As filed with the Securities and Exchange Commission on August 20, 1999
Registration No. 333-79283
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
PRE-EFFECTIVE AMENDMENT NO. 2 TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
(Exact name of Registrant as specified in its Charter)
Delaware
(State of Incorporation)
06-1204982
(I.R.S. Employer Identification Number)
1285 Avenue of the Americas
New York, New York 10019
212-713-2000
(Address and telephone number of Registrant's principal executive offices)
John L. Fearey, Esq.
PaineWebber Mortgage Acceptance Corporation IV
1285 Avenue of the Americas
New York, New York 10019
212-713-2000
(Name, address and telephone number of agent for service)
----------------
Copies to:
Michael S. Gambro, Esq.
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
212-504-6000
================================================================================
Approximate date of commencement of proposed sale to the
public: From time to time on or after the effective date of this Registration
Statement, as determined by market conditions.
If the only securities being registered on this Form are being
offered pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to
be offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of the
earlier effective registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant
to Rule 434, please check the following box. [ ]
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
Title of each class of Proposed maximum Proposed maximum Amount of
securities to be Amount to be offering price per aggregate offering registration
registered registered (2) unit (1) price (1) fee (2)
---------- -------------- -------- --------- -------
<S> <C> <C> <C> <C>
Asset-Backed $2,500,000,000 100% $2,500,000,000 $695,000(3)
Certificates and
Asset-Backed Notes,
issued in series
</TABLE>
- -----------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) In accordance with Rule 429(b) of the Securities and Exchange
Commission's Rules and Regulations under the Securities Act of 1933, as
amended, see the second succeeding paragraph.
(3) Previously paid.
-------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON
SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE
REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429 OF THE SECURITIES AND EXCHANGE
COMMISSION'S RULES AND REGULATIONS UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
THE PROSPECTUS AND PROSPECTUS SUPPLEMENTS CONTAINED IN THIS REGISTRATION
STATEMENT ALSO RELATE TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-3
(REGISTRATION NO. 333-61785) AND THE REGISTRANT'S REGISTRATION STATEMENT ON FORM
S-3 (REGISTRATION NO. 333-15685). $313,394,852.00 AGGREGATE PRINCIPAL AMOUNT OF
SECURITIES PREVIOUSLY REGISTERED, WITH RESPECT TO ASSET-BACKED CERTIFICATES AND
ASSET-BACKED NOTES, PURSUANT TO REGISTRATION STATEMENT ON FORM S-3 (REGISTRATION
NO. 333-61785) ARE BEING CARRIED FORWARD AND THE RELATED FILING FEE OF
$92,451.48 WAS PREVIOUSLY PAID WITH SUCH EARLIER REGISTRATION STATEMENT.
$389,852,350.52 AGGREGATE PRINCIPAL AMOUNT OF SECURITIES PREVIOUSLY REGISTERED,
WITH RESPECT TO ASSET-BACKED CERTIFICATES, PURSUANT TO REGISTRATION STATEMENT ON
FORM S-3 (REGISTRATION NO. 333-15685) ARE BEING CARRIED FORWARD AND THE RELATED
FILING FEE OF $118,137.08 WAS PREVIOUSLY PAID WITH SUCH EARLIER REGISTRATION
STATEMENT.
<PAGE>
EXPLANATORY NOTE
This Registration Statement includes a base prospectus and two forms of
prospectus supplement. Version 1 of the form of prospectus supplement may be
used in offering a series of Asset-Backed Certificates and Version 2 of the form
of prospectus supplement may be used in offering a series of Asset-Backed Notes.
Each such form is meant to be illustrative of the type of disclosure that might
be presented for a series of Certificates or Notes, but is not meant to be, and
necessarily cannot be, exhaustive of all possible features that might exist in a
particular series. These forms assume the possibility of credit enhancement in
the form of overcollateralization and a security insurance policy, but as
described in the base prospectus, the types of credit support may vary from
series to series. Each base prospectus used (in either preliminary or final
form) will be accompanied by the applicable prospectus supplement.
<PAGE>
PROSPECTUS SUPPLEMENT DATED ______, 199_
(To prospectus dated _______, 199_)
$__________________________
(APPROXIMATE)
____________ HOME EQUITY TRUST 199_-_
(ISSUER)
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
(DEPOSITOR)
__________________________________
(TRANSFEROR AND SERVICER)
HOME EQUITY ASSET BACKED CERTIFICATES, SERIES 199_-_
The __________ Home Equity Trust 199_-_ is issuing certificates in ___ classes,
but is offering only ____ classes through this prospectus supplement.
o The trust's main source of funds for making distributions on the certificates
will be collections on a pool of closed-end, fixed-rate loans secured
primarily by first or second mortgages or deeds of trust on residential one-
to four-family properties and security interests in manufactured homes.
o Credit enhancement will be provided by:
o the availability, if any, of excess interest;
o overcollateralization in certain circumstances, as described in this
prospectus supplement; [and
o a certificate guaranty insurance policy issued by ________________.
This policy will protect holders of the Class A certificates against
certain shortfalls in amounts due to be distributed at the times and to
the extent described in this prospectus supplement].
PRICE TO PUBLIC UNDERWRITING DISCOUNT PROCEEDS TO DEPOSITOR
$___________ $______________ $________________
___________% ______________%
The price to public and underwriting discount shown are for all classes of
offered certificates in the aggregate. This information is shown for each
individual class on page S-__. See "Underwriting."
The proceeds to depositor are less expenses, estimated at $___________, plus
accrued interest. See "Underwriting."
- --------------------------------------------------------------------------------
YOU SHOULD CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE S-__ OF
THIS PROSPECTUS SUPPLEMENT AND PAGE __ IN THE PROSPECTUS.
The certificates will not represent obligations of PaineWebber Mortgage
Acceptance Corporation IV, the transferor or any other person or entity. No
governmental agency will insure the certificates or the collateral securing the
certificates.
You should consult with your own advisors to determine if the offered
certificates are appropriate investments for you and to determine the
applicable legal, tax, regulatory and accounting treatment of the offered
certificates.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE OFFERED
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 offered certificates on any national securities exchange
or on any automated quotation system of any registered securities association
such as NASDAQ.
The underwriter[s], PaineWebber Incorporated [and _______________], will
purchase the offered certificates from PaineWebber Mortgage Acceptance
Corporation IV and expect to deliver the offered certificates in book-entry form
through the facilities of The Depository Trust Company to purchasers on or about
________, 199_.
PAINEWEBBER INCORPORATED
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
We provide information about the offered certificates for the series 199_-_
in two separate documents that progressively include more detail:
(1) the accompanying prospectus dated ___________, 199_. The accompanying
prospectus provides general information, some of which may not apply to the
offered certificates for the series 199_-_.
(2) this prospectus supplement. This prospectus supplement describes the
specific terms of the certificates for the series 199_-_. Sales of the offered
certificates may not be completed unless you have received both this prospectus
supplement and the prospectus. You are urged to read both this prospectus
supplement and the prospectus in full.
IF THE TERMS OF THE 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.
S-2
<PAGE>
THE SERIES _______ CERTIFICATES
PRINCIPAL AMOUNT PASS-THROUGH RATE EXPECTED RATINGS
---------------- ----------------- ----------------
Class ___........
Class ___........
Class ___........
Class ___........
Class ___........
S-3
<PAGE>
TABLE OF CONTENTS
PAGE
----
Summary........................................................................5
Risk Factors..................................................................14
Actual Yield to Maturity May Be Less Than Anticipated......................14
Unpredictability of Prepayments Could Adversely Affect Yield...............14
Limited Liquidity May Adversely Affect Market Value of Certificates........15
Credit Enhancement May Not Be Adequate.....................................15
Risks Relating to Non-Conforming Underwriting Guidelines...................16
Inadequacy of Value of Properties Could Affect Severity of Losses..........16
Geographic Concentration Could Increase Losses on the Loans................17
Recently Originated Loans May Have Higher Default Rates....................17
Borrower May Be Unable to Make Balloon Payments............................17
Subordinate Mortgages May Provide Insufficient Security for the Loans......17
Insolvency of Transferor May Adversely Affect Distributions on
Certificates.............................................................17
Bankruptcy of Borrowers May Adversely Affect Distributions on
Certificates.............................................................18
Bankruptcy of Other Parties May Adversely Affect Distributions on
Certificates.............................................................18
Violations of Federal and State Laws May Adversely Affect Ability to
Collect on Loans...................... 19
Year 2000 Non-Compliance May Adversely Affect Distributions on
Certificates.............................................................19
Failure of Servicer to Perform May Adversely Affect Distributions on
Certificates............................................................20
Transferor May Not Be Able to Repurchase or Replace Defective Loans........20
Forward-Looking Statements....................................................20
Defined Terms.................................................................21
Description of the Loans......................................................21
General....................................................................21
Statistical Information....................................................22
Assignment of Loans........................................................26
Trustee's Loan File........................................................26
Representations and Warranties of the Transferor...........................27
The Transferor and The Servicer...............................................28
General....................................................................28
Credit and Underwriting Guidelines.........................................28
Delinquency and Foreclosure Information....................................31
Prepayment and Yield Considerations...........................................32
General....................................................................32
Modeling Assumptions.......................................................34
Description of the Offered Certificates.......................................42
General....................................................................42
Definitive Certificates....................................................43
Certificate Principal Balances and Notional Amount.........................43
Pass-Through Rates.........................................................43
Distributions..............................................................44
Calculation of LIBOR.......................................................45
Termination; Purchase of Loans.............................................45
Report to Certificateholders...............................................46
Servicing of the Loans........................................................47
The Servicer...............................................................47
Collection and Other Servicing Procedures; Loan Modifications..............47
Payments on the Loans......................................................47
Realization on or Sale of Defaulted Loans..................................49
Servicing Fees and Other Compensation and Payment of Expenses..............51
Enforcement of Due-on-Sale Clauses.........................................52
Maintenance of Insurance Policies and Errors and Omissions and
Fidelity Coverage.......................................................52
Servicer Reports...........................................................53
Removal and Resignation of Servicer........................................54
Amendment..................................................................55
The Trustee...................................................................56
[The Certificate Insurance Policy.............................................57
[The Certificate Insurer......................................................57
Certain Federal Income Tax Consequences.......................................60
General....................................................................60
Discount and Premium.......................................................60
Characterization of Investments in Certificates............................60
ERISA Considerations..........................................................61
Legal Investment..............................................................64
Underwriting..................................................................64
[Experts......................................................................66
Ratings.......................................................................66
Legal Matters.................................................................66
Glossary of Terms.............................................................67
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
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.
Trust..................... _________ Home Equity Trust 199_-_, a New York
common law trust created pursuant to a pooling and
servicing agreement among the depositor,
________________ and ____________________.
Servicer.................. ________________. The servicer is a
______________________ with its principal place of
business in _________________. The servicer is a
wholly owned subsidiary of _________________, a
____________ corporation. The servicer's address
is ______________________________________________,
telephone number (___) _____________. ___________
will act as servicer of the loans and, in that
capacity, will:
(1) provide customary servicing functions with
respect to the loans pursuant to a pooling
and servicing agreement among the depositor,
the servicer and ______________________;
(2) provide certain reports to the trustee; and
(3) make certain advances.
Transferor................ ___________________________.
Trustee................... _________________________, a _____________________
corporation. The trustee's address is
__________________________, telephone number (___)
___-____.
[The Certificate Insurer.. ___________________. The certificate insurer's
address is _______________ ______________________,
telephone number (___) ___-____.]
S-5
<PAGE>
RELEVANT DATES
Cut-Off Date.............. __________, 199_.
Closing Date.............. On or about __________, 199_.
Distribution Date......... Distributions on the certificates
will be made on the ___th day of each month, or,
if the ___th day is not a business day, on the
next succeeding business day, commencing in ______
199_.
Determination Date........ The __th calendar day of each month or, if not a
business day, then the preceding business day.
Due Period................ The calendar month preceding the relevant
distribution date or determination date, as the
case may be.
Accrual Date.............. For the offered certificates, other than the Class
A-1 certificates, the calendar month immediately
prior to the month in which the relevant
distribution date occurs. For the Class A-1
certificates, the period beginning on the prior
distribution date (or on the closing date in the
case of the first distribution date) and ending on
the day prior to the relevant distribution date.
ASSETS OF THE POOL
The Loans................. The loans will consist primarily of fixed rate,
closed-end loans secured by first or second
priority liens and having original terms to
maturity of not greater than 30 years. Loans
representing approximately __% of the initial
aggregate unpaid principal balance of the loans
will be secured by mortgages or deeds of trust on
properties. Loans representing approximately ___%
of the aggregate unpaid principal balance of the
loans as of the cut-off date will be secured by
security interests in manufactured homes that are
not real estate.
The statistical information regarding the loans,
the mortgaged properties and the manufactured
homes is based on the characteristics of the loans
as of the close of business on the cut-off date.
Unless otherwise indicated, all percentages set
forth in this prospectus supplement are based on
the aggregate unpaid principal balance as of the
cut-off date. The aggregate unpaid principal
balance as of the cut-off date will be
$__________.
See "Description of the Loans" in the prospectus
supplement.
S-6
<PAGE>
Loan Interest Rate........ The loan interest rate of each loan is the per
annum interest rate which the borrower is required
to pay under the terms of the related loan. The
loan interest rate borne by each loan is fixed as
of the date of origination of the loan. As of the
cut-off date, the weighted average loan interest
rate for the loans was approximately _____%.
OFFERED CERTIFICATES......... We are offering the following __ classes of
certificates as part of the series 199_-_:
o Class A-1
o Class A-2
o Class A-3
o Class A-4
o Class A-5
o Class A-6
o Class A-6IO
The series 199_-_ will consist of a total of ___
classes. The Class R certificates are not being
offered through this prospectus supplement and the
accompanying prospectus.
Certificate Principal
Balance and
Pass-Through Rates...... Your certificates will have the approximate
original certificate principal balances or
notional balance set forth below, subject to a
permitted variance of plus or minus 5%:
o Class A-1..............$_______________
o Class A-2..............$_______________
o Class A-3..............$_______________
o Class A-4..............$_______________
o Class A-5..............$_______________
o Class A-6..............$_______________
The notional balance of the Class A-6IO
certificates at all times will equal the class
principal balance of the Class A-6 certificates.
S-7
<PAGE>
Each class of offered certificates will accrue
interest for each accrual period on its unpaid
class principal balance or notional balance at the
rate set forth on page [ ] of this prospectus
supplement.
Distributions............. The available distribution amount for any
distribution date will consist of the total of all
payments or other collections, or advances in lieu
of the payments, on or in respect of the loans
that are available for distributions of interest
on and principal of the offered certificates.
See "Description of the Certificates -
Distributions - Available Distribution Amount" in
this prospectus supplement.
On each distribution date, the trustee will apply
the available distribution amount for that date
for the following purposes and in the following
order of priority:
First, Class A: To interest on the Class A
certificates, pro rata, in accordance with their
interest entitlements, and interest due in prior
periods and not paid.
Second, Class A: To the extent of amounts then
required to be distributed as principal on the
Class A certificates, other than the Class A-6IO
certificates, payment of principal to be made in
accordance with the respective principal
entitlements for each class, in each case until
that class is reduced to zero.
[Third, certificate insurer: To reimburse the
certificate insurer for all insured payments made
by the certificate insurer which have not been
repaid, together with interest on these unpaid
amounts.]
Distributions of principal to the Class A
certificates described in priority Second above
will be paid first, to the Class A-6IO
certificates in the amounts described in this
prospectus supplement. These amounts are zero
prior to _____ 20__. After paying the Class A-6IO
certificates, distributions of principal will be
paid sequentially to Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6
certificates, in each case until the respective
class has been paid in full.
However, distributions to the Class A certificates
referred to in priority Second above will be made
pro rata among the Class A-1, Class A-2, Class
A-3, Class A-4, Class A-5 and Class A-6
certificates [when the certificate insurer has
defaulted under the certificate insurance policy
and] [if the
S-8
<PAGE>
overcollateralization amount has been reduced to
zero] as described under "Description of the
Certificates Distributions" in this prospectus
supplement.
A description of each class of certificates'
interest entitlement can be found in "Description
of the Certificates - Distributions" in this
prospectus supplement. As described in the
above-referenced section, there are circumstances
in which your interest entitlement for a
distribution date could be less than one full
month's interest at the pass-through rate on your
certificate principal balance.
The amount of principal required to be distributed
to the classes entitled to principal on a
particular distribution date also can be found in
"Description of the Certificates - Distributions"
and "--Related Definitions" in this prospectus
supplement. None of the offered certificates will
be entitled to receive any prepayment premiums
received on the loans.
SERVICING OF THE
LOANS........................ The servicer has agreed to service the loans on a
"scheduled/actual" basis. This means the servicer
is responsible for advancing scheduled payments of
interest in accordance with the pooling and
servicing agreement. The servicer has also agreed
to cause the loans to be serviced
o with the same care as it customarily employs
in servicing and administering loans for its
own account,
o in accordance with accepted mortgage
servicing practices of prudent lending
institutions and
o giving due consideration to [the certificate
insurer's and] the certificateholders'
reliance on the servicer.
The servicer will be required to advance
delinquent payments of interest on the loans and
advance any property protection expenses relating
to the loans. The servicer will not be required to
make any advance that it determines would be
nonrecoverable. The servicer will also be required
to pay compensating interest to cover prepayment
interest shortfalls to the extent of its servicing
fee.
See "Servicing of the Loans" in this prospectus
supplement.
S-9
<PAGE>
OPTIONAL TERMINATION......... The servicer may, at its option repurchase all but
not less than all of the loans in the trust on any
date on which the aggregate principal balance of
the loans, as of that date of determination, is
less than 10% of the aggregate unpaid principal
balances of the loans as of the cut-off date. If
this option is not exercised by the servicer, the
certificate insurer may exercise the option. See
"Description of the Offered Certificates--
Termination; Purchase of Loans" in this prospectus
supplement.
CREDIT ENHANCEMENT........... The credit enhancement provided for the benefit of
the offered certificates consists of:
o excess interest;
o the overcollateralization amounts[; and
o the certificate insurance policy].
Excess Interest........... Excess interest will be generated because the
amount of interest collected on the loans for each
due period is expected to be higher than the
interest distributable on the certificates for the
related distribution date. A portion of this
excess interest will be applied both to absorb
interest shortfalls and to create and maintain the
required level of overcollateralization.
Overcollateralization..... On the closing date, the overcollateralization
amount will equal zero. As a result of the
application of a portion of the excess interest in
reduction of the principal balance of the Class A
certificates, the applicable overcollateralization
amount is expected to increase over time until it
reaches the applicable required level of
overcollateralization. However, subject to the
satisfaction of certain loss and delinquency
tests, the required percentage level of
overcollateralization may increase or decrease
over time. The overcollateralization amount is the
first amount to absorb realized losses on the
loans and designated unreimbursed expenses of the
trust fund.
[Certificate Insurance
Policy................... The certificate insurer will issue a certificate
guaranty insurance policy. Under this policy, the
certificate insurer will irrevocably and
unconditionally guaranty payment on each
distribution date of timely payment of interest
and ultimate payment of principal due on the Class
A certificates. A payment by the certificate
insurer under the certificate Insurance Policy is
referred to in this prospectus supplement as an
insured payment. The certificate insurer
S-10
<PAGE>
will be entitled to reimbursement from excess
interest and the overcollateralization amount for
all insured payments, together with interest. See
"The Certificate Insurance Policy" in this
prospectus supplement.]
REGISTRATION AND
DENOMINATIONS OF THE
CERTIFICATES................. The Class A certificates initially will be issued
in book-entry form, in minimum denominations of
$25,000 and integral multiples of $1,000 in excess
of that amount. However, one certificate of each
class may be issued in a greater or lesser amount.
The Class A certificates are sometimes referred to
as book-entry certificates. No person acquiring an
interest in the book-entry certificates will be
entitled to receive a definitive certificate
representing the person's interest in the trust
fund, except under limited circumstances as
described in this prospectus supplement.
Beneficial owners may elect to hold their
interests through DTC, in the United States, or
Cedelbank or the Euroclear System, in Europe.
Transfers within DTC, Cedelbank or Euroclear, as
the case may be, will be in accordance with the
usual rules and operating procedures of the
relevant system. See "Description of the
Offered Certificates - General" in this prospectus
supplement.
TAX STATUS................... The trustee will make elections to treat
designated portions of the trust fund as separate
REMICs for federal income tax purposes. In the
opinion of counsel, those designated portions of
the trust fund will qualify for this treatment.
A portion of the trust fund will be treated as a
grantor trust. This portion includes certain
interest distributable to holders of the offered
certificates, other than the Class A-6IO
certificates, at their respective LIBOR-based or
fixed rates in excess of the weighted average of
the net loan interest rates less ___%.
Pertinent federal income tax consequences of an
investment in the offered certificates include:
o Each class of offered certificates will
represent "regular interests" in a REMIC
and interests in a grantor trust.
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.
S-11
<PAGE>
o You will be required to report income on
the offered certificates in accordance
with the accrual method of accounting.
o One or more classes of offered
certificates may be issued with original
issue discount for federal income tax
purposes. This generally requires you to
report income in advance of the related
cash distributions.
o If a portion of your purchase price is
allocable to the right to receive excess
interest through the grantor trust, you
will be able to amortize this portion
under the rules for notional principal
contracts, subject to limitations if
you are an individual.
See "Certain 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 the
Internal Revenue Code of 1986, as amended should
carefully review with its legal advisors whether
the purchase or holding of Class A 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 [and
________________] individual Prohibited
Transaction Exemption 90-36 [and Prohibited
Transaction Exemption ____]. This exemption
generally exempts from the application of certain
of the prohibited transaction provisions of ERISA,
and the excise taxes 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 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.
LEGAL INVESTMENT............. The offered certificates will not constitute
"mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984,
as amended. See "Legal Investment" in this
prospectus supplement.
S-12
<PAGE>
CERTIFICATE RATINGS.......... On the closing date, the offered certificates must
have the following ratings by each of ____________
and __________________,
CLASS
------ ------ -----
______ ______ _____
______ ______ _____
______ ______ _____
______ ______ _____
______ ______ _____
______ ______ _____
______ ______ _____
______ ______ _____
[The ratings on the Class A certificates are based
on the presence of the certificate insurance
policy.] A security rating is not a recommendation
to buy, sell or hold securities and the assigning
rating organization may revise or withdraw a
rating at any time. The ratings do not address the
possibility that holders of the offered
certificates may suffer a lower than anticipated
yield.
See "Ratings" in this prospectus supplement for
discussion of the primary factors on which the
ratings are based.
S-13
<PAGE>
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 CERTIFICATES SPECULATIVE OR RISKY. IN PARTICULAR, PAYMENTS ON
YOUR CERTIFICATES 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.
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 a
portion of the excess 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 certificate
insurance policy]; and
o a change in the required level of overcollateralization or a change in
the delinquency or loss levels with respect to the loans or excess
interest requirements used to determine an increase or decrease in the
required level of overcollateralization.
The allocation of a portion of the excess interest on the loans as an
additional payment of principal on the certificates as described in this
prospectus supplement will accelerate the principal amortization of the
certificates relative to the speed at which principal is paid on the loans.
However, any reduction in the required level of overcollateralization will slow
the principal amortization of the certificates. See "Prepayment and Yield
Considerations" in this prospectus supplement.
UNPREDICTABILITY OF PREPAYMENTS COULD ADVERSELY AFFECT YIELD
Approximately ___% of the loans by cut-off date principal balance provide
that the borrowers may, without penalty, prepay their loans in whole or in part
at any time. We cannot predict the rate at which borrowers will repay their
loans. A prepayment of a loan would result in a prepayment on the related
certificates.
o If you purchase your certificates at a discount and principal is repaid
slower than you anticipate, then your yield may be lower than you
anticipate.
o If you purchase your certificates at a premium and principal is repaid
faster than you anticipate, then your yield may be lower than you
anticipate.
o The rate of prepayments on the loans will be sensitive to prevailing
interest rates. Generally, if prevailing interest rates decline
significantly below the interest rates on the loans, those loans are
more likely to prepay than if prevailing rates remain above the interest
rates on those loans. Conversely, if prevailing interest rates rise
significantly, the prepayments on the loans are likely to decrease.
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o So long as credit enhancement is available, liquidations of defaulted
loans generally will have the same effect on the related certificates as
a prepayment of a loan.
o If the rate of default and the amount of losses on the loans related to
your certificate is higher than you expect, then your yield may be lower
than you expect.
See "Prepayment and Yield Considerations" in this prospectus supplement.
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. Lack of liquidity could result in a
substantial decrease in the market value of your certificates. See "Risk
Factors--Limited Liquidity" in the accompanying prospectus.
CREDIT ENHANCEMENT MAY NOT BE ADEQUATE
[Ratings of Certificate Insurer. Any reduction in a rating assigned to the
claims-paying ability of the certificate insurer may result in a reduction in
the rating of the Class A certificates. Future events may reduce the rating of
the certificate insurer or impair the ability of the certificate insurer to pay
claims for insured payments under the certificate insurance policy. In that
event, the certificate insurer might not have the ability to cover delays or
shortfalls in payments of interest or ultimate principal due on the
certificates. See "The Certificate Insurance Policy" and "The Certificate
Insurer" in this prospectus supplement.]
Loan Delinquencies, Defaults and Losses. Delinquencies, if not advanced by
the 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 payments of interest or principal due on the certificates will
occur[, unless the delays or shortfalls are covered under the certificate
insurance policy].
