depositor will
register the agency securities in accordance with the procedures established by
the issuer or guarantor for registration of these securities with a member of
the
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Federal Reserve System. Distributions on agency securities to which the trust
fund is entitled will be made directly to the trustee.
The trustee will administer the 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 these services. The agency securities and
any moneys attributable to distributions on the 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 holders of the securities to the extent they are entitled
to those assets of the trust fund or to other persons specified in the related
prospectus supplement and except for its power and authority to invest assets of
the trust fund in certain permitted instruments in compliance with the trust
agreement. The trustee will have no responsibility for distributions on the
securities, other than to pass through all distributions it receives with
respect to the agency securities to the holders of the related securities
without deduction, other than for
o any applicable trust administration fee payable to the trustee,
o certain expenses of the trustee, if any, in connection with legal actions
relating to the agency securities,
o any applicable withholding tax required to be withheld by the trustee and
o 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:
o to purchase the related assets of the trust fund;
o to repay indebtedness which was incurred to obtain funds to acquire the
assets of the trust fund;
o to establish any Reserve Funds or other funds described in the related
prospectus supplement; and
o to pay costs of structuring, guaranteeing and issuing the securities,
including the costs of obtaining credit support, if any.
The purchase of the assets of the trust fund for a series may be effected by an
exchange of securities with the seller of the assets of the trust fund.
YIELD CONSIDERATIONS
The related prospectus supplement will specify the manner in which each
monthly or other periodic interest payment on an asset of the trust fund is
calculated--generally, one-twelfth of the applicable interest rate multiplied by
the unpaid principal balance of the asset. In the case of Accrual Securities and
interest-only securities, the distributions of interest will be made in the
manner and amount described in the related prospectus supplement. The securities
of each series may bear a fixed, variable or adjustable security interest rate.
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The effective yield to holders of the securities will be below the yield
otherwise produced by the applicable security interest rate, or with respect to
an interest-only security, the distributions of interest on the security, and
purchase price paid by the investors of these securities. This is so because
while interest will generally accrue on each asset of the trust fund from the
first day of each month, the distribution of the interest, or the accrual of the
interest in the case of Accrual Securities, will not be made until the
distribution date occurring:
o in the month or other periodic interval following the month or other
period of accrual in the case of residential loans;
o in later months in the case of agency securities; or
o in intervals occurring less frequently than monthly in the case of series
of securities having distribution dates occurring at intervals less
frequently than monthly.
When a full prepayment is made on a residential loan, the borrower is
generally charged interest only for the number of days actually elapsed from the
due date of the preceding monthly payment up to the date of the prepayment,
instead of for a full month. Accordingly, the effect of the prepayments is to
reduce the aggregate amount of interest collected that is available for
distribution to holders of the securities. However, the residential loans may
contain provisions limiting prepayments of the loans or requiring the payment of
a prepayment penalty if the loan is prepaid in full or in part. The related
prospectus supplement may specify that any prepayment penalty collected with
respect to the residential loans will be applied to offset the 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. The related prospectus
supplement may specify that 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. The related prospectus supplement may specify that 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 holders of the securities on the related
distribution date. See "Maturity and Prepayment Considerations" and "Description
of the Securities" in this prospectus.
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 mortgage loans. Accordingly, corresponding delays in
the receipt of related proceeds by holders of the securities could occur. An
action to foreclose on a mortgaged property securing a mortgage loan is
regulated by state statutes and rules and is subject to many of the delays and
expenses of other lawsuits if defenses or counterclaims are interposed,
sometimes requiring several years to complete. Furthermore, in some states an
action to obtain a deficiency judgment is not permitted following a nonjudicial
sale of a property. If a default by a borrower occurs, 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 mortgage 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
mortgage loans and not yet reimbursed, including
o payments to senior lienholders,
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o legal fees and costs of legal action,
o real estate taxes and
o 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 on
a defaulted mortgage loan having a small remaining principal balance, the amount
realized after expenses of liquidation of a mortgage loan with a small remaining
balance would be smaller as a percentage of the loan than would be the case with
the other defaulted mortgage loan having a larger 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 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
o limit the ability of the master servicer to collect all or part of the
principal of or interest on the residential loans,
o entitle the borrower to a refund of amounts previously paid and,
o subject the trustee or master servicer to damages and administrative
sanctions which could reduce the amount of distributions available to
holders of the securities.
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 assets of the trust fund in a given
trust fund may vary depending on the type of residential loans or the
residential loans underlying the agency securities included in the trust fund.
Each prospectus supplement will contain information with respect to the type and
maturities of the assets of the trust fund. The related prospectus supplement
may specify that 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 the
security is 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
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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 the related series. If applicable, the prospectus
supplement will also contain tables setting forth the projected weighted average
life of the securities of the related 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. These
assumptions include prepayments on the related residential loans or residential
loans underlying the agency securities are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
It is unlikely that prepayment of the assets of the trust fund 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:
o homeowner mobility;
o economic conditions;
o enforceability of due-on-sale clauses;
o market interest rates and the availability of funds;
o the existence of lockout provisions and prepayment penalties;
o the inclusion of delinquent or sub-performing residential loans in the
assets of the trust fund;
o the relative tax benefits associated with the ownership of property; and
o 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 assets of the trust fund, the
assets of the trust fund are likely to be the subject of higher principal
prepayments than if prevailing rates remain at or above the interest rates borne
by the assets of the trust fund.
Other factors that might be expected to affect the prepayment rate of
securities backed by junior lien mortgage loans or Home Improvement Contracts
include:
o the amounts of the underlying senior mortgage loans;
o the interest rates on the underlying senior mortgage loans;
o the use of first mortgage loans as long-term financing for home purchase;
and
o the use of subordinate mortgage loans as shorter-term financing for a
variety of purposes, including:
o home improvement;
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o education expenses; and
o 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 the 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. The related
prospectus supplement may specify that the residential loans, except for FHA
loans and VA loans, contain or do not 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
clause of this type 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 if
there is a 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 if there
is a transfer or further encumbrance of the property must be exercised, so long
as the acceleration is permitted under applicable law.
With respect to a series of securities evidencing interests in a trust fund
including residential loans, the master servicer generally is required to
enforce any provision limiting prepayments and any due-on-sale or
due-on-encumbrance clause. The master servicer is required to enforce these
provisions only 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.
However, the master servicer will generally be prohibited from taking 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" in this prospectus for a description of provisions of each pooling
and servicing agreement and legal developments that may affect the prepayment
experience on the residential loans. See also "Description of the Securities --
Termination" in this prospectus for a description of the possible early
termination of any series of securities. See also "Residential Loans --
Representations by Unaffiliated Sellers; Repurchases" and "Description of the
Securities -- Assignment of Assets of the Trust Fund" in this prospectus for a
description of the circumstances under which the Unaffiliated Sellers, the
master servicer and the depositor are generally obligated to repurchase
residential loans.
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
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underlying residential loans. The prospectus supplement relating to each series
of securities will describe the circumstances and the manner in which the
optional repurchase right, if any, may be exercised.
In addition, the 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 the 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. We do not expect that the depositor will have any business
operations other than acquiring and pooling residential loans and agency
securities, offering securities 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 LOANS
UNDERWRITING STANDARDS
The residential loans will have been purchased by the depositor, either
directly or through affiliates, from loan sellers. The related prospectus
supplement will specify the underwriting criteria generally used to originate
the residential loans. The underwriting standards applicable to residential
loans underlying mortgage securities may vary substantially from the
underwriting standards set forth in the related prospectus supplement.
REPRESENTATIONS BY UNAFFILIATED SELLERS; REPURCHASES
Each Unaffiliated Seller made representations and warranties in respect of
the residential loans sold by the Unaffiliated Seller. The related prospectus
supplement will specify these representations and warranties which may include,
among other things:
o that the Unaffiliated Seller had good title to each residential loan and
the residential loan was subject to no offsets, defenses, counterclaims or
rights of rescission except to the extent that any buydown agreement may
forgive certain indebtedness of a borrower;
o 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;
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o 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 by the
contract;
o that the residential property was free from damage and was in good repair;
o that there were no delinquent tax or assessment liens against the
residential property;
o that each residential loan was current as to all required payments; and
o 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 the Unaffiliated Seller sold the residential loan to the depositor or its
affiliate. A substantial period of time may have elapsed between that date and
the date of initial issuance of the series of securities evidencing an interest
in the 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 the Unaffiliated Seller, its repurchase obligation will not
arise if the relevant event that would otherwise have given rise to this type of
obligation occurs after the date of the sale to or on behalf of the depositor.
The master servicer or the trustee will be required to 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 holders of the securities in the residential loan.
If the Unaffiliated Seller cannot cure the breach, then the Unaffiliated Seller
will be obligated to repurchase this residential loan from the trustee at the
purchase price for the loan. The related prospectus supplement will specify this
purchase price, which is generally equal to the sum of:
o the unpaid principal balance of the residential loans;
o unpaid accrued interest on the unpaid principal balance 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; and
o 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.
An Unaffiliated Seller, rather than repurchase a residential loan as to which
a breach has occurred, may have the option to cause the removal of the breached
residential loan from the trust fund and substitute in its place one or more
other residential loans. This option must be exercised within a specified period
after initial issuance of the related series of securities and be done in
accordance with the standards described in the related prospectus supplement.
The related prospectus supplement may specify that this repurchase or
substitution obligation will constitute the sole remedy available to holders of
securities or the trustee for a breach of representation by an Unaffiliated
Seller.
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.
We cannot assure you that Unaffiliated Sellers will carry out
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their repurchase and substitution obligations with respect to residential loans.
Any residential loan that is not repurchased or substituted for will remain in
the related trust fund. Any resulting losses on that residential loan will be
borne by holders of the securities, 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. The
sub-servicing agreement must be consistent with the terms of the servicing
agreement relating to the trust fund that includes the residential loan.
Although each sub-servicing agreement will be a contract solely between the
master servicer and the sub-servicer, the related pooling and servicing
agreement pursuant to which a series of securities is issued may provide that,
if for any reason the master servicer for the series of securities is no longer
acting in that capacity, the trustee or any successor master servicer must
recognize the sub-servicer's rights and obligations under any sub-servicing
agreement.
DESCRIPTION OF THE SECURITIES
GENERAL
The certificates of each series evidencing interests in a trust fund will be
issued pursuant to a separate pooling and servicing agreement or trust
agreement. Each series of notes, or, in certain instances, two or more series of
notes, will be issued pursuant to an indenture, and the issuer of the notes will
be a trust established by the depositor pursuant to an owner trust agreement or
another entity as may be specified in the related prospectus supplement. As to
each series of notes where the issuer is an owner trust, the ownership of the
trust fund will be evidenced by equity certificates issued under the owner trust
agreement, which may be offered by the related prospectus supplement.
Forms of each of the agreements referred to above 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 SEC within fifteen days after the initial issuance
of the securities and a copy of the agreement will be available for inspection
at the corporate trust office of the trustee specified in the related prospectus
supplement. 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.
As to each series, the securities will be issued in authorized denominations
evidencing a portion of all of the securities of the related series as set forth
in the related prospectus supplement. Each trust fund will consist of:
o residential loans, including any mortgage securities, or agency
securities, exclusive of
o any portion of interest payments relating to the residential loans
retained by the depositor, any of its affiliates or its predecessor in
interest ("retained interest") and
o principal and interest due on or before the Cut-Off Date, as from time
to time are subject to the agreement;
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o 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 holders of
the securities;
o with respect to trust funds that include residential loans:
o property acquired by foreclosure or deed in lieu of foreclosure of
mortgage loans on behalf of the holders of the securities, or, in the
case of Manufactured Housing Contracts that are not Land Contracts, by
repossession;
o any Primary Credit Insurance Policies and Primary Hazard Insurance;
o any combination of a Pool Insurance Policy, a Bankruptcy Bond, a
special hazard insurance policy or other type of credit support; and
o the rights of the trustee to any cash advance reserve fund or surety
bond as described under "--Advances" in this prospectus;
o if specified in the related prospectus supplement, the reserve fund; and
o 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 Security Register maintained by the Security Registrar.
However, the depositor or the trustee may require payment of a sum sufficient to
cover any tax or other governmental charge.
Each series of securities may consist of any combination of:
o one or more classes of senior securities, one or more classes of which
will be senior in right of payment to one or more of the other classes
subordinate to the extent described in the related prospectus supplement.
o one or more classes of securities which will be entitled to:
o principal distributions, with disproportionate, nominal or no interest
distributions; or
o interest distributions, with disproportionate, nominal or no
principal distributions;
o 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 Accrual Securities; or
o other types of classes of securities, as described in the related
prospectus supplement.
Each class of securities, other than certain interest-only securities, will
have a security principal balance and, generally will be entitled to payments of
interest based on a specified security interest rate as specified in the related
prospectus supplement. See "--Principal and Interest on the Securities" in this
Prospectus. 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. 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.
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ASSIGNMENT OF ASSETS OF THE TRUST FUND
At the time of issuance of each series of securities, the depositor will
cause the assets comprising the related trust fund or mortgage securities
included in the related trust fund to be assigned to the trustee. The
residential loan or agency security documents described below will be delivered
to the trustee or to the custodian. The trustee will, concurrently with the
assignment, deliver the securities to the depositor in exchange for the assets
of the trust fund. Each asset of the trust fund will be identified in a schedule
appearing as an exhibit to the related agreement. The schedule will include,
among other things:
o information as to the outstanding principal balance of each trust fund
asset after application of payments due on or before the Cut-Off Date;
o the maturity of the mortgage note, cooperative note, Manufactured Housing
Contract or agency securities;
o any Retained Interest, with respect to a series of securities evidencing
interests in a trust fund including agency securities;
o the pass-through rate on the agency securities;
o and with respect to a series of securities evidencing interests in
residential loans, for each loan:
o information respecting its interest rate;
o its current scheduled payment of principal and interest;
o its Loan-to-Value Ratio; and
o certain other information.
MORTGAGE LOANS AND MULTIFAMILY LOANS. The depositor will be required, as to
each mortgage loan, other than mortgage loans underlying any mortgage
securities, and Multifamily Loan, to 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 the mortgage loan, including:
o the mortgage note endorsed without recourse to the order of the trustee;
o the mortgage with evidence of recording indicated, 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 the mortgage certified by
the related Unaffiliated Seller that it is a true and complete copy of the
original of that Mortgage submitted for recording; and
o an assignment in recordable form of the mortgage to the trustee.
The related prospectus supplement may specify that the depositor or another
party will be required to promptly cause the assignment of each related mortgage
loan and Multifamily Loan to be recorded in the appropriate public office for
real property records. However, recording of assignments will not be required in
states where, in the opinion of counsel acceptable to the trustee, recording is
not required to protect the trustee's interest in the mortgage loan or the
Multifamily Loan against the claim of any subsequent transferee or any successor
to or creditor of the depositor or the originator of the mortgage loan.
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HOME EQUITY LOANS AND HOME IMPROVEMENT CONTRACTS. The related prospectus
supplement may specify that the depositor will:
o as to each Home Equity Loan and Home Improvement Contract, cause to be
delivered to the trustee or to the custodian the note endorsed to the
order of the trustee;
o with respect to Home Equity Loans and secured Home Improvement Contracts,
the mortgage with evidence of recording indicated on it. If any mortgage
is not returned from the public recording office, in which case the
depositor will deliver or cause to be delivered a copy of the mortgage
certified by the related Unaffiliated Seller that it is a true and
complete copy of the original of the mortgage submitted for recording; and
o with respect to Home Equity Loans and secured Home Improvement Contracts,
an assignment in recordable form of the mortgage to the trustee.
The related prospectus supplement may specify that the depositor or another
party will be required to 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. However, recording of
assignments will not be required in states where, in the opinion of counsel
acceptable to the trustee, 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 a Home Equity Loan or Home Improvement Contract.
With respect to unsecured Home Improvement Contracts, the depositor will
cause to be transferred physical possession of the Home Improvement Contracts to
the trustee or a designated custodian or, if applicable, the Unaffiliated Seller
may retain possession of the Home Improvement Contracts as custodian for the
trustee. In addition, the depositor will be required to 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 or security interest in the Home
Improvement Contracts. The related prospectus supplement may specify that 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 an 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:
o the related cooperative note;
o the original security agreement;
o the proprietary lease or occupancy agreement;
o the related stock certificate and related stock powers endorsed in blank;
and
o a copy of the original filed financing statement together with an
assignment of the financing statement to the trustee in a form sufficient
for filing.
The depositor or another party will cause the assignment and financing statement
of each related Cooperative Loan to be filed in the appropriate public office.
However, a filing is not required in states where in the opinion of counsel
acceptable to the trustee, filing is not required to protect
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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 the Cooperative Loan.
MANUFACTURED HOUSING CONTRACTS. The related prospectus supplement may
specify that the depositor will be required, as to each Manufactured Housing
Contract, to deliver or cause to be delivered to the trustee or to the
custodian:
o the original Manufactured Housing Contract endorsed to the order of the
trustee; and
o if applicable, copies of documents and instruments related to each
Manufactured Housing Contract and the security interest in the
manufactured home securing each Manufactured Housing Contract.
The related prospectus supplement may specify that in order to give notice of
the right, title and interest of the holders of securities to the Manufactured
Housing Contracts, the depositor will be required to 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. Registration must be done in accordance with the
procedures established by the issuer or guarantor for registration of the
securities with a member of the Federal Reserve System. Distributions on the
agency 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 after receipt, and the trustee or custodian will hold
the documents in trust for the benefit of the holders of securities. Generally,
if any document is found to be missing or defective in any material respect, the
trustee or custodian will immediately notify the master servicer and the
depositor. The master servicer will then immediately notify the applicable
Unaffiliated Seller. If the Unaffiliated Seller cannot cure the omission or
defect, the Unaffiliated Seller will be obligated to repurchase the related
residential loan from the trustee at the purchase price specified under
"Residential Loans--Representations by Unaffiliated Sellers; Repurchases", or,
in certain cases, substitute for the residential loan.
We cannot assure you that an Unaffiliated Seller will fulfill this repurchase
or substitution obligation. Although the master servicer or trustee is obligated
to enforce this obligation to the extent described above under "Residential
Loans -- Representations by Unaffiliated Sellers; Repurchases" neither the
master servicer nor the depositor will be obligated to repurchase or substitute
for the residential loan if the Unaffiliated Seller defaults on its obligation.
Generally, this repurchase or substitution obligation, if applicable, will
constitute the sole remedy available to the holders of securities 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.
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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 assets of the
trust fund. The Trust Account(s) must be maintained with a federal or state
chartered depository institution, and in a manner, satisfactory to each rating
agency rating the securities of the related series at the time any amounts are
held on deposit in the Trust Account.
The collateral eligible to secure amounts in the Trust Account is limited to
United States government securities and other high quality investments. A Trust
Account may be maintained as an interest bearing or non-interest bearing
account. Alternatively, the funds held in the Trust Account may be invested
pending the distribution on each succeeding distribution date in United States
government securities and other high quality investments. The prospectus
supplement will specify who is entitled to the interest or other income earned
on funds in the Trust Account. In respect of any series of securities having
distribution dates occurring less frequently than monthly, the master servicer
may obtain from an entity 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 the series, a Trust Account may contain funds relating to more
than one series of securities.
PRE-FUNDING ACCOUNT
The master servicer or the trustee may establish and maintain a pre-funding
account, in the name of the related trustee on behalf of the related holders of
the securities, 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 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
holders of securities 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 prospectus supplement may specify that the master servicer will be
required to deposit or cause to be deposited in a Trust Account for each trust
fund including residential loans or, in the case of advances on or before the
applicable distribution date, the following payments and collections received or
made by or on behalf of the master servicer subsequent to the Cut-Off Date.
These payments will not include payments due on or before the Cut-Off Date and
exclusive of any amounts representing a Retained Interest:
(1) all payments on account of principal, including principal
prepayments, on the residential loans;
(2) all payments on account of interest on the residential loans,
exclusive of any portion representing interest in excess of the Net Interest
Rate, unless the excess amount is required to be deposited pursuant to the
related agreement, and, if provided in the related prospectus supplement,
prepayment penalties;
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(3) all proceeds of
o any Primary Hazard Insurance Policies and any special hazard
insurance policy, to the extent the proceeds are not applied to the
restoration of the property or released to the borrower in
accordance with the master servicer's normal servicing procedures,
and
o any Primary Credit Insurance Policy, any FHA Insurance, VA
Guarantee, any Bankruptcy Bond and any Pool Insurance Policy, 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;
(4) all other cash amounts received, by foreclosure, eminent domain,
condemnation or otherwise, in connection with the liquidation of defaulted
residential loans. These amounts will also include the net proceeds on a
monthly basis with respect to any properties acquired for the benefit of
holders of securities by deed in lieu of foreclosure or repossession
(5) any advances made as described under "--Advances" in this prospectus;
(6) all amounts required to be transferred to the Trust Account from a
Reserve Fund, if any, as described below under "--Subordination" in this
prospectus;
(7) all proceeds of any residential loan or underlying mortgaged property
purchased by any Unaffiliated Seller as described under "Residential Loans --
Representations by Unaffiliated Sellers; Repurchases," exclusive of any
Retained Interest applicable to the loan;
(8) all proceeds of any residential loan repurchased as described under
"--Termination" in this prospectus;
(9) any 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" in this prospectus;
(10) 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;
(11) any amounts required to be transferred to the Trust Account pursuant
to any guaranteed investment contract; and
(12) any distributions received on any mortgage securities included in the
related trust fund.