Availability of Excess Interest for Overcollateralization. Each loan is
expected to generate more interest than is needed to pay interest on the related
certificates since the net weighted average interest rate on the related loans
is expected to be higher than the weighted average interest rate on the related
certificates. If the loans generate more interest than is needed to pay interest
on the offered certificates and certain fees and expenses of the trust, the
remaining interest will be used to compensate for losses and delinquencies
experienced by the loans. After these financial obligations of the trust have
been satisfied, a certain portion of the available excess interest will be used
to create and maintain overcollateralization. We cannot assure you, however,
that enough excess interest will be generated to:
o compensate for interest losses or shortfalls in payments on the loans or
o maintain the required level of overcollateralization.
The excess interest available on any distribution date will be affected by
the actual amount of interest received, collected or recovered in respect of the
loans during the preceding month and by the weighted average of the pass-through
rates on the offered certificates for the related distribution date. This amount
will be influenced by changes in the weighted average of the loan interest rates
and of the pass-through rates on the classes of certificates resulting from
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<PAGE>
prepayments and liquidations of the related loans and payments made in reduction
of the principal balances of the classes of certificates.
[The pooling and servicing agreement requires the trustee to make a claim for
an insured payment under the certificate insurance policy as to which the
trustee has determined that an insured payment will be necessary. Investors in
the Class A certificates should realize that, under extreme loss or delinquency
scenarios, they may temporarily receive no distributions of principal.
If the protection afforded by overcollateralization is insufficient [and if
the certificate insurer is unable to meet its obligations under the certificate
insurance policy, then you could experience a loss on your investment.]
RISKS RELATING TO NON-CONFORMING UNDERWRITING GUIDELINES
The transferor's underwriting standards are intended to assess the
creditworthiness of the borrower and the value of the property and to evaluate
the adequacy of the 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 with
o imperfect credit histories, ranging from minor delinquencies to
bankruptcies, or
o 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 properties may have a greater effect on the
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 properties have remained or will remain at the
levels in effect on the dates of origination of the related loans. See
"--Adequacy of Credit Enhancement" above, and "Description of the Loans--Credit
and Underwriting Guidelines" in this prospectus supplement.
INADEQUACY OF VALUE OF PROPERTIES COULD AFFECT SEVERITY OF LOSSES
Assuming that the properties provide adequate security for the loans,
substantial delays in recoveries may occur from the foreclosure or liquidation
of defaulted loans. We cannot assure you that the values of the 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 fees, real
estate taxes, and maintenance and preservation expenses will reduce the proceeds
payable on the loans and thereby reduce the security for the loans . As a
result, the risk that you will suffer losses could increase. [If any of the
properties fail to provide adequate security for the related loan, you may
experience a loss if the certificate insurer were unable to perform its
obligations under the certificate insurance policy.] See "Servicing of the
Mortgage Loans--Realization on Defaulted Loans" in this prospectus supplement,
and "Certain Legal Aspects of Residential Mortgage Loans--Foreclosure on
Mortgages" in the prospectus.
S-16
<PAGE>
GEOGRAPHIC CONCENTRATION COULD INCREASE LOSSES ON THE LOANS
When measured by aggregate principal balance as of the cut-off date,
mortgaged properties and manufactured homes located in ________, __________ and
___________ secure approximately ____%, ____% and ____%, respectively, of the
loans by cut-off date principal balance. This geographic concentration might
magnify the effect on the pool of loans of adverse economic conditions or of
special hazards in these areas and might increase the rate of delinquencies,
defaults and losses on the loans. Consequently, the geographic concentration
could result in shortfalls in distributions due on your certificates more than
would be the case if the mortgaged properties and manufactured homes were more
geographically diversified. See "Description of the Loans" in this prospectus
supplement.
RECENTLY ORIGINATED LOANS MAY HAVE HIGHER DEFAULT RATES
Defaults on loans tend to occur at higher rates during the early years of the
loans. Substantially all of the loans were originated within twelve months prior
to sale to the trust. As a result, the trust may experience higher rates of
default than if the loans had been outstanding for a longer period of time. This
could result in shortfalls in distributions due on your certificates.
BORROWER MAY BE UNABLE TO MAKE BALLOON PAYMENTS
Approximately ___% of the loans by cut-off date principal balance have
monthly payments based on an amortization which would require the payment of a
substantial portion of the principal balance of those loans at maturity. The
ability of a borrower to make that payment may depend on the borrower's ability
to obtain refinancing of the balance due on the loan at maturity. An increase in
interest rates over the interest rate on the loan may have an adverse effect on
the borrower's ability to obtain refinancing and to pay the required payment due
at maturity. A borrower's inability to pay the required payment due at maturity
could result in shortfalls in distributions due on your certificates.
SUBORDINATE MORTGAGES MAY PROVIDE INSUFFICIENT SECURITY FOR THE LOANS
Approximately ___% of the loans by cut-off date principal balance evidence a
lien that is subordinate to the rights of the mortgagee under a senior mortgage.
The proceeds from any liquidation, insurance or condemnation proceedings will be
available to satisfy the outstanding principal balance of these junior loans
only to the extent that the claims of the related senior mortgages have been
satisfied in full, including any foreclosure costs. In circumstances where the
servicer determines that it would be uneconomical to foreclose on the related
mortgaged property, the servicer may write off the entire outstanding principal
balance of the related loan as bad debt. The foregoing considerations will be
particularly applicable to junior loans that have high combined loan-to-value
ratios because in those cases, the servicer is more likely to determine that
foreclosure would be uneconomical. You should consider the risk that to the
extent losses on loans are not covered by available credit enhancement, you will
bear the losses.
INSOLVENCY OF TRANSFEROR MAY ADVERSELY AFFECT DISTRIBUTIONS ON 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 trust
and/or 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 powers in its capacity as a receiver or
S-17
<PAGE>
conservator of the transferor that if exercised could result in delays or
reductions in distributions of principal and interest on the certificates[,
unless those distributions are covered under the certificate 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 the certificates[, unless those distributions are covered under
the certificate insurance policy].
The FDIC recently proposed a statement of policy outlining the circumstances
under which 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 that statement of policy is not yet final, much of it merely
reiterates pre-existing law, 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 statement of policy.
See "Description of the Loans--Assignment of the Loans" in this prospectus
supplement.
BANKRUPTCY OF BORROWERS MAY ADVERSELY AFFECT DISTRIBUTIONS ON 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 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. As a result, these loans will likely experience more severe losses, which
may be total losses and could therefore increase the risk that you will suffer
losses. See "--Adequacy of Credit Enhancement" above and "--Legal
Considerations--Risks Relating to Violations of Federal and State Laws" below.
BANKRUPTCY OF OTHER PARTIES MAY ADVERSELY AFFECT DISTRIBUTIONS ON CERTIFICATES
The depositor intends to treat the transfer of the loans to the trust as an
absolute transfer and not as a secured lending arrangement. In this event, the
loans would not be part of the depositor's bankruptcy estate if a bankruptcy
occurred and would not be available to the depositor's creditors. If the
depositor becomes insolvent, it is possible that the bankruptcy trustee or a
creditor of the depositor may attempt to recharacterize the sale of the loans as
a borrowing by the depositor, secured by a pledge of the loans. This position,
if accepted by a court, could prevent timely distributions of amounts due on the
certificates and result in a reduction of distributions on the certificates.
If a bankruptcy or insolvency of the servicer occurs, the bankruptcy trustee
or receiver may have the power to prevent [the certificate insurer,] the trustee
or the depositor from appointing a successor servicer.
S-18
<PAGE>
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 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 will likely change over time and may become
more restrictive or stringent with respect to specific activities of the
servicer and transferor. Violations of these Federal and state laws may
o limit the ability of the servicer to collect principal or interest on the
loans,
o entitle the borrowers to a refund of amounts previously paid, and
o subject the servicer or the 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 . As a result, these
violations could result in shortfalls in the distributions due on your
certificates. An assessment of damages or sanctions against the servicer or the
transferor may adversely affect the ability of the servicer to service the loans
or the transferor to repurchase or replace defective loans. See "Risk
Factors--Certain Other Legal Considerations Regarding Residential Loans" in the
accompanying prospectus. The transferor will be required to repurchase or
replace any loan that did not comply with applicable Federal and state laws. See
"--Limitations on the Transferor" below.
YEAR 2000 NON-COMPLIANCE MAY ADVERSELY AFFECT DISTRIBUTIONS ON CERTIFICATES
We 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 operation in some way. The issue is whether the
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize this information
could generate erroneous data or cause a system to fail.
The servicer will certify that it is committed either to:
(1) implement modifications to its existing systems to the extent required
to cause them to be year 2000 ready; or
(2) acquire computer systems that are year 2000 ready in each case prior
to January 1, 2000.
However, we have not made any independent investigation of the computer
systems of the servicer. If computer problems result from the failure to
complete these efforts on time, or if the computer systems of servicer are not
fully year 2000 ready, then 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
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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:
(1) impress on them the importance of these services being year 2000
compliant; and
(2) 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
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, you could experience delays or
shortfalls in the distributions due on your certificates.
FAILURE OF SERVICER TO PERFORM MAY ADVERSELY AFFECT DISTRIBUTIONS ON
CERTIFICATES
The amount and timing of distributions on the certificates generally will be
dependent on the servicer to perform its servicing obligations in an adequate
and timely manner. See "Servicing of the Loans" in this prospectus supplement.
If the servicer fails to perform its servicing obligations, this failure may
result in the termination of the servicer. That termination with its transfer of
daily collection activities will likely increase the rates of delinquencies,
defaults and losses on the loans . As a result, shortfalls in the distributions
due on your certificates could occur.
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 this defective loan. See "Description of
Loans--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 the
distributions due on your certificates could occur. See "--Adequacy of Credit
Enhancement" above.
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" in this prospectus supplement.
Forward-looking statements are also found elsewhere in this prospectus
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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:
(1) economic conditions and industry competition,
(2) political and/or social conditions, and
(3) 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 these
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 used in this prospectus
supplement under the caption "Glossary of Terms" beginning on page S-[__] in
this prospectus supplement.
DESCRIPTION OF THE LOANS
GENERAL
On or about ________, 199_, PaineWebber Mortgage Acceptance Corporation IV
will acquire from ______________ a pool of loans, having an aggregate unpaid
principal balance as of ________, 199_ of approximately $______________. The
depositor will then transfer the loans to the trust pursuant to the Pooling and
Servicing Agreement. The trust will be entitled to all payments of principal and
interest in respect of the loans due after the cut-off date.
The mortgage loans are evidenced by Mortgage Notes, secured by mortgages or
deeds of trust on the mortgaged properties of which approximately ____% are
second lien mortgages. The manufactured housing contracts are secured by
manufactured homes that are not real estate.
The loans have original terms to stated maturity of up to 30 years. The loans
were selected by the transferor from the loans in the transferor's portfolio
that met the above criteria using a selection process believed by the transferor
not to be adverse to the certificateholders [or to the certificate insurer]. As
of the cut-off date, the average unpaid principal balance of the loans was
approximately $__________. As of the cut-off date, the weighted average loan
interest rate of the loans was approximately _____%. The weighted average CLTV
of the loans was approximately _____%. The weighted average remaining term to
maturity was approximately __ months and the latest scheduled maturity of any
loan is _______, 20__. However the actual date on which any loan is paid in full
may be earlier than the stated maturity date due to unscheduled payments of
principal.
As of the cut-off date, all of the loans were secured by mortgaged properties
or manufactured homes. Based on information supplied by the borrowers in
connection with their loan applications at origination, properties securing
approximately _____% of the loans by cut-off date principal balance will be
owner occupied primary residences . Properties securing
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approximately ___% of the loans by cut-off date principal balance will be
non-owner occupied or second homes.
Approximately ___% of the loans by cut-off date principal balance provide for
penalties if full prepayment occurs during the first two, three, four or five
years after origination thereof. Each of the loans is subject to a due-on-sale
clause. See "Certain Legal Aspects of Residential Loans" in the prospectus.
Except for approximately ____% of the loans by cut-off date principal
balance, the scheduled monthly payment on each loan includes interest plus an
amount that will amortize the outstanding principal balance of the loan over its
remaining term.
STATISTICAL INFORMATION
Set forth below is a description of certain additional characteristics of the
loans as of the cut-off date, except as otherwise indicated. Dollar amounts and
percentages may not add up to totals due to rounding.
GEOGRAPHIC DISTRIBUTION OF LOANS
% OF CUT-
AGGREGATE OFF DATE
NUMBER PRINCIPAL PRINCIPAL
JURISDICTION OF LOANS BALANCE BALANCE
- ------------ -------- --------- ---------
-------- --------- ---------
Total................................... $ 100.00%
======== ========= =========
No more than approximately ____% of the loans will be secured by properties
located in any one zip code.
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<PAGE>
PRINCIPAL BALANCES
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF PRINCIPAL BALANCES LOANS BALANCE BALANCE
- --------------------------- --------- --------- -----------
$___________ - $...................... - $ %
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
$___________ - $...................... -
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the average unpaid principal balance of the loans was
approximately $______.
LIEN PRIORITY
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
LIEN PRIORITY LOANS BALANCE BALANCE
- ------------- --------- --------- -----------
First Lien.............................. $ %
Second Lien.............................
-------- --------- ---------
Total................................. $ 100.00%
======== ========= =========
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CURRENT LOAN INTEREST RATES
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF LOAN INTEREST RATES LOANS BALANCE BALANCE
--------- --------- -----------
$ %
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
__________% - ...................... -
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average loan interest rate of the loans was
approximately _____% per annum.
COMBINED LOAN-TO-VALUE RATIOS
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF COMBINED LOAN-TO-VALUE RATIO LOANS BALANCE BALANCE
- ------------------------------------- --------- --------- ---------
_________% __ ....................._ $ %
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
_________% __ ....................._
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average CLTV of the loans was
approximately _____.
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<PAGE>
OCCUPANCY STATUS
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
OCCUPANCY LOANS BALANCE BALANCE
- --------- --------- --------- ---------
Owner Occupied......................... $ %
Non-Owner Occupied.....................
Second Home............................
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
PROPERTY TYPES
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
PROPERTY TYPE LOANS BALANCE BALANCE
- ------------- --------- --------- ---------
Single Family.......................... $ %
Two Family.............................
Three Family...........................
Four Family............................
Planned Unit Development...............
Condominium............................
Manufactured Housing...................
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
MONTHS SINCE ORIGINATION
% OF CUT-OFF
AGGREGATE DATE
NUMBER OF PRINCIPAL PRINCIPAL
RANGE OF LOAN AGE (IN MONTHS) LOANS BALANCE BALANCE
- ----------------------------- --------- --------- ---------
$ %
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average number of months since
origination of the loans was approximately ___ months.
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<PAGE>
REMAINING TERMS TO MATURITY
% OF CUT-OFF
AGGREGATE DATE
RANGE OF REMAINING TERMS TO MATURITY (IN NUMBER OF PRINCIPAL PRINCIPAL
MONTHS) LOANS BALANCE BALANCE
- ---------------------------------------- --------- --------- ---------
$ %
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average remaining term to maturity of
the loans was approximately ___ months.
The information set forth in the preceding section "Description of the Loans"
has been based on information provided by the transferor and tabulated by the
depositor. None of the depositor, the trustee [or the certificate insurer] make
any representation as to the accuracy or completeness of that information.
ASSIGNMENT OF LOANS
Pursuant to the Pooling and Servicing Agreement, the depositor will convey
without recourse to the trust in trust for the benefit of the certificateholders
[and the certificate insurer] all right, title and interest in and to each loan.
Each transfer will convey all right, title and interest in and to:
(1) principal due to the extent of the unpaid principal balance and
(2) interest accrued after the cut-off date.
However, the depositor will not convey its interest in principal, including
principal prepayments in full and curtailments, including partial prepayments,
due on each loan on or prior to the cut-off date. The transferor will retain its
rights to these amounts.
In connection with the transfer and assignment, the depositor will cause the
Trustee's Loan Files to be delivered to the trustee on the closing date.
TRUSTEE'S LOAN FILE
If the trustee [or the certificate insurer] during the process of reviewing
the Trustee's Loan Files finds any document constituting a part of a Trustee's
Loan File
(1) which is not executed,
(2) which has not been received,
(3) which is unrelated to the loans, or
S-26
<PAGE>
(4) that any loan does not conform to its requirements or to the
description thereof as set forth in the Loan Schedule,
the trustee [or the certificate insurer], as applicable, is required to promptly
so notify the trustee, the servicer, the transferor [and the certificate
insurer]. If notified, the transferor agrees to use reasonable efforts to remedy
a material defect in a document constituting part of a Trustee's Loan File . If,
however, the transferor has not remedied the defect within 120 days after the
trustee's notice to it and the defect materially and adversely affects the value
of the loan or the interest of the certificateholders [or the certificate
insurer] in the loan, the transferor will be required to either:
(1) substitute in lieu of the loan a Qualified Substitute Loan . If the
then unpaid principal balance of the Qualified Substitute Loan is less than
the principal balance of the loan as of the date of the substitution plus
accrued and unpaid interest on the loan, the transferor will be required to
deliver to the servicer as part of the related monthly remittance remitted by
the servicer, the Substitution Adjustment; or
(2) purchase the loan at the Purchase Price.
REPRESENTATIONS AND WARRANTIES OF THE TRANSFEROR
The transferor will represent, among other things, with respect to each loan,
as of the closing date, the following:
(1) The information set forth in the Loan Schedule with respect to each
loan is complete, true and correct as of the cut-off date;
(2) Immediately prior to the sale of the loans to the depositor, the
transferor had good and marketable title to each loan subject to no prior
lien or interest of any nature; and
(3) The transferor has transferred all right, title and interest of the
transferor in and to the loans and in the proceeds thereto to the depositor.
Pursuant to the Pooling and Servicing Agreement, the certificateholders, the
servicer, the transferor[, the certificate insurer] and the trustee are required
to give prompt written notice to the others if they discover that:
(1) any of the representations and warranties of the transferor have been
breached in any material respect as of the closing date, and
(2) the value of the loan or the interests of the certificateholders in
the related loan [or the interests of the certificate insurer] were
materially and adversely affected.
Within 120 days of the earlier to occur of the transferor's discovery or its
receipt of written notice of any breach, the transferor will be required to:
(1) promptly cure the breach in all material respects;
(2) (a) remove each loan which has given rise to the requirement for
action by the transferor to substitute one or more Qualified Substitute Loans
and,
(b) if the unpaid principal balance of the Qualified Substitute Loans
as of the date of substitution is less than the unpaid principal balance,
plus accrued and unpaid interest thereon of the replaced loans as of the date
of substitution, deliver to the trust fund the Substitution Adjustment; or
S-27
<PAGE>
(3) purchase the loan at the Purchase Price and deposit the Purchase Price
into the Collection Account on the next succeeding Determination Date . This
deposit will be net of any amounts received in respect of the repurchased
loan or loans and amounts that are held in the Collection Account or the
Certificate Account for future distribution to the extent the amounts have
not yet been applied to principal or interest on the loan.
Any substitution of one or more Qualified Substitute Loans must be effected
within two years after the closing date unless the trustee [and the certificate
insurer] receive an opinion of counsel that the substitution would not
constitute a prohibited transaction for purposes of the REMIC provisions of the
Internal Revenue Code. The obligation of the transferor to cure the breach or to
substitute or purchase any loan will constitute the sole remedy respecting a
material breach of any representation or warranty to the certificateholders, the
trustee [and the certificate insurer].
THE TRANSFEROR AND THE SERVICER
GENERAL
__________________ ("__________") is the transferor and servicer under the
Pooling and Servicing Agreement. __________ is a _________________ with its
principal place of business in _________________, and is a wholly owned
subsidiary of _____________________, a _____________ corporation. As of
___________, 199_, ___________ had total assets of approximately $___ million,
net loans of approximately $___ million, deposits of approximately $___ million
and capital of approximately $___ million. At _______, 199_, ___________'s
regulatory capital measures, determined under the regulatory reporting
requirement of the ____________________, were as follows: core capital ___% and
total risk based capital ___%.
The transferor will sell and assign each loan to the depositor in
consideration for the net proceeds from the sale of the offered certificates,
and for the Class R certificates. The Class R Certificates will initially be
retained by the transferor.
The offered certificates will not represent an interest in or obligation of,
nor are the loans guaranteed by, the transferor or any of its affiliates.
The servicer may utilize one or more subservicers in the performance of the
administrative and servicing obligations of the servicer under the Pooling and
Servicing Agreement. However, no subservicing arrangement will discharge the
servicer from its obligations under the Pooling and Servicing Agreement.
The trustee may remove the servicer, and the servicer may resign, only in
accordance with the terms of the Pooling and Servicing Agreement. No removal or
resignation will become effective until the trustee or a successor servicer
shall have assumed the servicer's responsibilities and obligations in accordance
with the Pooling and Servicing Agreement. Any collections received by the
servicer after its removal or resignation will be endorsed by it to the trustee
and remitted directly to the trustee.
CREDIT AND UNDERWRITING GUIDELINES
The following is a brief description of ______________'s underwriting
guidelines as they are currently in effect. The underwriting guidelines are
revised continuously based on opportunities and prevailing conditions in the
nonconforming credit residential mortgage market, as well as in the expected
market for securities backed by these loans. _________ has informed the
depositor
S-28
<PAGE>
that it believes that the underwriting guidelines are consistent with
standards generally used by lenders in the business of making loans based on
non-conforming credits.
Loans originated by correspondent originators generally will have been
originated in accordance with ______________'s underwriting guidelines. However,
some loans may be employee or preferred customer loans with respect to which no
income or asset verifications were required.
The underwriting process is intended to assess both the prospective
borrower's ability to repay and the adequacy of the real property as collateral
for the loan granted. __________'s underwriting guidelines permit the
origination and purchase of loans with multi-tiered credit characteristics
tailored to individual credit profiles. In general, ____________'s underwriting
guidelines require an analysis of
o the equity in the collateral,
o the payment history and debt-to-income ratio of the borrower,
o the property type, and
o the characteristics of the underlying first mortgage, if any.
A lower maximum CLTV is required for lower gradations of credit quality.
___________'s underwriting guidelines permit the origination or purchase of
fixed or adjustable rate loans that either fully amortize over a period
generally not to exceed 30 years . In the case of a balloon loan, the
amortization period is generally based on a 30-year or less amortization
schedule with a due date and a "balloon" payment at the end of a term that can
be no greater than 15 years.
The homes pledged to secure loans are single-family residences that may be
either owner occupied, which includes second homes, or non-owner occupied
investor properties. These properties may be
o detached,
o part of a two-or four-family dwelling,
o manufactured homes,
o condominium units or
o units in a planned unit development.
Commercial properties or agricultural land are not generally accepted as
collateral; however, they may be added as additional security.
____________'s underwriting guidelines require that the CLTV of a loan
generally not exceed 90%. However, a second loan in an amount of $50,000 or less
may have a CLTV of up to 95%, and a second loan in an amount of $25,000 or less
may have a CLTV of up to 100%. ___________'s underwriting guidelines do not
permit the origination or purchase of loans where the senior mortgagee may share
in any appreciation in the value of the related mortgaged property.
In most cases, the value of each property proposed as security for a loan is
determined by a full appraisal. A limited appraisal, conducted on a drive-by
basis, is sometimes utilized for loans
S-29
<PAGE>
with CLTVs under 50%. Appraisals are performed by professional appraisers who
have been approved by __________ or who are employed by an appraisal service
company approved by ________. _____________ evaluates appraisers based on
established criteria and appraisal requirements, and maintains a current
approved appraiser list.
______________'s underwriting guidelines provide for the origination of loans
under two programs:
(1) a full verification program for salaried or self-employed borrowers;
and
(2) a non-income verification program for self-employed borrowers only.
Under the full verification program, each mortgage applicant is required to
provide, and ____________ or its designee generally verifies, certain personal
financial information. The applicant's total monthly obligations should not
exceed 45% of the applicant's gross monthly income, as certified by the borrower
on the application. Total monthly obligations include principal and interest on
each mortgage, other loans, charge accounts and all other scheduled
indebtedness, generally, in the absence of countervailing considerations, such
as relatively high income or a relatively low CLTV. Applicants who are salaried
employees must provide current employment information in addition to recent
employment history. ___________ or its designee generally verifies this
information for salaried borrowers based on written confirmation from employers
or a combination of two of the following:
(1) the most recent pay stub;
(2) the most recent W-2 tax form; or
(3) telephone confirmation from the employer.
Self-employed applicants are required to provide personal and business
financial statements and signed copies of complete federal income tax returns,
including schedules, filed for the most recent two years. Unverifiable income
may be considered if an applicant's standard of living indicates substantial
financial resources and the applicant has a good credit record. Under the
non-income verification program, two years' history of self employment plus
proof of current self-employed status is required.
A credit report by an independent, nationally recognized credit reporting
agency reflecting the applicant's complete credit history is required.
Verification is required to be obtained of
(1) the senior loan balance, if any,
(2) the payment status of the senior loans and
(3) whether local taxes, interest, insurance and assessments are included
in the applicant's monthly payment.
All taxes and assessments not included in the payment are required to be
verified as current.
A poor credit history may not disqualify an applicant if, in ___________'s
judgment, there are offsetting factors. Offsetting factors include the
applicant's ability to pay and a relatively low CLTV.
In connection with purchase-money loans, __________'s underwriting guidelines
require
(1) an acceptable source of downpayment funds;
S-30
<PAGE>
(2) verification of the source of the downpayment funds; and
(3) adequate cash reserves.
______________'s underwriting guidelines generally require title insurance
coverage issued by an approved American Land Title Association or California
Land Title Association title insurance company on each loan it originates or
purchases. The applicant is required to secure property insurance in an amount
equal to the lesser of
(1) an amount sufficient to cover the new loan and any prior loan; and
(2) the cost of rebuilding the subject property, which generally does not
include land value.
DELINQUENCY AND FORECLOSURE INFORMATION
The following table sets forth the delinquency experience of the transferor's
servicing portfolio of loans generally similar in type to the loans, as of the
dates indicated below. However, the aggregate delinquency experience on the
loans will depend on the results obtained over the life of the loans. The
transferor's portfolio of loans may differ significantly from the loans included
in the trust fund in characteristics such as interest rates, principal balances,
geographic distribution, CLTV ratios and other relevant characteristics. We
cannot assure you that the delinquency and foreclosure experience on the loans
will be consistent with the historical information provided below. The rates of
delinquencies and foreclosures on the loans may be higher than the historical
information presented below.
The following table sets forth information relating to the delinquency
experience of a portfolio of loans for the quarters beginning ________, 199_ and
ending __________, 199_.
S-31
<PAGE>
<TABLE>
DELINQUENCY AND FORECLOSURE EXPERIENCE
(DOLLARS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------
<CAPTION>
_________, 199_ _________, 199_ _________, 199_ _________, 199_
----------------- ----------------- ----------------- -----------------
NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR NUMBER DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Portfolio.............
Delinquencies
and Foreclosures.....
Delinquency
Percentage...........
30-59 days...........
60-89 days...........
90 days or more......
Foreclosure
Percentage...........
Total...........
</TABLE>
The period of delinquency in the above table is based on the number of days
that a payment is contractually past due. The above delinquency and foreclosure
experience statistics are calculated on the basis of the total home equity loan
portfolio serviced by the transferor as of the dates indicated. All of the loans
were originated or acquired by the transferor. These statistics are not
cumulative. The above statistics do not include any of the loans secured by
manufactured homes or the loans which were recently acquired by the transferor
from _________ and ___________. Because the total amount of loans serviced by
the transferor has increased over these periods as a result of new originations,
the delinquency and foreclosure percentages shown above are lower than they
would be if these loans had been outstanding for a longer period of time.
Because the trust fund consists of a fixed pool of loans, the actual delinquency
and foreclosure percentages with respect to the loans may be higher, and could
be significantly higher, than the delinquency and foreclosure percentages
indicated in the table above.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity of a Class A certificate will depend on the price paid
by the related certificateholder for the Class A certificate, the related
pass-through rate and the rate and timing of principal payments. Principal
payments include payments in excess of the scheduled monthly payment,
prepayments in full or terminations, liquidations and repurchases on the loans.
Approximately _____% of the loans by cut-off date principal balance provide for
the payment of a penalty in connection with prepayment in full during the first
two, three, four or five years after origination of the related loan.
The rate of principal prepayments on the loans will be influenced by a
variety of economic, tax, geographic, demographic, social, legal and other
factors, and has fluctuated considerably in recent years. In addition, the rate
of principal prepayments may differ among loans at any time because of specific
factors relating to the loans. These factors include
S-32
<PAGE>
(1) the age of the loans,
(2) the geographic location of the related properties and the extent of
the related borrowers' equity in those properties, and
(3) changes in the borrowers' housing needs, job transfers and employment.
In general, if prevailing interest rates fall significantly below the
interest rates at the time of origination, loans may be subject to higher
prepayment rates than if prevailing interest rates remain at or above those at
the time those loans were originated. Conversely, if prevailing interest rates
rise appreciably above the interest rates at the time of origination, loans may
experience a lower prepayment rate than if prevailing interest rates remained at
or below those existing at the time those loans were originated. We cannot make
assurances as to the prepayment rate of the loans . In addition, we cannot make
assurances that the loans will conform to the prepayment experience of other
loans or to any past prepayment experience or any published prepayment forecast.
In general, if a Class A certificate is purchased at a premium over its face
amount and payments of principal of the Class A certificate occur at a rate
faster than that assumed at the time of purchase, the purchaser's actual yield
to maturity will be lower than that anticipated at the time of purchase.
Conversely, if a Class A certificate is purchased at a discount from its face
amount and payments of principal of the Class A certificate occur at a rate that
is slower than that assumed at the time of purchase, the purchaser's actual
yield to maturity will be lower than originally anticipated.
The rate and timing of defaults on the loans will also affect the rate and
timing of principal payments on the loans and thus the yield on the Class A
certificates. We cannot make assurances as to the rate of losses or
delinquencies on any of the loans. To the extent that any losses are incurred on
any of the loans that are not covered by excess interest or an Insured Payment,
the Class A certificateholders will bear the risk of losses resulting from
default by borrowers. See "Risk Factors" in this prospectus supplement and in
the prospectus.
The Weighted Average Life of the Class A certificates will be influenced by,
among other factors, the rate of principal payments on the loans.
The primary source of information available to investors concerning the Class
A certificates will be the monthly statements discussed herein under "Servicing
of the Loans - Servicer Reports." These statements will include information as
to the outstanding certificate principal balance of the certificates. We cannot
assure that any additional information regarding the Class A certificates will
be available through any other source. In addition, the depositor is not aware
of any source through which price information about the Class A certificates
will be generally available on an ongoing basis. The limited nature of the
information regarding the Class A certificates may adversely affect the
liquidity of the Class A certificates, even if a secondary market for the Class
A certificates becomes available.
Prepayments on loans are commonly measured relative to a prepayment standard
or model. The model used in this prospectus supplement is the Prepayment
Assumption model. A 100% Prepayment Assumption assumes a CPR of ___% per annum
of the outstanding principal balance of the loans in the first month of the life
of the loans and an additional approximate __% per annum in each month
thereafter until the ___ month. Beginning in the ____ month and in
S-33
<PAGE>
each month thereafter during the life of the loans, a CPR of _____% per annum
each month is assumed.
As used in the tables below, a 0% Prepayment Assumption assumes a prepayment
rate equal to 0% of the Prepayment Assumption, -- i.e., no prepayments.
Correspondingly, a 75% Prepayment Assumption assumes a prepayment rate equal to
75% of the Prepayment Assumption, and so forth. The Prepayment Assumption does
not purport to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans, including
the loans. Neither the transferor, the depositor nor the underwriters make any
representations about the appropriateness of the Prepayment Assumption or the
CPR.
MODELING ASSUMPTIONS
For purposes of preparing the tables below, the following modeling
assumptions have been made:
(1) no delinquencies or losses occur on the loans and all scheduled
principal payments on the loans are timely received on the first day of a Due
Period. Each Due Period will begin on the first day of each month and end on
the thirtieth day of the month, with the first Due Period for the loans
commencing on ________, 199_;
(2) the scheduled payments on the loans have been calculated on the
outstanding principal balance, prior to giving effect to prepayments, the
loan interest rate, and the remaining term to stated maturity such that the
loans will fully amortize by their remaining term to stated maturity;
(3) all scheduled payments of interest and principal in respect of the
loans have been made through the cut-off date;
(4) (a) all loans prepay monthly at the specified percentages of the
Prepayment Assumption,
(b) no optional or other early termination of the offered 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;
(5) all prepayments in respect of the loans include 30 days' accrued
interest;
(6) the closing date for the offered certificates is ________, 199_;
(7) each year will consist of twelve 30-day months with respect to the
Class A-1 certificates, interest will be calculated on the basis of a 360 day
year and the actual number of days elapsed;
(8) cash distributions are received by the holders of the offered
certificates on the ___ day of each month, commencing in ______ 199_;
(9) the pass-through rate for each class of offered certificates other
than the Class A-1 certificates is as set forth on page [ ] of this
prospectus supplement;
(10) the pass-through rate on the Class A-1 certificates will remain
constant at ___% per annum;
S-34
<PAGE>
(11) the additional fees deducted from the interest collections in respect
of the loans include the Servicing Fee, and _______% on the aggregate
certificate principal balances in respect of all other fees;
(12) no reinvestment income from any account is earned and available for
distribution;
(13) the pool consists of loans having the following characteristics:
ASSUMED LOAN CHARACTERISTICS
CUT-OFF REMAINING ORIGINAL
DATE TERM TO TERM TO
PRINCIPAL LOAN MATURITY MATURITY
SUB-POOL BALANCE RATE % (MONTHS) (MONTHS)
-------- ------- ------ -------- --------
The following tables indicate at the specified percentages of the Prepayment
Assumption the corresponding weighted average lives of each class of
certificates. All percentages in the following tables are rounded to the nearest
1%. As used in the following tables, the weighted average life of a class is
determined by
(1) multiplying the amount of each distribution of principal thereof by
the number of years from the date of issuance to the related distribution
date,
(2) summing the results and
(3) dividing the sum by the aggregate distributions of principal referred
to in clause (1) and rounding to two decimal places.
S-35
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-1 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
S-36
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-2 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
S-37
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-3 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
S-38
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-4 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
S-39
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-5 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
S-40
<PAGE>
PERCENTAGE OF ORIGINAL CERTIFICATE PRINCIPAL BALANCE
AT THE FOLLOWING PERCENTAGES OF PREPAYMENT ASSUMPTION
CLASS A-6 CERTIFICATES
---------------------------------------------------------------
PAYMENT DATE 0% 50% 75% 100% 125% 150%
- -------------- -------- -------- -------- -------- -------- --------
Initial Percent
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 200_
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
____ 20__
Weighted
Average
Life-to-Maturity
(Years)...
Weighted
Average
Life-to-Call
(Years)...
---------------
The above tables have been prepared based on the enumerated modeling
assumptions and should be read in conjunction with these modeling assumptions.
The modeling assumptions
S-41
<PAGE>
include the characteristics and performance of the loans which may differ from
their actual characteristics and performance.
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
The depositor will issue its Home Equity Asset Backed Certificates, Series
199_-_ on or about the closing date, pursuant to the Pooling and Servicing
Agreement.
The offered certificates, together with the Class R certificates, will
represent in the aggregate the entire beneficial interest in a trust.
Collectively, the assets of the trust are referred to as the trust fund which
includes:
(1) the loans and all payments thereunder and proceeds thereof received
after the cut-off date, exclusive of payments of principal, interest and
other amounts due thereon on or before the cut-off date;
(2) any REO Properties; and
(3) the funds or assets as from time to time are deposited in the
Certificate Account.
The certificates will consist of ____ classes to be designated as:
(1) the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class
A-6 certificates;
(2) the Class A-6IO certificates; and
(3) the REMIC residual certificates, or the Class R certificates.
Only the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5, Class A-6,
and Class A-6IO certificates are offered by this prospectus supplement.
The Class R certificates have not been registered under the Securities Act
and are not offered hereby. Accordingly, to the extent this prospectus
supplement contains information regarding the terms of the Class R certificates,
that information is provided because of its potential relevance to a prospective
purchaser of an offered certificate.
The Class A certificates will be issued only in book-entry form, in
denominations of $25,000 initial principal balance with integral multiples of
$1,000 in excess of that amount, except that one certificate for each class may
be issued in a different amount.
Each class of Class A certificates will initially be represented by a single
physical certificate in each case registered in the name of Cede, as nominee of
DTC. Cede will be the "Holder" or "Certificateholder" of the Class A
certificates as those terms are used in the Pooling and Servicing Agreement. No
beneficial owner of a Class A certificate will be entitled to receive a
certificate representing the person's interest in the Class A certificates,
except as set forth under "Definitive Certificates." Before any termination of
the book-entry provisions, distributions on the Class A certificates will be
made to persons with beneficial ownership interests in the Class A certificates
only through DTC and participants of DTC in the United States, or Cedelbank or
the Euroclear System, or indirectly through participants in these systems in
Europe. See "Description of the Securities--Book-Entry Registration of
Securities" in the prospectus.
S-42
<PAGE>
DEFINITIVE CERTIFICATES
While the Class A certificate is a book-entry certificate, it will be
converted to a Definitive Certificate and reissued to the beneficial owners or
their nominees, rather than to DTC or its nominee, only if:
(1) DTC or the servicer advises the trustee in writing that DTC is no
longer willing or able to discharge properly its responsibilities as
depository with respect to the book-entry certificates and DTC or the
servicer is unable to locate a qualified successor; or
(2) the trustee, at its option, elects to terminate the book-entry system
through DTC.
If any event described in the immediately preceding paragraph occurs, DTC
will be required to notify all its participants of the availability through DTC
of Definitive Certificates. The trustee will reissue the book-entry certificates
as Definitive Certificates to the beneficial owners if the Definitive
Certificates have been delivered to it. Distributions of principal of, and
interest on, the book-entry certificates will thereafter be made by the trustee,
or a paying agent on behalf of the trustee, directly to holders of Definitive
Certificates in accordance with the procedures set forth in the Pooling and
Servicing Agreement.
Definitive Certificates will be transferable and exchangeable at the offices
of the trustee or the certificate registrar. No service charge will be imposed
for any registration of transfer or exchange. However, the trustee may require
payment by the beneficial owner of the certificate of a sum sufficient to cover
any tax or other governmental charge imposed in connection with registration of
this transfer or exchange.
CERTIFICATE PRINCIPAL BALANCES AND NOTIONAL AMOUNT
On the closing date, the respective classes will have the certificate
principal balances indicated on the cover of this prospectus supplement in each
case, subject to a variance of plus or minus 5%.
The certificate principal balance of any class of certificates outstanding at
any time will be the then aggregate stated principal amount of the certificates.
On each distribution date, the certificate principal balance of each class of
principal certificates that have a principal balance will be reduced by any
distributions of principal actually made on the class of certificates on the
distribution date. See "--Distributions" below.
The Class A-6IO certificates will not have a certificate principal balance.
The Class A-6IO certificates will represent the right to receive distributions
of interest accrued on a notional amount equal to the aggregate certificate
principal balance of the Class A-6 certificates outstanding from time to time.
The Class R certificates will not have a certificate principal balance or a
notional amount.
A class of offered certificates will be considered to be outstanding until
its certificate principal balance or notional amount is reduced to zero.
PASS-THROUGH RATES
The pass-through rates applicable to the Class A-2, Class A-3, Class A-4,
Class A-5, Class A-6 and Class A-6IO certificates will, for any distribution
date, at all times be equal to the respective fixed rates set forth on page [ ]
of this prospectus supplement.
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The pass-through rate applicable to the Class A-1 certificates for any
distribution date will be equal to the lesser of:
(1) the Class A-1 LIBOR Rate; and
(2) the Weighted Average Net Loan Rate for that distribution date.
Interest distributable on each distribution date will be interest accrued
during the Accrual Period. Interest will accrue throughout an Accrual Period
only on the certificate principal balance or notional amount at the end of the
related Accrual Period, even though the certificate principal balance or
notional amount may be higher during a portion of the Accrual Period. Any
principal distributed during the Accrual Period is deemed to have been
distributed at the beginning of the Accrual Period.
Interest with respect to the Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6 and Class A-6IO certificates on each distribution date will accrue on
the basis of a 360-day year consisting of twelve 30-day months. Interest with
respect to the Class A-1 certificates on each distribution date will accrue on
the basis of the actual number of days during an Accrual Period over a 360-day
year.
DISTRIBUTIONS
General. Distributions on or with respect to the certificates will be made by
the trustee, to the extent of available funds, on each distribution date . The
distribution date is the __ day of each month or, if any ___ day is not a
business day, then on the next succeeding business day, commencing in _____
199__. All distributions will generally be made to the persons in whose names
the certificates are registered at the close of business on the related Record
Date. If the certificateholder provides the trustee with written wiring
instructions no less than five business days prior to the related Record Date,
distributions will be made by wire transfer in immediately available funds to
the account specified by the certificateholder at a bank or other entity having
appropriate facilities . Alternatively, distributions will be made by check
mailed to the certificateholder. Until Definitive Certificates are issued in
respect thereof, Cede & Co. will be the registered holder of the offered
certificates. See "--General" above. The final distribution on any certificate
will be made in like manner, but only if presentation and surrender of the
certificate is made at the location that will be specified in a notice of the
pendency of the final distribution. All distributions made on or with respect to
a class of certificates will be allocated pro rata among those certificates
based on their respective percentage interests in a particular class.
Available Distribution Amount. With respect to any distribution date,
distributions of interest on and principal of the certificates will be made from
the Available Distribution Amount for the distribution date.
Application of the Available Distribution Amount. On each distribution date,
the trustee will apply the Available Distribution Amount and any Insured Payment
for the distribution date for the following purposes and in the following order
of priority:
(1) to pay interest to the holders of the Class A-1, Class A-2, Class A-3,
Class A-4, Class A-5, Class A-6 and Class A-6IO certificates, up to an amount
equal to, and pro rata as among those classes in accordance with, all
Distributable Certificate Interest . Interest will be payable only to the
extent not previously paid, for all prior distribution dates;
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(2) to the Class A-6 certificates, in an amount equal to the lesser of
(a) the Principal Distribution Amount and
(b) the Class A-6 Lockout Distribution Amount, until the certificate
principal balance of the Class A-6 certificates has been reduced to zero;
(3) to the Class A-1, Class A-2, Class A-3, Class A-4, Class A-5 and Class
A-6 certificates, in that order, in an aggregate amount up to the Principal
Distribution Amount until the certificate principal balance of each class has
been reduced to zero. No amount will be distributed on any class of
certificates pursuant to this clause (3) while any Principal Balance
Certificate having a lower numerical designation remains outstanding;
[(4) to the certificate insurer, the Reimbursement Amount; and
(5) to the Class R certificates, any remaining amounts.
[If the certificate insurer has defaulted under the certificate insurance
policy, then on any distribution date on which the Overcollateralization Amount
has been reduced to zero,] any amounts payable to the holders of the Class A
certificates in respect of principal on the distribution date will be
distributed pro rata in proportion to the certificate principal balances of
those classes, and not sequentially.
Allocation of Net Prepayment Interest Shortfalls. On each distribution date,
Net Prepayment Interest Shortfalls will be allocated to reduce the Distributable
Certificate Interest of each class of Class A certificates.
CALCULATION OF LIBOR
On each distribution date, LIBOR will be established by the trustee. As to
the Accrual Period relating to the Class A-1 certificates, LIBOR will equal 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 that Accrual Period. With respect
to the first Accrual Period, LIBOR will equal 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, two LIBOR Business Days prior to the closing date.
If LIBOR does not appear on that page or another page as may replace that page
on that service or another service for displaying LIBOR or comparable rates as
may be reasonably selected by the trustee after consultation with the servicer,
the rate will be the Reference Bank Rate. If no quotations can be obtained and
no Reference Bank Rate is available, LIBOR will be LIBOR applicable to the
preceding distribution date.
The establishment of LIBOR as to each Accrual Period by the trustee and the
trustee's calculation of the rate of interest applicable to the Class A-1
certificates for the related Accrual Period will, in the absence of manifest
error, be final and binding.
TERMINATION; PURCHASE OF LOANS
The trust fund will terminate if the trustee receives notice of either:
(1) the later of
(a) the distribution to certificateholders of the final payment or
collection with respect to the last loan, or Periodic Advances of same by
the servicer, or
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(b) the disposition of all funds with respect to the last loan and the
remittance of all funds due under the Pooling and Servicing Agreement and
the payment of all amounts due and payable to [the certificate insurer
and] the trustee or
(2) mutual consent of the servicer[, the certificate insurer] and all
certificateholders in writing.
The servicer may, at its option, terminate the trust on any date on which
the aggregate unpaid principal balance of the loans, as of the date of
determination, is less than 10% of the cut-off date principal balance of the
loans. [If the servicer does not exercise this option, the certificate insurer
may exercise the option.]
When the trust is terminated, the servicer [or certificate insurer] must
purchase, on the next succeeding distribution date, all of the property of the
trust at a price equal to the sum of:
(1) the greater of
(a) 100% of the unpaid principal balance of each related outstanding
loan and each related REO Property and
(b) the fair market value determined as the average of three written
bids made by nationally recognized dealers. The fair market value must be
based on a valuation process which would be used to value comparable loans
and REO Property. Accrued interest on the loans and REO Properties are
disregarded for this purpose.
(2) the aggregate amount of accrued and unpaid interest on the unpaid
principal balances of the loans through the related Due Period and 30 days'
accrued interest on the unpaid principal balances at a rate equal to the loan
interest rate, in each case net of the Servicing Fee[, and
(3) any unreimbursed amounts due to the certificate insurer under the
Pooling and Servicing Agreement or the Certificate Insurance Agreement].
[This termination requires the prior written consent of the certificate
insurer if the termination would result in a draw on the certificate
insurance policy.]
REPORT TO CERTIFICATEHOLDERS
Pursuant to the Pooling and Servicing Agreement, on each distribution date
the trustee will deliver to [the certificate insurer,] each certificateholder
and the depositor a written report, based solely on information provided by the
servicer, containing information including, without limitation:
o the amount of the distribution on the distribution date;
o the amount of the distribution allocable to principal and allocable to
interest;
o the aggregate outstanding certificate principal balance of each Principal
Balance Certificate as of the distribution date;
o [the amount of any Insured Payment included in the distributions on that
distribution date]; and
o any other information as required by the Pooling and Servicing Agreement.
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SERVICING OF THE LOANS
THE SERVICER
___________________ will act as the servicer of the trust fund. See "The
Transferor and the Servicer" in this prospectus supplement. All references in
this prospectus supplement to the "Servicer" shall mean "Master Servicer" for
purposes of the accompanying prospectus.
COLLECTION AND OTHER SERVICING PROCEDURES; LOAN MODIFICATIONS
The servicer will be obligated under the Pooling and Servicing Agreement to
service and administer the loans, on behalf of the trust, for the benefit of the
certificateholders [and the certificate insurer] in accordance with the terms of
the Pooling and Servicing Agreement. The servicer will have full power and
authority to do any and all things in connection with the servicing and
administration which it may deem necessary or desirable. The servicer may
perform any of its obligations under the Pooling and Servicing Agreement through
one or more subservicers.
Even if the servicer has engaged a subservicer, the servicer will remain
liable for its servicing duties and obligations under the Pooling and Servicing
Agreement as if the servicer alone were servicing the loans. The servicer will
be obligated under the Pooling and Servicing Agreement to make reasonable
efforts to collect all payments called for under the terms and provisions of the
loans. The servicer will be obligated to follow loan collection procedures as it
would normally follow with respect to loans comparable to the loans . These
procedures are required to generally conform to the mortgage servicing practices
of prudent mortgage lending institutions which service mortgage and manufactured
housing loans of the same type as the loans for their own account in the
jurisdictions in which the related properties are located.
Consistent with the above, the servicer will be permitted, in its discretion,
to:
(1) waive any late payment charge or other charge in connection with any
loan, and
(2) arrange a schedule, running for no more than 180 days after the due
date of any installment due under the related loan, for the liquidation of
delinquent items.
PAYMENTS ON THE LOANS
The Pooling and Servicing Agreement provides that the servicer, for the
benefit of the certificateholders [and the certificate insurer], will establish
and maintain one or more Collection Accounts. Each Collection Account will
generally be an Eligible Account. The servicer shall have the right to choose
the location and relocate the Collection Account at any time, provided each
Collection Account shall otherwise comply with the requirements of the preceding
sentence. The Pooling and Servicing Agreement permits the servicer to direct any
depository institution maintaining a Collection Account to invest the funds in
that Collection Account in Permitted Investments. The Permitted Investments must
mature prior to the business day preceding the date on which the servicer is
required to transfer any amounts included in the funds from the Collection
Account to the Certificate Account. Permitted Investments may also be payable on
demand.
The servicer is obligated to deposit in the Collection Account on a daily
basis, amounts representing the following payments received and collections made
by it after the cut-off date:
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(1) all payments on account of principal, including unscheduled principal
prepayments, on the loans;
(2) all payments on account of interest on the loans;
(3) all Liquidation Proceeds [and all Insurance Proceeds] to the extent
those proceeds are not to be applied to the restoration of the related
mortgaged property or released to the related borrower in accordance with the
express requirements of law or in accordance with prudent and customary
servicing practices;
(4) all net revenues with respect to a property held by the trust fund;
(5) all other amounts required to be deposited in the Collection Account
pursuant to the Pooling and Servicing Agreement; and
(6) any amounts required to be deposited in connection with net losses
realized on investments of funds in the Collection Account.
The Pooling and Servicing Agreement further provides that all funds deposited in
any Collection Account that are to be included in the Servicer Remittance Amount
related to a particular distribution date be transferred to the Certificate
Account prior to the Servicer Remittance Date. The trustee will be obligated to
set up a Certificate Account.
The servicer is required to deposit into the Collection Account no later than
the Servicer Remittance Date an amount, subject to its determination that an
advance would not be nonrecoverable, equal to the sum of
(1) the interest portion of the scheduled monthly payments on each loan
due by the related due date but not received by the servicer as of the close
of business on the related Determination Date, net of the Servicing Fee and
(2) any Periodic Advance with respect to each REO Property which was
acquired during or prior to the related Due Period and as to which an REO
Property disposition did not occur during the related Due Period.
Periodic Advances by the servicer are reimbursable to the servicer subject to
certain conditions and restrictions and are intended to provide both sufficient
funds for the payment of interest to the offered certificates [and to pay the
premium due the certificate insurer]. Even if the Periodic Advance becomes
nonrecoverable, the servicer will be entitled to reimbursement of the Periodic
Advance from the trust fund. The servicer will be entitled to reimbursement even
if it determined in good faith at the time the Periodic Advance was made that
the Periodic Advance would be recoverable.
The servicer is required to make Servicing Advances, subject to the its
determination that the advance would not be nonrecoverable and that a prudent
mortgage lender would make a like advance if it or an affiliate owned the
related loan. Servicing Advances by the servicer are reimbursable to the
servicer subject to certain conditions and restrictions. Even if the Servicing
Advance becomes nonrecoverable , the servicer will be entitled to reimbursement
of the Servicing Advance from the trust fund. The servicer will be entitled to
reimbursement even if it determined in good faith at the time the Servicing
Advance was made that the Servicing Advance would be recoverable.
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The servicer is required to remit to the Certificate Account, the
Compensating Interest, if any, prior to the close of business on the business
day immediately following each Servicer Remittance Date.