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 on the agency securities will be made
directly to the trustee. The trustee will deposit or cause to be deposited into
the Trust Account 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. The trustee will not be required to deposit payments
due on or before the Cut-Off Date and any trust administration fee and amounts
representing the Retained Interest, if any.
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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
distribution dates and at the intervals specified in the related prospectus
supplement. These intervals may be monthly, quarterly, semi-annual or as
specified in the related prospectus supplement. The trustee will make these
distributions to the persons in whose names the securities are registered at the
close of business on the record date specified in the related 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:
o by wire transfer in immediately available funds to the account of a holder
of securities at a bank or other entity having appropriate facilities for
the transfer, if the holder of securities has so notified the trustee or
the master servicer and holds securities in any requisite amount specified
in the related prospectus supplement, or
o by check mailed to the address of the person entitled to the check as it
appears on the Security Register.
However, the final distribution in retirement of the securities will be made
only if presentation and surrender of the securities has occurred at the office
or agency of the Security Registrar specified in the notice to holders of
securities of the final distribution. The related prospectus supplement may
specify that distributions made to the holders of securities will be made on a
pro rata basis among the holders of securities of record on the related record
date, other than in respect of the final distribution, based on the aggregate
percentage interest represented by their respective securities.
FINAL DISTRIBUTION DATE. If specified in the prospectus supplement for any
series consisting of classes having sequential priorities for distributions of
principal, the final distribution date for each class of securities is the
latest distribution date on which the security principal balance is expected to
be reduced to zero. The final distribution date will be based on various
assumptions, including the assumption that no prepayments or defaults occur with
respect to the related assets of the trust fund. Since the rate of distribution
of principal of any class of securities will depend on, among other things, the
rate of payment, including prepayments, of the principal of the assets of the
trust fund, 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 assets of the trust fund for any series of
securities will depend on their particular characteristics, as well as on the
prevailing level of interest rates from time to time and other economic factors.
We cannot assure the actual prepayment experience of the assets of the trust
fund. See "Maturity and Prepayment Considerations" in this prospectus. In
addition, substantial losses on the assets of the trust fund in a given period,
even though within the limits of the protection afforded by the instruments
described under "Description of Credit Support," in this prospectus 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
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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 may 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 for the distributions in the related Trust
Account. The related prospectus supplement will specify the date the special
distribution is to be made. Special distributions may be made if, as a result of
o substantial payments of principal on the assets of the trust fund,
o low rates then available for reinvestment of payments on assets of the
trust fund,
o substantial Realized Losses or
o some combination of the foregoing, and
o 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, together with the amount available to be
withdrawn from any related Reserve Fund, may be insufficient to make required
distributions on the securities of the related series on the distribution date
or the 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.
PRINCIPAL AND INTEREST ON THE SECURITIES
Each class of securities, other than certain classes of interest-only
securities, may have a different security 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. The related prospectus supplement will specify the basis
on which interest on the securities will be calculated.
Some classes of securities will not be entitled to interest payments.
With respect to each distribution date, the accrued interest with respect to
each security other than an interest-only security, will be equal to interest on
the outstanding security principal balance 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 the related
series. As to each interest-only security, the interest with respect to any
distribution date will equal the amount described in the related prospectus
supplement for the related period.
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The related prospectus supplement may specify that the Accrued Security
Interest on each security of a series will be reduced, if shortfalls in
collections of interest occur 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. This shortfall will be allocated
among all of the securities of that series in proportion to the respective
amounts of Accrued Security Interest that would have been payable on the
securities absent the reductions and absent any delinquencies or losses. The
related prospectus supplement may specify that neither the trustee, the master
servicer nor the depositor will be obligated to fund shortfalls in interest
collections resulting from prepayments. See "Yield Considerations" and "Maturity
and Prepayment Considerations" in this prospectus.
Distributions of Accrued Security Interest that would otherwise be payable on
any class of Accrual Securities of a series will be added to the security
principal balance of the Accrual Securities on each distribution date until the
time specified in the related prospectus supplement on and after which payments
of interest on the Accrual Securities will be made. See "--Distributions--Final
distribution date" in this prospectus.
Some securities 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 assets of the trust fund
and other assets included in the related trust fund. With respect to each of
those securities, distributions generally will be applied to accrued and
currently payable interest, and then to principal. The outstanding security
principal balance of a security will be reduced to the extent of distributions
in respect of principal, and in the case of securities evidencing interests in a
trust fund that includes residential loans, by the amount of any Realized Losses
allocated to the securities.
Some securities will not have a security principal balance and will not be
entitled to principal payments. The initial aggregate security principal balance
of a series and each class of the related series will be specified in the
related prospectus supplement. The initial aggregate security principal balance
of all classes of securities of a series may be based on the aggregate principal
balance of the assets in the related trust fund. Alternatively, the initial
security principal balance for a series of securities may equal the initial
aggregate Cash Flow Value of the related assets of the trust fund as of the
applicable Cut-Off Date.
The aggregate of the initial Cash Flow Values of the assets of the trust fund
included in the trust fund for a series of securities will be at least equal to
the aggregate security principal balance of the securities of that series at the
date of initial issuance of that series.
With respect to any series as to which the initial security principal balance
is calculated on the basis of Cash Flow Values of the assets of the trust fund,
the amount of principal distributed for the series on each distribution date
will be calculated in the manner set forth in the related prospectus supplement,
which may be on the basis of:
o the decline in the aggregate Cash Flow Values of the assets of the trust
fund during the related Due Period, calculated in the manner prescribed in
the related agreement; minus
o 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" in this prospectus, the portion of the Cash Flow Value of
the assets of the trust fund corresponding to the Realized Loss.
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Generally, distributions in respect of principal will be made on each
distribution date to the class or classes of security entitled to distributions
of principal until the security principal balance of the class has been reduced
to zero. In the case of two or more classes of securities in a series, 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 class will 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 the class.
AVAILABLE DISTRIBUTION AMOUNT
As more specifically set forth in the related prospectus supplement, all
distributions on the securities of each series on each distribution date will
generally be made from the "Available Distribution Amount" which consists of the
following amounts:
(1) the total amount of all cash on deposit in the related Trust Account
as of a determination date specified in the related prospectus supplement,
exclusive of certain amounts payable on future distribution dates and certain
amounts payable to the master servicer, any applicable sub-servicer, the
trustee or another person as expenses of the trust fund;
(2) any principal and/or interest advances made with respect to the
distribution date, if applicable;
(3) any principal and/or interest payments made by the master servicer out
of its servicing fee in respect of interest shortfalls resulting from
principal prepayments, if applicable; and
(4) all net income received in connection with the operation of any
residential property acquired on behalf of the holders of securities through
deed in lieu of foreclosure or repossession, if applicable.
On each distribution date for a series of securities, the trustee or the
master servicer will be required to withdraw or cause to be withdrawn from the
Trust Account the entire Available Distribution Amount. The trustee or master
servicer will then be required to distribute the withdrawn amount or cause the
withdrawn amount to be distributed to the related holders of securities in the
manner set forth in this prospectus and in the related prospectus supplement.
SUBORDINATION
A senior/subordinate series will consist of one or more classes of securities
senior in right of payment to one or more classes of subordinate securities, as
specified in the related prospectus supplement. 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 securities as
to which credit support is provided by shifting interest subordination, the
rights of the holders of certain classes of subordinate securities to receive
distributions with respect to the residential loans will be subordinate to the
rights of the holders of certain classes of senior securities. With respect to
any defaulted residential loan that is finally liquidated, the amount of any
Realized Loss will generally equal the portion of the unpaid principal balance
remaining after application of all
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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 the reduction will be treated as a Realized Loss.
All Realized Losses will be allocated first to the most subordinate
securities of the related series as described in the related prospectus
supplement, until the security principal balance of the most subordinate
securities has been reduced to zero. Any additional Realized Losses will then be
allocated to the more senior securities or, if the series includes more than one
class of more senior securities, either on a pro rata basis among all of the
more senior securities in proportion to their respective outstanding security
principal balances, or as 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, the amount that may be allocated to the subordinate
securities of the related series may be limited to an amount specified in the
related prospectus supplement. See "Description of Credit Support -- Special
Hazard Insurance Policies" in this prospectus. If so, any Realized Losses which
are not allocated to the subordinate classes may be allocated among all
outstanding classes of securities of the related series, either on a pro rata
basis in proportion to their outstanding security principal balances, regardless
of whether any subordinate securities remain outstanding, or as provided in the
related prospectus supplement.
As set forth above, the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate security principal balance of each class. The
security principal balance of any security will be reduced by all amounts
previously distributed on the security in respect of principal, and, if so
provided in the related prospectus supplement, by any Realized Losses allocated
to the security. However, to the extent so provided in the related prospectus
supplement, holders of senior securities may be entitled to receive a
disproportionately larger amount of prepayments received in certain
circumstances. This will have the effect, in the absence of offsetting losses,
of accelerating the amortization of the senior securities and increasing the
respective percentage interest evidenced by the subordinate securities in the
related trust fund, with a corresponding decrease in the percentage interest
evidenced by the senior securities, as well as preserving the availability of
the subordination provided by the subordinate securities. In addition, the
Realized Losses will be first allocated to subordinate securities by reduction
of their security principal balance, which will have the effect of increasing
the respective ownership interest evidenced by the senior securities 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
securities 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, if losses on the
residential loans occur not in excess of the Available Subordination Amount, the
rights of the holders of subordinate securities to receive distributions of
principal and interest with respect to the residential loans will be subordinate
to the rights of the holders of senior securities.
The protection afforded to the holders of senior securities from the
subordination provisions may be effected both by the preferential right of the
holders of senior securities to receive current distributions from the trust
fund, subject to the limitations described in this prospectus, and by the
establishment and maintenance of any Reserve Fund. The Reserve Fund may be
funded by an
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initial cash deposit on the date of the initial issuance of the related series
of securities 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, if any, other than earnings on the Reserve
Funds, will be withdrawn for distribution to holders of senior securities as may
be necessary to make full distributions to those holders on a particular
distribution date, as described above. If on any distribution date, after giving
effect to the distributions to the holders of senior securities on this date,
the amount of the Reserve Fund exceeds the amount required to be held in the
Reserve Fund, the excess will be withdrawn and distributed in the manner
specified in the related prospectus supplement.
If any Reserve Fund is depleted before the Available Subordination Amount is
reduced to zero, the holders of senior securities 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, if current distributions are insufficient, the holders of senior
securities could suffer shortfalls of amounts due to them. The holders of senior
securities will bear their proportionate share of any losses realized on the
trust fund in excess of the Available Subordination Amount.
Amounts remaining in any Reserve Fund after the Available Subordination
Amount is reduced to zero will no longer be subject to any claims or rights of
the holders of senior securities of the series.
Funds in any Reserve Fund may be invested in United States government
securities and other high quality investments. The earnings or losses on those
investments will be applied in the manner described in the related prospectus
supplement.
The time necessary for any Reserve Fund to reach the required 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. The security principal balances of the
various classes of securities comprising a senior/subordinate series may be
based on the Cash Flow Value of the residential loans. If the percentage
allocated to the senior securities of the decline in the Cash Flow Value of the
residential loans during the related Deposit Period exceeds the remaining amount
of collections and advances in respect of the residential loans after paying
interest on the senior securities, the holders of the senior securities may not
receive all amounts to which they are entitled. In addition, this may result in
a loss being borne by the holders of the subordinate securities.
Because the Cash Flow Value of a residential loan will never exceed the
outstanding principal balance of the residential loan, 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,
such as those described in the immediately preceding paragraph, in respect of
other liquidated residential loans without affecting the remaining
subordination. This excess may also be deposited in a Reserve Fund for future
distributions.
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ADVANCES
The related prospectus supplement, with respect to any series of securities
evidencing interests in a trust fund that includes residential loans may specify
that 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 the distribution date. The amount of the advance will be
equal to the aggregate of payments of principal and/or interest, adjusted to the
applicable Net Interest Rate, on the residential loans that were due during the
related Due Period and that were delinquent, and not advanced by any
sub-servicer, on the applicable determination date. Any amounts held for future
distribution and so used will be replaced by the master servicer on or before
any future distribution date to the extent that funds in the Trust Account on
the distribution date will be less than payments to holders of securities
required to be made on the distribution date.
The related prospectus supplement may specify that the obligation of the
master servicer to make advances may be subject to the good faith determination
of the master servicer that the advances will be reimbursable from related late
collections, Insurance Proceeds or Liquidation Proceeds. See "Description of
Credit Support" in this prospectus. 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 the mortgage securities.
Advances are intended to maintain a regular flow of scheduled interest and
principal payments to holders of securities, rather than to guarantee or insure
against losses. The related prospectus supplement may specify that advances will
be reimbursable to the master servicer, without interest, out of related
recoveries on the residential loans respecting which amounts were advanced, or,
to the extent that the master servicer determines that any 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. The related prospectus supplement may specify that 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 borrower of, any surety bond, will be set forth in the related
prospectus supplement.
STATEMENTS TO HOLDERS OF SECURITIES
On each distribution date, the master servicer or the trustee will forward or
cause to be forwarded to each holder of securities of the related series and to
the depositor a statement including the information specified in the related
prospectus supplement. This information may include the following:
(1) the amount of the 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;
(2) the amount of the distribution, if any, allocable to interest;
(3) the amount of administration and servicing compensation received by or
on behalf of the trustee, master servicer and any sub-servicer with respect
to the distribution date and other customary information as the master
servicer or the trustee deems necessary or
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desirable to enable holders of securities to prepare their tax returns or
which a holder of securities reasonably requests for this purpose;
(4) if applicable, the aggregate amount of any advances included in this
distribution and the aggregate amount of any unreimbursed advances as of the
close of business on the distribution date;
(5) 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 the distribution
date;
(6) 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;
(7) 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 the month and the
date of acquisition;
(8) 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;
(9) the aggregate unpaid principal balance of the mortgage loans at the
close of business on the related distribution date;
(10) in the case of securities with a variable security interest rate, the
security interest rate applicable to the distribution date, as calculated in
accordance with the method specified in the prospectus supplement relating to
the related series;
(11) 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 security interest rate applicable to the next succeeding
distribution date;
(12) as to any series including one or more classes of Accrual Securities,
the interest accrued on each class with respect to the related distribution
date and added to the security principal balance;
(13) the amount remaining in the Reserve Fund, if any, as of the close of
business on the distribution date, after giving effect to distributions made
on the related distribution date;
(14) as to any senior/subordinate series, information as to the remaining
amount of protection against losses afforded to the holders of senior
securities by the subordination provisions and information regarding any
shortfalls in payments to the holder of senior securities which remain
outstanding; and
(15) 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.
Information furnished pursuant to clauses (1), (2) and (3) above may be
expressed as a dollar amount per minimum denomination security.
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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 the
calendar year. This report will set forth the aggregate of amounts reported
pursuant to clauses (1), (2) and (3) of the immediately preceding paragraph for
the related calendar year or if the person was a holder of record during a
portion of the calendar year, for the applicable portion of that year.
The related prospectus supplement may provide that additional information
with respect to a series of securities will be included in these statements. In
addition, the master servicer or the trustee will file with the Internal Revenue
Service and furnish to holders of securities the statements or information as
may be required by the Code or applicable procedures of the IRS.
BOOK-ENTRY REGISTRATION OF SECURITIES
If not issued in fully registered form, each class of securities will be
registered as book-entry securities. Persons acquiring beneficial ownership
interests in the securities will hold their securities through the Depository
Trust Company in the United States, or Cedelbank or The Euroclear System in
Europe, if they are Participants of these systems, or indirectly through
organizations which are Participants in these 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 these positions in customers'
securities accounts in the depositaries' names on the books of DTC. Except as
described below, no Security Owner will be entitled to receive a Definitive
Certificate. Unless and until Definitive Securities are issued, we anticipate
that only "holders" of the securities will be Cede & Co., as nominee of DTC.
Security Owners are only permitted to exercise their rights indirectly through
the Participants and DTC.
The Security Owner's ownership of a book-entry security will be recorded on
the records of the Financial Intermediary. In turn, the Financial Intermediary's
ownership of the 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 the Participants. While the
securities are outstanding, except under the circumstances described under this
caption "--Book-Entry Registration of Securities," under the rules, regulations
and procedures creating and affecting DTC and its operations, DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the 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
these distributions on behalf of their respective Security Owners. Accordingly,
although Security Owners will not possess certificates, the rules creating and
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affecting DTC and its operations 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
the Participants and indirect participants to transfer securities, by book-entry
transfer, through DTC for the account of the purchasers of the securities, which
account is maintained with their respective Participants. Under the rules
creating and affecting DTC and its operations and in accordance with DTC's
normal procedures, transfers of ownership of securities 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. The credits or any transactions in the securities
settled during this processing will be reported to the relevant Euroclear or
CEDEL Participants on that business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant 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
creating and affecting DTC and its operations. Transfers between CEDEL
Participants and Euroclear Participants will occur in accordance with their
respective rules and operating procedures.
Under a book-entry format, beneficial owners of the book-entry securities may
experience some delay in their receipt of payments, since the trustee will
forward payments 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. These
distributions will be subject to tax reporting in accordance with the relevant
United States tax laws and regulations. See "Federal Income Tax Consequences" in
this prospectus. 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 the book-entry securities, may by limited due to the lack
of physical certificates for the book-entry securities. In addition, issuance of
the book-entry securities in book-entry form may reduce the liquidity of the
securities in the secondary market since certain potential investors may be
unwilling to purchase securities for which they cannot obtain physical
certificates.
The related prospectus supplement may specify that Cede & Co. will provide
monthly and annual reports on the trust fund as nominee of DTC. Cede & Co. may
make these reports available to beneficial owners if requested, 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 the beneficial owners are credited.
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We understand 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 terms of the securities only at the direction of one or
more Financial Intermediaries to whose DTC accounts the book-entry securities
are credited, to the extent that these actions are taken on behalf of Financial
Intermediaries whose holdings include these book-entry securities. CEDEL or
Euroclear, as the case may be, will take any other action permitted to be taken
by a holder of securities under the terms of the securities 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
the 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.
Definitive Securities will be delivered to beneficial owners of securities
(or their nominees) only if:
(1) DTC is no longer willing or able properly to discharge its
responsibilities as depository with respect to the securities, and the depositor
is unable to locate a qualified successor,
(2) the depositor or trustee, at its sole option, elects to terminate the
book-entry system through DTC, or
(3) after the occurrence of an event of default under the pooling and
servicing agreement, Security Owners representing a majority in principal amount
of the securities of any class then outstanding advise DTC through a Participant
of DTC in writing that the continuation of a book-entry system through DTC or a
successor thereto is no longer in the best interest of the Security Owners.
If any of the events described in the immediately preceding paragraph occur,
the trustee will notify all beneficial owners of the occurrence of the event and
the availability through DTC of Definitive Securities. If the global certificate
or certificates representing the book-entry securities and instructions for
reregistration are surrendered by DTC, the trustee will issue Definitive
Securities. The trustee will then recognize the holders of the Definitive
Securities as holders of securities 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 the
procedures and may discontinue the procedures 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 securities held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to the beneficial ownership interests. WE CANNOT ASSURE YOU
THAT CEDE & CO., DTC OR ANY FINANCIAL INTERMEDIARY WILL PROVIDE INFORMATION TO
YOU OR ACT IN ACCORDANCE WITH THEIR RESPECTIVE RULES, REGULATIONS, AND
PROCEDURES.
COLLECTION AND OTHER SERVICING PROCEDURES
RESIDENTIAL LOANS. The master servicer, directly or through
sub-servicers, will be required to
o make reasonable efforts to collect all required payments under the
residential loans and
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o follow or cause to be followed the 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. However,
these procedures must be consistent with any insurance policy, bond or
other instrument described under "Description of Primary Insurance
Coverage" or "Description of Credit Support" in this prospectus.
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 these 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 the
conveyance, encumbrance, or proposed conveyance or encumbrance, exercise or
cause to be exercised its rights to accelerate the maturity of the residential
loan under any applicable due-on-sale or due-on-encumbrance clause. The master
servicer will accelerate the maturity only if the exercise of the 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 the 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 the property has
been conveyed, encumbered or is proposed to be conveyed or encumbered. Pursuant
to the assumption and modification agreement, the person to whom the property
has been conveyed becomes liable under the mortgage note, cooperative note, Home
Improvement Contract or Manufactured Housing Contract. To the extent permitted
by applicable law, the borrower remains liable on the mortgage note, cooperative
note, Home Improvement Contract or Manufactured Housing Contract, provided that
coverage under any Insurance Instrument with respect to the residential loan is
not adversely affected.
The master servicer can enter into a substitution of liability agreement with
the person to whom the property is conveyed, pursuant to which the original
borrower is released from liability and the person is substituted as the
borrower and becomes liable under the mortgage note, cooperative note, Home
Improvement Contract or Manufactured Housing Contract. In connection with any
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 may be retained by or on behalf of the
master servicer as additional compensation for administering of the assets of
the trust fund. See "Certain Legal Aspects of Residential Loans --
Enforceability of Certain Provisions" and "-- Prepayment Charges and
Prepayments" in this prospectus. The master servicer will be required to notify
the trustee and any custodian that any assumption or substitution agreement has
been completed.