REALIZATION ON OR SALE OF DEFAULTED LOANS
The servicer will generally be required to foreclose on or otherwise
comparably convert the ownership of properties securing those of the loans as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with any
foreclosure or other conversion, the servicer will be required to follow those
procedures it follows with respect to similar loans held in its own portfolio.
However, the servicer shall not be required to expend its own funds in
connection with any foreclosure or to restore any damaged property unless it
shall determine that:
(1) the foreclosure and/or restoration will increase the proceeds of
liquidation of the loan to certificateholders after reimbursement to itself
for those expenses and
(2) those expenses shall be recoverable to it through Liquidation
Proceeds. The servicer will reimburse itself for these expenses prior to the
deposit in the Collection Account of those proceeds.
The servicer will be permitted to foreclose against the property securing a
defaulted loan either by foreclosure, by sale, by strict foreclosure, and in the
case of manufactured homes, repossession. If a deficiency judgment is available
against the borrower or any other person, the servicer may proceed for the
deficiency.
If title to any property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale will be required to be issued to
the trustee, or to the servicer on behalf of the trustee[, the certificate
insurer] and the certificateholders. Even if title to the related property is
acquired and the loan is canceled, the loan is required to be considered to be a
loan held in the trust fund until the related property is sold and that loan
becomes a liquidated loan. For purposes of all calculations under the Pooling
and Servicing Agreement, so long as that loan is an outstanding loan:
(1) It will be assumed that the Mortgage Note or manufactured housing
contract and the related amortization schedule in effect at the time of any
acquisition of title will remain in effect. This assumption will be made even
if the indebtedness evidenced by the related Mortgage Note or manufactured
housing contract has been discharged. However, the amortization schedule will
be adjusted to reflect the application of proceeds received in any month
pursuant to the succeeding clause. This assumption will be made after giving
effect to any previous partial prepayments and before any adjustment thereto
by reason of any bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period.
(2) Net proceeds after payment of servicer's expenses related to
disposition from the property received in any month will be deemed to be
received first in payment of the accrued interest that remained unpaid on the
date that title to the related property was acquired by the trust. The excess
of the net proceeds, if any, will be deemed to be received in respect of the
delinquent principal installments that remained unpaid on that date.
Thereafter, net proceeds from that property received in any month will be
applied to the payment of installments of principal and accrued interest on
that loan deemed to be due and payable in accordance with the terms of the
Mortgage Note or manufactured housing contract and the amortization
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schedule. If those net proceeds exceed the then unpaid REO Property
amortization, the excess shall be treated as a partial principal prepayment
received in respect of that loan.
(3) Only that portion of the net proceeds on a loan allocable to interest
that bears the same relationship to the total amount of net proceeds
allocable to interest as the rate at which the Servicing Fee is determined
bears to the loan interest rate borne by that loan will be allocated to the
Servicing Fee.
If the trust fund acquires any property as aforesaid or otherwise in
connection with a default or imminent default on a loan, that property will be
required to be disposed of by or on behalf of the trust fund prior to the close
of the third calendar year after its acquisition by the trust fund unless:
(1) the trustee [and the certificate insurer] received an opinion of
counsel to the effect that the holding by the trust fund of that property
subsequent to that period, and specifying the period for which the property
may be held, will not
(a) cause any of the trust REMICs to be subject to the tax on
prohibited transactions imposed by Code Section 860F(a)(1),
(b) otherwise subject the trust fund or any of the trust REMICs to tax
or
(c) cause any of the trust REMICs 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
the 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 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 property does not result in the receipt by the
trust fund of any income from non-permitted assets as described in Code
Section 860F(a)(2)(B), and
(c) the trust fund does not derive any "net income from foreclosure
property" within the meaning of Code Section 860G(c)(2), with respect to
the property.
Instead of foreclosing on any defaulted loan, the servicer may, in its
discretion, permit the assumption of that loan if, in the servicer's judgment,
the default is unlikely to be cured and if the assuming borrower satisfies the
servicer's underwriting guidelines with respect to loans owned by the servicer.
In connection with any assumption, the loan interest rate of the related
Mortgage Note or manufactured housing contract and the payment terms will not be
permitted to be changed. Any fee collected by the servicer for entering into an
assumption agreement will be retained by the servicer as servicing compensation.
Alternatively, the servicer may encourage the refinancing of any defaulted loan
by the borrower.
Prior to instituting foreclosure proceedings or accepting a deed-in-lieu of
foreclosure with respect to any property, the servicer shall make,
(1) inspection of the property in accordance with accepted servicing
procedures, and
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(2) with respect to environmental hazards, inspection substantially
comparable to the procedures as are required by the provisions of the FNMA's
Selling and Servicing Guide applicable to single-family homes or manufactured
homes, as applicable, and in effect on the date of this prospectus
supplement.
The servicer shall be entitled to rely on the results of any inspection made by
others. In cases where the inspection reveals that this property is potentially
contaminated with or affected by hazardous wastes or hazardous substances, the
servicer shall promptly give written notice of that fact to [the certificate
insurer,] the trustee and the certificateholders. The servicer shall not
commence foreclosure proceedings or accept a deed-in-lieu of foreclosure for any
property where that inspection reveals potential contamination by hazardous
waste [without obtaining the consent of the certificate insurer].
SERVICING FEES AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its activities as servicer under the Pooling and
Servicing Agreement, the servicer will be entitled with respect to each loan to
the Servicing Fee. The Servicing Fee will be payable monthly from amounts on
deposit in the Collection Account. In addition, the servicer will be entitled to
receive, as additional servicing compensation, any late payment charges,
prepayment penalties, assumption fees or similar items, to the extent permitted
by applicable law and the related Mortgage Notes or manufactured housing
contract. The servicer shall also be entitled to withdraw from the Collection
Account any interest or other income earned on deposits in the Collection
Account. The servicer will pay all expenses incurred by it in connection with
its servicing activities under the Pooling and Servicing Agreement and will not
be entitled to reimbursement of such expenses except as specifically provided in
the Pooling and Servicing Agreement.
The servicer may recover Periodic Advances and Servicing Advances from the
Collection Account to the extent permitted by the Pooling and Servicing
Agreement and by the terms of the loans . If not recovered from the borrower on
whose behalf a Periodic Advance or Servicing Advance was made, the Servicer may
recover Periodic Advances and Servicing Advances from late collections on the
related loan, including
(1) Liquidation Proceeds,
(2) released mortgaged property proceeds[, Insurance Proceeds],
(3) other amounts as may be collected by the servicer from the borrower or
otherwise relating to the loan, or,
(4) in the case of Periodic Advances, from late collections of interest on
any loan.
If a Periodic Advance or a Servicing Advance becomes a nonrecoverable advance,
the servicer may be reimbursed for the advance from the Certificate Account.
The servicer shall not be required to make any Periodic Advance or Servicing
Advance which it determines would be a nonrecoverable Periodic Advance or
nonrecoverable Servicing Advance. A Periodic Advance or Servicing Advance is
"nonrecoverable" if in the good faith judgment of the servicer, the Periodic
Advance or Servicing Advance is not ultimately recoverable.
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ENFORCEMENT OF DUE-ON-SALE CLAUSES
The servicer will exercise its rights to accelerate the maturity of the
related loan under any "due-on-sale" clause contained in the related mortgage,
Mortgage Note or manufactured housing contract if the servicer has knowledge of
the borrower's conveyance or prospective conveyance of the property. However,
the servicer shall not exercise any of these rights if the "due-on-sale" clause,
in the reasonable belief of the servicer, is not enforceable under applicable
law. In that event, the servicer may enter into an assumption and modification
agreement with the person to whom the property has been or is about to be
conveyed, pursuant to which the person becomes liable under the Mortgage Note or
manufactured housing contract . The borrower will remain liable on the Mortgage
Note or manufactured housing contract, unless prohibited by applicable law or
the mortgage, Mortgage Note or manufactured housing contract. However, the loan
interest rate of the related Mortgage Note or manufactured housing contract and
the payment terms will not be changed. The servicer is also authorized to enter
into a substitution of liability agreement with the person to whom the property
is conveyed to. Pursuant this agreement the original borrower is released from
liability and the person to whom the property is conveyed is substituted as
borrower and becomes liable under the Mortgage Note or manufactured housing
contract.
MAINTENANCE OF INSURANCE POLICIES AND ERRORS AND OMISSIONS AND FIDELITY COVERAGE
Generally, the underwriting requirements of the transferor require borrowers
to obtain fire and casualty insurance as a condition to approving the related
loan. However, the existence and/or maintenance of fire and casualty insurance
is not in all cases monitored by the transferor. Title insurance is not required
on all loans. The servicer will follow those practices with respect to the
loans. Accordingly, if a property suffers any hazard or casualty losses, or if
the borrower is found not to have clear title to that property,
certificateholders may bear the risk of loss resulting from a default by the
related borrower to the extent those losses are not covered by foreclosure or
Liquidation Proceeds on the defaulted loan or by the applicable credit
enhancement. To the extent that the related mortgage documents or manufactured
housing contracts require the borrower to maintain a fire and hazard insurance
policy with extended coverage on the related property in an amount at least
equal to the lesser of the full insurable value of that property or the unpaid
principal balance of that loan and any senior liens, the servicer will
(1) monitor the status of insurance in varying degrees based on certain
characteristics of the related loans, and
(2) cause that insurance to be maintained on a case-by-case basis.
Further, with respect to each property acquired by the trust by foreclosure,
by deed in lieu of foreclosure or repossession, the servicer will maintain fire
and hazard insurance for the property with extended coverage in an amount at
least equal to the lesser of
(1) the full insurable value of the improvements that are a part of the
property and
(2) the unpaid principal balance owing on the related loan at the time of
the foreclosure, deed in lieu of foreclosure or repossession, plus accrued
interest thereon and related liquidation expenses.
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The insurance on a property acquired by foreclosure, deed in lieu of foreclosure
or repossession may not, however, be less than the minimum amount required to
fully compensate for any loss or damage on a replacement cost basis.
Any cost incurred by the servicer in maintaining any insurance will not be
added to the unpaid principal balance of the related loan for purposes of
calculating distributions to the certificateholders. No earthquake or other
additional insurance other than flood insurance will be required to be
maintained by any borrower or the servicer, other than as required by terms of
the related mortgage documents or manufactured housing contracts and the
applicable laws and regulations that at any time are in force and require the
additional insurance. The servicer will also be required under the Pooling and
Servicing Agreement to maintain in force:
(1) a policy or policies of insurance covering errors and omissions in the
performance of its obligations as servicer; and
(2) a fidelity bond in respect of its officers, employees or agents.
No pool insurance policy, title 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 mortgage loans or manufactured
housing contracts. No loan will be insured by any government or government
agency.
SERVICER REPORTS
The servicer is required to deliver an officer's certificate to [the
certificate insurer and] the trustee prior to the last day of the [_____] month
following the end of the servicer's fiscal year, stating that
(1) a review of the activities of the servicer during the preceding fiscal
year and of performance under the Pooling and Servicing Agreement has been
made under the officers' supervision, and
(2) to the best of the officers' knowledge, based on the review, the
servicer has fulfilled all its obligations under the Pooling and Servicing
Agreement for that year. If there has been a default in the fulfillment of
any obligation, the certificate will specify each default known to the
officers and the nature and status of the default including the steps being
taken by the servicer to remedy each default.
The servicer will deliver a statement to [the certificate insurer and] the
trustee from a firm of independent certified public accountants on or before the
last day of the _____ month following the end of the servicer's fiscal year.
This statement will be to the effect that the accounting firm has examined
certain documents and records relating to the servicing of the loans during the
preceding calendar year. Based on the examination conducted substantially in
compliance with generally accepted auditing standards and the requirements of
the Uniform Single Attestation Program for Mortgage Bankers or the Audit Program
for Mortgages serviced for FHLMC, the statement is required to provide that the
servicing has been conducted in compliance with the Pooling and Servicing
Agreement . The statement will set forth those significant exceptions or errors
in records that, in the opinion of the firm of independent certified public
accountants, generally accepted auditing standards and the Uniform Single Audit
Program for Mortgage Bankers or the Attestation Program for Mortgages serviced
for FHLMC require it to report.
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<PAGE>
REMOVAL AND RESIGNATION OF SERVICER
The trustee, only at the direction of [the certificate insurer or] the
majority certificateholders[, with the consent of the certificate insurer, in
the case of any direction of the majority certificateholders,] may remove the
servicer if an event described below occurs and continues beyond the applicable
cure period:
(1) any failure by the servicer to remit to the trustee any payment
required to be made by the servicer under the terms of the Pooling and
Servicing Agreement which continues unremedied beyond any grace period
[permitted by the certificate insurer];
(2) the failure by the servicer to make any required Servicing Advance or
Periodic Advance;
(3) (a) any failure on the part of the servicer duly to observe or perform
in any material respect any of the other covenants or agreements on the part
of the servicer contained in the Pooling and Servicing Agreement, or
(b) the breach of any representation and warranty set forth in the
Pooling and Servicing Agreement,
which continues unremedied for a period of 30 days after the date on which
written notice of the failure or breach, requiring the same to be remedied,
is given to the servicer by the depositor or the trustee, or to the servicer
and the trustee by any certificateholder [or the certificate insurer];
(4) insolvency events of the servicer;
(5) the delinquency or loss experience of the loan pool exceeds certain
levels specified in the Pooling and Servicing Agreement.
The servicer may not assign its obligations under the Pooling and Servicing
Agreement nor resign from the obligations and duties imposed on it under the
Pooling and Servicing Agreement except
(1) by mutual consent of [the certificate insurer and] the trustee, or
(2) if determined that the servicer's duties under the Pooling and
Servicing Agreement are no longer permissible under applicable law and this
incapacity cannot be cured by the servicer without the incurrence[, in the
reasonable judgment of the certificate insurer,] of unreasonable expense.
No resignation shall become effective until a successor has assumed the
servicer's responsibilities and obligations in accordance with the Pooling and
Servicing Agreement.
If the servicer is removed or resigns, the trustee has agreed to be the
successor servicer. However, the transfer of servicing will be effected over a
period 90 days or less. Immediately after the resignation or removal, the
trustee, as successor servicer, will be obligated to make Periodic Advances and
Servicing Advances and certain other advances unless it determines reasonably
and in good faith that those advances would not be recoverable. If, however, the
trustee is unwilling or unable to act as successor servicer, or if the majority
certificateholders [with the consent of the certificate insurer or the
certificate insurer] so requests, the trustee shall appoint, or petition a court
of competent jurisdiction to appoint a successor servicer. This appointment must
be made in accordance with the provisions of the Pooling and Servicing
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Agreement [and subject to the approval of the certificate insurer ]. The
successor servicer must be an established loan servicing institution [acceptable
to the certificate insurer] having a net worth of at least $15,000,000.
The trustee and any other successor servicer in that capacity is entitled to
the same reimbursement for advances and no more than the same servicing
compensation as the servicer. See "--Servicing and Other Compensation and
Payment of Expenses" above.
AMENDMENT
The Pooling and Servicing Agreement may be amended from time to time by the
depositor, the servicer and the trustee by written agreement. A party may amend
the Pooling and Servicing Agreement without notice to, or consent of, the
certificateholders, to
(1) cure any ambiguity,
(2) to correct or supplement any provisions in the Pooling and Servicing
Agreement,
(3) to comply with any changes in the Internal Revenue Code, or
(4) to make any other provisions with respect to matters or questions
arising under the agreement which shall not be inconsistent with the
provisions of the agreement.
This type of amendment shall not adversely affect in any material respect the
interests of any certificateholder of any outstanding class of certificates,
unless 100% of the class of certificateholders so affected shall have consented.
Furthermore, no amendment shall
(1) reduce in any manner the amount of, or delay the timing of, payments
received on loans which are required to be distributed on any certificate
without the consent of the affected certificateholder, or
(2) change the rights or obligations of any other party to the Pooling and
Servicing Agreement without the consent of the party.
The Pooling and Servicing Agreement may be amended from time to time by the
depositor, the servicer , the trustee and the holders of the majority
certificateholders for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the certificateholders.
This type of amendment shall not be made unless the trustee [and the certificate
insurer] receives an opinion of counsel, at the expense of the party requesting
the change, that the change will not adversely affect the status of any of the
trust fund as a REMIC or cause a tax to be imposed on the trust fund or any of
the REMICs. In addition, this type of amendment shall not
(1) reduce in any manner the amount of, or delay the timing of, payments
received on loans which are required to be distributed on any certificate
without the consent of the holder of the certificate or
(2) reduce the percentage for each class the holders of which are required
to consent to any amendment without the consent of the holders of 100% of
each class of certificates affected thereby.
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<PAGE>
THE TRUSTEE
_________________, a _______________ corporation, has been named trustee
pursuant to the Pooling and Servicing Agreement. The trustee will serve
initially as the custodian of the Trustee's Loan Files. The Pooling and
Servicing Agreement provides that the trustee shall be entitled to a Trustee Fee
in respect of its services as trustee.
The trustee shall at all times
(1) be a banking association organized and doing business under the laws
of any State or the United States of America subject to suspension or
examination by federal or state authority,
(2) be authorized under such laws to exercise corporate trust powers,
(3) have a combined capital and surplus of at least $50,000,000, whose
long-term deposits, if any, are rated at least "___" by _________and "____"
by __________[, or such lower rating as may be approved in writing by the
certificate insurer and
(4) reasonably acceptable to the certificate insurer as evidenced in
writing].
If at any time the trustee shall cease to be eligible in accordance with the
provisions described in this paragraph, it shall resign immediately in the
manner and with the effect specified in the Pooling and Servicing Agreement.
Any resignation or removal of the trustee and appointment of a successor
trustee will become effective if a successor trustee [acceptable to the
certificate insurer] has accepted the appointment.
The trustee, or any trustee or trustees hereafter appointed, may resign at
any time in the manner set forth in the Pooling and Servicing Agreement. The
servicer will promptly appoint a successor trustee or trustees if the servicer
receives notice of resignation. The successor trustee must meet the eligibility
requirements in the manner set forth in the Pooling and Servicing Agreement. The
servicer will deliver a copy of the instrument used to appoint a successor
trustee to the certificateholders[, the certificate insurer] and the depositor.
If the succussor trustee accepts appointment in the manner provided in the
Pooling and Servicing Agreement, the servicer will give notice of the successor
trustee's appointment to the certificateholders. The resigning trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee if no successor trustee has been appointed and has accepted appointment
within 30 days after the giving of notice of resignation. The court may appoint
a successor trustee after delivery of the notice, if any, as it may deem proper
and prescribe.
If the trustee fails to perform in accordance with the terms of the Pooling
and Servicing Agreement[, the certificate insurer or] the majority
certificateholders [with the consent of the certificate insurer,] may remove the
trustee and appoint a successor trustee in the manner set forth in the Pooling
and Servicing Agreement.
For the purpose of meeting any legal requirements of any jurisdiction in
which any part of the trust fund or the trust or property securing the same may
at the time be located, the servicer and the trustee acting jointly shall have
the power and shall execute and deliver all instruments to
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(1) appoint one or more persons approved by the trustee to act as
co-trustee or co-trustees, jointly with the trustee, or separate trustee or
separate trustees, of all or any part of the trust fund, including the trust,
and
(2) to vest in the person or persons, title to the trust fund or the
trust, or any part thereof, and, subject to the provisions of the Pooling and
Servicing Agreement, those powers, duties, obligations, rights and trusts as
the servicer and the trustee may consider necessary or desirable.
[THE CERTIFICATE INSURANCE POLICY
The following summary of the terms of the certificate insurance policy does
not purport to be complete and is qualified in its entirety by reference to the
certificate insurance policy. The information in this section regarding the
certificate insurance policy has been supplied by the certificate insurer for
inclusion herein. Only the Class A certificates will be entitled to the benefit
of the certificate insurance policy to be issued by the certificate insurer.
On the closing date, the certificate insurer will issue the certificate
insurance policy in favor of the trustee. The certificate insurance policy will
unconditionally and irrevocably guarantee Insured Payments on the Class A
certificates.
The certificate insurer's obligation under the certificate insurance policy
will be discharged to the extent that funds are received by the trustee for
distribution to the holders, whether or not the funds are properly distributed
by the trustee.
For purposes of the certificate insurance policy, the "holder" as to a
particular Class A certificate does not and may not include the servicer, the
transferor or the depositor.
The certificate insurance policy will be non-cancelable.
The certificate insurance policy will be issued pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
THE CERTIFICATE INSURANCE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY
INSURANCE SECURITY FUND SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.]
[THE CERTIFICATE INSURER
The following information has been supplied by __________________ for
inclusion in this prospectus supplement. No representation is made by the
transferor, the depositor, the servicer, the trustee, the underwriters or any of
their respective affiliates as to the accuracy or completeness of the
information.
The certificate insurer is a ______________________ corporation regulated by
the Office of the Commissioner of Insurance of the State of ____________. The
certificate insurer is licensed to do business in 50 states, the District of
Columbia, the Commonwealth of Puerto Rico and the Territory of Guam. The
certificate insurer primarily insures ___________________ obligations. The
certificate insurer is a wholly-owned subsidiary of _____________, a ___________
company. Moody's Investor Service, Inc., Standard & Poor's Ratings Services and
Fitch IBCA, Inc. have each assigned a __________ financial strength rating to
the certificate insurer.
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<PAGE>
The following financial statements are incorporated into this prospectus
supplement and shall be deemed to be a part of this prospectus supplement:
(1) the consolidated financial statements of the certificate insurer and
its subsidiaries as of December 31, 199_ and December 31, 199_ and for the
three years ended December 31, 199_ prepared in accordance with generally
accepted accounting principles, included in the Annual Report on Form 10-K of
________________ and
(2) the unaudited consolidated financial statements of the certificate
insurer and its subsidiaries as of March 31, 199_ and for the periods ending
March 31, 199_ and March 31, 199_, included in the Quarterly Report on Form
10-Q of __________ for the period ended March 31, 199_.
Any statement contained in a document incorporated in this prospectus
supplement by reference 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 modified or superseded the statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus supplement.
All financial statements of the certificate insurer and its subsidiaries
included in documents filed by _________________ with the Securities and
Exchange Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the
certificates shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part of this prospectus supplement from the
respective dates of filing the documents.
The following table sets forth the capitalization of the certificate insurer
as of December 31, 199_, December 31, 199_, December 31, 199_ and March 31,
199_, respectively, in conformity with generally accepted accounting principles.
S-58
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--------------------------
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER 31, DECEMBER 31, MARCH 31,
199_ 199_ 199_ 199_
------------ ------------ ------------ ----------
Unearned premium........ $ $ $ $
Other liabilities.......
------------ ------------ ------------ ----------
Total Liabilities....... $ $ $ $
------------ ------------ ------------ ----------
Stockholder's equity
Common stock.......... $ $ $ $
Additional paid-in
capital...............
Accumulated other
comprehensive income..
Retained earnings.....
------------ ------------ ------------ ----------
Total stockholder's equity $ $ $ $
------------ ------------ ------------ ----------
Total liabilities and
stockholder's equity.... $ $ $ $
============ ============ ============ ==========
Components of stockholder's equity as set forth in the above Capitalization
Table, 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
certificate insurer effective January 1, 1998. As this new standard only
requires additional information in the financial statements, it does not affect
the certificate insurer's financial position or results of operations.
For additional financial information concerning the certificate insurer, see
the audited and unaudited financial statements of the certificate insurer
incorporated by reference in this prospectus supplement. Copies of the financial
statements of the certificate insurer incorporated by reference and copies of
the certificate insurer's annual statement for the year ended December 31, 199_
are available, without charge, from the certificate insurer. The address of the
certificate insurer's administrative offices and its telephone number are
__________________________________ and (___) ___-_____.
The certificate insurer makes no representation regarding the certificates or
the advisability of investing in the certificates . The certificate insurer
makes no representation regarding, nor has it participated in the preparation
of, this prospectus supplement other than the information supplied by the
certificate insurer and presented under the headings "The Certificate Insurance
Policy" and "The Certificate Insurer" in the prospectus supplement and in the
financial statements incorporated in this prospectus supplement by reference.]
S-59
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
For federal income tax purposes, we will make elections to treat designated
portions of the trust fund as one or more REMICs. The Class A certificates will
represent the "regular interests" in a REMIC and in the right to receive the
basis risk payments. The beneficial owner of a principal balance certificate
will be required to allocate its basis between the regular interest and the
right to receive the basis risk payments. The Class R certificates will
represent the "residual interest" in each of the trust REMICs. 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
Servicing Agreement, for federal income tax purposes, each portion of the trust
fund as to which a REMIC election is made will qualify as a REMIC under the
Internal Revenue Code . The portion of the trust fund not designated as a REMIC
will be treated as a grantor trust. See "Certain Federal Income Tax
Consequences--REMICs" in the accompanying prospectus.
The REMIC regular interests represented by the principal balance certificates
each bear interest at the lesser of their respective pass-through rates and
Weighted Average Net Loan Rate less ___%. Because the interest rate of the
regular interests may be lower than the pass-through rates on the Principal
Balance Certificates, some or all of the regular interests may be treated or
issued with original issue discount or at a lesser premium based on the portion
of the investor's purchase price for the principal balance certificates
allocable to the regular interest. See "--Discount and Premium" below.
DISCOUNT AND PREMIUM
The regular interests represented by the Class A-1 through Class A-6
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 regular interests in accordance with the
accrual method of accounting. The Class A-6IO certificates will be treated as
issued with original issue discount in an amount equal to all distributions
expected to be received thereon over their issue price. It is anticipated that
the regular interests represented by the Class __ and Class __ certificates will
be issued with original issue discount for federal income tax purposes. It is
anticipated that the regular interests represented by the Class __ and Class __
certificates will be issued at a premium for federal income tax purposes. See
"Certain Federal Income Tax Consequences--REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount" and "--Premium" in the
accompanying prospectus.