AGENCY SECURITIES. The trustee will be required, if it has not received a
distribution with respect to any agency security by the date specified in the
related prospectus supplement in accordance with the terms of its agency
security, to request the issuer or guarantor, if any, of the agency security to
make this payment as promptly as possible. The trustee will be legally permitted
to take legal action against the issuer or guarantor as the trustee deems
appropriate under the circumstances, including the prosecution of any claims in
connection with the agency securities. The reasonable legal fees and expenses
incurred by the trustee in connection with the
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prosecution of the legal action will be reimbursable to the trustee out of the
proceeds of the action and will be retained by the trustee prior to the deposit
of any remaining proceeds in the Trust Account pending distribution to holders
of securities of the related series. If the proceeds of the legal action may be
insufficient to reimburse the trustee for its legal fees and expenses, the
trustee will be entitled to withdraw from the Trust Account an amount equal to
the expenses incurred by it, in which event the trust fund may realize a loss up
to the amount so charged.
REALIZATION ON DEFAULTED RESIDENTIAL LOANS
As servicer of the residential loans, the master servicer, on behalf of
itself, the trustee and the holders of securities, will present claims to the
insurer under each Insurance Instrument, to the extent specified in the related
prospectus supplement. The master servicer will be required to take reasonable
steps as are necessary to receive payment or to permit recovery under the
Insurance Instrument with respect to defaulted residential loans. The related
prospectus supplement may specify that 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 may be entitled to reimbursement for any
unreimbursed advances and reimbursable expenses for the defaulted residential
loan.
If any property securing a defaulted residential loan is damaged and
proceeds, if any, from the related Primary Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to permit
recovery under the related Primary Credit Insurance Policy, if any, the master
servicer will not be required to expend its own funds to restore the damaged
property unless it determines:
(1) that the restoration will increase the proceeds to holders of securities
on liquidation of the residential loan after reimbursement of the master
servicer for its expenses; and
(2) that the expenses will be recoverable by it from related Insurance
Proceeds or Liquidation Proceeds.
If recovery on a defaulted residential loan under any related Primary Credit
Insurance Policy 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 the normal practices and procedures
as it deems necessary, and appropriate for the type of defaulted residential
loan, or advisable to realize on the defaulted residential loan. If the proceeds
of any liquidation of the property securing the defaulted residential loan are
less than:
o the outstanding principal balance of the defaulted residential loan, or
the Cash Flow Value of the mortgage loan if the security principal
balances are based on Cash Flow Values);
o the amount of any liens senior to the defaulted residential loan plus
interest accrued on the defaulted residential loan at the Net Interest
Rate; plus
o the aggregate amount of expenses incurred by the master servicer in
connection with the proceedings and which are reimbursable under the
related agreement
the trust fund will realize a loss in the amount of this difference.
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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 the related residential loan. If the master servicer has
expended its own funds to restore damaged property and these 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 the expenses incurred by it, in which event the trust fund may
realize a loss up to the amount charged. Because Insurance Proceeds cannot
exceed deficiency claims and certain expenses incurred by the master servicer,
no 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 on the defaulted residential loan 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 amount is legally permissible, the insurer will
exercise its right under any related pool insurance policy to purchase the
property and realize for itself any excess proceeds. See "Description of Primary
Insurance Coverage" and "Description of Credit Support" in this prospectus.
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 housing corporation 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 Cooperative Shares" in this prospectus. This approval is usually
based on the purchaser's income and net worth and numerous other factors. The
necessity of acquiring 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
If the related prospectus supplement provides for Retained Interests, they
may 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 an asset of the trust fund represents a specified portion
of the interest payable on the asset. The Retained Interest will be deducted
from related payments as received and will not be part of the related trust
fund. Any partial recovery of interest on a residential loan, after deduction of
all applicable administration fees, may be allocated between Retained Interest,
if any, and interest at the Net Interest Rate on a pro rata basis.
The related prospectus supplement may specify that the primary administration
compensation of the master servicer or the trustee with respect to a series of
securities will generally come from the monthly payment to it, with respect to
each interest payment on a trust fund asset. The amount of the compensation may
be at a rate equal to one-twelfth of the difference between the interest rate on
the asset and the sum of the Net Interest Rate and the Retained Interest Rate,
if any, times the scheduled principal balance of the trust fund asset.
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With respect to a series of securities as to which the trust fund includes
mortgage securities, the compensation payable to the master servicer for
servicing and administering these mortgage securities on behalf of the holders
of the securities may be based on a percentage per annum described in the
related prospectus supplement of the outstanding balance of these mortgage
securities and may be retained from distributions on the mortgage securities.
Any sub-servicer may 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, these amounts
will decrease as the assets of the trust fund amortize.
As additional compensation in connection with a series of securities relating
to residential loans, the master servicer or the sub-servicers may be entitled
to retain all assumption fees and late payment charges and any prepayment fees
collected from the borrowers and any excess recoveries realized on liquidation
of a defaulted residential loan. 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. The prospectus supplement will further
specify any allocations for these amounts.
With respect to a series of securities relating to residential loans, the
master servicer will pay from its administration compensation its regular
expenses incurred in connection with its servicing of the residential loans,
other than expenses relating to foreclosures and disposition of property
acquired in foreclosure.
We anticipate that the administration compensation will in all cases exceed
these expenses. The master servicer is entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted
residential loans. The reimbursement includes under certain circumstances
reimbursement of expenditures incurred by it in connection with the restoration
of residential properties, this right of reimbursement being prior to the rights
of holders of securities to receive any related Liquidation Proceeds. The master
servicer may also be entitled to reimbursement from the Trust Account for
advances, if applicable. With respect to a series of securities relating to
agency securities, the trustee will be required to pay all of its anticipated
recurring expenses.
EVIDENCE AS TO COMPLIANCE
Each agreement will generally provide that on or before a specified date in
each year, beginning with the first date that occurs at least six months after
the Cut-Off Date, the master servicer, or the trustee, at its expense shall
cause a firm of independent public accountants which is a member of the American
Institute of Certified Public Accountants to furnish a statement to the trustee.
In the statement, the accounting firm will be required to state that they have
performed tests in accordance with generally accepted accounting principles
regarding the records and documents relating to residential loans or agency
securities serviced, as part of their examination of the financial statements of
the master servicer or the trustee, as the case may be. Based on the
examination, the accountants will be required to state that there were no
exceptions that, in their opinion, were material, or provide a list of the
exceptions. In rendering that statement, the firm may rely, as to matters
relating to direct servicing of residential loans by sub-servicers, on
comparable statements for examinations conducted substantially in compliance
with generally accepted accounting principles in the residential loan servicing
industry, rendered
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within one year of the statement, of independent public accountants with respect
to the related sub-servicer.
Each applicable servicing agreement or trust agreement will also provide for
delivery to the trustee, on or before a specified date in each year, of an
annual statement signed by an officer of the master servicer, in the case of a
pool of agency securities or mortgage securities, or of the trustee, in the case
of a trust agreement. This statement will be to the effect that, to the best of
the officer's knowledge, the master servicer or the trustee, as the case may be,
has fulfilled its obligations under the related 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 servicing
agreement will generally provide that:
o 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
o shall resign if a determination is made that its duties under the related
agreement are no longer permissible under applicable law; and
o the resignation will not 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 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 holders of securities
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. However,
neither the master servicer nor any person shall be protected
o against any liability for any breach of warranties or representations made
in the servicing agreement; or
o against any specific liability imposed on the master servicer; or
o by the terms of the servicing agreement; or
o by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties under the agreement; or
o by reason of reckless disregard of obligations and duties under
the related servicing agreement.
The master servicer and any director, officer, employee or agent of the master
servicer will be entitled to 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 may
further provide that the master servicer and any director, officer, employee or
agent of the master servicer will be
o entitled to indemnification by the trust fund and
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o 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
o any loss, liability, or expense related to any specific residential
loan or residential loans,
o any loss, liability, or expense otherwise reimbursable pursuant to the
servicing agreement, and
o any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
under the agreement or by reason of reckless disregard of obligations
and duties under the agreement.
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
be permitted, however, in its discretion to undertake any action which it may
deem necessary or desirable with respect to the servicing agreement and the
rights and duties of the parties to the servicing agreement and the interests of
the holders of securities under the servicing agreement. In that event, the
legal expenses and costs of the action and any liability resulting from taking
the actions will be expenses, costs and liabilities of the trust fund. The
master servicer will be entitled to be reimbursed for these expenses out of the
Trust Account. This right of reimbursement is prior to the rights of holders of
securities 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. However, the successor or surviving entity must
meet the qualifications specified in the related prospectus supplement.
The related prospectus supplement may specify that the master servicer's
duties may be terminated if a termination fee is paid, and the master servicer
may be replaced with a successor meeting the qualifications specified in the
related prospectus supplement.
THE DEPOSITOR. Each applicable 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 holders of securities 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. However, neither the
depositor nor any person will 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
under the agreement or by reason of reckless disregard of obligations and duties
under the agreement. The depositor and any director, officer, employee or agent
of the depositor will be entitled to 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
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harmless against any loss, liability, or expense incurred in connection with any
legal action relating to:
o the agreement or the securities;
o any Pool Insurance Policy;
o any special hazard insurance policy and the Bankruptcy Bond; or
o any agency securities,
other than any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties under
the related agreement or by reason of reckless disregard of obligations and
duties under the related agreement.
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 the related agreement and which in its opinion
may involve it in any expense or liability. The depositor may be permitted,
however, in its discretion to undertake any action which it may deem necessary
or desirable with respect to the related agreement and the rights and duties of
the parties to the related agreement and the interests of the holders of
securities under the related agreement. In that event, the legal expenses and
costs of the action and any liability resulting from taking these actions will
be expenses, costs and liabilities of the trust fund. The depositor will be
entitled to be reimbursed for those expenses out of the Trust Account. This
right of reimbursement will be prior to the rights of holders of securities 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. Each trustee for any series of securities will be required to
be an entity 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 as 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 or the trustee may have the power to
appoint co-trustees or separate trustees of all or any part of the trust fund.
If the appointment occurs, all rights, powers, duties and obligations conferred
or imposed on the trustee by the agreement relating to the series shall be
conferred or imposed on the trustee and the separate trustee or co-trustee
jointly. In any jurisdiction in which the trustee shall be incompetent or
unqualified to perform certain acts, the rights, powers and duties shall be
conferred or imposed on the separate trustee or co-trustee singly. The separate
trustee or co-trustee will be required to exercise and perform these rights,
powers, duties and obligations solely at the direction of the trustee.
The trustee may resign at any time, in which event the depositor or the other
party specified in the related agreements will be obligated to appoint a
successor trustee. The depositor or the other party specified in the related
agreements 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,
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incapable of acting or a receiver or similar person shall be appointed to take
control of its affairs. In these circumstances, the depositor or the other party
specified in the related agreements will be obligated to appoint a successor
trustee. The holders of securities evidencing not less than a majority of the
voting rights allocated to the 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 asset of the trust
fund or related document other than the certificate of authentication on the
forms of securities, and will not assume any responsibility for their
correctness. The trustee under any agreement will not be 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 assets of the trust fund, 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 has
occurred and is continuing, the trustee will be required to perform only those
duties specifically required under the related agreement. However, when the
trustee receives the various certificates, reports or other instruments required
to be furnished to it under an agreement, the trustee will be required to
examine those documents and to determine whether they conform to the
requirements of the agreement.
Each agreement may 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 holders of securities 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. However, neither the trustee nor any
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 under the related agreement or by
reason of reckless disregard of obligations and duties under the related
agreement. 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 agreement.
Each agreement may 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. However, the trustee may not be held
harmless against any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties under
the related agreement or by reason of reckless disregard of obligations and
duties under the related agreement.
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 may apply if specified in
the related prospectus supplement.
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A deficiency event with respect to the securities of any of the series is the
inability to distribute to holders of one or more classes of securities of these
series, in accordance with the terms of the securities and the related
agreement, any distribution of principal or interest on these securities when
and as distributable, in each case because of the insufficiency for the purpose
of the funds then held in the related trust fund.
If a deficiency event occurs, the trustee or master servicer, as may be set
forth in the related prospectus supplement, may be required to determine the
sufficiency of funds available to make future required distributions on the
securities.
The trustee or master servicer may obtain and rely on 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 the trust fund to make the
distributions on the securities, which opinion or report will be conclusive
evidence as to sufficiency. Prior to making this determination, distributions on
the securities shall continue to be made in accordance with their terms.
If 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 the series in accordance with their terms. However, these
distributions will be made monthly and without regard to the amount of principal
that would otherwise be distributable on any distribution date. Under certain
circumstances following the positive determination, the trustee or master
servicer may resume making distributions on the 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 securities of the series pro rata,
without regard to the priorities as to distribution of principal set forth in
these securities. Also, these securities will, to the extent permitted by
applicable law, accrue interest at the highest security interest rate borne by
any security of the series. Alternatively, if any class of the series shall have
an adjustable or variable security interest rate, interest will accrue 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 this case, the holders of
securities evidencing a majority of the voting rights allocated to the
securities may direct the trustee to sell the related trust fund. Any direction
to sell the trust fund will be irrevocable and binding on the holders of all
securities of the series and on the owners of any residual interests in the
trust fund. In the absence of this direction, the trustee may not sell all or
any portion of the trust fund.
EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENTS. Events of default under each pooling
and servicing agreement will be specified in the related prospectus
supplement and will generally consist of:
o any failure by the master servicer to distribute or cause to be
distributed to holders of the certificates, or the failure of the master
servicer to remit funds to the trustee for this distribution, which
continues unremedied for five days or another period specified in the
servicing agreement after the giving of written notice of the failure in
accordance with the procedures described in the agreement;
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o 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 or another period specified in
the pooling and servicing agreement after the giving of written notice of
the failure in accordance with the procedures described in the agreement;
o 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; and
o any other event of default specified in the pooling and servicing
agreement.
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 a percentage of the voting rights allocated
to the certificates as may be specified in the pooling and servicing agreement
will be required to 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 of the residential loans. The trustee or another
successor servicer will then succeed to all responsibilities, duties and
liabilities of the master servicer and will be entitled to similar compensation
arrangements.
If the trustee would be obligated to succeed the master servicer but is
unwilling to act as master servicer, it may, 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, or other amount as may be specified in the related
agreement, to act as successor to the master servicer under the pooling and
servicing agreement. Pending the appointment, the trustee is obligated to act in
this capacity. The trustee and the successor may agree on 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 holder of the certificate will have the right under any pooling and
servicing agreement to institute any proceeding with respect to its certificates
unless permitted in the related agreement and:
o the 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 of the event of default;
o the holders of certificates evidencing not less than 25% of the voting
rights allocated to the certificates, or other percentages specified in
the agreement, have made written request to the trustee to institute the
proceeding in its own name as trustee and have offered to the trustee
reasonable indemnity as it may require against the costs, expenses and
liabilities to be incurred by instituting the proceedings; and
o the trustee for sixty days after receipt of notice, request and offer of
indemnity has neglected or refused to institute any proceeding.
The trustee, however, is generally under no obligation to
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o exercise any of the trusts or powers vested in it by any pooling and
servicing agreement or to make any investigation of matters arising under
the pooling and servicing agreement or
o institute, conduct, or defend any litigation under, or in relation to, the
pooling and servicing agreement, at the request, order or direction of any
of the holders of certificates covered by the pooling and servicing
agreement,
unless the holders of the certificates have offered to the trustee reasonable
security or indemnity against the costs, expenses and liabilities which may be
incurred in the undertaking.
SERVICING AGREEMENT. Servicing defaults under the related servicing
agreement will be specified in the related prospectus supplement and will
generally include:
o any failure by the master servicer to pay or cause to be paid to holders
of the notes, or the failure of the master servicer to remit funds to the
trustee for the payment which continues unremedied for the period
specified in the servicing agreement after the giving of written notice of
the failure in accordance with the procedures described in the agreement;
o 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 the period specified in the pooling and
servicing agreement after the giving of written notice of the failure in
accordance with the procedures described in the agreement;
o 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; and
o any other servicing default specified 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. However,
the right of the master servicer as noteholder or as holder of the Equity
Certificates and the right to receive servicing compensation and expenses for
servicing the mortgage loans during any period prior to the date of the
termination may not be terminated. The trustee or another successor servicer
will then succeed to all responsibilities, duties and liabilities of the master
servicer and will be entitled to similar compensation arrangements.
If 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 an amount specified
in the related agreement, to act as successor to the master servicer under the
servicing agreement. Pending this appointment, the trustee is obligated to act
in that capacity. The trustee and the successor may agree on 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. Events of default under the indenture will be specified in the
related prospectus supplement and will generally include:
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o a default for five days or more, or another period of time specified in
the related indenture, in the payment of any principal of or interest on
any note of the related series;
o failure to perform any other covenant of the issuer or the trust fund in
the indenture which continues for the period specified in the related
indenture, after notice of the event of default is given in accordance
with the procedures described in the related indenture;
o any representation or warranty made by the issuer or the trust fund in the
indenture or in any other writing delivered in connection with the
indenture having been incorrect in a material respect as of the time made,
and the breach is not cured within the period specified in the related
indenture, after notice of the breach is given in accordance with the
procedures described in the related indenture;
o certain events of bankruptcy, insolvency, receivership or liquidation of
the issuer or the trust fund; and
o 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 voting rights allocable to the notes, or another percentage specified in
the indenture, may declare the principal amount of all the notes of the series
to be due and payable immediately. This 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 the series have been declared to be due and payable, the trustee may,
in its discretion, regardless of acceleration, elect to
o maintain possession of the collateral securing the notes of the series and
o continue to apply payments on the collateral as if there had been no
declaration of acceleration.
The trustee may only do so if the collateral continues to provide sufficient
funds for the payment of principal of and interest on the notes of the series as
they would have become due if there had not been 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
o the holders of 100% of the voting rights allocated to the notes of the
series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding
notes of the series at the date of the sale,
o the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would have
become due if the related 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 the series, or
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o the trustee satisfies the other requirements as may be set forth in the
related indenture.
If the trustee liquidates the collateral in connection with an event of
default under the indenture, the indenture provides that the trustee will have a
prior lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, if an event of default occurs under the indenture, the amount available
for payments to the Noteholders would be less than would otherwise be the case.
However, the trustee will not be permitted to 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 an event of default under the indenture.
If the principal of the notes of a series is declared due and payable, the
holders of any notes issued at a discount from par may be entitled to receive no
more than an amount equal to the unpaid principal amount of the related note
less the amount of the discount that is unamortized.
No noteholder generally will have any right under an indenture to institute
any proceeding with respect to the related agreement unless permitted by the
indenture and
o the holder previously has given to the trustee written notice of default
and the continuance of a default;
o the holders of notes or Equity Certificates of any class evidencing not
less than 25% of the voting rights allocated to the notes, or another
percentage specified in the indenture:
o have made written request to the trustee to institute the proceeding in
its own name as trustee; and
o have offered to the trustee reasonable indemnity;
o the trustee has neglected or refused to institute any proceeding for 60
days after receipt of a request and indemnity; and
o no direction inconsistent with the written request has been given to the
trustee during the 60 day period by the holders of a majority of the note
principal balances of the related class.
However, the trustee will generally be under no obligation to
o exercise any of the trusts or powers vested in it by the indenture or
o institute, conduct or defend any litigation under the indenture or in
relation to the indenture at the request, order or direction of any of the
holders of notes covered by the agreement,
unless those holders have offered to the trustee reasonable security or
indemnity against the costs, expenses and liabilities which may be incurred in
this undertaking.
AMENDMENT
With respect to each series of securities, each agreement governing the
rights of the holders of the securities may generally be amended by the parties
to the agreement, without the consent of any of the holders of securities:
(1) to cure any ambiguity;
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(2) to correct or supplement any provision in any agreement which may be
inconsistent with any other provision in any agreement;
(3) to make any other provisions with respect to matters or questions arising
under the agreement; and
(4) if the 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 action which, if made
effective, would apply retroactively to the trust fund at least from the
effective date of the amendment,
provided that the required action, other than an amendment described in clause
(4) above, will not adversely affect in any material respect the interests of
any holder of the securities covered by the agreement. Each agreement may also
be amended, subject to certain restrictions to continue favorable tax treatment
of the entity by the parties to this agreement, with the consent of the holders
of securities evidencing not less than 51% of the voting rights allocated to the
securities, or another percentage specified in the indenture, for any purpose.
However, no amendment may
(a) reduce in any manner the amount of, or delay the timing of,
payments received on assets of the trust fund which are required to be
distributed on any security without the consent of the holder of the
security; or
(b) reduce the aforesaid percentage of voting rights required for
the consent to the amendment without the consent of the holders of all
securities of the related series then outstanding, or as otherwise
provided in the related agreement.
TERMINATION
The obligations created by the agreement for each series of securities will
generally terminate when any of the following first occurs
o the payment to the holders of securities of that series of all amounts
held in the Trust Account and required to be paid to the holders of
securities pursuant to the agreement,
o 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,
o the purchase of all of the assets of the trust fund by the party entitled
to effect the termination,
in each case, under the circumstances and in the manner set forth in the
related prospectus supplement.
In no event, however, will the trust created by the agreement continue beyond
the period specified in the related prospectus supplement. Written notice of
termination of the agreement will be given to each holder of securities. The
final distribution will be made only after surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
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The exercise of the right to purchase the assets of the trust fund as set
forth in the preceding paragraph will effect early retirement of the securities
of that series.
VOTING RIGHTS
Voting rights allocated to securities of a series will generally be based on
security principal balances. Any other method of allocation will be specified in
the related prospectus supplement. The prospectus supplement may specify that 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
The prospectus supplement may specify that each residential loan may be
covered by a Primary Hazard Insurance Policy and, if required as described in
the related prospectus supplement, a Primary Credit Insurance Policy. In
addition, the prospectus supplement may specify that 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. This insurance is subject to underwriting and approval of individual
residential loans by the respective insurers.
PRIMARY CREDIT INSURANCE POLICIES
The prospectus supplement will specify whether the master servicer will be
required to 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 this insurance is required, as described under
"Description of the Securities -- Realization on Defaulted Residential Loans" in
this prospectus.
The master servicer will be required to cause to be paid the premium for each
Primary Credit Insurance Policy to be paid on a timely basis. The master
servicer, or the related sub-servicer, if any, will be required to 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 on its being so named, or on the
extent to which information in this regard is furnished by borrowers. All
amounts collected by the master servicer under any policy will be required to be
deposited in the Trust Account. The master servicer will generally not be
permitted to cancel or refuse to renew any 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. However, the master servicer may
cancel or refuse to renew any Primary Credit Insurance Policy, if it uses its
best efforts to obtain a replacement Primary Credit Insurance Policy for the
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 or notes having the same rating as the securities on their date of
issuance.
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As conditions precedent to the filing or payment of a claim under a Primary
Credit Insurance Policy, the insured typically will be required, if a default by
the borrower occurs, among other things, to:
o advance or discharge
o hazard insurance premiums; and
o as necessary and approved in advance by the insurer, real estate taxes,
protection and preservation expenses and foreclosure and related costs;
o if any physical loss or damage to the residential property occurs, have
the residential property restored to at least its condition at the
effective date of the Primary Credit Insurance Policy, with ordinary wear
and tear excepted; and
o tender to the insurer good and merchantable title to, and possession of,
the residential property.
FHA INSURANCE AND VA GUARANTEES
Residential loans designated in the related prospectus supplement as insured
by the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1934, as amended. Certain residential loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated payment
mortgage program and the FHA Title I Program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. The
prospectus supplement relating to 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. The
following, together with any further description in the related prospectus
supplement, 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 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 mortgage 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 will be 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 borrower'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 borrower. These forbearance plans may involve the
reduction or suspension of regular mortgage payments for a specified period,
with the payments to be made on 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 circumstances beyond a
borrower's control is accompanied by certain other criteria, HUD may provide
relief by making payments. These payments are to be repaid to HUD by borrower,
to the master servicer or any sub-servicer in partial or full satisfaction of
amounts due
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under the residential loan 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 borrower 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. The master servicer or any sub-servicer of each
FHA-insured single family loan will generally be obligated to purchase any
debenture issued in satisfaction of the residential loan if a default occurs for
an amount equal to the principal amount of any 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 will be compensated for no more than two-thirds of its foreclosure
costs, and will be compensated for interest accrued and unpaid prior to this
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 will include
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. The Serviceman's Readjustment
Act of 1944, as amended, permits a veteran, or in certain instances the spouse
of a veteran, to obtain a mortgage loan guarantee by the VA covering mortgage
financing of the purchase of a one- to four-family dwelling unit at interest
rates permitted by the VA. The program has no mortgage loan limits, requires no
down payment from the purchaser and permits the guarantee of mortgage loans of
up to 30 years' duration. However, no residential loan guaranteed by the VA will
have an original principal amount greater than five times the partial VA
guarantee for the related residential loan. The prospectus supplement relating
to 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 will be, 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 will be submitted after
liquidation of the residential property.
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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 generally 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 these
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
The related prospectus supplement may specify that the related servicing
agreement will require the master servicer to cause the borrower on each
residential loan to maintain a Primary Hazard Insurance Policy. This coverage
will be specified in the related prospectus supplement, and in general will
equal the lesser of the principal balance owing on the 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. In either case, the
coverage may not be 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 be required to 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
on its being so named, or on the extent to which information in this regard is
furnished by borrowers. All amounts collected by the master servicer under any
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 a hazard insurance policy by the
master servicer's maintaining a blanket policy insuring against hazard losses on
the residential loans. If the blanket policy contains a deductible clause, the
master servicer will generally be required to deposit in the Trust Account all
sums which would have been deposited in the Trust Account but for this clause.
The master servicer will also generally be required to maintain a fidelity bond
and errors and omissions policy with respect to its officers and employees. This
policy will generally provide 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 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.
The policies relating to the residential loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms. Therefore, the policies will not contain identical terms and
conditions. The basic terms of those policies are dictated by respective state
laws, and most policies typically do not cover any physical damage resulting
from the following:
o war,
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o revolution,
o governmental actions,
o floods and other water-related causes,
o earth movement, including earthquakes, landslides and mudflows,
o nuclear reactions,
o wet or dry rot,
o vermin, rodents, insects or domestic animals,
o theft, and,
o 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 may require the master servicer
to cause the borrower to acquire and maintain flood insurance in an amount equal
in general to the lesser of:
(1) 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
(2) 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 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,
this clause generally provides that the insurer's liability if a partial loss
occurs does not exceed the greater of:
(1) the replacement cost of the improvements less physical depreciation;
and
(2) that proportion of the loss as the amount of insurance carried bears to
the specified percentage of the full replacement cost of the improvements.
The related agreement will generally not require that a hazard or flood
insurance policy be maintained for any Cooperative Loan. Generally, the
cooperative housing corporation is responsible for maintenance of hazard
insurance for the property owned by it and the tenant-stockholders of that
cooperative housing corporation do not maintain individual hazard insurance
policies. To the extent, however, that a cooperative housing corporation and the
related borrower on a cooperative note do not maintain similar insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to the borrower's cooperative
apartment or the building could significantly reduce the value of the collateral
securing the cooperative note.
The effect of co-insurance if a partial loss occurs on improvements securing
residential loans may be that hazard Insurance Proceeds may be insufficient to
restore fully the damaged property because:
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(1) the amount of hazard insurance the master servicer will be required to
cause to be maintained on the improvements securing the residential loans will
decline as the principal balances owing on them decrease, and
(2) residential properties have historically appreciated in value over time.
Under the terms of the residential loans, borrowers are generally required to
present claims to insurers under hazard insurance policies maintained on the
residential properties.
The master servicer, on behalf of the trustee and holders of securities, 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 these claims is
dependent on the extent to which information in this regard is furnished to the
master servicer by borrowers. However, the related prospectus supplement may
specify that to the extent of the amount available to cover hazard losses under
the special hazard insurance policy for a series, holders of securities may not
suffer loss by reason of delinquencies or foreclosures following hazard losses,
whether or not subject to co-insurance claims.
DESCRIPTION OF CREDIT SUPPORT
The related prospectus supplement will specify if the trust fund that
includes residential loans for a series of securities may include credit support
for this series or for one or more classes of securities comprising this 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 by this credit
support or a specified dollar amount:
o a Pool Insurance Policy;
o a special hazard insurance policy;
o a Bankruptcy Bond;
o a reserve fund;
o or a similar credit support instrument.
Alternatively, the prospectus supplement relating to a series of securities will
specify if credit support may be provided by subordination of one or more
classes of securities or by overcollateralization, in combination with or in
lieu of any one or more of the instruments set forth above. See "Description of
the Securities -- Subordination" and "Description of Credit
Support--Overcollateralization" in this prospectus. 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 the related series, and the borrowers on
the 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 by the credit
support.
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POOL INSURANCE POLICIES
The prospectus supplement relating to a series of securities may specify that
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 under the Pool Insurance Policy 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. The master servicer
will be required to pay the premiums for each Pool Insurance Policy on a timely
basis unless, as described in the related prospectus supplement, the payment of
these fees is otherwise provided. The master servicer will be required to
present or cause to be presented claims under each Pool Insurance Policy to the
pool insurer on behalf of itself, the trustee and the holders of securities.
Pool Insurance Policies, however, are not blanket policies against loss, since
claims under these policies may be made only if certain conditions are
satisfied, 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 for the failure.
Pool Insurance Policies in general provide that no claim may be validly
presented under Pool Insurance Policies with respect to a residential loan
unless:
o an acceptable Primary Credit Insurance Policy, if the initial Collateral
Value of the residential loan exceeded 80%, has been kept in force until
the Collateral Value is reduced to 80%;
o 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;
o 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
o 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
(1) acquire the property securing the defaulted residential loan for a
payment equal to the principal balance of the loan plus accrued and unpaid
interest at its interest rate to the date of acquisition and certain
expenses described above advanced by or on behalf of the insured. This
option is conditioned on the pool insurer being 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
(2) pay the amount by which the sum of the principal balance of the defaulted
residential loan and accrued and unpaid interest at its interest rate to
the date of the payment of the
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claim and these expenses exceeds the proceeds received from a sale of the
residential property that the pool insurer has approved.
In both (1) and (2), the amount of payment under a Pool Insurance Policy will
generally be reduced by the amount of the 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
(1) in the case when a Primary Credit Insurance Policy is in force, within a
specified number of days after the claim for loss has been settled or paid
under a Primary Credit Insurance Policy, or after acquisition by the
insured or a sale of the property approved by the pool insurer, whichever
is later; or
(2) in the case when a Primary Credit Insurance Policy is not in force,
within a specified number of 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 after the claim is made by the
insured.
The prospectus supplement relating to a series of securities will specify
whether the amount of coverage under each Pool Insurance Policy will be reduced
over the life of the securities of the 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 will
generally include 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, holders of securities may experience a shortfall in the amount
of interest distributed in connection with the payment of claims under a Pool
Insurance Policy. This shortfall may result because the pool insurer will be
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 the claim is paid.
In addition, holders of securities 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 the
Pool Insurance Policy. These expenditures by the master servicer could include
amounts necessary to cover real estate taxes and to repair the related
residential property. The master servicer will be reimbursed for the
expenditures from amounts that otherwise would be distributed to holders of
securities, and the 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 that are not Land Contracts" in this prospectus.
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. As a result, any further losses will be borne by holders of
securities of the related series.
If a pool insurer ceases to be a Qualified Insurer, the master servicer will
be required to 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 the Pool Insurance Policy. However, the related prospectus
supplement will specify whether if the cost of the replacement policy is greater
than the cost of the 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 the Pool Insurance Policy.
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However, if 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 be required to 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 be required to 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, this policy will not provide coverage against
hazard losses. As set forth under "Description of Primary Insurance
Coverage--Primary Hazard Insurance Policies" in this prospectus, the Primary
Hazard Insurance Policies covering the residential loans typically exclude from
coverage physical damage resulting from a number of causes. Even when the damage
is covered, the Primary Hazard Insurance Policies may afford recoveries that are
significantly less than full replacement cost of the losses. Further, a special
hazard insurance policy will not cover all risks, and the coverage under this
type of policy will be limited in amount. Certain hazard risks will, as a
result, be uninsured and will therefore be borne by you.
SPECIAL HAZARD INSURANCE POLICIES
The prospectus supplement with respect to a series of securities may specify
that the master servicer will be required to obtain a special hazard insurance
policy for the series. This policy will be issued by the special hazard insurer
specified in the prospectus supplement and cover any special hazard amount as
described in the immediately succeeding paragraph. The master servicer will be
obligated to exercise its best reasonable efforts to keep or cause to be kept a
special hazard insurance policy in full force and effect, unless coverage under
the policy has been exhausted through payment of claims. However, the master
servicer will be under no obligation to maintain the policy if a Pool Insurance
Policy covering the series is no longer in effect. 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 these premiums is otherwise provided for.
Claims under each special hazard insurance policy will generally be
limited to:
(1) a percentage set forth in the related prospectus supplement, which is
generally not greater than 1%, of the aggregate principal balance as of
the Cut-Off Date of the residential loans comprising the related trust
fund;
(2) twice the unpaid principal balance as of the Cut-Off Date of the largest
residential loan in the trust fund; or
(3) 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.
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:
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o 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
o 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
o normal wear and tear,
o war,
o civil insurrection,
o certain governmental actions,
o errors in design,
o faulty workmanship or materials,
o except under certain circumstances, nuclear or chemical reaction or
contamination,
o flood, if the property is located in a federally designated flood area,
and
o 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:
(1) the cost of repair to the property; and
(2) when transfer of the property to the insurer occurs, the unpaid principal
balance of the residential loan at the time of acquisition of the property
by foreclosure, deed in lieu of foreclosure or repossession, plus
(a)accrued interest at the interest rate to the date of claim settlement
and
(b)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 (1) of the immediately preceding paragraph will satisfy the condition
under a Pool Insurance Policy that the property be restored before a claim under
this type of policy may be validly presented with respect to the defaulted
residential loan secured by the property. The payment described under clause (2)
of the immediately preceding paragraph will render unnecessary presentation of a
claim in respect of the residential loan under a Pool Insurance Policy.
Therefore, so long as the
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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 holders of securities, but will affect the relative amounts of coverage
remaining under any special hazard insurance policy and any Pool Insurance
Policy.
The special hazard insurer must typically approve the sale of a residential
property under any special hazard insurance policy. The funds received by the
insured in excess of the unpaid principal balance of the residential loan plus
interest on that balance 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 the
special hazard insurer. To the extent funds are refunded to the special hazard
insurer, 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 under the policy will be exhausted and any further losses
will be borne by the holders of securities.
A claim under a special hazard insurance policy generally must be filed
within a specified number of 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 after a claim is accepted by the special
hazard insurer. Special hazard insurance policies generally provide that no
claim may be paid unless
o Primary Hazard Insurance Policy premiums,
o flood insurance premiums, if the property is located in a federally
designated flood area, and, as approved by the special hazard insurer,
o real estate property taxes, if applicable,
o property protection and preservation expenses and
o foreclosure costs
have been paid by or on behalf of the insured, and unless the insured has
maintained the Primary 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 the special
hazard insurance policy. The replacement policy must have total coverage that is
equal to the then existing coverage of the special hazard insurance policy.
However, if the cost of the replacement policy is greater than the cost of the
special hazard insurance policy, the coverage of the replacement policy may be
reduced to a level so that the premium rate does not exceed the premium rate on
the special hazard insurance policy as provided in the related prospectus
supplement.
Each special hazard insurance policy is designed to permit full recoveries
under a Pool Insurance Policy in circumstances in which the 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. Therefore, each pooling and servicing agreement will generally 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.
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BANKRUPTCY BONDS
The prospectus supplement with respect to a series of securities may specify
that the master servicer will be required to obtain a Bankruptcy Bond for the
series. The obligor on, and the amount of coverage of, any Bankruptcy Bond will
be set forth in the related prospectus supplement. The master servicer will be
required to exercise its best reasonable efforts to maintain or cause to be
maintained the Bankruptcy Bond in full force and effect, unless coverage under
the Bankruptcy Bond has been exhausted through payment of claims. The master
servicer will be required to pay or cause to be paid the premiums for each
Bankruptcy Bond on a timely basis, unless, as described in the related
prospectus supplement, payment of the premiums is otherwise provided for.
RESERVE FUNDS
The related prospectus supplement may specify that the depositor will deposit
or cause to be deposited in an account any combination of cash, one or more
irrevocable letters of credit or one or more United States government securities
and other high quality investments in specified amounts, or any other instrument
satisfactory to the rating agency or agencies. These deposits will be applied
and maintained in the manner and under the conditions specified in the
prospectus supplement. In the alternative or in addition to the 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 holders of
securities, 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. The related prospectus
supplement may specify that any Reserve Fund will not be deemed to be part of
the related trust fund.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Instruments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
CROSS-SUPPORT PROVISIONS
The related prospectus supplement may specify that 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. In addition, 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 relating to a
series that includes a cross-support provision will describe the manner and
conditions for applying the 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 the credit support
relates and the manner of determining the amount of the coverage provided by the
credit support and of the application of the coverage to the identified trust
funds.
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LETTER OF CREDIT
The prospectus supplement relating to a series of securities may specify that
the residential loans in the related trust fund may be covered by one or more
letters of credit, issued by a bank or financial institution specified in the
prospectus supplement. Under a letter of credit, the issuing bank or financial
institution will be obligated to honor draws in an aggregate fixed dollar
amount, net of unreimbursed payments, 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. Any letter of credit may permit draws only if certain types of
losses occur. The amount available under the letter of credit will, in all
cases, be reduced to the extent of the unreimbursed payments under the letter of
credit.
INSURANCE POLICIES AND SURETY BONDS
The prospectus supplement relating to a series of securities may specify that
one or more classes of securities of the series will be covered by insurance
policies and/or surety bonds provided by one or more insurance companies or
sureties. The instruments may cover 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
The prospectus supplement may specify that a portion of the interest payments
on residential loans 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 residential loans.
OVERCOLLATERALIZATION
The related prospectus supplement may specify that the subordination
provisions of a trust fund may be used to accelerate to a limited extent the
amortization of one or more classes of securities relative to the amortization
of the related assets of the trust fund. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of securities. This acceleration feature
creates, with respect to the assets of the trust fund, overcollateralization
which results from the excess of the aggregate principal balance of the related
assets of the trust fund, over the principal balance of the related class or
classes of securities. This acceleration may continue for the life of the
related security, or may be limited. In the case of limited acceleration, once
the required level of overcollateralization is reached, and subject to certain
provisions specified in the related prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF RESIDENTIAL LOANS
The following discussion contains general summaries of certain legal aspects
of loans secured by residential properties. Because the legal aspects are
governed by applicable state law, which 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
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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" in this prospectus.
GENERAL
All of the residential loans are generally loans to homeowners. 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 on the type of security instrument customary to grant
a security interest in real property in the state in which the residential
property is located. The prospectus supplement relating to a series of
securities may specify that a trust fund also contains:
(1) Home Improvement Contracts evidenced by promissory notes, which may be
secured by an interest in the related mortgaged property or may be
unsecured;
(2) 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
(3) Manufactured Housing Contracts evidencing both
o the obligation of the borrower to repay the loan evidenced by the
Manufactured Housing Contract; and
o the grant of a security interest in the related manufactured home or
with respect to Land Contracts, a lien on the real estate 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 this loan.
Generally, any of the foregoing types of encumbrance will create a lien on, or
grant a title interest in, the subject property. The priority of the lien will
depend on the terms of the particular security instrument, if any, the knowledge
of the parties to the instruments, as well as the order of recordation or filing
of the instrument in the appropriate public office. This 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 generally be secured by either
mortgages, deeds of trust, security deeds or deeds to secure debt depending on
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 on or conveys title to the real property encumbered
by this instrument and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note. This 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.
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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, and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. However, 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, who is similar to a mortgagor and who is the
owner of the subject property and may or may not be the borrower, the
beneficiary who is similar to a mortgagee and who is the lender, and the
trustee, a third-party grantee. Under a deed of trust, the trustor grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. A security deed and
a deed to secure debt are special types of deeds which indicate on their face
that they are granted to secure an underlying debt. By executing a security deed
or deed to secure debt, the grantor conveys title to, as opposed to merely
creating a lien on, the subject property to the grantee until a time when 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
o the law of the state in which the real property is located,
o the express provisions of the mortgage, deed of trust, security deed or
deed to secure debt and,
o 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 in the real
property sufficient to permit it to own the building and all separate dwelling
units in the building. 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, or an underlying
lease of the land, 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
(1) 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
(2) 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.
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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 the mortgage and its consequent inability to make the
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 the 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 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. If a
default of the tenant-stockholder occurs, the lender may generally sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of Cooperative
shares. See "--Foreclosure on Cooperative Shares" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder", as defined in Section 216(b)(2) of the
Code, of a "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. These amounts paid or accrued represent 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 the items are
allowable as a deduction to the corporation, this 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 this section for any
particular year. If a Cooperative of this type 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
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significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that this
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. The 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 the responsible 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 the 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 the office, depending on state law.
The master servicer will generally be required to obtain possession of the
certificate of title, but, the related prospectus supplement may specify if it
will not be required to effect the notation or delivery of the required
documents and fees. The failure to effect the notation or delivery, or the
taking of action under the wrong law, under a motor vehicle title statute rather
than under the UCC, is likely to cause the trustee not to 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, regardless of 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 borrower from permanently attaching the manufactured home to its site. So
long as the borrower does not violate this agreement, a security interest in the
manufactured home will be governed by the certificate of title laws or the UCC,
and the notation of the security interest on the certificate of title or the
filing of a UCC financing statement will be effective to 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.
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The depositor will assign or cause to be assigned a security interest in the
manufactured homes to the trustee, on behalf of the holders of securities. The
related prospectus supplement may specify that neither the depositor, the master
servicer nor the trustee will amend the certificates of title to identify the
trustee, on behalf of the holders of securities, as the new secured party.
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, the assignment is an effective conveyance of the 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, the assignment of the security
interest might not be held effective against creditors of the depositor or the
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 following actions should 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:
o the notation of the lien of the depositor on the certificate of title or
delivery of the required documents and fees or,
o 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.
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, the 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 holders of securities as the new
secured party on the certificate of title that, through fraud or negligence, the
security interest of the trustee could be released.