The Prepayment Assumption will be ___% CPR for purposes of accruing original
issue discount, determining whether the original issue discount is de minimis
and amortizing any premium. See "Yield and Maturity Considerations--Weighted
Average Lives" in this prospectus supplement. No representation is made as to
the rate, if any, at which the mortgage loans will prepay.
CHARACTERIZATION OF INVESTMENTS IN 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,
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including original issue discount, 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 mortgage loans are treated as assets described in Section 856(c)(4)(A) or
Section 7701(a)(19)(C) of the Code, the regular interest represented by the
offered certificates will be treated as the assets in their entirety.
Furthermore, the principal balance 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 may 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 "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the accompanying prospectus.
For further information regarding the federal income tax consequences of
investing in the offered certificates, see "Certain 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,
(4) any Plan and
(5) persons who have certain specified relationships to the Plans
"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 the Plans. There are certain exemptions
issued by the United States Department of Labor that may be applicable to an
investment by an ERISA Plan in the certificates, including Prohibited
Transaction Class Exemption 83-1. For further discussion of PTE 831, including
the necessary conditions to its applicability and other important factors to be
considered by an ERISA Plan contemplating investing in the certificates, see
"ERISA Considerations" in the prospectus.
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<PAGE>
The U.S. Department of Labor has granted an individual administrative
exemption to PaineWebber Incorporated-Prohibited Transaction Exemption 90-36,
Exemption Application No. D-8069, 55 Fed. Reg. 25903 (1990) . This exempts from
certain of the prohibited transaction rules of ERISA with respect to the initial
purchase, the holding and the subsequent resale by an ERISA 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 Class A certificates by a Plan is on terms
including the price for the Class A 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 Class A certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the trust;
(3) The Class A 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 Rating Services, Moody's
Investors Service, Inc., Fitch IBCA, Inc. or Duff & Phelps Credit Rating Co.
(4) The sum of all payments made to the underwriter[s] in connection with
the distribution of the Class A certificates represents not more than
reasonable compensation for underwriting the Class A certificates. 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 Pooling and
Servicing Agreement and reimbursement of the servicer's reasonable expenses
in connection therewith;
(5) The trustee must not be an affiliate of any other member deemed to be
a "sponsor" of the trust fund; and
(6) The Plan investing in the Class A 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 fund also must meet the following requirements:
(1) The corpus of the trust fund 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 Ratings Services,
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 Class A certificates.
In order for an exemption to apply to certain self-dealing/conflict of
interest prohibited transactions that may occur when a Plan fiduciary causes the
Plan to acquire Class A certificates, the exemption requires, among other
matters, that:
(1) in the case of an acquisition in connection with the initial issuance
of certificates, at least fifty percent of each class of certificates in
which Plans have invested is acquired by
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persons independent of the "sponsors" of the trust fund and at least fifty
percent of the aggregate interest in the trust fund is acquired by persons
independent of the Restricted Group,
(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 Class A certificates does not exceed
twenty-five percent (25%) of all of the certificates outstanding at the time
of the acquisition and
(4) immediately after the acquisition, no more than twenty-five percent
(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.
The Exemption[s] do[es] not apply to certain prohibited transactions in the
case of Plans sponsored by
(1) an underwriter,
(2) the trustee,
(3) the servicer,
(4) any obligor with respect to the loans included in the trust,
(5) any entity deemed to be a "sponsor" of the trust fund as this term is
defined in the exemption, or
(6) any affiliate of any party.
Subject to the foregoing, the depositor believes that the Exemption[s] will
apply to the acquisition and holding of the Class A 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 an ERISA 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 an
ERISA 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.
The sale of Class A certificates to an ERISA Plan is not a representation by
the depositor or the underwriter, that this investment meets all relevant legal
requirements with respect to investments by ERISA Plans generally or any
particular ERISA Plan, or that this investment is appropriate for ERISA Plans
generally or any particular ERISA Plan.
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LEGAL INVESTMENT
The offered certificates will not constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
Institutions subject to the jurisdiction of the following agencies should
review applicable rules, supervisory policies and guidelines of these agencies
before purchasing any of the offered certificates:
(1) the Office of the Comptroller of the Currency,
(2) the Board of Governors of the Federal Reserve System,
(3) the Federal Deposit Insurance Corporation,
(4) the Office of Thrift Supervision,
(5) the National Credit Union Administration or
(6) state banking or insurance authorities.
The offered certificates may be deemed to be unsuitable investments under one or
more of these rules, policies and guidelines and certain restrictions may apply
to those investments. It should also be noted that certain states have enacted
legislation limiting to varying extents the ability of some entities, in
particular, insurance companies, to invest in mortgage related securities.
Investors should consult with their own legal advisors in determining whether
and to what extent the offered certificates constitute legal investments for
those investors. See "Legal Investment" in the prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the depositor[, and] PaineWebber Incorporated, an affiliate of the
depositor, [and ________________ ("_________"), the depositor has agreed to sell
to the underwriter[s], and the underwriter[s] ha[ve] agreed to purchase from the
depositor, the certificate principal balance or notional amount of offered
certificates set forth opposite its name in the tables below:
PRINCIPAL AMOUNT OR NOTIONAL AMOUNT OF:
------------------------------------------------------
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ------------------------ ------------ ------------ ------------ ------------
PaineWebber Incorporated
- --------------------- ------------ ------------ ------------ ------------
Total...........
============ ============ ============ ============
CLASS A-5 CLASS A-6 CLASS A-6IO
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
- ------------------------ ------------ ------------ ------------
PaineWebber Incorporated
- --------------------- ------------ ------------ ------------
Total...........
============ ============ ============
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The depositor has been advised by the underwriter[s] that [it/they]
propose[s] initially to offer the offered certificates to the public at the
prices set forth below, and to certain dealers at prices less the initial
concession set forth below for each class. The underwriter[s] may allow, and the
dealers may reallow, a concession not in excess of that set forth below for each
class. After the initial public offering of the offered certificates, the public
offering price and the concessions and reallowances may be changed.
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4
CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------ ------------
Concessions...........
Reallowances..........
Price to Public.......
Underwriting Discount.
CLASS A-5 CLASS A-6 CLASS A-6IO
CERTIFICATES CERTIFICATES CERTIFICATES
------------ ------------ ------------
Concessions...........
Reallowances..........
Price to Public.......
Underwriting Discount.
Until the distribution of the offered certificates is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriter[s]
and certain selling group members to bid for and purchase the offered
certificates. As an exception to these rules, the underwriter[s] [is/are]
permitted to engage in certain transactions that stabilize the price of the
offered certificates. Those transactions consist of bids or purchases for the
purpose of pegging, fixing or maintaining the price of the offered certificates.
If the underwriter[s] create[s] a short position in the offered certificates
in connection with the offering, the underwriter[s] may reduce that short
position by purchasing offered certificates in the open market. A short position
will result if the underwriter[s] sell[s] more offered certificates than are set
forth on page [ ] of this prospectus supplement.
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.
Neither the depositor nor the underwriter[s] make[s] 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 underwriter[s] make[s] any representation that the
underwriter[s] will engage in the transactions or that those transactions, once
commenced, will not be discontinued without notice.
There is currently no secondary market for the offered certificates. We
cannot assure you that a secondary market for the offered certificates will
develop or, if it does develop, that it will continue.
S-65
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The depositor has agreed to indemnify the underwriter[s] against, or make
contributions to the underwriter[s] with respect to, certain liabilities,
including liabilities under the Securities Act of 1933, as amended.
In addition to the purchase of the offered certificates pursuant to the
Underwriting Agreement, PaineWebber Incorporated and certain of its affiliates
have certain financing relationships with the transferor.
[EXPERTS
The consolidated financial statements of the certificate insurer,
_______________, as of December 31, 199_ and 199_ and for each of the years in
the three-year period ended December 31, 199_, are incorporated by reference
into this prospectus supplement in reliance on the report of _________,
independent certified public accountants and on the authority of the firm as
experts in accounting and auditing. The report of the accounting firm is also
incorporated by reference into this prospectus supplement]
RATINGS
It is a condition to the original issuance of the class A certificates that
they will receive ratings of "____" by ____________________ and "____"
____________________. [The ratings assigned to the class A certificates will be
based on the financial strength rating of the certificate insurer.] Explanations
of the significance of the ratings may be obtained from
________________________________________ and _________________________________.
The ratings will be the views only of the rating agencies. We cannot assure that
any ratings will continue for any period of time or that the ratings will not be
revised or withdrawn. Any revision or withdrawal of the ratings may have an
adverse effect on the market price of the offered certificates.
A securities rating addresses the likelihood of the receipt by the
certificateholders of distributions on the offered certificates. The ratings on
the offered certificates do not constitute statements regarding the possibility
that the certificateholders might realize a lower than anticipated yield. A
securities 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 securities rating should be evaluated independently of
similar ratings on different securities.
LEGAL MATTERS
The validity of the offered certificates and certain federal income tax
matters will be passed on for the depositor and the underwriters by Cadwalader,
Wickersham & Taft, New York, New York.
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<PAGE>
GLOSSARY OF TERMS
"ACCRUAL PERIOD" is the period from,
(1) in the case of the Class A-1 certificates, the preceding distribution
date, or the closing date, in the case of first distribution date, to and
including the day preceding the current distribution date and
(2) in the case of all other certificates, the first day of the preceding
calendar month to and including the last day of the preceding calendar month.
"ADMINISTRATIVE FEE RATE" is sum of
(1) the applicable Servicing Fee Rate,
(2) the per annum rate at which the monthly trustee Fee is calculated [and
(3) the per annum rate at which the premium payable to the certificate
insurer is calculated].
"AVAILABLE DISTRIBUTION AMOUNT" for any distribution date is, in general,
equal:
(1) the servicer Remittance Amount relating to the distribution date,
minus
(2) the sum of the
(a) Trustee Fee for the distribution date [and
(b) the amount owed to the certificate insurer as a premium for the
certificate Insurance Policy for the distribution date].
"BASE PRINCIPAL DISTRIBUTION AMOUNT" for any distribution date is the sum,
without duplication, of
(1) the amount allocable to principal actually due and collected by the
servicer in respect of the loans during the related Due Period, including all
full and partial principal prepayments,
(2) the unpaid principal balance of each loan that was repurchased from
the trust fund during the related Due Period,
(3) the portion of any Substitution Adjustment allocable to principal paid
by the transferor in connection with a substitution of a loan during the
related Due Period, and
(4) all Net Liquidation Proceeds [and Insurance Proceeds] actually
collected by the servicer during the related Due Period (to the extent
allocable to principal).
"CERTIFICATE ACCOUNT" is an Eligible Account set up by the trustee into which
the servicer will deposit the Servicer Remittance Amount on the Servicer
Remittance Date.
["CERTIFICATE INSURANCE AGREEMENT" The Insurance and Indemnity Agreement
among the certificate insurer, the depositor and the transferor.]
"CERTIFICATE INTEREST REMITTANCE AMOUNT" is the sum of the Interest
Remittance Amounts for each class of certificates.
S-67
<PAGE>
"CLASS A-1 LIBOR RATE" is LIBOR calculated as described under "Description of
the Offered Certificates--Calculation of LIBOR" as of the LIBOR Determination
Date, plus __% per annum, subject to a maximum rate of __% per annum.
"CLASS A-6 LOCKOUT DISTRIBUTION AMOUNT" for any distribution date, is the
product of
(1) the applicable Class A-6 Lockout Percentage for the distribution date
and
(2) the Class A-6 Lockout Pro Rata Distribution Amount for the
distribution date.
"CLASS A-6 LOCKOUT PERCENTAGE" for each distribution date is as follows:
LOCKOUT
DISTRIBUTION DATES PERCENTAGE
----------------------------- ------------
____ 199_ - ____ 20__... %
____ 20__ - ____ 20__... %
____ 20__ - ____ 20__... %
____ 20__ - ____ 20__... %
____ 20__ and thereafter %
"CLASS A-6 LOCKOUT PRO RATA DISTRIBUTION AMOUNT" for any distribution date is
an amount equal to the product of
(1) a fraction, the numerator of which is the certificate principal
balance of the Class A-6 certificates immediately prior to the distribution
date and the denominator of which is the aggregate certificate principal
balance of all the principal balance certificates immediately prior to the
distribution date and
(2) the Principal Distribution Amount for the distribution date.
"CLTV" for any loan is the combined loan-to-value ratio, which is calculated
by dividing the sum of:
(1) any outstanding first lien balance of the loan as of the date of
origination of the related loan plus
(2) the unpaid principal balance of the loan as of the cut-off date, by
the appraised value of the property at origination.
"CODE" means the Internal Revenue Code of 1986, as amended.
"COLLECTION ACCOUNT" an Eligible Account established and maintained for the
benefit of the certificateholders [and the certificate insurer] into which the
servicer shall deposit required payments and collections.
"COMPENSATING INTEREST" for any distribution date is an amount equal to the
lesser of
(1) the aggregate of the Prepayment Interest Shortfalls for the related
distribution date resulting from principal prepayments during the related Due
Period and
(2) the servicer's aggregate Servicing Fees received in the related Due
Period.
"CPR" means constant prepayment rate.
"DEBT SERVICE REDUCTION" is a reduction by a court of the monthly payment due
on a loan.
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"DEFICIENT VALUATION" is reduction in the principal balance of a loan by the
bankruptcy court in connection as a result of a bankruptcy of the borrower.
"DEFINITIVE CERTIFICATE" is a physical certificate issued in the name of the
beneficial owner of the offered certificate rather than DTC.
"DETERMINATION DATE" with respect to any distribution date is the [ ] day of
month in which the related distribution date occurs, or, the [ ] day is not a
business day, the immediately preceding business day.
"DISTRIBUTABLE CERTIFICATE INTEREST" with respect to each class of Class A
certificates for each distribution date is equal to interest at the pass-through
rate applicable to each class of certificates for the distribution date accrued
on the related certificate balance or notional amount during the related Accrual
Period, as the case may be, outstanding immediately prior to the distribution
date. Distributable Certificate Interest will be calculated on the basis of a
360-day year consisting of twelve 30-day months, except that interest calculated
with respect to the Class A-1 certificates will be based on a 360-day year and
the actual number of days elapsed.
"DUE PERIOD" for each distribution date or Determination Date is the period
that begins on the ___ day of the calendar month preceding the month in which
the distribution date or Determination Date occurs and ends on and includes the
last day of the month in which the distribution date or Determination Date
occurs.
"ELIGIBLE ACCOUNT" is a trust account maintained with a depository
institution acceptable to each rating agency [and the certificate insurer].
"EXTRA PRINCIPAL DISTRIBUTION AMOUNT" for any distribution date if there
exists an Overcollateralization Deficiency Amount, is the Turbo Amount.
"FORECLOSURE PROFITS" With respect to any distribution date, the excess, if
any, of:
(1) Net Liquidation Proceeds in respect of each loan that became a
Liquidated Loan in the Due Period prior to the distribution date over
(2) the sum of the unpaid principal balance of each Liquidated Loans plus
accrued and unpaid interest.
["INSURANCE PROCEEDS" are the proceeds paid by any insurer pursuant to any
insurance policy covering a loan to the extent the proceeds are not applied to
the restoration of the related property or released to the related borrower.
Insurance Proceeds do not include Insured Payments.]
"INSURED PAYMENT" means
(1) with respect to any distribution date the excess, if any, of
(a) the sum of:
(i) the amount of interest accrued on the principal balances or
notional balance of the related Class A certificates, at the applicable
pass-through rate during the related Accrual Period, excluding any
Relief Act Shortfalls and Net Prepayment Interest Shortfall,
(ii) the Subordination Deficit and
(iii) any related Preference Amounts, without duplication, over
S-69
<PAGE>
(b) the Total Available Funds for the distribution date and
(2) on the final distribution date, the outstanding principal balance of
all classes of Class A certificates then outstanding, to the extent not
otherwise paid on the distribution date.
"INTEREST REMITTANCE AMOUNT" is interest payable on any distribution date at
the related pass-through rate on the related certificate principal balance or
notional amount outstanding on the immediately preceding distribution date,
after giving effect to all payments of principal made on the distribution date.
"LIBOR" is the London interbank offered rate for one-month U.S. dollar
deposits.
"LIBOR BUSINESS DAY" means any day other than
(1) a Saturday or a Sunday or
(2) a day on which banking institutions in the city of London, England are
required or authorized by law to be closed.
"LIBOR DETERMINATION DATE" is the second business day prior to the preceding
distribution date, or prior to the cut-off date in the case of the first
distribution date.
"LIQUIDATED LOAN" in general, a defaulted loan as to which the servicer has
determined that all amounts that it expects to recover on the loan have been
recovered, exclusive of any possibility of a deficiency judgment.
"LIQUIDATED LOAN LOSS" is the aggregate of the amount of losses with respect
to each loan which became a Liquidated Loan in the Due Period prior to the
distribution date, equal to the excess of:
(1) the unpaid principal balance of each Liquidated Loan, plus accrued
interest thereon, over
(2) Net Liquidation Proceeds with respect to the Liquidated Loan. To the
extent of the Available Distribution Amount, a Liquidated Loan Loss will be
recovered by the holders of the certificates, on the distribution date which
immediately follows the event of loss.
Any Liquidated Loan Loss that results in a Subordination Deficit will require
payment of an Insured Payment if not otherwise available from the Available
Distribution Amount.
"LIQUIDATION PROCEEDS" are the amounts received by the servicer, [including
Insurance Proceeds], in connection with the liquidation of a defaulted or
written-down loan or property acquired in respect thereof, other than amounts
required to be paid to the borrower pursuant to the terms of the loan or to be
applied otherwise pursuant to law.
"LOAN SCHEDULE" is the schedule appearing as an exhibit to the Pooling and
Servicing Agreement which sets forth the requirements and descriptions of the
loans.
"MORTGAGE NOTE" evidences an interest in a mortgage loan secured by a
mortgage or deed of trust.
"NET FORECLOSURE PROFITS" for any distribution date is the excess, if any,
of:
(1) the aggregate Foreclosure Profits for the distribution date, over
(2) the Liquidated loan Loss for the distribution date.
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"NET LOAN RATE" with respect to any loan is, in general, a per annum rate
equal to the related loan interest rate in effect from time to time, minus the
Administrative Fee Rate.
"NET LIQUIDATION PROCEEDS" with respect to any defaulted loan, the
Liquidation Proceeds with respect to the loan, net of the sum of:
(1) expenses incurred by the servicer in connection with the liquidation
of any defaulted loan and
(2) any unreimbursed Periodic Advances made by the servicer with respect
to the defaulted loan.
"NET PREPAYMENT INTEREST SHORTFALLS" with respect to any distribution date,
the excess of:
(1) the Prepayment Interest Shortfalls for the related distribution date
and
(2) the Compensating Interest paid by the servicer for the related
distribution date.
"OVERCOLLATERALIZATION AMOUNT" with respect to any distribution date is the
excess, if any, of:
(1) the aggregate principal balance of the loans as of the close of
business on the last day of the related Due Period over
(2) the aggregate certificate principal balance of the offered
certificates, as of the distribution date, after taking into account the
distribution of the Base Principal Distribution Amount, but not the Extra
Principal Distribution Amount, on the distribution date.
"OVERCOLLATERALIZATION DEFICIENCY AMOUNT" for any distribution date is the
excess, if any,
(1) of the related Overcollateralization Target Amount for the
distribution date over
(2) the related Overcollateralization Amount for the distribution date.
The Overcollateralization Deficiency Amount is calculated after giving effect
to the reduction on the distribution date of the aggregate certificate principal
balance attributable to the distribution of the Base Principal Distribution
Amount on the distribution date.
"OVERCOLLATERALIZATION TARGET AMOUNT" for any distribution date will be
established pursuant to the Pooling and Servicing Agreement and may increase or
decrease over time and may be modified from time to time by agreement of the
[certificate insurer and the] transferor.
"PERIODIC ADVANCE" for any distribution date is sum of:
(1) the interest portion of the scheduled monthly payments on each loan
due by the related due date but not received by the servicer as of the close
of business on the related Determination Date, net of the Servicing Fee and
(2) with respect to each REO Property which was acquired during or prior
to the related Due Period and as to which an REO Property disposition did not
occur during the related Due Period, an amount equal to the excess, if any,
(a) of interest on the unpaid principal balance of the loan
related to the REO Property at the related loan interest rate, net
of the Servicing Fee, for the related Due Period for the related
loan over
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(b) the net income from the REO Property to be transferred to
the Certificate Account for the distribution date pursuant to the
Pooling and Servicing Agreement.
"PERMITTED INVESTMENTS" are certain government securities and other
investment grade obligations specified in the Pooling and Servicing Agreement
that mature, unless payable on demand, no later than the business day preceding
the date on which the servicer is required to transfer any amounts included in
the funds from the Collection Account to the Certificate Account.
"PLAN" is any
(1) employee benefit plan as defined in Section 3(3) of ERISA,
(2) plan described in Section 4975(e)(1) of the Code, including individual
retirement accounts or Keogh plans, or
(3) entity whose underlying assets include plan assets by reason of a plan's
investment in entities specified in clauses (1) and (2) above.
"POOLING AND SERVICING AGREEMENT" is a pooling and servicing agreement among
the depositor, the servicer and the trustee.
"PREFERENCE AMOUNT" is any amount previously distributed to a holder of a
Class A certificate that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.) as amended from time to time, in accordance with a final
non-appealable order of a court having competent jurisdiction.
"PREPAYMENT ASSUMPTION" represents an assumed rate of prepayment each month
relative to the then outstanding principal balance of the pool of loans for the
life of the loans.
"PREPAYMENT INTEREST SHORTFALL" with respect to any distribution date is an
amount equal to the excess, if any, of
(1) 30 days' interest on the outstanding principal balance of a loan at a
per annum rate equal to the related loan interest rate, less any Deficient
Valuation and/or any Debt Service Reduction, and less the rate at which the
Servicing Fee is calculated, over
(2) the amount of interest actually remitted by the borrower in connection
with the principal prepayment in full, less the Servicing Fee for the loan in
the related month.
"PRINCIPAL DISTRIBUTION AMOUNT" for any distribution date is the sum of:
(1) the Base Principal Distribution Amount for the distribution date and
(2) the Extra Principal Distribution Amount for the distribution date, if
any.
"PURCHASE PRICE" is equal to the unpaid principal balance of a loan as of the
date of purchase, plus the greater of:
(1) all accrued and unpaid interest on the loan or
(2) 30 days' interest on the loan, computed at the related loan interest
rate, plus the amount of any unreimbursed Servicing Advances made by the
servicer.
The Purchase Price shall be deposited in the Collection Account on the next
succeeding Determination Date after deducting any amounts received in respect of
a repurchased loan or
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<PAGE>
loans and being held in the Collection Account for future distribution to the
extent the amounts have not yet been applied to principal or interest on the
loan or loans.
"QUALIFIED SUBSTITUTE LOAN" is any loan or loans which:
(1) relates or relate to a detached one-family residence or to the same
type of residential dwelling as the loan being substituted for and in each
case has or have the same or a better lien priority as the deleted loan with
a borrower having the same or better traditionally ranked credit status and
is an owner-occupied property,
(2) matures or mature no later than, and not more than one year earlier
than, the deleted loan,
(3) has or have a CLTV or CLTV at the time of the substitution no higher
than the CLTV of the deleted loan,
(4) has or have an unpaid principal balance or principal balances after
application of all payments received on or prior to the date of substitution,
which shall be the unpaid principal balance or principal balances, not
substantially less and not more than the unpaid principal balance of the
deleted loan as of the date, and
(5) complies or comply as of the date of substitution with each
representation and warranty set forth in the Pooling and Servicing Agreement.
"RECORD DATE" is the last business day of the calendar month immediately
preceding the month in which the related distribution date occurs.
"REDUCED WEIGHTED AVERAGE NET LOAN RATE" is the Weighted Average Net Loan
Rate minus ____% per annum.
"REFERENCE BANK RATE" will be, with respect to any Accrual Period, the
arithmetic mean of the offered rates for United States dollar deposits for one
month which are offered by four major banks specified in the Pooling and
Servicing Agreement to prime banks in the London interbank market for a period
of one month in amounts approximately equal to the outstanding certificate
principal balance of the Class A-1 certificates. The Reference Bank Rate will be
rounded upwards, if necessary, to the nearest one-sixteenth of one percent. The
Reference Bank Rate will be determined as of 11:00 a.m., London, England time,
on the second LIBOR business day prior to the first day of the related Accrual
Period.
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 servicer, as of 11:00 a.m.,
New York time, on the date for loans in U.S. Dollars to leading European banks
for a period of one month in amounts approximately equal to the outstanding
certificate principal balance of the Class A-1 certificates.
If no quotations can be obtained, the Reference Bank Rate will be the
Reference Bank Rate applicable to the preceding Accrual Period.
"REIMBURSEMENT AMOUNT" for any distribution date is the lesser of:
(1) the excess of:
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(a) the Available Distribution Amount remaining after the distributions
set forth in clauses (1) through (3) under "Description of the Offered
Certificates--Application of the Available Distribution Amount" have been
made for the distribution date over
(b) the amount of any Insured Payment for the distribution date [and
(2) the amount of all Insured Payments and other payments made by the
certificate insurer pursuant to the Certificate Insurance Agreement which
have not been previously repaid together with interest thereon at the rate
set forth in the Certificate Insurance Agreement as of the distribution
date].
"RELIEF ACT SHORTFALLS" are interest shortfalls incurred by any class of
certificates resulting from the application of the Soldiers' and Sailors' Civil
Relief Act of 1940, as amended. See "Certain Legal Aspects of Residential
Loans--Soldiers' and Sailors' Civil Relief Act of 1940" in the prospectus.
"REO PROPERTY" is a property acquired on behalf of the certificateholders in
respect of a defaulted loan through foreclosure, deed-in-lieu of foreclosure,
repossession or otherwise.
"SERVICER REMITTANCE AMOUNT" for any distribution date is the sum of
(1) all unscheduled collections of principal and interest on the loans
collected by the servicer during the related Due Period and all scheduled
monthly payments on the loans in the case of loans due on the related due
date and received on or prior to the business day preceding the Servicer
Remittance Date,
(2) all Periodic Advances made by the servicer with respect to interest
payments due to be received on the loans in the case of the related due date,
(3) the amount of Compensating Interest due with respect to loans for the
related Due Period, and
(4) any other amounts required to be placed in a Collection Account by the
servicer in respect of the loans pursuant to the Pooling and Servicing
Agreement but excluding the following:
(a) amounts received on particular Loans as late payments of interest
and respecting which the servicer has previously made an unreimbursed
Periodic Advance;
(b) the portion of Liquidation Proceeds used to reimburse any
unreimbursed Periodic Advances made with respect to the loans by the
Servicer;
(c) those portions of each payment of interest on a particular Loan
which represent the Servicing Fee;
(d) that portion of Liquidation Proceeds and proceeds received in
respect of any REO Property which represents any unpaid Servicing Fee;
(e) all income from Permitted Investments that is held in the
Collection Account for the account of the servicer;
(f) all amounts in respect of late fees, assumption fees, prepayment
penalties and similar fees;
(g) certain other amounts which are reimbursable to the Servicer, as
provided in the Pooling and Servicing Agreement; and
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<PAGE>
(h) that portion of Net Foreclosure Profits with respect to loans
otherwise due to the servicer as provided in the Pooling and Servicing
Agreement.
"SERVICER REMITTANCE DATE" is the date on which all funds deposited in any
Collection Account that are to be included in the Servicer Remittance Amount
related to a particular distribution date are required to be transferred to the
Certificate Account, in no event later than the close of business on the ____
business day prior to the distribution date .
"SERVICING ADVANCES" are advances to be made by the Servicer constituting
"out-of-pocket" costs and expenses relating to:
(1) the preservation and restoration of the property,
(2) enforcement proceedings, including foreclosures,
(3) expenditures relating to the purchase or maintenance of a first lien
not included in the trust on the property, and
(4) certain other customary amounts described in the Pooling and Servicing
Agreement.
"SERVICING FEE" is an amount equal to interest at one-twelfth of the
Servicing Fee Rate for the loan on the unpaid principal balance of the loan at
the end of the applicable Due Period.
"SERVICING FEE RATE" is the rate, equal to ___%, at which the Servicing Fee
is paid.
"SUBORDINATION DEFICIT" for any distribution date is the excess, if any, of:
(1) the aggregate of the certificate principal balance of all classes, on
the related distribution date, after taking into account the payment of the
related Principal Distribution Amount on the distribution date [except for
amounts payable under the certificate Insurance Policy] over
(2) the aggregate unpaid principal balance of the loans, as of the end of
the related Due Period.
"SUBSTITUTION ADJUSTMENT" is the amount by which the principal balance of a
loan to be substituted for, plus accrued and unpaid interest on the loan exceeds
the principal balance of the related Qualified Substitute Loan.
"TELERATE PAGE 3750" means the display page so designated on the Bridge
Telerate Service, or such other page as may replace page 3750 on such service
for the purpose of displaying London interbank offered rates of major banks. If
such rate does not appear on such page, or such other page as may replace such
page on such service, or if such service is no longer offered, such other
service for displaying LIBOR or comparable rates as may be selected by the
issuer after consultation with the trustee, the rate will be the Reference Bank
Rate.
"TOTAL AVAILABLE FUNDS" with respect to each class of Class A certificates
and any distribution date is the Available Distribution Amount for the
distribution date.
"TRUSTEE FEE" is a fee payable to the trustee, which fee shall include the
expenses of the trustee, including transition expenses, to the extent the
expenses are not paid by the servicer in respect of its services as trustee.
"TURBO AMOUNT" for any distribution date is the product of
(1) ___% per annum and
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(2) the unpaid principal balance of the loans as of the end of the related
Due Period, less
any losses on the loans allocable to interest that were incurred during the
related Due Period.
"TRUSTEE'S LOAN FILE" consists of the following documents with respect to
each loan, the Mortgage Note, the Mortgage, the Assignment of Mortgage, all
intervening assignments and each assumption, modification or substitution
agreement.
"WEIGHTED AVERAGE LIFE" refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor thereof of each dollar distributed in reduction of principal of the
security, assuming no losses.
"WEIGHTED AVERAGE NET LOAN RATE" is the weighted average of the Net Loan
Rates for any distribution date for all the loans, based on loan interest rates
applied with respect to payments due in the related Due Period and weighted on
the basis of their respective unpaid principal balances immediately following
the preceding distribution date or, in the case of the initial distribution
date, as of the cut-off date.
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====================================== ======================================
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
Summary............................S-5
Risk Factors.......................S-14
Forward-Looking Statements.........S-20
Defined Terms......................S-21
Description of the Loans...........S-21
The Transferor and The Servicer....S-28
Prepayment and Yield ConsiderationsS-32
Description of the Offered
Certificates.......................S-42
Servicing of the Loans.............S-47
The Trustee........................S-56
[The Certificate Insurance Policy..S-57
[The Certificate Insurer...........S-57
Certain Federal Income Tax
Consequences.......................S-60 $___________ (APPROXIMATE)
ERISA Considerations...............S-61
Legal Investment...................S-64 ______________ HOME
Underwriting.......................S-64 EQUITY TRUST 199_-_
[Experts...........................S-66
Ratings............................S-66 HOME EQUITY ASSET
Legal Matters......................S-66 BACKED CERTIFICATES,
Glossary Of Terms..................S-67 SERIES 199_-_
PAINEWEBBER MORTGAGE ACCEPTANCE
PROSPECTUS CORPORATION IV
Page (DEPOSITOR)
----
Available Information..................
Reports to Securityholders............. ______________________
Incorporation of Certain Information by (TRANSFEROR AND SERVICER)
Reference..............................
prospectus supplement or Current Report ---------------------------------------
on Form 8-K............................ PROSPECTUS SUPPLEMENT
Summary of Terms....................... ---------------------------------------
Risk Factors...........................
The trust funds........................ PAINEWEBBER INCORPORATED
Use of Proceeds........................
Yield Considerations...................
Maturity and Prepayment Considerations.
The Depositor..........................
Residential loan Program............... _____________, 199_
Description of the Securities..........
Description of Primary Insurance
Coverage...............................
Description of Credit Support..........
Certain Legal Aspects of Residential
loans..................................
Certain Federal Income Tax Consequences
State and Other Tax Consequences.......
ERISA Considerations...................
Legal Investment.......................
Plans of Distribution..................
Legal Matters..........................
Financial Information..................
Rating.................................
Index of Defined Terms.................
-----------------
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
____________, 199_.
====================================== ======================================
<PAGE>
PROSPECTUS SUPPLEMENT DATED _________, 199_
(To prospectus dated ____________, 199_)
$ (APPROXIMATE)
HOME LOAN ASSET BACKED NOTES, SERIES 199_-
__________ HOME LOAN OWNER TRUST 199_-
ISSUER
PAINEWEBBER MORTGAGE ACCEPTANCE CORPORATION IV
DEPOSITOR
TRANSFEROR AND MASTER SERVICER
SERVICER
___________________
o The issuer, an owner trust, is issuing notes that have an approximate
original principal balance of $ , subject to permitted variance of plus
or minus % and a per annum interest rate of one-month LIBOR plus %.
o The notes are backed by a pool of [first lien mortgage loans on
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 notes is provided by a financial guaranty insurance
policy issued by ____________________.]
- --------------------------------------------------------------------------------
You should consider carefully the risk factors beginning on page s-[ ] of
this prospectus supplement and page [ ] in the prospectus.
The notes will represent obligations of the issuer only and will not
represent obligations of PaineWebber Mortgage Acceptance Corporation IV or any
other person or entity. No governmental agency or any other person will insure
the notes or the collateral securing the notes[, except that __________________
will insure the notes]. The notes 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 notes.
- --------------------------------------------------------------------------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THE NOTES
OR DETERMINED THAT THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We will not list the notes on any securities exchange or on any automated
quotation system.
PaineWebber Incorporated [and _______________________], as the
underwriter[s], will purchase the notes from PaineWebber Mortgage Acceptance
Corporation IV and will offer them to the public at a price equal to ___% of the
initial principal amount of the notes. The underwriter[s] will receive an
underwriting discount equal to % of the initial principal amount of the notes.
The underwriter[s] expect[s] to deliver the notes to purchasers on or about
_________, 199_ in book-entry form through The Depository Trust Company,
Cedelbank and The Euroclear System. PaineWebber Mortgage Acceptance Corporation
IV expects to receive from this offering approximately % of the original
principal balance of the notes, before deducting expenses payable by PaineWebber
Acceptance Corporation IV.
PAINEWEBBER INCORPORATED
<PAGE>
IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE PROSPECTUS
We provide information about the series 199_-_ notes is in two separate
documents that progressively include more detail:
o the accompanying prospectus dated __________, 199_, which provides
general information, some of which may not apply to the series 199_-_
notes; and
o this prospectus supplement, which describes the specific terms of the
series 199_-_ notes.
Sales of the notes 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 notes vary between this prospectus supplement and the
accompanying prospectus, then you should rely on the information in this
prospectus supplement.
Cross-references in this prospectus supplement and the accompanying
prospectus to captions in these materials are included to assist in locating
further related discussions. The following table of contents and the table of
contents in the accompanying prospectus provide the pages on which these
captions are located.
All statistical data with respect to the loans are approximate, and are
based on the scheduled principal balances of the loans as of the close of
business on ___________, 199_, except where noted otherwise.
S-2
<PAGE>
TABLE OF CONTENTS
PAGE
Summary.....................................................................S-5
Risk Factors...............................................................S-15
Basis Risk May Adversely Affect Yield...................................S-15
Actual Yield to Maturity May Be Less Than Anticipated..................S-15
Unpredictability of Prepayments Could Adversely Affect Yield............S-16
Limited Liquidity May Adversely Affect Market Value of Notes............S-16
Credit Enhancement May Not Be Adequate..................................S-17
Noteholders'Rights Are Limited by Securities Insurer....................S-17
Risks Relating to Non-Conforming Underwriting Guidelines................S-17
Transfers of Servicing May Adversely Affect Payments on the Notes.......S-18
Inadequacy of Value of Properties Could Affect Severity of Losses.......S-18
Bankruptcy of Borrower May Adversely Affect Payments on the Notes.......S-19
Geographic Concentration Could Increase Losses on the Loans.............S-19
Non-Recordation of Assignments Could Increase Losses on the Loans.......S-19
Insolvency of Transferor May Adversely Affect Payments on the Notes.....S-20
Bankruptcy of Other Parties May Adversely Affect Payments on the
Notes................................................................S-20
Violations of Federal and State Laws May Adversely Affect Ability
to Collect on Loans..................................................S-21
Failure of Servicer to Perform May Adversely Affect Payments on
the Notes............................................................S-21
Transferor May Not Be Able To Repurchase or Replace Defective
Loans...............................................................S-22
Year 2000 Non-Compliance May Adversely Affect Payments on the
Notes...............................................................S-22
Forward-Looking Statements.................................................S-23
The Pool...................................................................S-24
General.................................................................S-24
Payments on the Loans...................................................S-24
Characteristics of the Loans............................................S-26
Loan Statistics.........................................................S-27
Master Servicer............................................................S-38
Master Servicer Duties..................................................S-38
Servicer...................................................................S-40
General.................................................................S-40
Servicing Procedures....................................................S-40
Delinquency and Loss Experience May Not Be Applicable to the Pool.......S-43
Underwriting Criteria......................................................S-45
General.................................................................S-45
Prepayment and Yield Considerations........................................S-50
General.................................................................S-50
Excess Spread and Reduction of Overcollateralization Amount.............S-55
Reinvestment Risk.......................................................S-56
Maturity Date...........................................................S-56
Yield Considerations Relating to Adjustable-Rate Loans..................S-56
Weighted Average Lives of the Notes.....................................S-57
Modeling................................................................S-58
The Owner Trust and Indenture..............................................S-61
General.................................................................S-61
The Owner Trustee.......................................................S-62
The Indenture Trustee...................................................S-62
Description of the Notes...................................................S-63
General.................................................................S-63
Payments on the Notes...................................................S-65
Priority of Payments....................................................S-66
[Securities Insurer Reimbursement Amount................................S-66
Optional Redemption.....................................................S-67
Description of Credit Enhancement..........................................S-68
[Financial Guaranty Insurance Policy....................................S-68
The Securities Insurer..................................................S-70
Overcollateralization...................................................S-73
Subordination...........................................................S-74
Description of the Transfer and Servicing Agreements.......................S-74
Sale and Assignment of the Loans........................................S-75
Representations and Warranties..........................................S-76
Repurchase of Loans.....................................................S-76
Fees and Expenses.......................................................S-78
Servicing...............................................................S-78
Collection Account, Note Payment Account and Certificate
Distribution Account................................................S-79
Income From Accounts....................................................S-80
Collection and Other Servicing Procedures For Loans.....................S-80
Insurance...............................................................S-81
Realization On Defaulted Loans..........................................S-81
S-3
<PAGE>
Evidence as to Compliance...............................................S-83
Certain Matters Regarding the Master Servicer...........................S-83
Master Servicer Events of Default.......................................S-84
Certain Matters Regarding the Servicer..................................S-85
Servicer Determinations and Events of Default...........................S-85
Rights of Noteholders on Occurrence of Event of Default.................S-87
Restrictions on Noteholders' Rights.....................................S-87
The Owner Trustee and Indenture Trustee.................................S-88
Duties of the Owner Trustee And Indenture Trustee.......................S-89
Reports to Noteholders..................................................S-90
Federal Income Tax Consequences............................................S-92
Classification of Investment Arrangement................................S-92
Taxation of Holders.....................................................S-92
Backup Withholding and Information Reporting............................S-94
ERISA Considerations.......................................................S-94
General.................................................................S-94
Prohibited Transactions.................................................S-95
Review by Plan Fiduciaries..............................................S-96
Legal Investment...........................................................S-96
Use of Proceeds............................................................S-97
Underwriting...............................................................S-97
Experts....................................................................S-98
Legal Matters..............................................................S-98
Ratings....................................................................S-98
Glossary of terms.........................................................S-100
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
notes, you should read carefully this entire document and the accompanying
prospectus.
RELEVANT PARTIES
Issuer..................... ________________ Home Loan Owner Trust 199_-_, a
Delaware business trust, will be established
pursuant to a trust agreement among the depositor,
the paying agent, the owner trustee and
______________. You may contact the issuer at the
owner trust's offices. See "The Owner Trust and
Indenture" in this prospectus supplement.
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................. ___________________________________________.
__________________'s address is _______________
_______________________________________. See
"________________" and "Master Servicer" in this
prospectus supplement. _________ will also act as
the initial servicer.
Servicer................... ____________________________________________.
__________________s' address is _______________
_________________________________________. See
"Servicer" in this prospectus supplement.
_____________ will begin servicing the loans on or
before _____________, 199_.
[Securities Insurer........ ____________________________________________.
__________________'s address is _______________
____________________________. See "Description
of Credit Enhancement--The Securities Insurer"
in this prospectus supplement.]
Indenture Trustee, Paying
Agent and Custodian...... ____________________________________________.
__________________'s address is _______________
_________________________________________. See
"The Owner Trust and Indenture--The Indenture
Trustee" in this prospectus supplement.
Owner Trustee.............. ____________________________________________.
__________________'s address is _______________
_________________________________________. See
"The Owner Trust and
S-5
<PAGE>
Indenture--The Owner Trustee"
in this prospectus supplement.
RELEVANT DATES
Closing Date............... On or about __________, 199_.
Cut-Off Date............... The close of business on __________, 199_.
Payment Date............... The ____ day of each month or, if that day is not
a business day, the next business day, commencing
in ____________ 199_.
Due Period................. For the first payment date, commencing on the
cut-off date and ending on the first day of the
month in which the relevant payment date occurs.
For each other payment date, commending on the ___
day of the calendar month preceding the month in
which the relevant payment date occurs, and ending
on the 1st day of the month in which the relevant
payment date occurs.
Determination Date......... The ___ calendar day of each month or, if that day
is not a business day, then the preceding business
day.
ASSETS OF THE ISSUER
Loans...................... The assets of the issuer will consist primarily of
a pool of mortgage loans, which will have an
aggregate principal balance of approximately
$__________ as of __________, 199_. The loans will
be secured by first liens on one- to four-unit
single family residences, condominium units and
townhouses.
Approximately _____% of the loans, by cut-off date
aggregate principal balance, will bear interest at
a fixed rate for the term of the loan.
Approximately ______% of the loans, by original
aggregate principal balance, will bear interest at
an adjustable rate.
The interest rate on each adjustable-rate loan
will be subject to adjustment after an initial
period. Approximately _____% of the loans, by
cut-off date principal balance, known as "____
loans" will bear interest at a fixed rate for
S-6
<PAGE>
approximately two years after origination.
Approximately _____% of the loans, by cut-off date
aggregate principal balance, known as "____ loans"
will bear interest at a fixed rate for three years
after origination. Approximately ____% of the
loans, by cut-off date aggregate principal
balance, will bear interest at a fixed rate for
six months after origination. At the end of the
six month, two year or three year period and every
six months after that date, each of these
adjustable-rate loans will be subject to an
interest rate adjustment.
The loans have been originated using underwriting
standards that are less stringent than FHLMC or
FNMA guidelines concerning first-lien mortgage
loans. See "The Pool" in this prospectus
supplement and "The Trust Funds--Residential
Loans" in the accompanying prospectus.
OFFERED SECURITIES........... The issuer is offering the series 199_-_ notes
with an approximate original principal balance of
$__________, subject to a permitted variance of
plus or minus __%. The notes will bear interest at
a per annum rate equal to one-month LIBOR plus a
margin. The notes represent obligations of the
issuer only, and will be secured by the assets of
the issuer pursuant to the indenture. See
"Description of the Notes" in this prospectus
supplement.
Interest Payments.......... On each payment date, interest accrued during the
preceding accrual period will be due on the notes.
The notes will accrue interest for each accrual
period on their unpaid principal balance at a per
annum rate equal to the lesser of:
(1) one-month LIBOR plus ____%, or on any payment
date after the call option date, one-month
LIBOR plus ____%, and
(2) the amount of interest due on the loans for
that accrual period, net of the sum of:
(a) the fees of the master servicer, the
servicer and the indenture trustee and
the premium payable to the securities
insurer and
(b) on and after the payment date in
_________, ____% of the outstanding
principal balance of the loans,
expressed as an annualized
S-7
<PAGE>
percentage of the outstanding principal balance of
the notes.
The maximum rate we refer to in clause (2) is
sometimes called the net funds cap. Any resulting
shortfall together with interest on the shortfall
will be carried forward and will be paid on the
next payment date to the extent there are funds
available.
The ratings assigned to the notes do not address
the likelihood of your receipt of interest carried
forward to later payment dates due to the net
funds cap. Interest on the notes will be
calculated on the basis of the actual number of
days elapsed in the accrual period and a 360-day
year.
With respect to the first payment date, the
accrual period is the period from and including
the closing date, through but excluding the first
payment date. Each other accrual period is the
period from and including the immediately
preceding payment date, through but excluding the
related payment date.
See "Description of the Notes--Payments on the
Notes" in this prospectus supplement.
Principal Payments......... On each payment date, the notes will be due
payments of principal. See "Description of the
Notes--Payments on the Notes" in this prospectus
supplement for a detailed discussion of the amount
and timing of principal payments.
The final payment of principal is scheduled to
occur on the payment date occurring in
___________. The notes are expected to have
received payments of principal in full by no later
than the maturity date. However, the actual final
payment date, on which the notes receive payment
of principal in full, may occur significantly
earlier than the maturity date. See "Prepayment
and Yield Considerations--Maturity Date" in this
prospectus supplement.
OTHER SECURITIES ISSUED...... In addition to the notes, the issuer is also
issuing residual interest certificates that
evidence the residual interest in the assets of
the issuer. The residual interest certificates are
subordinate to the notes.
We are not offering the residual interest
certificates through this prospectus supplement or
the accompanying prospectus.
S-8
<PAGE>
SERVICING OF THE LOANS....... _____________, 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. See "Description of the Transfer and
Servicing Agreements--Servicing" in this
prospectus supplement.
________________ 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.
___________ has agreed to service the loans
beginning on or before __________, 199_. The
master servicer will service the loans for an
interim period beginning on the closing date until
_______ has assumed its duties as servicer.
CREDIT ENHANCEMENT........... Credit enhancement for the notes will be provided
by and utilized in the following order of
priority:
o first, the subordination of the residual
interest certificates;
o second, the overcollateralization that results
from the cash flow structure; and
o third, the guaranty policy.
Each of these sources of credit enhancement is
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 notes and to provide protection against
losses on the loans. The credit enhancement for
the notes is for the benefit of the series 199_-_
notes only. The series 199_-_ notes will not be
entitled to the benefits of any other credit
enhancement.
S-9
<PAGE>
See "Risk Factors--Adequacy of Credit
Enhancement" in this prospectus supplement.
Subordination.............. The rights of the holders of the residual interest
certificates to receive payments from any
remaining amounts available on each payment date
are subordinate to your rights. See "Description
of Credit Enhancement--Subordination" in this
prospectus supplement.
[Overcollateralization;
Application of Excess
Spread................... The overcollateralization amount with respect to
any payment date will equal the excess of the
aggregate principal balance of the loans over the
unpaid principal balance of the notes, after
giving effect to regular principal and interest
payments on the notes on that payment date. On the
closing date, the overcollateralization amount
will be equal to $__________. The
overcollateralization amount is expected to
increase through the application of excess spread
to reduce the unpaid principal balance of the
notes. This application of excess interest
payments on the loans, known as "excess spread,"
is intended to create and maintain the
overcollateralization amount at a level equal to a
particular target amount.
The overcollateralization target amount may
increase or decrease over time. The
overcollateralization target amount is subject to
some minimum and maximum amounts and trigger
events that are based on excess spread
requirements and the delinquency and loss
experience of the loans and the outstanding
principal balance of the loans. See "Description
of Credit Enhancement--Overcollateralization" in
this prospectus supplement.
An increase in the overcollateralization target
amount will occur if, among other things, the
delinquency or loss experience of the loans
exceeds those levels established by the securities
insurer. These levels can be changed by the
securities insurer. If an increase in the
overcollateralization target amount occurs, then
the principal amortization of the notes would be
accelerated by the payment of any available excess
spread to the notes. This acceleration will
continue until the overcollateralization amount
equals the increased overcollateralization target
amount.
If the delinquency or loss experience of the loans
does not exceed the levels established by the
securities insurer, then a decrease or stepdown in
the overcollateralization target
S-10
<PAGE>
amount may initially occur when the outstanding
principal balance of the loans is reduced to an
amount established by the securities insurer. A
decrease or stepdown will likely result in the
current overcollateralization amount exceeding the
decreased overcollateralization target amount. If
the overcollateralization amount exceeds the
overcollateralization target amount, then:
o all or a portion of the principal payments that
would otherwise be paid to the notes will
instead be paid to the residual interest
certificates and
o the principal amortization of the notes would
be reduced in relation to the principal
amortization of the loans.
The securities insurer may lower the
overcollateralization target amount at any time to
particular minimum amounts.
See "Description of Credit
Enhancement--Overcollateralization" in this
prospectus supplement.]
[Guaranty Policy........... A financial guaranty insurance policy from
___________________, will irrevocably and
unconditionally guaranty to the indenture trustee
timely payment of interest and ultimate payment of
principal due on the notes. The guaranty policy
may not be canceled for any reason. The guaranty
policy does not guaranty any specified rate of
prepayments or any interest payments carried
forward to subsequent payment dates due to the net
funds cap. The guaranty policy does not provide
funds to redeem any of the notes, unless the
redemption is at the option of the securities
insurer. See "Description of Credit
Enhancement--Financial Guaranty Insurance Policy"
and "--The Securities Insurer" in this prospectus
supplement.
The insurance which the guaranty policy provides
is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New
York Insurance Law.]
ALLOCATION AND PAYMENTS TO
THE NOTES.................. Interest and principal payments due on the notes
will be paid from the available payment amount and
any insured payment made under the guaranty
policy. On each payment date, the priority of
payments from the available payment amount will be
as follows
S-11
<PAGE>
o first, to pay accrued interest and principal on
the notes; and
o second, to pay the excess spread, if any.
The available payment amount with respect to any
payment date, will generally equal
o the sum of interest and scheduled principal
payments collected from the loans during the
related due period or advanced by the master
servicer and any prepayments or other
unscheduled principal payments collected during
the related due period,
o minus the payment of the issuer's fees and
expenses including the fees owed to the master
servicer, the servicer, the securities insurer
and the indenture trustee.
[The securities insurer will be required to make
an insured payment to the indenture trustee when
it receives a claim under the guaranty policy. See
"Description of Credit Enhancement--Financial
Guaranty Insurance Policy" in this prospectus
supplement.
An insured payment with respect to any payment
date, generally will be made under the guaranty
policy to cover any deficiency attributable to the
sum of:
o any deficiency resulting from the available
payment amount being less than the accrued and
unpaid interest due on the notes and
o any deficiency resulting from the aggregate
unpaid principal balances of the loans being
less than the aggregate unpaid principal
balances of the notes.