If the owner of a manufactured home moves it to a state other than the state
in which the 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 the relocation and after that period until the owner
re-registers the manufactured home in the new state. If the owner were to
relocate a manufactured home to another state and re-register the manufactured
home in the other state, and if the depositor did not take steps to re-perfect
its security interest in the new 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 this manufactured home, it must surrender possession of
the 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 a borrower under a manufactured housing
conditional sales contract sells a manufactured home, the lender must
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surrender possession of the certificate of title or it will receive notice as a
result of its lien noted thereon. Accordingly, the lender will have an
opportunity to require satisfaction of the related manufactured housing
conditional sales contract before release of the lien. The master servicer will
be obligated to take the steps, at the master servicer's expense, as are
necessary to maintain perfection of security interests in the manufactured
homes.
Under the laws of most states, statutory liens, such as liens for repairs
performed on a manufactured home and liens for personal property taxes take
priority even over a perfected security interest. In addition, certain liens
arising as a matter of federal law, such as federal tax liens, also take
priority over a perfected security interest. The depositor will obtain the
representation of the Unaffiliated Seller that it has no knowledge of any liens
with respect to any manufactured home securing a contract. However, these types
of liens could arise at any time during the term of a mortgage note or
Manufactured Housing Contract. No notice will be given to the trustee or holders
of securities if this type of a lien arises.
FORECLOSURE ON MORTGAGES
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by serving legal pleadings on 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
party defendants. 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 borrower is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. A foreclosure action is equitable in nature and is addressed to a court
of equity. Accordingly, the court may relieve a borrower of a default and deny
the mortgagee foreclosure on proof that the borrower's default was neither
willful nor in bad faith and that the mortgagee's action was meant to establish
a waiver, or fraud, bad faith, oppressive or unconscionable conduct to warrant a
court of equity to refuse affirmative relief to the mortgagee. Under certain
circumstances a court of equity may relieve the borrower from an entirely
technical default where the 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. The challenge could be successful if a court determines that the sale
was for less than fair consideration and the sale occurred while the borrower
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 in accordance
with a power of sale provided
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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 if the borrower defaulted under the terms of
the note or deed of trust. In some states, prior to the 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 posting of
a copy of the notice of sale on the property, recording and sending the notice
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. It is uncommon for a third party to purchase the property at the
foreclosure sale because:
(1) of the difficulty potential third party purchasers at the sale might
have in determining the exact status of title and
(2) the physical condition of the property may have deteriorated during the
foreclosure proceedings.
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 and section 548 of the current Bankruptcy Code,
and, therefore, could be rescinded in favor of the bankrupt's estate, if:
(1) 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
(2) the price paid for the foreclosed property did not represent "fair
consideration," which is "reasonably equivalent value" under the
Bankruptcy Code.
However, on May 23, 1994, Durrett was effectively overruled by the United States
Supreme Court in BFP v. Resolution Trust Corporation, as Receiver for Imperial
Federal Savings and Loan Association, et al., in which the Court held that
"`reasonably equivalent value', for foreclosed property, is the price in face
received at the foreclosure sale, so long as all the requirements of the State's
foreclosure law have been complied with." The Supreme Court decision, however,
may not be controlling as to whether a non-collusive, regularly conducted
foreclosure can be avoided as a fraudulent conveyance under applicable state
law, if a court
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determines that the sale was for less than "fair consideration" under applicable
state law. For these reasons, it is common for the lender to purchase the
property from the trustee or referee for an amount equal to the principal amount
of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure.
Generally, state law controls the amount of foreclosure costs and expenses,
including attorneys' and trustee's fees, which may be recovered by a lender. In
some states there is a statutory minimum purchase price which the lender may
offer for the property. Thereafter, subject to the right of the borrower in some
states to remain in possession during the redemption period, the lender will
assume ownership of the mortgaged property. The burdens of ownership include
obtaining casualty insurance, paying taxes and making repairs at the lender's
own expense as are necessary to render the property suitable for sale. Depending
on 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. If it does
foreclose, the junior mortgagee 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 if the borrower is in default under the senior mortgage. In either
event the junior mortgagee would add the amounts expended to the balance due on
the junior loan, and it may be subrogated to the rights of the senior
mortgagees. In addition, if 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 borrower 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. The courts have taken a number of different approaches:
o 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;
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o 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;
o finally, some courts have been faced with the issue of whether or not
federal or state constitutional provisions reflecting due process concerns
for adequate notice require that borrowers under deeds of trust or
mortgages receive notices in addition to the statutorily-prescribed
minimums. For the most part, these cases have upheld the notice provisions
as being reasonable or have found that the sale by a trustee under a deed
of trust, or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protections to the
borrower.
In addition, certain states impose a statutory lien for associated costs on
property that is the subject of a cleanup action by the state on account of
hazardous wastes or hazardous substances released or disposed of on the
property. This statutory 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 these costs could be substantial, it is unclear
whether they would be imposed on a secured lender on residential properties. If
title to a residential property was acquired on behalf of holders of securities
and cleanup costs were incurred in respect of the residential property, the
holders of securities might realize a loss if these 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. These agreements 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 the tenant-stockholder, including mechanics'
liens against the Cooperative apartment building incurred by the
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 on 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 this lease or agreement if the tenant-stockholder
fails to make payments or defaults in the performance of covenants required
under the related agreement. 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 if a default by the tenant-stockholder occurs 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.
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The recognition agreement generally provides that, if the tenant-stockholder
has defaulted under the proprietary lease or occupancy agreement, the
Cooperative will take no action to terminate the proprietary 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.
However, the Cooperative will retain its right to sums due under the 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 on the Cooperative Loan.
Recognition agreements also provide that if a foreclosure occurs on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholders.
Foreclosure on the Cooperative shares is accomplished by a sale in accordance
with the provisions of Article 9 of the UCC and the security agreement relating
to those shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale. Generally, a
sale conducted according to the usual practice of 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 to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "--Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS THAT ARE NOT LAND
CONTRACTS
Repossession of manufactured housing is governed by state law. So long as a
manufactured home has not become so attached to real estate that it would be
treated as a part of the real estate under the law of the state where it is
located, repossession of the home, if a default occurs by the borrower, 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:
(1) Except in those few states where the debtor must receive notice of his
right to cure his default -typically 30 days to bring the account
current-repossession can commence
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immediately when a default occurs without prior notice. Repossession may
be effected either through self-help, which is the peaceable retaking
without court order, voluntary repossession or through judicial process,
which is the 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, if 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.
(2) 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, if notice to the debtor is given, 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.
(3) 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 judgments. The deficiency judgment is a personal
judgment against the debtor for the shortfall. Occasionally, after
resale of a manufactured home and payment of all expenses and
indebtedness, there is a surplus of funds. In that case, the UCC
requires the party suing for the deficiency judgment to remit the
surplus to the debtor. Because the defaulting owner of a manufactured
home generally has very little capital or income available following
repossession, a deficiency judgment may not be sought in many cases or,
if obtained, will be settled at a significant discount in light of the
defaulting owner's strained financial condition.
RIGHTS OF REDEMPTION WITH RESPECT TO RESIDENTIAL PROPERTIES
The purposes of a foreclosure action are to enable the mortgagee to realize
on its security and to bar the borrower, 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
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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 the foreclosure 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 borrower 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 after payment of the
foreclosure sales price, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership and maintenance of the property until the redemption
period has expired. In some states, there is no right to redeem property after a
trustee's sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given debtors prior to
repossession, many states do require delivery of a notice of default and of the
debtor's right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of the home
so that the owner may redeem at or before resale. In addition, the sale must
comply with the requirements, including the notice requirements, of the UCC.
ANTI-DEFICIENCY LEGISLATION, BANKRUPTCY LAWS AND OTHER LIMITATIONS ON LENDERS
States have taken a number of approaches to anti-deficiency and related
legislation:
o Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage.
o 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 from the public sale of the real property
and the amount due to the lender.
o 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.
o In certain other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting its
security. However in some of these states, the lender, following judgment
on the 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
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permitting election, is that lenders will usually proceed against the
security first rather than bringing a personal action against the
borrower.
o Finally, other statutory provisions limit any deficiency judgment against
the former borrower following a judicial sale to the excess of the
outstanding debt over the fair market value of the property at the time of
the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment
against the former borrower as a result of low or no bids at the judicial
sale.
In addition to anti-deficiency and related legislation, numerous other
federal and state statutory provisions, including the Bankruptcy Code and state
laws affording relief to debtors, may interfere with or affect the ability of a
secured mortgage lender to obtain payment of a mortgage loan, to realize on
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions, including foreclosure actions and
deficiency judgment proceedings, are automatically stayed when a bankruptcy
petition is filed, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the bankruptcy court
may be reluctant to take, particularly if the debtor has the prospect of
restructuring his or her debts and the mortgage collateral is not deteriorating
in value. The delay and the consequences caused by the automatic stay can be
significant. Also, under the Bankruptcy Code, the filing of a petition in
bankruptcy by or on behalf of a subordinate lender secured by a mortgage on the
property, may stay the senior lender from taking action to foreclose out the
junior lien.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in", i.e., bid up
to the amount of the debt, at the sale of the asset. See "--Foreclosure on
Mortgages" above. A homeowner may also file for relief under Chapter 11 of the
Bankruptcy Code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner may file for relief under
Chapter 13 of the Bankruptcy Code and address his or her debts in a
rehabilitation plan. Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to restructure
their debts file for relief under Chapter 13 rather than under Chapter 11.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on the debtor's residence by paying arrearages within
a reasonable time period and to deaccelerate and reinstate the original mortgage
loan payment schedule. This cure is allowed even though the lender accelerated
the loan and a final judgment of foreclosure had been entered in state court
provided no sale of the property had yet occurred, prior to the filing of the
debtor's petition under the Bankruptcy Code. Courts have approved Chapter 11
plans that have allowed curing of defaults over a number of years. In certain
circumstances, defaults may be cured over a number of years even if the full
amount due under the original loan is never repaid, even if the mortgagee
objects. Under a Chapter 13 plan, curing of defaults must be accomplished within
the five year maximum term permitted for repayment plans.
Generally, a repayment plan filed in a case under Chapter 13 may not modify
the claim of a mortgage lender if the borrower elects to retain the property,
the property is the borrower's principal residence and the property is the
lender's only collateral. If the last payment on the
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original payment schedule of a mortgage loan secured only by the debtor's
principal residence is due before the final date for payment under a debtor's
Chapter 13 plan --which date could be up to five years after the debtor emerges
from bankruptcy--under a case recently decided by an intermediate appellate
court, the debtor's rehabilitation plan could modify the terms of the loan by
bifurcating an undersecured lender's claim into a secured and an unsecured
component in the same manner as if the debtor were a debtor in a case under
Chapter 11. While this decision is contrary to a prior decision of a more senior
appellate court in another jurisdiction, it is possible that the intermediate
court's decision will become the accepted interpretation in view of the language
of the applicable statutory provision. If this interpretation is adopted by a
court considering the treatment in a Chapter 13 repayment plan of a home equity
loan, the home equity loan could be restructured as if the bankruptcy case were
under Chapter 11 if the final payment is due within five years of the debtor's
emergence from bankruptcy.
In a case under Chapter 11, provided certain substantive and procedural
safeguards are met, the amount and terms of a mortgage loan secured by property
of the debtor, including the debtor's principal residence, may be modified.
Under the Bankruptcy Code, the outstanding amount of a loan secured by the real
property may be reduced to the then-current value of the property as determined
by the court, with a corresponding partial reduction of the amount of the
lender's security interest, if the value is less than the amount due on the
loan. This reduction will leave the lender a general unsecured creditor for the
difference between the value of the collateral and the outstanding balance of
the loan. A borrower's unsecured indebtedness will typically be discharged in
full when payment of a substantially reduced amount is made.
Other modifications may include a reduction in the amount of each scheduled
payment, and/or an extension or reduction of the final maturity date. State
statutes and general principles of equity may also provide a borrower with means
to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Because many of the
mortgage loans will have loan-to-value ratios in excess of 100% at origination,
or the loan-to-value ratios otherwise may exceed 100% in cases where the market
value declined subsequent to origination, a potentially significant portion of
the unpaid principal amount of the related mortgage loan would likely be treated
as unsecured indebtedness in a case under Chapter 11.
In a bankruptcy or similar proceeding of a borrower, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the borrower under the related mortgage loan. Payments on
long-term debt may be protected from recovery as preferences if they are
payments in the ordinary course of business made on debts incurred in the
ordinary course of business or if the value of the collateral exceeds the debt
at the time of payment. Whether any particular payment would be protected
depends on the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment to
the lender. In certain circumstances, subject to the court's approval, a debtor
in a case under Chapter 11 of the Bankruptcy Code may have the power to grant
liens senior to the lien of a mortgage. Moreover, the laws of certain states
also give priority to certain tax and mechanics liens over the lien of a
mortgage. Under the Bankruptcy Code, if the court finds that actions of the
mortgagee have been unreasonable and inequitable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
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Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the mortgage loans have been considered by Congress, and
more proposed legislation may be considered in the future. No assurance can be
given that any particular proposal will or will not be enacted into law, or that
any provision so enacted will not differ materially from the proposals described
above.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted mortgage loan. In addition,
substantive requirements are imposed on 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
o the federal Truth-in-Lending Act and Regulation Z,
o Real Estate Settlement Procedures Act and Regulation X,
o Equal Credit Opportunity Act and Regulation B,
o Fair Credit Billing Act,
o Fair Credit Reporting Act,
o Fair Housing Act, Housing and Community Development Act,
o Home Mortgage Disclosure Act,
o Federal Trade Commission Act,
o Fair Debt Collection Practices Act,
o Uniform Consumer Credit Code,
o Consumer Credit Protection Act,
o Riegle Act, and
o related statutes and regulations.
These federal laws impose specific statutory liabilities on 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 holders of securities as the holders of a junior deed of trust or a junior
mortgage are subordinate in lien priority and in payment priority
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to those of the holder of the senior mortgage or deed of trust. These rights
include the prior rights of the senior mortgagee or beneficiary to receive and
apply hazard insurance and condemnation proceeds and, if the borrower defaults,
to cause a foreclosure on the property. When the foreclosure proceedings are
completed 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" in this prospectus.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. If a conflict
exists 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. If the borrower or trustor fails 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 makes these expenditures, the expenditures will generally
have priority over all sums due under the junior mortgage.
CONSUMER PROTECTION LAWS
Numerous Federal and state consumer protection laws impose substantial
requirements on creditors involved in consumer finance. These laws include
o the federal Truth-in-Lending Act and Regulation Z,
o Real Estate Settlement Procedures Act and Regulation X,
o Equal Credit Opportunity Act and Regulation B,
o Fair Credit Billing Act,
o Fair Credit Reporting Act,
o Fair Housing Act, Housing and Community Development Act,
o Home Mortgage Disclosure Act,
o Federal Trade Commission Act,
o Fair Debt Collection Practices Act,
o Uniform Consumer Credit Code, Consumer Credit Protection Act,
o Riegle Act, and
o related statutes and regulations.
These laws can impose specific statutory liabilities on creditors who fail to
comply with their provisions and may affect the enforceability of a residential
loan.
Residential loans often contain provisions obligating the borrower 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. The related prospectus supplement may specify
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that 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 holders of securities.
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" Rules of the Federal Trade Commission
have 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 Holder-in-Due-Course Rules is
subject to any applicable limitations implied by the Riegle Act and is limited
to the amounts paid by a debtor on the residential loan, and the holder of the
residential loan may also be unable to collect amounts still due under those
rules.
If a residential loan is subject to the requirements of the
Holder-in-Due-Course-Rules, the trustee will be subject to any claims or
defenses that the debtor may assert against the seller.
ENFORCEABILITY OF CERTAIN PROVISIONS
Generally, 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 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 "encourages" 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. The preemption pursuant to the Garn-St. Germain Act exempts
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. 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 the Window Period Loans unless the
property underlying a window period loan is located in Michigan, New Mexico or
Utah. 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-
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sale clauses. Mortgage loans originated by these institutions are therefore not
deemed to be Window Period Loans.
When the Window Period Loans exemption expired on October 15, 1985,
due-on-sale clauses became generally enforceable except in those states whose
legislatures exercised their authority to regulate the enforceability of
due-on-sale clauses with respect to mortgage loans that were
(1) originated or assumed during the "window period", which ended in all
cases not later than October 15, 1982, and
(2) originated by lenders other than national banks, federal savings
institutions and federal credit unions.
FHLMC took 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--enacted statutes extending, on various terms and for varying
periods, prohibiting enforcement of due-on-sale clauses with respect to certain
categories of Window Period Loans. The Garn-St. Germain Act also sets forth nine
specific instances in which a mortgage lender covered by the Garn-St. Germain
Act, including federal savings and loan associations and federal savings banks,
may not exercise a due-on-sale clause, regardless of the fact that a transfer of
the property may have occurred. These include intra-family transfers, certain
transfers by operation of law, leases of fewer than three years, the creation of
a junior encumbrance and other instances where regulations promulgated by the
Director of the Office of Thrift Supervision, successor to the Federal Home Loan
Bank Board, prohibit the enforcement of due-on-sale clauses. To date none of
these regulations have been issued. Regulations promulgated under the Garn-St.
Germain Act prohibit the imposition of a prepayment penalty if a loan is
accelerated 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. As a result, this inability to enforce
due-on-sale clauses may have an impact on the average life of the mortgage loans
related to a series and the number of those 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 lender on the contract and permitting the
acceleration of the maturity of the related contracts by the lender on the
contract if any sale or transfer occurs that is not consented to. The related
prospectus supplement may specify that the master servicer will, to the extent
it has knowledge of this conveyance or proposed conveyance, exercise or cause to
be exercised its rights to accelerate the maturity of the related Manufacturing
Housing Contracts through enforcement of "due-on-sale" clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
borrower 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 Manufactured Housing
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
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prohibiting enforcement of "due-on-sale" clauses applicable to the manufactured
homes. Consequently, some states may prohibit the master servicer 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
Contracts 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 these loans, including
o prohibiting prepayment for a specified period after origination,
o prohibiting partial prepayments entirely or
o requiring the payment of a prepayment penalty if a prepayment in full or
in part occurs.
The laws of certain states may
o render prepayment fees unenforceable after a mortgage loan is outstanding
for a certain number of years, or
o 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
borrower. Some state statutory provisions may also treat certain prepayment fees
as usurious if in excess of statutory limits.
SUBORDINATE FINANCING
When the borrower encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may have
difficulty servicing and repaying multiple loans. In addition, if the junior
loan permits recourse to the borrower --as junior loans often do-and the senior
loan does not, a borrower may be more likely to repay sums due on the junior
loan than those on the senior loan. Second, acts of the senior lender that
prejudice the junior lender or impair the junior lender's security may create a
superior equity in favor of the junior lender. For example, if the borrower 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 borrower is
additionally burdened. Third, if the borrower 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, provides that state usury limitations shall not
apply to certain types of
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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 believes 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 the mortgage
loans, any limitation under the state's usury law would not apply to the
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 this state action will be eligible for
inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
ALTERNATIVE MORTGAGE INSTRUMENTS
Adjustable rate mortgage loans originated by non-federally chartered lenders
have historically been subject to a variety of restrictions. These 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 of the Garn-St. Germain Act which provides that, regardless of
any state law to the contrary,
(1) state-chartered banks may originate "alternative mortgage instruments,"
including adjustable rate mortgage loans, in accordance with regulations
promulgated by the Comptroller of the Currency with respect to
origination of alternative mortgage instruments by national banks;
(2) state-chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative
mortgage instruments by federal credit unions; and
(3) all other non-federally chartered housing creditors, including without
limitation
o state-chartered savings and loan associations,
o savings banks and mutual savings banks and
o 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
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respect to origination of alternative mortgage instruments by federal savings
and loan associations.
Title VIII of the Garn-St. Germain Act further provides that a state does not
need to apply the provisions of Title VIII by adopting, prior to October 15,
1985, a law or constitutional provision expressly rejecting the applicability of
these provisions. Certain states have done this.
ENVIRONMENTAL LEGISLATION
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act, as amended, 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
amended, among other things, the provisions of CERCLA with respect to lender
liability and the secured creditor exemption. The Conservation Act offers
protection to lenders by defining certain activities in which a lender can
engage and still have the benefit of the secured creditor exemption. A lender
will be deemed to have participated in the management of a mortgaged property,
and will lose the secured creditor exemption, if it actually participates in the
operational affairs of the property of the borrower. The Conservation Act
provides that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the mortgaged property. The
Conservation Act also provides that a lender may continue to have the benefit of
the secured creditor exemption even if it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure
provided that the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
Other federal and state laws in certain circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. The cleanup costs may be substantial. It is possible that the
cleanup costs could become a liability of a trust fund and reduce the amounts
otherwise distributable to the holders of the related series of securities.
Moreover, certain federal statutes and certain states by statute impose an
environmental lien for any cleanup costs incurred by a state on the property
that is the subject of these types of cleanup costs. All subsequent liens on the
property generally
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are subordinated to the environmental lien. 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 an environmental lien could be adversely affected.
The related prospectus supplement may specify that the mortgage loan seller
will make representations 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 the mortgage loan to the trustee. In
addition, the related agreement may 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 these 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 these laws.
See "Description of the Securities--Realization on Defaulted Mortgage Loans" in
this prospectus.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, a borrower who enters military service after the origination of the
borrower's residential loan, including a borrower 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 the borrower's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military
service, 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 the prospectus supplement may
specify that the shortfalls would not be covered by advances or, any form of
credit support provided in connection with the securities. In addition, the
Relief Act imposes limitations that impair the ability of the master servicer to
foreclose on an affected mortgage loan or enforce rights under a Home
Improvement Contract or Manufactured Housing Contract during the borrower's
period of active duty status, and, under certain circumstances, during an
additional three month period after that period. Thus, if a mortgage loan or
Home
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Improvement Contract or Manufactured Housing Contract goes into default, there
may be delays and losses occasioned as a result.
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 by this prospectus. This discussion is directed solely to
holders of securities that hold the securities as capital assets within the
meaning of Section 1221 of the Code. This discussion 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 in this prospectus,
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" in this prospectus. Holders of securities 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 under this prospectus.
The following discussion addresses securities of four general types:
(1) REMIC Securities,
(2) Grantor Trust Securities,
(3) Partnership Securities, and
(4) Debt Securities.
The prospectus supplement relating to each series of securities will indicate
which of the foregoing treatments will apply to the series. If a REMIC election
or elections will be made for the related trust fund, the prospectus supplement
will identify all "regular interests" and "residual interests" in the REMIC. For
purposes of this tax discussion:
(1) references to a "holder of securities" or a "holder" are to the
beneficial owner of a security,
(2) references to "REMIC Pool" are to an entity or portion of an entity as
to which a REMIC election will be made and
(3) references to mortgage loans include agency securities and private
mortgage-backed securities as specified in the related prospectus
supplement.
The following discussion is based in part on the OID Regulations, and in part
on the REMIC Provisions. The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, debt instruments such as the securities.
REMICS
CLASSIFICATION OF REMICS. When each series of REMIC Securities is issued,
Cadwalader, Wickersham & Taft, special counsel to the depositor, will deliver an
opinion. This opinion will
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generally be to the effect that, assuming compliance with all provisions of the
related pooling and servicing agreement,
(1) the related trust fund, or each applicable portion of the related trust
fund, will qualify as a REMIC and
(2) the REMIC securities offered with respect to the related trust fund will
be considered to evidence ownership of "regular interests" or "residual
interests" 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 and at all times after
that date, 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 their agents 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 certificates will contain provisions meeting
these requirements. See "--Taxation of Owners of Residual
Securities--Tax-Related Restrictions on Transfer of Residual
Securities--Disqualified Organizations" in this prospectus.
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
after that date pursuant to a fixed price contact in effect on the Startup Day.
Qualified mortgages include whole 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 after
that date; 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 borrower; and
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(iv) a mortgage that was not in fact principally secured by real property,
but only if that 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 the 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 if defaults occur, 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 that 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.
Foreclosure property is 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:
(1) one or more classes of regular interests or
(2) 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
o issued on the Startup Day with fixed terms,
o designated as a regular interest,
o unconditionally entitles the holder to receive a specified principal
amount, or other similar amount, and
o 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
variable rate, or consist of a specified, nonvarying portion of the
interest payments on qualified mortgages.
This 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
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even if payments of principal with respect to that 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 REMIC status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for that
year and after that year. In that event, the 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 regulations have
been issued. Any 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 REMIC status are not satisfied. The
agreement pursuant to which each REMIC Pool is formed will include provisions
designed to maintain the trust fund's status as a REMIC under the REMIC
Provisions. We do not anticipate 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 REMIC
Securities would be 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 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 on those loans. 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 those 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 in the REMIC, and will
be "permitted assets" within the meaning of Section 860L(c) for a financial
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 that calendar quarter. The REMIC will report those determinations to
holders of securities in the manner and at the times required by applicable
Treasury regulations. The SBJPA of 1996 repealed the reserve method of bad debts
of domestic building and loan associations and mutual savings banks, and thus
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 institutions must "recapture" a portion
of their existing bad debt reserves is
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suspended if a certain portion of their assets are maintained in "residential
loans" under Code Section 7701(a)(19)(C)(v), but only if the 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 that property, 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, tiered
REMICs may be effected by two or more separate elections being made to treat
designated portions of the related trust fund as REMICs for federal income tax
purposes. When any series of REMIC Securities is issued, Cadwalader, Wickersham
& Taft will deliver an opinion. This opinion will generally be to the effect
that, assuming compliance with all provisions of the related agreement governing
the REMIC Securities, 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 those 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 Regular
Securityholder. In addition, principal payments on a Regular Security will
generally 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 the 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. Original issue discount is determined 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 income. The following
discussion
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is based in part on the OID Regulations and in part on the legislative history
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 certain issues are not
addressed in the regulations, it is anticipated that the trustee will apply the
methodology described in the conference committee report to the 1986 Act. We
cannot assure you 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 in the OID Regulations 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
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 a particular 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 that 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 those 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 provided that
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 related prospectus supplement, because the
underlying mortgage loans provide for remedies if a default occurs, 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 those Regular Securities includes all distributions of interest
as well as principal on them. 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
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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 the 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, 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
distributions should be determined in accordance with 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 related prospectus supplement. Holders
generally must report de minimis original issue discount pro rata as principal
payments are received, and that 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" below.
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 Code 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
(1) 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
(2) 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:
(1) the yield to maturity of the Regular Security at the issue date,
(2) events, including actual prepayments, that have occurred prior to the
end of the accrual period, and
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(3) 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 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. An 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 those Regular
Securities.
In the case of a Non-Pro Rata Security, we anticipate that the trustee will
determine the yield to maturity of this type of Security based on 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 its unpaid principal balance:
(1) the remaining unaccrued original issue discount allocable to the
security, or to that portion, will accrue at the time of distribution, and
(2) the accrual of original issue discount allocable to each remaining
security of that class will be adjusted by reducing the present value of the
remaining payments on that class and the adjusted issue price of that class to
the extent attributable to the portion of the unpaid principal balance of that
security 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 issue discount determined based on the Prepayment Assumption for the
class as a whole. You are advised to consult your 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 must include in gross income the daily portions of the original issue
discount on the Regular Security reduced pro rata by a fraction,
(1) the numerator of which is the excess of its purchase price over the
adjusted issue price and
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(2) the denominator of which is the excess of the remaining stated redemption
price at maturity over the adjusted issue price.
Alternatively, a subsequent purchaser may elect to treat all 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:
(1) the issue price does not exceed the original principal balance by more
than a specified amount and
(2) 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 the rate is subject to a fixed multiple that is greater that 0.65
but not more than 1.35. This floating 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 the information is
not
(1) within the control of the issuer or a related party or
(2) 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 this type of 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, these regulations
may lead to different timing of income inclusion than would be the case under
the OID Regulations. Furthermore, application of these principles could lead to
the characterization of gain on the sale of contingent interest Regular
Securities as ordinary income. Investors should
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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 bearing the following
interest rates will qualify as a regular interest in a REMIC:
(1) (a) a rate that qualifies as a variable rate under the OID Regulations
that is tied to current values of a variable rate, or
(b) 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
(c) a positive or negative multiple of that 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 a rate that is subject
to one or more caps or floors, or
(2) one or more 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.
Accordingly, it is anticipated that 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." The yield to maturity and future payments on
the Regular Security will generally 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 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, we anticipate 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 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:
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(1) is exceeded by the then-current principal amount of the Regular Security,
or
(2) in the case of a Regular Security having original issue discount, is
exceeded by the adjusted issue price of that Regular Security at the time of
purchase.
Any purchaser generally will be required to recognize ordinary income to the
extent of accrued market discount on Regular Security as distributions
includible in the stated redemption price at maturity of the Regular Securities
are received, in an amount not exceeding any distribution. Any 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 the regulations are issued, market discount would
accrue either:
(1) on the basis of a constant interest rate, or
(2) in the ratio of stated interest allocable to the relevant period to the
sum of the interest for the period plus the remaining interest as of the end of
the 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 the period plus the
remaining original issue as of the end of the period.
Any 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. Any 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 on that security. The deferred portion of interest expense in any
taxable year generally will not exceed the accrued market discount on the
Regular Security for the year. Any 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 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 the
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
an 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 the market discount is less than 0.25%
of the remaining stated redemption price at maturity of the Regular Security
multiplied by the weighted average maturity of the Regular Security, determined
as described 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. 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.
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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 a Regular Security as a "capital
asset" within the meaning of Code Section 1221, the Regular Securityholder may
elect under Code Section 171 to amortize the premium under the constant yield
method. This election will apply to all debt obligations acquired by the Regular
Securityholder at a premium held in that taxable year or after that taxable
year, 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 Section 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. 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 this election:
(1) "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
(2) 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 this election on
an instrument by instrument basis or for a class or group of debt instruments.
However, if the holder makes this 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. You should
consult your own tax advisors regarding the advisability of making this type of
an election.
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 those 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.
However, the holder of a Regular
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Security 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 a loss with
respect to principal sustained during the taxable year on account of any Regular
Securities becoming wholly or partially worthless. 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 Regular Securities becoming wholly worthless. Although the
matter is not free from doubt, the non-corporate Regular Securityholders should
be allowed a bad debt deduction at a time when the principal balance of the
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
losses only after all the mortgage loans remaining in the trust fund 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
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 if the class is terminated.
Regular Securityholders are urged to consult their own tax advisors regarding
the appropriate timing, amount and character of any loss sustained with respect
to 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. You
are advised to consult your 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
(1) the cost of the Regular Security to the seller,
(2) increased by any original issue discount or market discount previously
included in the seller's gross income with respect to the Regular
Security and
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(3) reduced by amounts included in the stated redemption price at maturity
of the Regular Security that were previously received by the seller, by
any amortized premium and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the applicable
holding period described below. Gain will be treated as ordinary income:
(1) if a Regular Security is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that 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 the transaction,
(2) in the case of a non-corporate taxpayer, to the extent the 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
(3) to the extent that the 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 the 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 the
holder with respect to the Regular Security.
In addition, gain or loss recognized from the sale of a Regular Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Capital gains of non-corporate taxpayers
generally are subject to a lower maximum tax rate (20%) than ordinary income of
those taxpayers (39.6%) for capital assets held for more than one year. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income of holders of Residual Securities, 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 the
quarter and by allocating each daily portion among the Residual Holders in
proportion to their respective holdings of Residual Securities in the REMIC Pool
on that 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:
(1) the limitations on deductibility of investment interest expense and
expenses for the production of income do not apply,
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(2) all bad loans will be deductible as business bad debts, and
(3) the limitation on the deductibility of interest and expenses related to
tax-exempt income will apply.
The REMIC Pool's gross income includes:
(1) interest, original issue discount income and market discount income, if
any, on the mortgage loans,
(2) reduced by amortization of any premium on the mortgage loans,
(3) plus income from amortization of issue premium, if any, on the Regular
Securities,
(4) plus income on reinvestment of cash flows and reserve assets, and
(5) plus any cancellation of indebtedness income if realized losses are
allocated 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. If an interest in the mortgage loans is acquired by the REMIC Pool
at a discount, and one or more of the 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. The discount on the mortgage loans which is
includible in income may exceed the deduction allowed upon distributions on
those Regular Securities on account of any unaccrued original issue discount
relating to those Regular Securities. When more than one class of Regular
Securities distributes 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
those classes are not issued with substantial discount or are issued at a
premium.
If taxable income attributable to 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 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. By contrast, 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 any
mismatching or unrelated deductions against which to offset income, subject to
the discussion of "excess inclusions" below
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under "-- Limitations on Offset or Exemption of REMIC Income." The timing of any
mismatching of income and deductions described in this paragraph, if present
with respect to a series of securities, may have a significant adverse effect on
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 the
Residual Holders for those periods in accordance with generally accepted
accounting principles. You should consult your own accountants concerning the
accounting treatment of your 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 the Residual Security. The 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,
(1) first, by a cash distribution from the REMIC Pool, and
(2) 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 a loss was
disallowed and may be used by the Residual Holder only to offset any income
generated by the same REMIC Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, the taxable income will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's basis in its assets.
This 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 the 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 a residual interest as
zero rather than a 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 a residual interest to induce the transferee
to acquire the interest. 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 that basis until termination of
the REMIC Pool unless future Treasury regulations provide for periodic
adjustments to the REMIC income otherwise reportable by the 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 on 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. 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 in this prospectus, and "-- Premium,"
below.
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 the mortgage
loans is exceeded by their unpaid principal balances. The REMIC Pool's basis in
the mortgage loans is generally the fair market value of the mortgage loans
immediately after the transfer of the mortgage loans to the REMIC Pool. The
REMIC Regulations provide that in the REMIC Pool's basis in the mortgage loans
is equal in the aggregate to the issue prices of all regular and residual
interests in the REMIC Pool. The accrued portion of the 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 their unpaid principal balances, the REMIC Pool will be considered to
have acquired the mortgage loans at a premium equal to the amount of the 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
of the mortgage loans 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 borrowers 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 those mortgage loans may be deductible in
accordance with a reasonable method regularly employed by the holder of the
mortgage loans. The allocation of a premium pro rata among principal payments
should be considered a reasonable method. However, the Internal Revenue Service
may argue that a premium should be allocated in a different manner, such as
allocating the 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
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the excess of REMIC taxable income for the calendar quarter allocable to a
Residual Security over the daily accruals for each quarterly period of:
(1) 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
(2) the adjusted issue price of the Residual Security at the beginning of
each 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 the daily accruals of REMIC income described in this paragraph for all
prior quarters, decreased by any distributions made with respect to the Residual
Security prior to the beginning of each quarterly period. Accordingly, the
portion of the REMIC Pool's taxable income that will be treated as excess
inclusions will be a larger portion of 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 the 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 that
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 and the portion of the REMIC taxable income 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
(1) could not be offset by net operating losses of its shareholders,
(2) would constitute unrelated business taxable income for tax-exempt
shareholders, and
(3) 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. The elimination of this special rule is 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
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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 the 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, a tax would be imposed in an
amount equal to the product of:
(1) the present value of the total anticipated excess inclusions with respect
to a Residual Security for periods after the transfer and
(2) 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. This 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. This tax generally would be imposed on the
transferor of the Residual Security, except that where a transfer is through an
agent, including a broker, nominee, or other middleman, for a Disqualified
Organization, the tax would instead be imposed on the agent. However, a
transferor of a Residual Security would in no event be liable for this 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 the
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.
In addition, if a "Pass-Through Entity," as defined in the second succeeding
paragraph, 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 that entity, then a tax is imposed on that entity equal to
the product of:
(1) the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and
(2) the highest marginal federal corporate income tax rate. That 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 the tax if it received an
affidavit from the record holder that it is not a Disqualified Organization or
stating the holder's taxpayer identification number and, during the period the
person is the record holder of the Residual Security, the Pass-Through Entity
does not have actual knowledge that the affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership," as defined in the immediately succeeding paragraph, holds a
Residual Security, all interests in the electing large partnership are treated
as held by Disqualified Organizations for purposes of the tax imposed on a
Pass-Through Entity by Section 860E(c) of the Code. An exception to this tax,
otherwise available to a Pass-Through Entity that is furnished certain
affidavits by record holders
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of interests in the entity and that does not know the affidavits are false, is
not available to an electing large partnership.
For these purposes,
(1) "Disqualified Organization" means the United States, any state or
political subdivision of the United States or any state, any foreign government,
any international organization, any agency or instrumentality of any of the
foregoing. However, the term does not include
(a) an instrumentality if all of its activities are subject to tax
and a majority of its board of directors is not selected by the
governmental entity,
(b) 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
(c) any organization, other than a farmers' cooperative described in
Code Section 531, that is exempt from taxation under the Code unless the
organization is subject to the tax on unrelated business income imposed by
Code Section 511;
(2) "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 the interest, be treated as a
Pass-Through Entity; and
(3) 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 applicable agreement with respect to a series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless:
(1) the proposed transferee furnished to the transferor and the trustee an
affidavit providing its taxpayer identification number and stating that
the transferee is the beneficial owner of the Residual Security and is
not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization, i.e., as a broker,
nominee or middleman of the Disqualified Organization; and
(2) the transferor provides a statement in writing to the trustee that it
has no actual knowledge that the affidavit is false.
Moreover, the related 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 the restrictions on
transfer. Each Residual Holder will be deemed to have agreed, as a condition of
ownership of a Residual Security, to any amendments to the related 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 depositor or the trustee may charge
a fee for computing and providing this 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
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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 in the
following sentence, to a Residual Holder, other than a Residual Holder who is
not a U.S. Person, is disregarded for all federal income tax purposes if 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:
(1) 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
(2) 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:
(1) the transferor
(a) conducted, at the time of the transfer, a reasonable investigation
of the financial condition of the transferee,
(b) found that the transferee historically paid its debts as they came
due, and
(c) found no significant evidence to indicate that the transferee would
not continue to pay its debts as they came due in the future, and
(2) 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 agreement with respect to each series of Securities 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, unless that 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:
(1) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and
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(2) 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 securities 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 a transfer may be made.
SALE OR EXCHANGE OF A RESIDUAL SECURITY. If the sale or exchange of a
Residual Security occurs, 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 a Residual Holder in a 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 from the REMIC Pool exceeds the adjusted basis on that
distribution date. Income will be treated as gain from the sale or exchange of
the Residual Holder's Residual Security. As a result, 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 the Residual Security as a capital asset
under Code Section 1221, then it will recognize a capital loss at that time in
the amount of the remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income
(1) 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 the transaction or
(2) in the case of a non-corporate taxpayer, to the extent that 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. These wash sale
rules will apply 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 the sale or disposition of the Residual Security,
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 mark to market regulations under Code Section 475 relating
to the requirement that a
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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:
(1) 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,
(2) the receipt of income from assets that are not the type of mortgages or
investments that the REMIC Pool is permitted to hold,
(3) the receipt of compensation for services, or
(4) the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation.
Regardless of clauses (1) and (4) above, 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 generally will not be treated
as a disposition if it is occasioned by
(1) a default or reasonably foreseeable default,
(2) an assumption of the mortgage loan,
(3) the waiver of a due-on-sale or due-on-encumbrance clause, or
(4) the conversion of an interest rate by a borrower 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
(1) during the three months following the Startup Day,
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(2) made to a qualified Reserve Fund by a Residual Holder,
(3) in the nature of a guarantee,
(4) made to facilitate a qualified liquidation or clean-up call, and
(5) as otherwise permitted in Treasury regulations yet to be issued. We do
not anticipate 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. We do not anticipate 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
the adoption is deemed to occur, and sells all of its assets, other than cash,
within a 90-day period beginning on that 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 the
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 the Residual Holder, the Residual Holder or
the 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
these itemized deductions, in the 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:
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(1) 3% of the excess, if any, of adjusted gross income over $126,600 for
1999, $63,300 in the case of a married individual filing a separate return, as
adjusted for inflation for subsequent years, or
(2) 80% of the amount of itemized deductions otherwise allowable for the
year.
In the case of a REMIC Pool, these 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. These investors
who hold REMIC Securities either directly or indirectly through certain
Pass-Through Entities may have their pro rata share of expenses allocated to
them as additional gross income, but may be subject to a limitation on
deductions. In addition, these expenses are not deductible at all for purposes
of computing the alternative minimum tax, and may cause investors of this type
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, this additional
gross income and limitation on deductions will apply to the allocable portion of
these expenses to holders of Regular Securities, as well as holders of Residual
Securities, where Regular Securities are issued in a manner that is similar to
pass-through certificates in a fixed investment trust. Generally, all these
expenses will be allocable to the Residual Securities. In general, the allocable
portion will be determined based on the ratio that a REMIC Holder'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, will be considered "portfolio
interest" and, therefore, generally will not be subject to 30% United States
withholding tax, provided that the non-U.S. Person:
(1) 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
(2) provides the trustee, or the person who would otherwise be required to
withhold tax from the 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 the signed 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 the non-U.S. Person. In the latter case, the non-U.S. Person will be
subject
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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 IRS recently issued final New Regulations which would provide alternative
methods of satisfying the beneficial ownership certification requirement
described above. The New Regulations will be effective January 1, 2001, current
withholding certificates will remain valid until the earlier of December 31,
2000, or the 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:
(1) the certification described above be provided by the partners rather than
by the foreign partnership and
(2) the partnership provide certain 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:
(1) the mortgage loans were issued after July 18, 1984 and
(2) the trust fund or segregated pool of assets in that trust fund, 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" in this
prospectus. 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 non-U.S. Persons, 30% or lower treaty rate withholding will not apply.
Instead, the amounts paid to the 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, those 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.
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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." Reportable payments include interest distributions,
original issue discount, and, under certain circumstances, principal
distributions, unless the Regular Holder complies with certain reporting and/or
certification procedures. These reporting and/or certification procedures
include the provision of its taxpayer identification number to the trustee, its
agent or the broker who effected the sale of the Regular Security, or the 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 will 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
o corporations,
o non-calendar year taxpayers,
o securities or commodities dealers,
o real estate investment trusts,
o investment companies,
o common trust funds,
o thrift institutions and
o charitable trusts,
may request 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 information from the nominee.
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 as, as described under
"--Limitations on Deduction of Certain Expenses" above, allocable to the
holders. Furthermore, under the regulations, information must
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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 an opinion. The
opinion will be to the effect that, assuming compliance with all provisions of
the applicable 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 these securities are not
designated as "Stripped Securities," the holder of each security in the series,
referred to in this Prospectus 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. As a
result, the holder of these securities 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, in accordance with the holder's method
of accounting, its pro rata share of the entire income from the mortgage loans
represented by its Standard Security, including
(1) interest at the coupon rate on the mortgage loans,
(2) original issue discount, if any,
(3) prepayment fees,
(4) assumption fees, and
(5) late payment charges received by the servicer.