Insured payments will not be available to cover
o interest shortfalls on the notes resulting from
the Soldiers' and Sailors' Relief Act of 1940,
as amended, or
o interest payments carried forward from prior
payment dates due to the application of the net
funds cap.]
See "Description of the Notes" in this prospectus
supplement for a further discussion of the
payments of interest and principal on the notes.
OPTIONAL REDEMPTION.......... The holders of residual interest certificates have
the option to cause the issuer to effect an early
redemption of the notes on or after any payment
date on which the
S-12
<PAGE>
outstanding aggregate principal balance of the
loans declines to __% or less of the aggregate
principal balance of the loans as of the cut-off
date. The early redemption option will be effected
by purchasing all of the loans at a price that
will at least pay in full
o accrued interest,
o interest carried forward due to the net funds
cap, together with accrued interest on the
carried forward interest,
o unreimbursed servicing advances and
o monthly advances and principal of the notes.
On or after any payment date on which the
outstanding aggregate principal balance of the
loans declines to __% or less of the aggregate
principal balance of the loans as of the cut-off
date, the securities insurer or the servicer will
have the option to cause the issuer to effect the
same early redemption of the notes if the holders
of the residual interest certificates fail to
exercise this early redemption option.
[In addition, if the events of default specified
in the insurance agreement occur with respect to
the issuer, the securities insurer may, at its
option, cause an early redemption of the notes.]
See "Description of the Notes--Optional
Redemption" in this prospectus supplement.
CLEARANCE, SETTLEMENT AND
DENOMINATIONS OF THE NOTES.. The series 199_-_ notes 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 note, except in
limited circumstances described in the
accompanying prospectus. See "Risk
Factors--Book-Entry Registration" and "Description
of the Securities--Book-Entry Registration of
Securities" in the accompanying prospectus.
We will offer beneficial interests in the notes in
minimum denominations of $25,000 and integral
multiples of $1,000 in excess of that amount.
S-13
<PAGE>
TAX STATUS................... Special counsel to the depositor and the
underwriters is of the opinion that under existing
law
o the notes will be characterized as debt for
federal income tax purposes and
o the issuer will not be characterized as an
association or a publicly traded partnership
taxable as a corporation or a taxable mortgage
pool for federal income tax purposes.
By acceptance of a note, you are deemed to agree
to treat your notes as debt for Federal, state and
local income tax purposes and franchise tax
purposes. See "Federal Income Tax Consequences" in
this prospectus supplement and "Certain Federal
Income Tax Consequences" in the accompanying
prospectus for additional information concerning
the application of federal income tax laws.
ERISA CONSIDERATIONS......... Subject to important considerations described in
this prospectus supplement and in the accompanying
prospectus, the notes are eligible for purchase by
persons investing assets of employee benefit plans
or individual retirement accounts. You should
carefully review with your legal advisors whether
the purchase or holding of the notes could give
rise to a prohibited transaction. See "ERISA
Considerations" in this prospectus supplement and
in the accompanying prospectus.
LEGAL INVESTMENT............. Your notes will constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984, as amended, for as
long as they are rated not lower than the second
highest rating category by one or more nationally
recognized statistical rating organizations.
Consequently, your notes will be legal investments
for some entities to the extent provided in the
Secondary Mortgage Market Enhancement Act of 1984,
as amended, and applicable state laws. You should
consult your own legal advisors to determine
whether the notes constitute legal investments for
you. See "Legal Investment" in this prospectus
supplement and in the accompanying prospectus.
NOTE RATINGS................. On the closing date, the notes are required to be
rated "___" by _________________________ and
"____" by _________________________________. See
"Ratings" in this prospectus supplement and
"Rating" in the
S-14
<PAGE>
accompanying prospectus for a discussion of the
primary factors on which the ratings are based.
IMPORTANT COVENANTS OF
NOTEHOLDERS................ By accepting your note, you agree not to institute
or join in any bankruptcy, reorganization or other
insolvency or similar proceeding against the
transferor, the servicer, the master servicer or
the issuer. You also agree to allow the securities
insurer to exercise all of your voting rights with
respect to your notes. See "Risk
Factors--Limitations on Rights of Noteholders" and
"Description of the Transfer and Servicing
Agreements--Restrictions on Noteholders' Rights"
in this prospectus supplement.
<PAGE>
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 notes speculative or risky. In particular, payments on your
notes will depend on payments received on and other recoveries with respect to
the loans.
BASIS RISK MAY ADVERSELY AFFECT YIELD
The yield on your notes will be sensitive to fluctuations in the level of
one-month LIBOR and may be adversely affected by the application of the net
funds cap. The prepayment of the mortgage loans with higher mortgage rates may
result in a lower net funds cap. If on any payment date the application of the
net funds cap results in an interest payment lower than the interest rate on the
notes during the related accrual period, the value of your notes may decline.
The mortgage pool will contain adjustable-rate mortgage loans that, after a
period of six months, two years or three 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 your
notes during the related accrual period. In particular, because the interest
rate on your notes adjusts monthly, while the interest rates on the mortgage
loans adjust semi-annually, in a rising interest rate environment, the amount of
interest paid on the notes on any payment date may be less than one-month LIBOR
plus the applicable margin.
Although you will be entitled to receive on subsequent payment dates the
amount of any interest shortfall resulting from the application of the net funds
cap on the notes, in light of the payment priorities on the relevant payment
dates, there is no assurance that funds will be available. The failure to pay
the applicable amount carried forward on subsequent payment dates due to a lack
of funds will not be an event of default under the indenture. In addition, [the
guaranty policy does not cover,] and the ratings of the notes do not address,
the likelihood of the payment of those amounts carried forward.
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The yield to maturity on the notes may be affected by the resetting of the
mortgage rates on the adjustable-rate mortgage loans. In addition, because the
mortgage rate for most mortgage 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 mortgage loans
after the adjustment. Also, while a substantial majority of the "2/28" and
"3/27" loans impose prepayment penalties if a loan is prepaid during the initial
one to five years of the loan, these penalties are typically suspended during
the sixty-day period following the initial adjustment date. The suspension of
the prepayment penalties may also result in increased prepayments on the
mortgage loans during the related 60 day period.
See "Certain Legal Aspects of Residential Loans--Prepayment Charges and
Prepayments" in the prospectus.
ACTUAL YIELD TO MATURITY MAY BE LESS THAN ANTICIPATED
The degree to which the actual yield of your notes may vary from the
anticipated yield will depend on:
o the price of your notes, including the amount of any premium or
discount;
o the degree to which the timing of payments on your notes is sensitive to
the prepayment experience of loans and the application of excess spread
as principal on the notes;
o the timing of delinquencies, defaults and losses on the loans to the
extent not covered by the credit enhancement[, including the guaranty
policy]; and
o a change in the overcollateralization target amount or a change in the
delinquency or loss levels with respect to the loans or excess spread
requirements used to determine an increase or decrease in the
overcollateralization target amount.
The allocation of excess spread as an additional payment of principal on the
notes until the overcollateralization amount equals the overcollateralization
target amount will accelerate the principal amortization of the notes relative
to the speed at which principal is paid on the loans. However, any reduction in
the overcollateralization amount will slow the principal amortization of the
notes. See "Prepayment and Yield Considerations" in this prospectus supplement.
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 the notes and the
aggregate amount of payments and the yield to maturity of your notes. Because
the prepayment experience of the loans will depend on future events and a
variety of factors, the prepayment experience of the loans is uncertain and in
all likelihood will not conform to any projected rates of prepayments. See
"Prepayment and Yield Considerations" in this prospectus supplement.
LIMITED LIQUIDITY MAY ADVERSELY AFFECT MARKET VALUE OF NOTES
A secondary market for the notes may not develop or, if it does develop, it
may not provide you with liquidity of investment or continue while your notes
are outstanding. Limited liquidity
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could result in a substantial decrease in the market value of your notes. See
"Risk Factors--Limited Liquidity" 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 notes. 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 guaranty 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 notes. 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 payments of interest or principal due on the notes will occur,
unless these delays or shortfalls are covered under the guaranty policy. See
"Description of Credit Enhancement" in this prospectus supplement.
AVAILABILITY OF EXCESS SPREAD FOR OVERCOLLATERALIZATION. Excess spread may
not be generated in sufficient amounts to create and maintain the
overcollateralization amount at the overcollateralization target amount at all
times. In particular, delinquencies, if not advanced by the master servicer,
defaults and principal prepayments on the loans will reduce the excess spread
that otherwise would be available on a payment date. The reduction of the
available excess spread will result in a slower principal amortization of the
notes in relation to the loans. This in turn will result in a lower level of
overcollateralization amount. See "Description of Credit
Enhancement--Overcollateralization" in this prospectus supplement.
LIMITATIONS ON SUBORDINATION. The holders of the residual interest
certificates are never obligated to refund payments previously distributed to
them to holders of the notes, including payments of excess spread. This is the
case even if on a subsequent payment date insufficient funds are available to
pay interest or principal due on the notes. See "Description of Credit
Enhancement--Subordination" in this prospectus supplement.]
NOTEHOLDERS' RIGHTS ARE LIMITED BY SECURITIES INSURER
[Generally, the securities insurer may exercise all of your voting rights
with respect to your notes without your consent. The exercise, or a refusal to
consent to the exercise, by the securities insurer of some noteholder rights
could be adverse to your interest. For example, this type of event could cause
an unanticipated prepayment of principal on your notes. See "Description of the
Transfer and Servicing Agreements--Restrictions on Noteholder Rights" in this
prospectus supplement.]
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 related
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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 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 "--Adequacy of Credit Enhancement" above, and "Underwriting Criteria" in
this prospectus supplement.
TRANSFERS OF SERVICING MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
The servicing of loans like those originated pursuant to 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
_________, 199_, the servicing of the related loans will be transferred from
__________ to ______________. Following that time, _____________ will directly
service all of the loans. Interruptions in servicing may occur during the
transfer of servicing to the servicer.
Pursuant to the servicing agreement, the term of the servicer shall be
extendable for successive 90 day terms until the notes 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.
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, like
legal fees, real estate taxes, and maintenance and preservation expenses, will
reduce the proceeds payable on the mortgage notes and thereby reduce the
security for the loans.
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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 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 PAYMENTS ON THE NOTES
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 "--Adequacy of Credit Enhancement" above and "--Legal Considerations--Legal
Compliance and Regulation" below.
GEOGRAPHIC CONCENTRATION COULD INCREASE LOSSES ON THE LOANS
Because of the geographic concentration of mortgaged properties within
______________, an economic downturn or recession in ___________ may affect the
ability of the borrowers to timely pay their loans. Accordingly the loans may
experience higher rates of delinquencies, defaults and losses than the rates
experienced by loans having greater geographical diversification. In addition,
mortgaged properties located in ___________ may experience special hazards that
are not covered by any available casualty insurance, including earthquakes,
mudslides and other disasters. Accordingly, these loans may experience higher
rates of delinquencies, defaults and losses than rates experienced for similar
loans secured by residential properties located in other states. See "--Adequacy
of Credit Enhancement" above.
NON-RECORDATION OF ASSIGNMENTS COULD INCREASE LOSSES ON THE LOANS
The transferor will not be required to record assignments of the mortgages
to the indenture trustee in the real property records of _____________ and some
other states. The master servicer will retain record title to the related
mortgages on behalf of the issuer, the indenture trustee and the holders of the
notes. 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
indenture trustee is not necessary to effect a pledge of the loans to the
indenture 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 indenture trustee, the other parties to this sale, assignment,
satisfaction or discharge may have rights superior to those of the indenture
trustee. In some states, in the absence of a related recordation of the
assignments of the mortgages, the pledge to the indenture trustee of the loans
may not be effective against particular 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 indenture trustee, you could
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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.
INSOLVENCY OF TRANSFEROR MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
If the FDIC is appointed receiver or conservator of the transferor, the
FDIC's administrative expenses may have priority over the interest of the issuer
and/or the indenture 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 that if exercised could result in
delays or reductions in payments of principal and interest on the notes[, unless
these payments are covered under the guaranty 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 payments of principal and
interest on the notes[, unless these payments are covered under the guaranty
policy.]
The FDIC recently proposed a statement of policy outlining the
circumstances under which 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 that statement of policy is not yet final, much
of it merely reiterates pre-existing law, and substantive changes are not
expected. The transfer of the loans to PaineWebber Mortgage Acceptance
Corporation IV has been structured with the specific intent to satisfy the
requirements of the proposed statement of policy.
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 PAYMENTS ON THE NOTES
The depositor intends to treat the transfer of the loans to the issuer as
an absolute transfer and not as a secured lending arrangement. In this event,
the loans would not be part of the depositor's bankruptcy estate if a bankruptcy
occurs and would not be available to the depositor's creditors. If an insolvency
of the depositor occurs, it is possible that the bankruptcy trustee or a
creditor of the depositor may attempt to recharacterize the sale of the loans as
a borrowing by the depositor, secured by a pledge of the loans. This position,
if accepted by a court, could prevent timely payments of amounts due on the
notes and result in a reduction of payments on the notes.
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 indenture trustee or the issuer from appointing a successor master
servicer or servicer.
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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 issuer will
likely not have a perfected 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 payment and failure to pay amounts due on the notes.
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 will likely change over time and may
become more restrictive or stringent with respect 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 issuer, 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 issuer could result in the issuer's assets being
insufficient to pay all interest and principal due on the notes. 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--Certain Other Legal Considerations Regarding Residential 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
"--Limitations on the Transferor and Servicer" below.
FAILURE OF SERVICER TO PERFORM MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
The amount and timing of payments on the notes generally will be dependent
on ________________ as the servicer to perform 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 ninety days or the occurrence of particular events of
default may result in the termination of the servicer.] For example, an event
that causes a material adverse effect, 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 similar other successor appointed
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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 which could cause shortfalls in
payments due on your notes.
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 payments due on your notes could occur. See
"--Adequacy of Credit Enhancement" above, and "______________________" and
"Description of Credit Enhancement" in this prospectus supplement.
YEAR 2000 NON-COMPLIANCE MAY ADVERSELY AFFECT PAYMENTS ON THE NOTES
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
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 indenture trustee will certify
that they are committed either to:
(1) implement modifications to their respective existing systems to
the extent required to cause them to be year 2000 ready; or
(2) 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 indenture 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
indenture trustee are not fully year 2000 ready, the resulting disruptions in
the collection or distribution of receipts on the loans could materially and
adversely affect your investment.
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
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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 notes, 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, payments to you could be
delayed or otherwise adversely affected.
FORWARD-LOOKING STATEMENTS
In this prospectus supplement and the accompanying prospectus, we use
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 those 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 notes and this
offering. We define the capitalized terms we used in this prospectus supplement
under the caption "Glossary of Terms" beginning on page S-[__] in this
prospectus supplement.
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THE POOL
GENERAL
On or about ____________, 199__, the depositor will acquire from the
transferor a pool of loans having an aggregate unpaid principal balance as of
the close of business on ____________, 199__, of approximately $__________. The
depositor will then transfer the loans to the issuer pursuant to the Owner Trust
Agreement in exchange for the notes and the Residual Interest Certificates. The
owner 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.
Approximately ____% of the loans, by cut-off date pool principal balance,
will be closed-end, fully amortizing, adjustable-rate home loans. Approximately
____% of the loans will be fully amortizing fixed-rate home loans. None of the
loans are insured or guaranteed by any governmental agency. The loans 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. A small number of the loans were acquired by the transferor either
through a network of correspondents or direct origination. No loans were
purchased by the transferor in bulk.
The loans have been underwritten in compliance with the underwriting
standards of the transferor. See "Underwriting Criteria" in this prospectus
supplement.
PAYMENTS ON THE LOANS
Interest on each loan is payable monthly on its outstanding principal
balance at a per annum loan 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 _____% of the loans, by cut-off date pool
principal balance, known as "____ loans" will bear interest at a fixed rate for
approximately two years after origination. Approximately ____% of the loans, by
cut-off date pool principal balance, known as "____ loans" will bear interest at
a fixed rate for three years after origination. Approximately ____% of the
loans, by cut-off date pool principal balance, will bear interest at a fixed
rate for six months after origination. Approximately ____% of the loans, by
cut-off date pool principal balance, will bear interest at a fixed rate for the
life of the loans.
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The loan interest rate on each adjustable-rate loan will be adjusted on
each loan interest rate reset date to a rate equal to the sum of:
(1) Six-Month LIBOR, as published in The Wall Street Journal; and
(2) the number of basis points stated in the mortgage note.
The loan interest rate reset date for each adjustable-rate loan will occur at
end of the related six month, two year or three year period, and at six month
intervals, thereafter. The new loan interest rate will be rounded and may be
subject to periodic rate caps, lifetime caps and lifetime floors. A periodic
rate cap limits changes in the loan rate for each loan on a particular reset
date. The lifetime cap for a loan is the maximum loan reset rate that may be
charged on a loan. The lifetime floor is the minimum loan reset 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
first business day of the related calendar month beginning in 199_, as published
by _____________. 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 ____________ 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, as published by __________.
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.
SIX-MONTH LIBOR
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
January................................. ____% ____% ____% ____% ____%
February................................ ____% ____% ____% ____% ____%
March................................... ____% ____% ____% ____% ____%
April................................... ____% ____% ____% ____%
May..................................... ____% ____% ____% ____%
June.................................... ____% ____% ____% ____%
July.................................... ____% ____% ____% ____%
August.................................. ____% ____% ____% ____%
September............................... ____% ____% ____% ____%
October................................. ____% ____% ____% ____%
November................................ ____% ____% ____% ____%
December................................ ____% ____% ____% ____%
The initial loan interest rate in effect on an adjustable-rate loan
generally will be lower, and may be significantly lower, than the loan interest
rate that would have been in effect based on the rate of Six-Month LIBOR and the
Gross Margin 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 loans will be dependent
on the ability of the borrowers to make larger monthly payments following
adjustments of the loan interest rate. Loans that have the same
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initial loan interest rate at the cut-off date may not always bear interest at
the same loan interest rate. This is so because the 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;
provided, however, that any Liquidated Home Loan will have a principal balance
of zero. With respect to any date, the pool principal balance will be equal to
the aggregate principal balances of all loans 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. Approximately
____% of the loans, by cut-off date pool principal balance, provide for a
prepayment penalty for specific partial prepayments and any prepayments in full
made during the first, second, third and fifth years of the loan, except for a
short prepayment window at the time of the first adjustment of the loan interest
rate. The prepayment penalty 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 notes.
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 of the
loans included in the pool as of the cut-off date. As of the cut-off date, the
loans had an approximate aggregate principal balance of $_________. Unless the
context indicates otherwise, any numerical or statistical information presented
in this prospectus supplement is based on the characteristics of
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the pool of loans that will be included in the owner trust and that comprise the
cut-off date pool principal balance.
Before the closing date, the transferor may remove any of the loans
identified as of the date of this prospectus supplement or may substitute
comparable loans for any of the loans identified as of the date of this
prospectus supplement. However, that the aggregate principal balance of the
loans will not exceed __% of the cut-off date pool principal balance. As a
result, the statistical information presented below regarding the
characteristics of the loans included in the pool may vary in some respects from
comparable information based on the actual composition of the loans included in
the pool on the closing date. In addition, after the cut-off date, the
characteristics of the actual loans may materially vary from the information
below due to a number of factors. These factors include prepayments after the
cut-off date or the substitution or repurchase of loans after the closing date.
LOAN STATISTICS
As of the cut-off date, the loans had the following characteristics:
LOANS
Number of Loans......................................
Principal Balance
Aggregate.......................................... $
Average............................................ $
Range.............................................. $ to $
Current Loan Rate
Weighted Average................................... %
Range.............................................. % to %
Current Loan Rate-(Fixed-Rate Loans)
Weighted Average................................... %
Range.............................................. % to %
Current Loan Rate-(Adjustable-Rate Loans)
Weighted Average................................... %
Range.............................................. % to %
Gross Margin-(Adjustable-Rate Loans)
Weighted Average................................... %
Range.............................................. % to %
Lifetime Caps-(Adjustable-Rate Loans)
Weighted Average................................... %
Range.............................................. % to %
Lifetime Floors-(Adjustable-Rate Loans)
Weighted Average................................... %
Range.............................................. % to %
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Months to Next Change Date-(Adjustable-Rate Loans)
Weighted Average................................... months
Range.............................................. months to months
Remaining Term to Maturity (months)
Weighted Average................................... months
Range.............................................. months to months
Seasoning (months)
Weighted Average................................... months
Range.............................................. months to months
Loan-to-Value Ratio
Weighted Average................................... %
Range.............................................. % to %
As of the cut-off date, all of the loans had original stated maturities of
not more than years, and no loan was scheduled to mature later than
____________.
As of the cut-off date, all of the loans were secured by mortgaged
properties located in __ states.
The following tables are based on some statistical characteristics with
respect to the loans as of the cut-off date. The sum of the dollar amounts and
percentages in the following tables may not equal the totals due to rounding.
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<PAGE>
GEOGRAPHIC DISTRIBUTION
% OF CUT-
AGGREGATE OFF DATE
NUMBER PRINCIPAL PRINCIPAL
JURISDICTION OF LOANS BALANCE BALANCE
- ------------ -------- --------- ---------
-------- --------- ---------
Total................................... 100.00%
======== ========= =========
PRINCIPAL BALANCES
% OF CUT-
AGGREGATE OFF DATE
NUMBER PRINCIPAL PRINCIPAL
RANGE OF PRINCIPAL BALANCES OF LOANS BALANCE BALANCE
- --------------------------------------------- -------- --------- ---------
$
-------- --------- ---------
Total................................... $ 100.00%
======== ========= =========
* Less than 0.01%.
As of the cut-off date, the average cut-off date principal balance of the
loans was approximately $____.
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<PAGE>
CURRENT LOAN RATES
% OF CUT-
AGGREGATE OFF DATE
NUMBER PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES OF LOANS BALANCE BALANCE
- ------------------- -------- --------- ---------
$ %
-------- --------- ---------
Total................................... $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average loan interest rate of the
loans was approximately _____% per annum.
CURRENT LOAN RATES--FIXED-RATE LOANS
% OF CUT-OFF
DATE
PRINCIPAL
AGGREGATE BALANCE OF
NUMBER PRINCIPAL FIXED-RATE
RANGE OF LOAN RATES OF LOANS BALANCE LOANS
- ------------------- -------- --------- ------------
%
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average loan interest rate of the
fixed-rate loans was approximately _______% per annum.
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<PAGE>
CURRENT LOAN RATES--ADJUSTABLE-RATE LOANS
% OF CUT-
OFF DATE
PRINCIPAL
AGGREGATE BALANCE OF
NUMBER PRINCIPAL ADJUSTABLE-
RANGE OF LOAN RATES OF LOANS BALANCE RATE LOANS
- ------------------- -------- --------- -----------
$ %
-------- --------- ---------
Total................................. $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average loan interest rate of the
adjustable-rate loans was approximately _____% per annum.
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<PAGE>
DISTRIBUTION OF GROSS MARGINS--ADJUSTABLE-RATE LOANS
% OF CUT-OFF DATE
RANGE OF AGGREGATE PRINCIPAL BALANCE
GROSS NUMBER OF PRINCIPAL OF ADJUSTABLE-RATE
MARGINS LOANS BALANCE LOANS
- -------- --------- --------- ------------------
$ %
--------- --------- ---------
Total......................... $ 100.00%
--------- --------- ---------
As of the cut-off date, the weighted average gross margin of the
adjustable-rate loans was approximately ____% per annum.
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DISTRIBUTION OF LIFETIME CAPS--ADJUSTABLE-RATE LOANS
% OF CUT-OFF DATE
RANGE OF AGGREGATE PRINCIPAL BALANCE
LIFETIME NUMBER OF PRINCIPAL OF ADJUSTABLE-RATE
CAPS LOANS BALANCE LOANS
- -------- --------- --------- ------------------
$ %
--------- --------- ---------
Total......................... $ 100.00%
========= ========= =========
As of the cut-off date, the weighted average lifetime cap on the
adjustable-rate loans was approximately ______% per annum.
DISTRIBUTION OF LIFETIME FLOORS--ADJUSTABLE-RATE LOANS
% OF CUT-OFF DATE
RANGE OF AGGREGATE PRINCIPAL BALANCE
LIFETIME NUMBER OF PRINCIPAL OF ADJUSTABLE-RATE
FLOORS LOANS BALANCE LOANS
- -------- --------- --------- ------------------
$ %
--------- --------- ---------
Total......................... $ 100.00%
========= ========= =========
As of the cut-off date, the weighted average lifetime floor of the
adjustable-rate loans was approximately ______% per annum.
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MONTH OF NEXT CHANGE DATE--ADJUSTABLE-RATE LOANS
% OF CUT-OFF
DATE PRINCIPAL
AGGREGATE BALANCE OF
MONTH OF NEXT NUMBER PRINCIPAL ADJUSTABLE-RATE
CHANGE DATE OF LOANS BALANCE LOANS
- ------------- -------- --------- ---------------
$ %
-------- --------- ---------
Total............................. $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average next reset date of the
adjustable-rate loans was approximately ___________, 200_.
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<PAGE>
LOAN-TO-VALUE RATIOS
NUMBER AGGREGATE % OF CUT-OFF
RANGE OF LOAN-TO OR PRINCIPAL DATE PRINCIPAL
VALUE RATIO LOANS BALANCE BALANCE
- ---------------- ------ --------- --------------
$ %
------ --------- ---------
Total................................ $ 100.00%
====== ========= =========
As of the cut-off date, the weighted average Loan-to-Value Ratio of the
loans was approximately %.
OCCUPANCY STATUS
AGGREGATE % OF CUT-OFF
NUMBER PRINCIPAL DATE PRINCIPAL
OCCUPANCY OF LOANS BALANCE BALANCE
- --------- -------- --------- --------------
Owner Occupied............................ $ %
Non-Owner Occupied........................