A holder of securities generally will be able to deduct its share of the
servicing fee and all administrative and other expenses of the trust fund in
accordance with its method of accounting, provided that the 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 administrative and other expenses of the Grantor Trust Fund, to the
extent that the 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:
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(1) 3% of the excess, if any, of adjusted gross income over $126,600 for 1999
$63,300 in the case of a married individual filing a separate return, in each
case, as adjusted for inflation in subsequent years, or
(2) 80% of the amount of itemized deductions otherwise allowable for that
year.
As a result, 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 that security.
Securities with respect to interest at the pass-through rate or as discount
income on those Standard Securities. In addition, the expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause the 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 that
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. Interest income on the assets will be
considered "interest on obligations secured by mortgages on real property" to
that 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 in the REMIC, 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 the
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. We cannot assure you
that the treatment described above is
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proper. Accordingly, we urge you to consult your own tax advisors concerning
the effects of these arrangements on the characterization of your investment
for federal income tax purposes.
PREMIUM AND DISCOUNT. We advise you to consult with your tax advisors as to
the federal income tax treatment of premium and discount arising either at the
time of initial issuance of Standard Securities or subsequent acquisition.
PREMIUM. The treatment of premium incurred at the time of the purchase of a
Standard Security will be determined generally as described above under
"--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 holder'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 borrowers, other than individuals, originated after July 1,
1982, and mortgages of individuals originated after March 2, 1984. Under the OID
Regulations, an 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 the income.
Unless indicated otherwise in the related prospectus supplement, no prepayment
assumption will be assumed for purposes of the 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 the mortgage loans acquired by a
holder of securities are purchased at a price equal to the then unpaid principal
amount of those mortgage loans, no original issue discount attributable to the
difference between the issue price and the original principal amount of those
mortgage loans, i.e., points, will be includible by the related holder.
MARKET DISCOUNT. Holders of securities 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 in those sections 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. The related
prospectus supplement will specify what, if any, prepayment assumption will be
assumed for purposes of accrual.
RECHARACTERIZATION OF SERVICING FEES. If the servicing fees paid to a
servicer were deemed to exceed reasonable servicing compensation, the amount of
excess would represent neither income nor a deduction to holders of securities.
In this regard, there are no authoritative guidelines for federal income tax
purposes as to either the maximum amount of servicing compensation that
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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 the applicable
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. This
guidance provides safe harbors for servicing deemed to be reasonable and
requires taxpayers to demonstrate that the value of servicing fees in excess of
these applicable 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 those 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 those 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 of those securities. While holders of
securities would still be treated as owners of beneficial interests in a grantor
trust for federal income tax purposes, the corpus of the trust could be viewed
as excluding the portion of the mortgage loans the ownership of which is
attributed to the servicer, or as including the portion as a second class of
equitable interest. Applicable Treasury regulations treat an arrangement of this
type as a fixed investment trust, since the multiple classes of trust interests
should be treated as merely facilitating direct investments in the trust assets
and the existence of multiple classes of ownership interests is incidental to
that purpose. In general, a recharacterization should not have any significant
effect on the timing or amount of income reported by a holder of securities,
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. If a sale or exchange of a Standard
Security occurs, a holder of securities 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 holder'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 on those securities. 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 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:
(1) 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 holder's net investment in the conversion transaction at 120% of
the appropriate applicable Federal rate in
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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 that transaction or
(2) in the case of a non-corporate taxpayer, to the extent the taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates.
Capital gains of noncorporate taxpayers generally are subject to a lower
maximum tax rate (20%) than ordinary income of the taxpayers (39.6%) for capital
assets held for more than one year. The maximum tax rate for corporations is the
same with respect to both ordinary income and capital gains.
STRIPPED SECURITIES
GENERAL. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, securities that are subject to those rules will be referred to as
"Stripped Securities." The securities will be subject to those rules if:
(1) 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,
(2) 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"), and
(3) 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 those 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 holders of Stripped Securities, the
servicing fees will be allocated to the classes of Stripped Securities in
proportion to the distributions to the 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 in that
section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as an
obligation issued on the date that the stripped interest is purchased. Although
the treatment of Stripped Securities for federal income tax purposes is not
clear in certain respects, particularly where
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Stripped Securities are issued with respect to a mortgage pool containing
variable-rate mortgage loans, the depositor has been advised by counsel that:
(1) 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
(2) 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 applicable 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 those
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 a Stripped Security of this type 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 a Stripped Security will be required to account
for any discount as market discount rather than original issue discount if
either:
(1) the initial discount with respect to the Stripped Security was treated as
zero under the de minimis rule, or
(2) no more than 100 basis points in excess of reasonable servicing is
stripped off the related mortgage loans. Any market discount would be reportable
as described above under "--Taxation of Owners of Regular Securities--Market
Discount," without regard to the de minimis rule described in this prospectus,
assuming that a prepayment assumption is employed in that 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
(1) "real estate assets" within the meaning of Code Section 856(c)(4)(A),
(2) "obligation[s]. . . principally secured by an interest in real property"
within the meaning of Code Section 860G(a)(3)(A), and
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(3) "loans. . . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v).
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 those mortgage
loans qualify for this tax treatment. The application of these Code provisions
to Buydown Loans is uncertain. See "--Standard Securities -- Tax Status" above.
TAXATION OF STRIPPED SECURITIES. Original Issue Discount. Except as described
above under "General," each Stripped Security will be considered to have been
issued at an original issue discount for federal income tax purposes. Original
issue discount with respect to a Stripped Security must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which may be prior to the receipt of the
cash attributable to that income. Based in part on the issue discount required
to be included in the income of a holder of a Stripped Security in any taxable
year likely will be computed generally as described above under "--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 of the Stripped Security. The stated redemption price at maturity
will include the aggregate amount of the payments to be made on the Stripped
Security to the holder of securities, 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 holder's recognition of original issue
discount will be either accelerated or decelerated and the amount of the
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by the holder'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 that Stripped Security to recognize a loss,
which may be a capital loss, equal to that 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 those
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, those regulations may lead to different timing of income inclusion
that would be the case under the OID Regulations. Furthermore, application of
those 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 holder's adjusted basis
in that Stripped Security, as described above under "--Taxation of Owners of
Regular Securities -- Sale or Exchange of Regular Securities." To the extent
that a
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subsequent purchaser's purchase price is exceeded by the remaining payments on
the Stripped Securities, the subsequent purchaser will be required for federal
income tax purposes to accrue and report the 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 holder of
securities other than an original holder of securities 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 the 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 holder of securities may
be treated as the owner of:
(1) one installment obligation consisting of the Stripped Security's pro rata
share of the payments attributable to principal on each mortgage loan and a
second installment obligation consisting of the respective Stripped Security's
pro rata share of the payments attributable to interest on each mortgage loan,
(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan, or
(3) 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 to that Stripped Security.
Alternatively, the holder of one or more classes of Stripped Securities may
be treated as the owner of a pro rata fractional undivided interest in each
mortgage loan to the extent that the related Stripped Security, or classes of
Stripped Securities in the aggregate, represent the same pro rata portion of
principal and interest on each 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 these 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, holders of
securities 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 holder of
securities at any time during that calendar year, information, prepared on the
basis described above, as is necessary to enable the holder of those securities
to prepare its federal income tax returns. The information will include the
amount of original issue discount accrued on securities held by persons other
than holders of securities 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
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discount required to be reported as taxable income by a holder of securities,
other than an original holder of securities that purchased at the issue price.
In particular, in the case of Stripped Securities, the reporting will be based
on a representative initial offering price of each class of Stripped Securities
or some price as set forth in the related prospectus supplement. The trustee
will also file original issue discount information with the Internal Revenue
Service. If a holder of securities fails to supply an accurate taxpayer
identification number or if the Secretary of the Treasury determines that a
holder of securities 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 any lower rate as may be provided for interest by an
applicable tax treaty. Accrued original issue discount recognized by the holder
of securities on the sale or exchange of that 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 these 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 applicable 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.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT
SECURITIES. For federal income tax purposes:
(1) 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
(2) 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). However, 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.
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TAXATION OF DEBT HOLDER OF SECURITIES. Treatment of the Debt Securities as
Indebtedness. The Depositor will agree, and the holders of securities 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 Fund.
As a result, the timing and amount of income allocable to holders of the 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:
(1) income reportable on Debt Securities is not required to be reported under
the accrual method unless the holder otherwise uses the accrual method and
(2) 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
"--Taxation of Owners of Regular Securities" above.
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. The prospectus
supplement may specify that the Depositor will agree, and the holders of
securities will agree by their purchase of securities, to treat the Partnership
Trust Fund:
(1) 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 holders of securities, including the
depositor, and the Debt Securities, if any, being debt of the partnership or
(2) 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 this beneficial 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. A characterization of this type
would not result in materially adverse tax consequences to holders of securities
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.
PARTNERSHIP TAXATION. As a partnership, the Partnership Trust Fund will not
be subject to federal income tax. Rather, each holder of securities will be
required to separately take into account each holder's allocated share of
income, gains, losses, deductions and credits of the Partnership Trust Fund. We
anticipate that the Partnership Trust Fund's income will consist primarily of
interest earned on the mortgage loans, including appropriate adjustments for
market
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discount, original issue discount and bond premium, as described above under
"--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, i.e., the
applicable governing agreement and related documents. The partnership agreement
will provide, in general, that the holders of securities will be allocated
taxable income of the Partnership Trust Fund for each Due Period equal to the
sum of:
(1) the interest that accrues on the Partnership Securities in accordance
with their terms for the Due Period, including interest accruing at the
applicable pass-through rate for the applicable Due Period and interest on
amounts previously due on the Partnership Securities but not yet distributed;
(2) 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
(3) any other amounts of income payable to the holders of securities for the
applicable Due Period.
That 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. No assurance can be given that the IRS would
not require a greater amount of income to be allocated to securities. Moreover,
even under the foregoing method of allocation, holders of securities 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 that amount. Thus, cash basis holders will in
effect be required to report income from the Partnership Securities on the
accrual basis and holders of securities may become liable for taxes on
Partnership Trust Fund income even if they have not received cash from the
Partnership Trust Fund to pay these taxes.
All of the taxable income allocated to a holder of securities 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 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 holder of securities would be miscellaneous itemized deductions subject to
the limitations described above under " -- Standard Securities -- General."
Accordingly, these deductions might be disallowed to the individual in whole or
in part and might result in the holder of the securities being taxed on an
amount of income that exceeds the amount of cash actually distributed to the
holder of the securities over the life of the Partnership Trust Fund.
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Discount income or premium amortization with respect to each mortgage loan
would be calculated in a manner similar to the description above under "--
Standard Securities -- General" and "-- Premium and Discount." Regardless of
that description, it is intended that the Partnership Trust Fund will make all
tax calculations relating to income and allocations to holders of securities 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
required calculations to be made separately for each mortgage loan, the
Partnership Trust Fund might be required to incur additional expense, but we
believe that there would not be a material adverse effect on holders of
securities.
DISCOUNT AND PREMIUM. The prospectus supplement may provide that the mortgage
loans will have been issued with original discount. However, 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
"--Standard Securities--Premium and Discount" in this prospectus. As previously
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
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of any market discount income or premium deduction
may be allocated to holders of securities.
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. A termination of this type 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. The interests in a new
Partnership Trust Fund would be deemed distributed to the partners of the old
partnership in liquidation of the old partnership, which would not constitute a
sale or exchange. The Partnership Trust Fund will not comply with certain
technical requirements that might apply when 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 holder'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 a 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
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the Partnership Securities. If a sale or other disposition of some of the
Partnership Securities occurs, the holder may be required to allocate a portion
of the 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 similar 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 holder of securities 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 to those securities, the excess will
generally give rise to a capital loss if the retirement of the Partnership
Securities occurs.
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 holders
of securities in proportion to the principal amount of Partnership Securities
owned by them as of the close of the last day of the related Due Period. As a
result, a holder purchasing Partnership Securities may be allocated tax items
attributable to periods before the actual transaction, which will affect its tax
liability and tax basis.
The use of this 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 holders of
securities. 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 holder of
securities, no gain will be recognized to that holder of securities to the
extent that the amount of any money distributed with respect to that holder's
security exceeds the adjusted basis of that holder's interest in the security.
To the extent that the amount of money distributed exceeds that holder's
adjusted basis, gain will be currently recognized. In the case of any
distribution to a holder of securities, no loss will be recognized except if a
distribution in liquidation of a holder's interest occurs. Any gain or loss
recognized by a holder of securities will be capital gain or loss.
SECTION 754 ELECTION. If a holder of securities sells its Partnership
Securities at a profit or loss, the purchasing holder of securities will have a
higher or lower basis, as applicable, in the Partnership Securities than the
selling holder of securities 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 that election.
As a result, holders of securities might be allocated a greater or lesser
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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. The 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 on IRS Form 1065 with the IRS for each taxable
year of the Partnership Trust Fund and will report each holder'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 those nominees will be required to forward the 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 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. This
information includes:
(1) the name, address and taxpayer identification number of the nominee and
(2) as to each beneficial owner:
(x) the name, address and identification number of the beneficial
owner,
(y) whether the beneficial owner is a U.S. Person, a tax-exempt entity
or a foreign government, an international organization, or any wholly
owned agency or instrumentality of either of the foregoing, and
(z) certain information on Partnership Securities that were held,
bought or sold on behalf of the beneficial owner 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 information statement of this type 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 person specified in the applicable agreement as the tax matters partner
will be responsible for representing the holders of securities 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 holders of securities, and, under certain circumstances, a holder of
securities may be precluded from separately litigating a proposed adjustment to
the items of the Partnership Trust Fund. An adjustment could also result
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in an audit of a holder's returns and adjustments of items not related to the
income and losses of the Partnership Trust Fund.
TAX CONSEQUENCES TO FOREIGN HOLDERS OF SECURITIES. 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. This is so because there is no clear authority
dealing with that issue under facts substantially similar to those described in
this prospectus. 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 the 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, the 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 relating to 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 holder of securities 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 ON 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 "Federal
Income Tax Consequences" in this prospectus, potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the securities offered under this prospectus. 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 under this prospectus.
ERISA CONSIDERATIONS
Title I of ERISA and Section 4975 of the Code impose certain requirements on
Plans and on persons who are fiduciaries with respect to the 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 in this prospectus. Accordingly, assets of the 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
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
who have certain specified relationships to the Plan. In addition, Section
406(b) of ERISA and Section 4975(c)(1)(E) and (F) of the Code impose certain
prohibitions on Parties in Interest who are fiduciaries with respect to the
Plan. Certain Parties in Interest that participate in a prohibited transaction
may be subject to a penalty imposed under Section 502(i) of ERISA or an excise
tax pursuant to Sections 4975(a) and (b) of the Code, unless a statutory or
administrative exemption is available.
Certain transactions involving a trust fund might be deemed to constitute
prohibited transactions under ERISA and Section 4975 of the Code with respect to
a Plan that purchases securities if the residential loans, agency securities,
mortgage securities and other assets included in the trust fund are deemed to be
assets of the Plan. The U.S. Department of Labor has promulgated regulations at
29 C.F.R. ss. 2510.3-101 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 these
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." "Benefit Plan Investors" 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
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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 in these regulations, neither Plans nor persons
investing plan assets should acquire or hold securities in reliance ON the
availability of any exception under the regulations.
In addition, the 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 notes of this type, but would not, by reason of the
purchase, include the underlying assets of the related trust fund. However,
without regard to whether notes of this type are treated as an equity interest
for these purposes, the purchase or holding of notes by or on behalf of a Plan
could be considered to result in a prohibited transaction. A prohibited
transaction may result 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
the Plan, or if the depositor, the master servicer, any sub-servicer or any
trustee has investment authority with respect to the assets of the 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 the 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 United States
Department of Labor issued an individual exemption, Prohibited Transaction
Exemption 90-36, referred to as the "Exemption," on June 25, 1990 to PaineWebber
Incorporated. The Exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA, and the excise taxes
and civil penalties imposed on the prohibited transactions pursuant to Section
4975(a) and (b) of the Code and Section 502(i) of ERISA, certain transactions,
among others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of pass-through certificates, such as a senior class
of certificates, underwritten by an underwriter, provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," the term "underwriter" shall include:
(1) PaineWebber Incorporated,
(2) any person directly or indirectly, through one or more intermediaries,
controlling, controlled by or under common control with PaineWebber Incorporated
and
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(3) 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 under the Exemption:
(1) 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;
(2) 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;
(3) 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 IBCA, Inc.;
(4) the trustee cannot be an affiliate of any other member of the "restricted
group." The "restricted group" consists of any underwriter, the depositor, the
trustee, the master servicer, any sub-servicer, the obligor on credit support
and any borrower with respect to assets of the trust fund constituting more than
5% of the aggregate unamortized principal balance of the assets of the trust
fund in the related trust fund as of the date of initial issuance of the
certificates;
(5) (a) the sum of all payments made to and retained by the underwriter(s)
must represent not more than reasonable compensation for underwriting the
certificates;
(b) the sum of all payments made to and retained by the depositor pursuant
to the assignment of the assets of the trust fund to the related trust fund
must represent not more than the fair market value of those obligations; and
(c) the sum of all payments made to and retained by the master servicer
and any sub-servicer must represent not more than reasonable compensation for
that person's services and reimbursement of that person's reasonable expenses
in connection with those services;
(6) 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:
(1) the trust fund must consist solely of assets of the type that have been
included in other investment pools;
(2) certificates evidencing interests in such other investment pools must
have been rated in one of the three highest categories of one of Standard &
Poor's Ratings Services, Moody's Investors Service, Inc., Duff & Phelps Credit
Rating Co. or Fitch IBCA, Inc. for at least one year prior to the acquisition of
certificates by or on behalf of a Plan or with plan assets; and
(3) certificates evidencing interests in those 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 its
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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 the "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 PaineWebber 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 borrower with respect to 5% or less of the fair market value of the
assets of the trust fund or
(b) an affiliate of that 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.
Satisfaction of these conditions 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 the restrictions
are deemed to otherwise apply merely
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(1) because a person is deemed to be a Party in Interest with respect to an
investing Plan,
(2) by virtue of providing services to the Plan, or
(3) by virtue of having certain specified relationships to a person of that
type, solely as a result of the Plan's ownership of certificates.
Before purchasing a certificate, a fiduciary of a Plan should itself confirm:
(1) that the certificates constitute "certificates" for purposes of the
Exemption and
(2) that the specific and general conditions and other applicable
requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the Plan fiduciary should consider its general
fiduciary obligations under ERISA in determining whether to purchase any
certificates on behalf of a Plan.
In addition to the Exemption, a Plan fiduciary or other investor using plan
assets should consider the availability of certain class exemptions granted by
the U.S. Department of Labor. These class exemptions may provide relief from
certain of the prohibited transaction provisions of ERISA and the related excise
tax provisions of the Code, including
(1) PTCE 83-1, regarding transactions involving mortgage pool investment
trusts;
(2) PTCE 84-14, regarding transactions effected by a "qualified professional
asset manager";
(3) PTCE 90-1, regarding transactions by insurance company pooled separate
accounts;
(4) PTCE 91-38, regarding investments by bank collective investment funds;
(5) PTCE 95-60, regarding transactions by insurance company general accounts;
and
(6) 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. This new section provides certain exemptive relief from the
provisions of Part 4 of Title I of ERISA, including the prohibited transaction
provisions, and Section 4975 of the Code for transactions involving an insurance
company general account. Pursuant to Section 401(c) of ERISA, the U.S.
Department of Labor was required to issue final regulations no later than
December 31, 1997. These final regulations 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:
(1) as otherwise provided by the Secretary of Labor in the 401(c) regulations
to prevent avoidance of the regulations or
(2) 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.
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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 the
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 United States
Department of Labor proposed the 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 that investment and the availability of
the Exemption or any class exemption in connection with that investment. We
cannot assure you 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 in the Exemption or class exemption
were satisfied, that the 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.
LEGAL INVESTMENT
The prospectus supplement relating to each series of securities will specify
which, if any, of the classes of securities offered constitute "mortgage related
securities" for purposes of SMMEA. Any class of securities offered by this
prospectus 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 these 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,
(1) state-chartered savings banks,
(2) commercial banks, savings and loan associations and insurance companies,
(3) 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
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interest by the United States or any agency or instrumentality of the United
States constitute legal investments for these types of entities.
Pursuant to SMMEA, a number of states enacted legislation, on or before the
October 3, 1991 cutoff for these legislative 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 ON existing state law, and not SMMEA.
Accordingly, the investors affected by this type of legislation will be
authorized to invest in securities qualifying as "mortgage related securities"
only to the extent provided in the legislation.
SMMEA also amended the legal investment authority of federally-chartered
depository institutions as follows:
(1) 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 by these "mortgage
related securities", federal credit unions may invest in these "mortgage related
securities", and
(2) national banks may purchase these "mortgage related 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 regulations the applicable federal regulatory authority
may prescribe. In this connection, the Office of the Comptroller of the Currency
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 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 National Credit Union Administration to
participate in the "investment pilot program" described in 12 C.F.R. ss.
703.140. The Office of Thrift Supervision has issued Thrift Bulletin 13a
(December 1, 1998), "Management of Interest Rate Risk, Investment Securities and
Derivatives Activities," which thrift institutions subject to the jurisdiction
of the Office of Thrift Supervision should consider before investing in the
securities.
All depository institutions considering an investment in the securities
should review the "Supervisory Policy Statement on Investment Securities and
End-User Derivatives Activities" -- the "1998 policy statement" -- of the
Federal Financial Institutions Examination Council, which has been adopted by
the Board of Governors of the Federal Reserve System, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency and the Office of Thrift
Supervision effective May 26, 1998, and by the National Credit Union
Administration, effective October 1, 1998. The 1998 policy statement sets forth
general guidelines which depository institutions must follow in managing risks,
including market, credit, liquidity, operational (transaction), and legal risks,
applicable to all securities, including mortgage pass-through securities and
mortgage-
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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 federal and
state authorities before purchasing any securities. A review should be
conducted, as certain series or classes may be deemed unsuitable investments, or
may otherwise be restricted, under these rules, policies or guidelines and 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,
(1) "prudent investor" provisions,
(2) percentage-of-assets limits,
(3) provisions which may restrict or prohibit investment in securities which
are not "interest bearing" or "income paying," and,
(4) 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
(1) whether and to what extent the securities constitute legal investments
or are subject to investment, capital or other restrictions and,
(2) if applicable, whether SMMEA has been overridden in any jurisdiction
relevant to the investor.
PLANS OF DISTRIBUTION
The securities offered by this prospectus 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 for a sale. The
related prospectus supplement will specify whether the securities will be
distributed in a firm commitment underwriting, subject to the terms and
conditions of the underwriting agreement, by PaineWebber Incorporated acting as
underwriter with other underwriters, if any, named in the related underwriting
agreement. If it is a firm commitment underwriting, the related 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
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from the depositor or from purchasers of the securities in the form of
discounts, concessions or commissions. The related prospectus supplement will
describe any compensation paid by the depositor to the underwriters.
Alternatively, the related 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 ON 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 the offering and
any agreements to be entered into between the depositor and purchasers of
securities of the related series.
The depositor will indemnify PaineWebber Incorporated 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 of any liability.
The related prospectus supplement relating to securities of a particular
series offered by this prospectus will specify whether the depositor or any
other person or persons specified in the prospectus supplement may purchase some
or all of the securities from the underwriter or underwriters or other person or
persons specified in the related prospectus supplement. A purchaser may
thereafter from time to time offer and sell, pursuant to this prospectus and the
related prospectus supplement, some or all of the securities so purchased,
directly, through one or more underwriters to be designated at the time of the
offering of these securities, through dealers acting as agent and/or principal
or in any other manner as may be specified in the related prospectus supplement.
The related offering may be restricted in the manner specified in the related
prospectus supplement. The related transactions may be effected at market prices
prevailing at the time of sale, at negotiated prices or at fixed prices. Any
underwriters and dealers participating in the purchaser's offering of the
related securities may receive compensation in the form of underwriting
discounts or commissions from a purchaser and dealers may receive commissions
from the investors purchasing the related securities for whom they may act as
agent. The discounts or commissions will not exceed those customary in those
types of transactions involved. Any dealer that participates in the distribution
of the related securities may be deemed to be an "underwriter" within the
meaning of the Securities Act of 1933. Any commissions and discounts received by
a dealer and any profit on the resale or the securities by that dealer might be
deemed to be underwriting discounts and commissions under the Securities Act of
1933.
In the ordinary course of business, PaineWebber Incorporated and the
depositor, or their affiliates, may engage in various securities and financing
transactions. These financing transactions include repurchase agreements to
provide interim financing of the depositor's residential loans pending the sale
of residential loans or interests in residential loans, including the
securities.
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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 the related 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. Holders of securities should
consult with their legal advisors in this regard prior to any 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 by this
prospectus. 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.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
With respect to each series of securities offered by this prospectus, there
are incorporated in this prospectus 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 the 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 series of securities, if
written or oral request of any person is made, a copy of any or all reports
incorporated in this prospectus by reference. The depositor will be required to
provide these reports only to the extent reports relate to one or more of
classes of the related series of securities, other than the exhibits to these
documents, unless these exhibits are specifically incorporated by reference in
these documents. Requests should be directed in writing to PaineWebber Mortgage
Acceptance Corporation IV, 1285 Avenue of the Americas, New York, New York
10019, Attention: General Counsel, or by telephone at (212) 713-2000.
The depositor filed a registration statement relating to the securities with
the SEC. This prospectus is part of the registration statement, but the
registration statement includes additional information.
Copies of the registration statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, if payment of the
prescribed charges is made, or may be examined free of charge at the SEC's
offices, 450 Fifth Street N.W., Washington, D.C. 20549 or at the regional
offices of the Commission located at Suite 1300, 7 World Trade Center, New York,
New York 10048 and Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661-2511. The SEC also maintains a site on the World Wide
Web at "http://www.sec.gov" at which you 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 filed the registration statement, including all
exhibits to the registration statement, through the EDGAR system and therefore
these materials should be available by logging onto the SEC's Web site. The SEC
maintains computer terminals providing access to the EDGAR system at each of the
offices referred to above.
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LEGAL MATTERS
The validity of the securities and certain federal income tax matters in
connection with the securities will be passed on 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
It will be a condition to the issuance of the securities of each series
offered by this prospectus and by the related 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 specified in the
related prospectus supplement.
Any rating would be based on, among other things, the adequacy of the value
of the assets of the trust fund and any credit enhancement with respect to the
related class. A rating will reflect the specified Rating Agency's assessment
solely of the likelihood that holders of a class of securities of the related
class will receive payments to which holders of securities are entitled by their
terms. The rating will not constitute
(1) an assessment of the likelihood that principal prepayments on the
related residential loans will be made,
(2) the degree to which the rate of prepayments might differ from that
originally anticipated or
(3) the likelihood of early optional termination of the series of
securities. The 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.
The rating will not address the possibility that prepayment at higher or lower
rates than anticipated by an investor may cause the investor to experience a
lower than anticipated yield. The rating will not address that an investor
purchasing a security at a significant premium might fail to recoup its initial
investment under certain prepayment scenarios.
We cannot assure you that any 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.
A rating may be lowered or withdrawn due to any erosion in the adequacy of the
value of the assets of the trust fund or any credit enhancement with respect to
a series. The 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 the credit enhancement
provider's long term debt.
The amount, type and nature of credit enhancement, if any, established with
respect to a series of securities will be determined on the basis of criteria
established by each rating agency rating classes of the related series. These
criteria are sometimes based on an actuarial analysis of
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the behavior of mortgage loans in a larger group. The foregoing analysis is
often the basis on which each rating agency determines the amount of credit
enhancement required with respect to each class. We cannot assure you that the
historical data supporting any actuarial analysis will accurately reflect future
experience. In addition, we cannot assure you 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. We cannot assure you
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 and 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 borrowers of scheduled
payments of principal and interest on the residential loans. Accordingly, the
rates of delinquencies, foreclosures and losses with respect to any trust fund
may be affected. To the extent that these losses are not covered by credit
enhancement, these losses will be borne, at least in part, by the holders of one
or more classes of the security of the related series.
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GLOSSARY OF TERMS
"ACCRUAL SECURITIES" are one or more classes of securities with respect to
which accrued interest will not be distributed but rather will be added to the
security principal balance of the securities on each distribution date for the
period described in the related prospectus supplement.
"ACCRUED SECURITY INTEREST" is the interest accruing with respect to each
class of securities related to a series, in an amount equal to interest on the
outstanding security principal balance, or notional amount with respect to
interest-only securities, 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 the series.
"AVAILABLE DISTRIBUTION AMOUNT" is the amount which will be available for
distribution on the securities of each series on each distribution date as may
be specified in the related prospectus supplement and generally includes:
(1) the total amount of all cash on deposit in the related Trust Account
as of a determination date specified in the related prospectus supplement,
exclusive of amounts payable on future distribution dates and amounts payable
to the master servicer, any applicable sub-servicer, the trustee or another
person as expenses of the trust fund;
(2) any principal and/or interest advances made with respect to the
distribution date, if applicable;
(3) any principal and/or interest payments made by the master servicer out
of its servicing fee in respect of interest shortfalls resulting from
principal prepayments, if applicable; and
(4) all net income received in connection with the operation of any
residential property acquired on behalf of the holders of securities through
deed in lieu of foreclosure or repossession, if applicable.
"AVAILABLE SUBORDINATION AMOUNT" is an amount equal to the difference
between
(1) the applicable percentage amount of the aggregate initial principal
balance of the residential loans in the related trust fund as specified in the
related prospectus supplement and
(2) the amounts paid to the holders of senior securities that but for the
subordination provisions would have been payable to the holders of subordinate
securities.
"BANKRUPTCY BOND" is a bond insuring residential loans which covers
(1) certain losses resulting from
(a) an extension of the maturity of a residential loan, or
(b) a reduction by the bankruptcy court of the principal balance of
or the interest rate on a residential loan, and
(2) the unpaid interest on the amount of a principal reduction during the
pendency of a proceeding under the United States Bankruptcy Code, 11 U.S.C.
Sections 101 et seq.
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"BUYDOWN FUNDS" are funds paid on the related Buydown Loans.
"BUYDOWN LOANS" are residential loans subject to temporary buydown plans. The
monthly payments made by the borrower in the early years of the Buydown Loan
will be less than the scheduled payments on the Buydown Loan. Generally, the
borrower under a Buydown Loan will be eligible for a reduced interest rate on
the loan.
"CASH FLOW VALUE" is the security principal balance of the securities of the
related series which, based on certain assumptions, including the assumption
that no defaults occur on the assets of the trust fund, can be supported by
either:
(1) the future scheduled payments on the assets of the trust fund, with
the interest on the assets adjusted to the Net Interest Rate;
(2) the proceeds of the prepayment of the assets of the trust fund,
together with reinvestment earnings on the assets of the trust fund, if any,
at the applicable Assumed Reinvestment Rate; or
(3) amounts available to be withdrawn from any Reserve Fund for the
series, as further specified in the related prospectus supplement relating to
a series of securities.
"CERCLA" is the Comprehensive Environmental Response, Compensation and
Liability Act, as amended.
"COLLATERAL VALUE" is
(1) with respect to a residential property or cooperative unit, it is the
lesser of:
(a) the appraised value determined in an appraisal obtained by the
originator at origination of the loan; and
(b) the sales price of the property.
(2) with respect to residential property securing a Refinance Loan, it is the
appraised value of the residential property determined at the time of the
origination of the Refinance Loan.
"CONSERVATION ACT" is the Asset Conservation, Lender Liability and Deposit
Insurance Act of 1996, as amended.
"CODE" is the Internal Revenue Code of 1986, as amended.
"COOPERATIVE" is a private cooperative housing corporation, the shares of
which secure Cooperative Loans.
"COOPERATIVE LOANS" are loans secured primarily by shares in a Cooperative
which with the related proprietary lease or occupancy agreement give the owners
the right to occupy a particular dwelling unit in the Cooperative.
"CUT-OFF DATE" is the date specified in the related prospectus supplement
which generally represents the first date after which payments on the
residential loans in a pool will begin to be paid to the trust.
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"DEBT SECURITIES" are securities which represent indebtedness of a
Partnership Trust Fund for federal income tax purposes.
"DEPOSIT PERIOD" is the period specified in the related prospectus supplement
which is generally the period commencing on the day following the determination
date immediately preceding the related determination date and ending on the
related determination date.
"DEFINITIVE SECURITY" is a physical certificate representing a security
issued in the name of the beneficial owner of the security rather than DTC.
"DUE PERIOD" is the period of time specified in the related prospectus
supplement.
"EQUITY CERTIFICATES" are certificates, with respect to a series of notes
where the issuer is an owner trust, issued under an owner trust agreement which
evidence the equity ownership of the related trust.
"FHA INSURANCE" is insurance issued by the FHA to insure residential loans as
authorized under the United States Housing Act of 1934, as amended. The
residential loans will be insured under various FHA programs including the
standard FHA 203(b) program to finance the acquisition of one- to four-family
housing units, the FHA 245 graduated payment mortgage program and the FHA Title
I Program.
"FHLMC CERTIFICATES" are mortgage participation certificates issued by the
FHLMC.
"FINANCIAL INTERMEDIARY" is an entity that maintains the Security Owner's
account and records the Security Owner's ownership of securities on that
account.
"FNMA CERTIFICATES" are guaranteed mortgage pass-through securities issued
by the FNMA.
"GARN-ST. GERMAIN ACT" is the Garn-St. Germain Depository Institutions Act
of 1982, enacted on October 15, 1982.
"GNMA CERTIFICATES" are fully modified pass-through mortgage-backed
certificates guaranteed by the GNMA.
"GRANTOR TRUST SECURITIES" are securities which represent interests in a
grantor trust as to which no REMIC election will be made.
"HOME EQUITY LOANS" are one- to four-family first or junior lien closed end
home equity loans for property improvement, debt consolidation or home equity
purposes.
"HOME IMPROVEMENT CONTRACTS" are home improvement installment sales contracts
and installment loan agreements which may be unsecured or secured by a lien on
the related mortgaged property or a manufactured home. This lien may be
subordinated to one or more senior liens on the related mortgaged property.
"INSURANCE INSTRUMENT" is any Primary Hazard Insurance Policy or Primary
Credit Insurance Policy.
"INSURANCE PROCEEDS" are all proceeds of any Primary Credit Insurance Policy,
any FHA Insurance, any VA Guarantee, any Bankruptcy Bond and any Pool Insurance
Policy, minus proceeds that represent reimbursement of the master servicer's
costs and expenses incurred in connection with presenting claims under the
related insurance policies.
"LAND CONTRACTS" are Manufactured Housing Contracts that are secured by
mortgages on the related mortgaged property.
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"LIQUIDATION PROCEEDS" are cash proceeds received by foreclosure, eminent
domain, condemnation or otherwise, excluding any proceeds from any insurance
policies along with the net proceeds on a monthly basis with respect to any
properties acquired for the benefit of the security holders by deed in lieu of
foreclosure or repossession.
"LOAN-TO-VALUE RATIO" is the ratio at a given time, 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.
"LOCKOUT PERIOD" is a period after the origination of certain residential
loans during which prepayments are entirely prohibited or require payment of a
prepayment penalty if a prepayment in full or in part occurs.
"MANUFACTURED HOUSING CONTRACTS" are manufactured housing conditional sales
contracts and installment loan agreements which may be secured by a lien on:
(1) new or used manufactured homes;
(2) the real property and any improvements on the real property which may
include the related manufactured home if deemed to be part of the real
property under applicable state law; or
(3) in certain cases, a new or used manufactured home which is not deemed
to be a part of the related real property under applicable state law.
"MULTIFAMILY LOANS" are mortgage loans secured by first or junior liens on
multifamily residential properties consisting of five or more dwelling units.
"NET INTEREST RATE" with respect to any residential loan is the rate
specified in the related prospectus supplement which is generally the interest
rate on the residential loan minus the sum of the fee rate payable to the
servicer and the trustee and Retained Interest Rate with respect to any mortgage
loan.
"NON-PRO RATA SECURITY" is a Regular Security on which principal is
distributed in a single installment or by lots of specified principal amounts if
requested by a holder of securities or by random lot.
"OID REGULATIONS" are sections 1271-1273 and 1275 of the Code and the
Treasury regulations issued under those sections that set forth the rules
governing original issue discount.
"PARTNERSHIP SECURITIES" are securities which represent interests in a
Partnership Trust Fund.
"PARTNERSHIP TRUST Fund" is a trust fund which is treated as a partnership
or, if owned by a single beneficial owner, ignored for federal income tax
purposes.
"PARTICIPANTS" are participating organizations through which a Security Owner
can hold its book-entry security.
"PLANS" are retirement plans and other employee benefit plans and
arrangements, including individual retirement accounts and annuities and Keogh
plans, which are subject to ERISA, and bank collective investment funds and
insurance company general and separate accounts in which the plans, accounts or
arrangements are invested.
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"POOL INSURANCE POLICY" is an insurance policy, which provides 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,
subject to any limitations specified in the related prospectus supplement.
"PREPAYMENT ASSUMPTION" is the assumed rate of prepayment of the mortgage
loans as set forth in the related prospectus supplement.
"PREPAYMENT PERIOD" is a period that may be particularly specified in the
related prospectus supplement which may commence on:
(1) the first day of the preceding calendar month with respect to
securities that have monthly distribution dates, or
(2) the first day of the month in which the immediately preceding
distribution date occurred with respect to securities with distribution dates
that occur less frequently than monthly, or the first day of the month in
which the Cut-Off Date occurred with respect to the first Prepayment Period;
and will end in both cases on the last day of the preceding calendar month.
"PRIMARY CREDIT INSURANCE POLICY" is an insurance policy which covers losses
on residential loans up to an amount equal to the excess of the outstanding
principal balance of a defaulted residential loan, plus accrued and unpaid
interest on the related defaulted residential loan and designated approved
expenses, over a specified percentage of the Collateral Value of the related
residential property.
"PRIMARY HAZARD INSURANCE POLICY" is an insurance policy which provides
coverage on residential loans of the standard form of fire and hazard insurance
policy with extended coverage customary in the state in which the residential
property is located.
"PTCE" is the Prohibited Transaction Class Exemption.
"QUALIFIED INSURER" is a private mortgage guaranty insurance company duly
qualified under applicable laws and approved as an insurer by FHLMC, FNMA, or
any successor entity, which has a claims-paying ability acceptable to the rating
agency or agencies.
"REALIZED LOSS" is the amount of loss realized on a defaulted residential
loan that is finally liquidated. This amount generally equals 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 residential loans for which the principal balances
were reduced in connection with bankruptcy proceedings, the amount of that
reduction.
"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.
"REGULAR SECURITIES" are securities which constitute one or more classes of
regular interests with respect to each REMIC Pool.
"REGULAR SECURITYHOLDER" is a holder of a Regular Security.
"RELIEF ACT" is the Soldiers' and Sailors' Civil Relief Act of 1940, as
amended.
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"REMIC POOL" is an entity or portion of an entity as to which a REMIC
election will be made.
"REMIC PROVISIONS" are Sections 860A through 860G of the Code.
"REMIC REGULATIONS" are the REMIC Provisions and the Treasury regulations
issued under the REMIC provisions.
"REMIC SECURITIES" are securities which represent interests in a trust fund,
or a portion of a trust fund, that the trustee will elect to have treated as a
REMIC under the REMIC Provisions of the Code.
"RESIDUAL SECURITIES" are Securities which constitute one or more classes of
residual interests with respect to each REMIC Pool.
"RESERVE FUND" is an account which includes a combination of specified
amounts of cash, a combination of one or more irrevocable letters of credit, or
one or more United States government securities and other high quality
investments, 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 the prospectus supplement. In addition or in
alternative, an account 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.
"RESTRICTED GROUP" consist of any underwriter, the depositor, the trustee,
the master servicer, any subservicer, the obligor on credit support and any
borrower with respect to assets of the trust fund constituting more than 5% of
the aggregate unamortized principal balance of the assets of the trust fund as
of the date of initial issuance of the certificates.
"RETAINED INTEREST" are interest payments relating to residential loans,
including any mortgage securities, or agency securities included in the trust
fund which are retained by the depositor, any of its affiliates or its
predecessor in interest.
"RETAINED INTEREST RATE" is the rate at which interest payments relating to
residential loans, including any mortgage securities or agency securities
retained by the Depositor, any of it affiliates or its predecessor in interest,
are calculated.
"SECURITY REGISTER" is a record where exchanges or transfers of securities
are registered by the Security Registrar.
"SECURITY REGISTRAR" is one who registers exchanges or transfers of
securities in the Security Register.
"SECURITY OWNER" is a person who has beneficial ownership interests in a
security.
"SBJPA OF 1996" is the Small Business Job Protection Act of 1996.
"SMMEA" is the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"STARTUP DAY" is the date the REMIC securities are issued.
"STRIPPED AGENCY SECURITIES" are GNMA Certificates, FNMA Certificates or
FHLMC Certificates issued in the form of certificates which represent:
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(1) undivided interests in all or part of either the principal
distributions, but not the interest distributions, or the interest
distributions, but not the principal distributions, of the certificates; or
(2) interests in some specified portion of the principal or interest
distributions, but not all distributions, on an underlying pool of mortgage
loans or other GNMA Certificates, FNMA Certificates or FHLMC Certificates.
"TITLE V" is Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980.
"TRUST ACCOUNTS" are one or more accounts included in each trust fund
established and maintained on behalf of the holders of securities into which the
master servicer or the trustee will be required to, deposit all payments and
collections received or advanced with respect to assets of the related trust
fund. A Trust Account may be maintained as an interest bearing or a non-interest
bearing account, or funds held in the Trust Account may be invested in certain
short-term high-quality obligations
"UNAFFILIATED SELLERS" are sellers of residential loans to the depositor that
are not affiliated with the depositor.
"U.S. PERSON" is
(1) A citizen or resident of the United States,
(2) a corporation or partnership or other entity created or organized in
or under the laws of the United States, any State of the United States or
the District of Columbia, unless, in the case of a partnership, Treasury
regulations are adopted that provide otherwise, including any entity treated
as a corporation or partnership for federal income tax purposes,
(3) an estate that is subject to U.S. federal income tax regardless of
the source of its income, or
(4) a trust if a court within the United States is able to exercise
primary supervision over the administration of that trust, and one or more
U.S. Persons have the authority to control all substantial decisions of that
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.
"VA GUARANTEE" is a guarantee of residential loans by the VA under the
Serviceman's Readjustment of 1944, as amended.