Second Home...............................
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
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MORTGAGED PROPERTY TYPES
AGGREGATE % OF CUT-OFF
PROPERTY NUMBER PRINCIPAL DATE PRINCIPAL
TYPE OF LOANS BALANCE BALANCE
- -------- -------- --------- --------------
$ %
-------- --------- ---------
Total.............................. $ 100.00%
======== ========= =========
MONTHS SINCE ORIGINATION
% OF CUT-OFF
AGGREGATE DATE
RANGE OF LOAN AGE (IN NUMBER PRINCIPAL PRINCIPAL
MONTHS) OF LOANS BALANCE BALANCE
- --------------------- -------- --------- ------------
$ %
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average number of months since
origination of the loans was approximately __ months.
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REMAINING TERMS TO MATURITY
% OF CUT-OFF
AGGREGATE DATE
RANGE OF REMAINING TERMS TO NUMBER PRINCIPAL PRINCIPAL
MATURITY (IN MONTHS) OF LOANS BALANCE BALANCE
- --------------------------- -------- --------- ------------
$ %
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
As of the cut-off date, the weighted average remaining term to maturity of
the loans was approximately ___ months.
TRANSFEROR ASSIGNED RISK CATEGORIES
% OF CUT-OFF
AGGREGATE DATE
TRANSFEROR ASSIGNED RISK NUMBER PRINCIPAL PRINCIPAL
CATEGORIES OF LOANS BALANCE BALANCE
- ------------------------ -------- --------- ------------
$ %
-------- --------- ---------
Total................................ $ 100.00%
======== ========= =========
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<PAGE>
MASTER SERVICER
MASTER SERVICER DUTIES
__________, as master servicer, will be responsible for performing the loan
master servicing functions for the loans pursuant to the Sale and Servicing
Agreement. All references in the accompanying prospectus to "master servicer"
shall mean the "servicer" with respect to this prospectus supplement. 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 the amount equal to one-twelfth of the product of ___% and the
principal balance of the related loan as of the first day of the immediately
preceding Due Period. In 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,
the Note Payment Account,
o a portion of late payment charges, and
o prepayment penalties
which, together with the Master Servicer Fee, are referred to as the Master
Servicer Compensation.
The master servicer will service the loans for an interim period beginning
on the closing date and ending on or before May 1, 1999. During this time the
master servicer shall 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
________, 199_. After this date, the servicer will perform the servicing
functions with respect to the loans.
Under the Sale and 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
payments to holders of the notes. Prior to each payment date, the master
servicer will remit a Monthly Advance, if necessary, to the indenture
trustee for deposit into the note payment account to be paid on the
related payment date. 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 and the servicer are obligated to pay any shortfall in interest
up to an amount equal to the sum of the Master Servicer Fee and the
Servicing Fee for the related payment date. The Compensating Interest
will first be paid by the
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master servicer out of its Master Servicer Compensation on any payment
date. Any required Compensating Interest in excess of the Master
Servicer Compensation will be paid by the servicer out of its
Servicing Fee. The servicer will be reimbursed for all amounts paid by
it in respect of Compensating Interest
o first, on the related payment date, from amounts that would otherwise
be paid to the Residual Certificateholder and
o second, on subsequent payment dates, by the master servicer out of
amounts otherwise payable in respect of the Master Servicer
Compensation and amounts that would otherwise be payable to the
Residual Certificateholder;
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 indenture trustee[, the securities insurer] and the rating agencies
and notify the indenture trustee[, the securities insurer] and the
rating agencies of any event of default with respect to the servicer
under the Servicing Agreement;
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 Transfer and Servicing Agreements;
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 some 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 Sale and
Servicing Agreement 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 indenture trustee, the owner trustee or a successor
master servicer[, acceptable to the securities
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<PAGE>
insurer,] has assumed the master servicer's responsibilities and obligations
under the Sale and Servicing Agreement.
See "Description of the Transfer and Servicing Agreements" in this
prospectus supplement.
SERVICER
GENERAL
_____________________, will service the loans in accordance with the
Servicing Agreement ___________________________________________________________.
The servicer's corporate offices are located at _____________________________.
_____________________________________________________________________.
The master servicer will service the loans for an interim period beginning
on the closing date and ending on or before __________, 199_. During this time
the master servicer shall 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
_______, 199_. After that date the servicer will perform the servicing functions
with respect to the loans.
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 indenture
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 its
conventional loan portfolio. All references in this prospectus supplement to the
servicer shall mean master servicer for purposes of the accompanying prospectus.
For a description of other servicing procedures applicable to the loans, see
"Description of the Transfer and Servicing Agreements" in this prospectus
supplement. In response to changes and developments in the consumer finance
area, as well as the refinement of the servicer's servicing and collection
procedures, the servicer's servicing policies and procedures for specific types
of loans, including the loans in the trust, may change from time to time. The
manner in which the servicer performs its servicing obligations will affect the
amount and timing of principal and interest payments on the loans. As a result,
payments to the holders of the notes will be affected.
The servicer's loan servicing activities include
o responding to borrower inquiries,
o processing and administering loan payments,
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<PAGE>
o reporting and remitting principal and interest to trustees, investors
and other interested parties,
o collecting delinquent loan payments,
o evaluating and conducting loss mitigation efforts,
o charging off uncollectible loans, and
o otherwise administering the loans.
The servicer has developed loss mitigation methodologies for conventional loans,
which includes short sales with repayment plans, short pay-offs, substitutions
of collateral and modifications that use borrower-specific repayment schedules.
Servicing operations also include
o customer complaint monitoring,
o maintenance of daily delinquency information,
o analysis and monitoring of legal remedies, including collection
litigation,
o foreclosure proceedings and dispositions,
o accounting for principal and interest,
o contacting delinquent borrowers,
o handling borrower defaults,
o recording mortgages and assignments,
o investor and securitization reporting, and
o management portfolio reporting.
The servicer utilizes a computer-based loan servicing system. The servicer
provides
o payment processing and cashier functions,
o automated payoff statements,
o on-line collection, statement and notice mailing, and
o a full range of investor reporting information.
The servicer has installed a predictive automated dialing system and
computerized telephone loan inquiry system to increase the productivity of its
collections staff.
Collection activity usually begins once a loan is 5 days delinquent,
without regard to any grace period. At this time, if payment has not been
received the 5-day notice is sent. The focus of collection activity is
understanding the cause of, and finding a solution for, the delinquency.
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Throughout the entire process there is a continual effort to contact the
borrower and make acceptable payment arrangements. The servicer sends late
notices to borrowers whose payment has not been received by the 11th day after
the due date. Borrowers whose loans are 16 days delinquent will receive written
notice that late fees have been imposed. If payment has not been received by the
21st day, the 21-day late notice is sent. If the borrower cannot be contacted
within 15 days after the first attempted phone call, or at 20 days of
delinquency, a third party property inspection company may be engaged to visit
the borrower's home to complete an exterior inspection of the property securing
the loan, if applicable. The inspection provides specific details about the
property, including whether the property is vacant or occupied, and a notice is
left to call the servicer's servicing department.
If payment is not received by the 26th day of delinquency a notice advising
of the pending notice of default is sent via Western Union. The demand is sent
via either Western Union or certified mail, return receipt requested, and
regular first class mail. The demand requires the borrower to pay the full
amount due within 30 days to avoid further legal action. If the demand for
payment has expired with no plan for reinstatement, the loan will be submitted
to a default review committee. If the committee approves the foreclosure, the
loan is referred to the legal department to commence foreclosure proceedings in
accordance with applicable servicing agreement requirements. Between 15 and 30
days after the expiration of the demand, if the servicer and the borrower have
not agreed on a plan to cure the default, the legal department will refer the
loan to local counsel for foreclosure. Continuous effort will be made by
telephone to remain in contact with the borrower while the loan is being
approved for foreclosure and during the foreclosure process. These procedures
are taken in an effort to exhaust all avenues to cure the default.
Under the Servicing Agreement, the servicer may resign from its duties only
in accordance with the terms of the agreement. No removal or resignation will
become effective until the master servicer or a successor servicer has assumed
the servicer's responsibilities and obligations under the Servicing Agreement.
The servicer may not assign its obligations under the Servicing Agreement.
However, the servicer may delegate some of its obligations to a sub-servicer
pursuant to a sub-servicing agreement. A sub-servicer must meet specific
eligibility requirements, as set forth in the Servicing Agreement. Each
sub-servicing agreement will require that the loans be serviced in a manner that
is consistent with the terms of the Servicing Agreement. The servicer will not
be released of its servicing obligations and duties with respect to any
subserviced loans. As of the Closing Date, the servicer will not have
subcontracted its servicing obligations and duties to a sub-servicer with
respect to the loans.
Delinquency and Loss Experience. The following tables set forth specific
information relating to:
o the delinquency experience, including foreclosures in progress and
bankruptcies, as of the end of indicated period, and
o the loan loss experience for the indicated period.
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This information is for those portfolios of one- to four- family residential
mortgage loans that consisted primarily of performing loans at the time the
servicer began servicing those loans. The servicer did not service any of these
types of portfolios prior to [1998]. The indicated periods of delinquency are
based on the number of days past due on a contractual basis.
DELINQUENCY AND LOSS EXPERIENCE MAY NOT BE APPLICABLE TO THE POOL
It is unlikely that the delinquency experience of the loans will correspond
to the delinquency experience of the servicer's mortgage portfolios set forth in
the following tables. The statistics shown below represent the delinquency
experience of the servicers' mortgage servicing portfolios only for the periods
presented. However, the aggregate delinquency experience on the loans will
depend on the results obtained over the life of the loans. There can be no
assurance that the loans will perform in a manner consistent with the
delinquency or foreclosure experience of the servicer's mortgage servicing
portfolios described in this prospectus supplement. It should be noted that if
the residential real estate market should experience an overall decline in
property values, the actual rates of delinquencies and foreclosures could be
higher than those previously experienced by the servicer. In addition, adverse
economic conditions or other factors may affect the timely payment by borrowers
of scheduled payments of principal and interest on the loans. As a result, the
actual rates of delinquencies and foreclosures with respect to the loans in the
trust may vary significantly from the information set forth in the tables below.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AT ___________, 199_
-------------------------------------------
PERCENT
BY NO. PERCENT
BY NO. OF BY DOLLAR OF BY DOLLAR
LOANS AMOUNT LOANS AMOUNT
--------- --------- ------- ---------
Total portfolio................... $ N/A
--------- --------- ------- ---------
Period of delinquency
31-59 days........................ $ % %
60-89 days........................
90 days or more................... --------- --------- ------- ---------
Total delinquent loans............ $ % %
========= ========= ======= =========
Loans in foreclosure.............. $ % %
========= ========= ======= =========
The information regarding the total portfolio represents only the
servicer's one-to-four family residential mortgage loan portfolios that
consisted primarily of performing loans at the time the servicer began servicing
those loans. The number of total delinquent loans includes loans in foreclosure.
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<PAGE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
AT ______________,
199_
--------------------
BY NO. BY DOLLAR
OF LOANS AMOUNT
-------- ---------
Total portfolio.......................................... $
Foreclosed loans.........................................
Foreclosure ratio........................................ % %
The information regarding the total portfolio represents only the
servicer's one-to-four family residential mortgage loan portfolios that
consisted primarily of performing loans at the time the servicer began servicing
those loans. For the purposes of these tables, foreclosed loans means the
principal balance of mortgage loans secured by mortgaged properties the title to
which has been acquired by the servicer, by investors or by an insurer following
foreclosure or delivery of a deed in lieu of foreclosure. The foreclosure ratio
is equal to the aggregate principal balance or number of foreclosed loans
divided by the aggregate principal balance or number, as applicable, of mortgage
loans in the total portfolio at the end of the indicated period.
LOAN LOSS EXPERIENCE ON THE SERVICER'S
SERVICING PORTFOLIO OF MORTGAGE LOANS
(DOLLARS IN THOUSANDS)
YEAR ENDED
____________,
199_
-------------
Total portfolio................................................. $
Gross losses....................................................
Recoveries......................................................
-----------
Net losses...................................................... $
===========
Annualized net losses as a percentage of total portfolio........ %
-----------
The information regarding the total portfolio represents only the
servicer's one-to-four family residential mortgage loan portfolios that
consisted primarily of performing loans at the time the servicer began servicing
those loans. In addition, the information regarding the total portfolio uses the
aggregate principal balance of the mortgage loans outstanding on the last day of
the period. Gross losses are the actual losses incurred on liquidated properties
for each respective period. Losses are calculated after repayment of all
principal, foreclosure costs and accrued interest to the date of liquidation.
Recoveries are from liquidation proceeds and deficiency judgments. Net losses
are gross losses minus recoveries.
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<PAGE>
UNDERWRITING CRITERIA
GENERAL
[The loans were underwritten or reunderwritten in accordance with ________'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.
__________ 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.
______________'s underwriting of the loans generally consisted of 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.
The transferor has implemented a credit policy that provides a number of
guidelines to assist underwriters in the credit decision process. The
creditworthiness characteristics emphasized by the transferor are the borrower's
debt-to-income ratio, credit history and employment stability. The
debt-to-income ratio for a borrower is calculated by dividing:
(1) the borrower's total monthly payment obligations, including
payments due under the loan with the transferor, but after any debt
consolidation from the proceeds of that loan, by
(2) the borrower's monthly gross income.
A credit bureau report that reflects the applicant's credit history is
obtained by the transferor 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 - generally
less than 90 days old - at the time of application. 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. A borrower's income is verified
through various means, including
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(1) applicant interviews,
(2) written verifications with employers, and
(3) 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 ___________ 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. This determination
was made based on the data provided in the application, some verifications and
the appraisal or other valuation of the mortgaged property. In some
circumstances, ___________ 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 "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 applicant may be
qualified based
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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 amount 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 __________. Appraisers were typically licensed independent
appraisers selected in accordance with the underwriting standards. 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 ________ or an independent
review company.
Pursuant to the underwriting standards, each loan was assigned a risk grade
and categorized in a "Loan Class," denominated by a letter. ___________'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. No
30-day, 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. No Chapter 7
bankruptcies with respect to the borrower may have been discharged during the
previous three years. No Chapter 13 bankruptcy filings may have been made by the
borrower during the previous three years. 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 80% for a mortgage loan originated
under an "Easy Documentation" program and 80% for a mortgage loan originated
under a "Stated Income" application program.
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A maximum Loan-to-Value Ratio of 80% is permitted for a mortgage loan secured by
a non-owner occupied property. The maximum permissible Loan-to-Value Ratio is
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, 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. No Chapter 7 bankruptcies with respect
to the borrower may have been discharged during the two years. No Chapter 13
bankruptcy filings may have been made by the borrower during the previous two
years. 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 two 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 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 is
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 is
also 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.
No Chapter 7 bankruptcies with respect to the borrower may have been discharged
during the previous two years. No Chapter 13 bankruptcy filings may have been
made by the borrower during the previous two years. No foreclosures may have
been filed within the last two years with respect to borrower property. A
maximum Loan-to-Value Ratio of 85% is permitted for a mortgage loan secured by
an owner-occupied property. A maximum Loan-to-Value Ratio of 75% is permitted
for a mortgage loan secured by a non-owner-occupied property. The maximum
permissible Loan-to-Value Ratio is 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
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permissible Loan-to-Value Ratio is also 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 and a majority of credit not currently
delinquent. 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. 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% is
permitted for a mortgage loan secured by an owner-occupied property. A maximum
Loan-to-Value Ratio of 70% is permitted for a mortgage loan secured by a
non-owner-occupied property. The maximum permissible Loan-to-Value Ratio is
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 is
also 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% is permitted for a mortgage loan
secured by an owner-occupied property. A maximum Loan-to-Value Ratio of 65% for
all programs is permitted for a mortgage loan secured by a non- owner-occupied
property. The maximum permissible Loan-to-Value Ratio is 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 is
also 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.
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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, ___________ may make a loan on a
mortgage that takes a borrower out of foreclosure. ____________ 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, "Easy
Documentation" program or "Stated Income" application program. A maximum
Loan-to-Value Ratio of 60% for mortgage loans originated under a full
documentation program, "Easy Documentation" program or "Stated Income"
application program is permitted for a mortgage loan secured by a
non-owner-occupied property. The maximum permissible Loan-to-Value Ratio is
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 is
also 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 65% 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, __________ 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 __% higher than the ratio that would otherwise be permitted
for that Loan Class if particular 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
are likely to experience greater rates of delinquency, foreclosure and loss. As
a result, 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 notes will be sensitive to fluctuations in the level of
One-Month LIBOR and the net funds cap. In addition, because the rate and timing
of principal payments on the notes depends primarily on the rate and timing of
principal payments, i.e., the prepayment experience, of the loans and the
availability and amount of Excess Spread, the final payment of principal on the
notes could occur significantly earlier than the Maturity Date. If significant
principal
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payments are made on the notes, the holders of the notes may not be able to
reinvest those payments in a comparable alternative investment having a
comparable yield. No prediction can be made as to the rate of prepayments on the
loans in either stable or changing interest rate environments. Any reinvestment
risk resulting from the rate of prepayments on the loans will be borne entirely
by the holders of the affected notes.
The rate of principal payments on the notes, the aggregate amount of each
interest payment on the notes and the yield to maturity on the notes will be
directly related to and affected by:
(1) the prepayment experience of the loans;
(2) the application of Excess Spread to reduce the Note Principal
Balance of the notes to the extent described in this prospectus supplement
under "Description of Credit Enhancement--Overcollateralization," and
(3) under some circumstances, the rates of delinquencies, defaults or
losses experienced on the loans.
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 relevant defaulted loans. On or after any payment date on which the pool
principal balance declines to __% or less of the cut-off date pool principal
balance, the majority Residual Interest Certificateholders may purchase all of
the loans from the issuer at a price equal to or greater than the Termination
Price. This purchase would result in a redemption of the notes. Furthermore, to
the extent that the majority Residual Interest Certificateholders fail to
exercise those optional redemption rights, the securities insurer and the
servicer may be entitled to exercise a similar right to effect an optional
redemption of the notes if the pool principal balance declines to __% or less of
the cut-off date pool principal balance. See "Description of the Notes--Optional
Redemption" in this prospectus supplement.
The weighted average life of a note is the average amount of time that will
elapse from the closing date to the date each dollar in respect of principal of
that note is repaid. The weighted average life of a note will be influenced by,
among other factors, the following:
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(1) the prepayment experience of the loans;
(2) the rate at which Excess Spread is paid to holders of those notes;
(3) the extent to which any reduction of the Overcollateralization
Amount is paid to the holders of the Residual Interest Certificates; and
(4) under some circumstances, the rates of delinquencies, defaults or
losses experienced on the loans.
If substantial principal prepayments on the loans are received from
unscheduled prepayments, liquidations or repurchases, then the payments to the
holders of the notes resulting from these prepayments may significantly shorten
the actual average lives of these notes. If the loans experience delinquencies
and particular defaults in the payment of principal, then the holders of the
notes may similarly experience a delay in the receipt of principal payments
attributable to those delinquencies and defaults. In particular instances, these
delinquencies and defaults may result in longer actual average lives of those
notes than would otherwise be the case. However, to the extent that the
principal balances of Liquidated Home Loans are included in the principal
payments on the notes then the holders of those notes will experience an
acceleration in the receipt of principal payments. In some instances this may
result in shorter actual average lives of those notes than would otherwise be
the case. See "Risk Factors--Adequacy of Credit Enhancement" 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;
(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 and the servicer
intends to enforce those 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
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(2) this 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 a substitution of collateral, 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 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 notes.
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.
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 loan 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
loan 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
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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 the foregoing 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.
Payments of principal to holders of the notes at a faster rate than
anticipated will increase the yields on the notes purchased at discounts but
will decrease the yields on the notes purchased at premiums. The payments of
principal may be attributable to scheduled payments and prepayments of principal
on the loans and to the application of Excess Spread. The effect on an
investor's yield due to payments of principal to the holders of the notes
occurring at a rate that is faster, or slower, than the rate anticipated by the
investor during any period following the issuance of the notes will not be
entirely offset by a subsequent like reduction, or increase, in the rate of the
payments of principal during any subsequent period.
The rate of delinquencies and defaults on the loans, and the recoveries, if
any, on defaulted loans and foreclosed properties, will also affect the
prepayment experience of the loans. As a result, the weighted average lives of
the notes will also be affected. To the extent that the delinquencies, defaults
and losses cause a reduction in the amount of Excess Spread, then payments of
principal to the holders of the notes could be delayed and result in a slower
rate of principal amortization of the notes. See "Description of Credit
Enhancement--Overcollateralization" in this prospectus supplement.
However, to the extent that the delinquencies, defaults and losses cause an
increase in the Overcollateralization Deficiency Amount, then an increasing
amount of Excess Spread may be applied to the payment of principal to the
holders of the notes. This increase in the Overcollateralization Deficiency
Amount would result in a faster rate of principal amortization of the notes. If
the Overcollateralization Amount is reduced to zero, then the defaults and
losses would cause an increase in the payment of principal to the holders of the
notes to the extent that the defaults or losses are covered by the credit
enhancement available for the notes[, including the guaranty policy]. Several
factors may influence delinquencies, defaults and losses, including
o the outstanding loan principal balances;
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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--Realization On Defaulted Loans" 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" and "The Pool" in this prospectus supplement. The risk of
delinquencies, defaults and losses is greater and voluntary principal
prepayments are less likely in regions where a weak or deteriorating economy
exists. A weak or deteriorating economy may be evidenced by, among other
factors, increasing unemployment or falling property values.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
[The overcollateralization feature has been designed to accelerate the
principal amortization of the notes relative to the principal amortization of
the loans. If on any payment date, the Overcollateralization Target Amount
exceeds the Overcollateralization Amount, Excess Spread, if any, will be paid as
principal to the holders of the Notes in the amounts described under
"Description of the Notes--Priority of Payments" in this prospectus supplement.
If the Overcollateralization Amount equals or exceeds the Overcollateralization
Target Amount for the related payment date, Excess Spread otherwise payable to
the holders of the notes will instead be paid to the holders of the Residual
Interest Certificates. On any payment date after the Stepdown Date as to which
the Overcollateralization Amount is, or after taking into account all other
payments to be made on the related payment date, would be at least equal to the
Overcollateralization Target Amount, principal collections on the loans
otherwise payable as principal to the holders of the notes on the related
payment date in reduction of their Note Principal Balance may instead be paid to
the holders of the Residual Interest Certificates. As a result, the rate of the
principal amortization of related notes will be reduced, and may be delayed,
until the Overcollateralization Amount is reduced to the Overcollateralization
Target Amount.
The yield to maturity on notes purchased at a premium or discount will be
affected by the extent to which any Excess Spread is paid to holders of the
notes, or to the holders of the Residual Interest Certificates, in lieu of
payment to the holders of the notes. If Excess Spread payments to the holders of
the Residual Interest Certificates occurs sooner than anticipated by an investor
who purchases notes at a discount, the actual yield to that investor may be
lower than anticipated. If Excess Spread payments to the holders of the Residual
Interest Certificates occur later than anticipated by an investor who purchases
notes at a premium, the actual yield to that investor may be lower than
anticipated. In particular, high rates of delinquencies on the loans during any
Due Period will cause the Excess Spread available on the related payment date to
be reduced. This occurrence may cause the Note Principal Balance of the notes to
amortize at a slower rate relative to the pool principal balance, resulting in a
possible reduction of the Overcollateralization Amount.
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If the securities insurer changes the Overcollateralization Target Amount
or the delinquency or loss levels or Excess Spread requirements that determine
whether the Overcollateralization Target Amount will increase or decrease, your
principal on the notes may be paid more slowly or quickly than otherwise would
be the case. This could adversely affect the yield to maturity of your notes.
See "--Reinvestment Risk" and "Description of Credit Enhancement--
Overcollateralization" in this prospectus supplement.]
REINVESTMENT RISK
The reinvestment risk with respect to an investment in the notes will be
affected by the rate and timing of principal payments, including prepayments, in
relation to the prevailing interest rates at the time of receipt of these
principal payments. For example, during periods of falling interest rates,
holders of the notes may receive an increased amount of principal payments from
the loans at a time when the related holders may be unable to reinvest these
payments in investments having a yield and rating comparable to their respective
notes. Conversely, during periods of rising interest rates, holders of the notes
may receive a decreased amount of principal prepayments from the loans at a time
when the holders may have an opportunity to reinvest these payments in
investments having a higher yield than, and a comparable rating to, their
respective notes. If the securities insurer changes the Overcollateralization
Target Amount or the delinquency or loss levels or Excess Spread requirements
that determine whether the Overcollateralization Target Amount will increase or
decrease, your principal on the notes may be paid more slowly or quickly than
may otherwise be the case. This could adversely affect your reinvestment risk.
MATURITY DATE
The Maturity Date of the notes was determined by adding one year to the
payment date which occurs in the month following the Maturity Date of the latest
maturing loan. The actual maturity of the notes may be significantly earlier
than the Maturity Date.
YIELD CONSIDERATIONS RELATING TO ADJUSTABLE-RATE LOANS
During the initial period following origination, substantially all of the
adjustable-rate loans bore interest at loan interest rates which were set
independently of the Six-Month LIBOR applicable at the time of origination. See
"The Pool--Payments on the Loans" in this prospectus supplement.
At the initial reset date for each adjustable-rate loan, the loan interest
rate was or will be adjusted to a rate based on the applicable Six-Month LIBOR
plus the related Gross Margin. However, the loan interest rate is subject to the
applicable periodic rate cap and applicable lifetime cap and lifetime floor on
the loan interest rate. On a reset date, increases in Six-Month LIBOR will
increase the loan 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.
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If the loan 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 the notes could be adversely affected. In addition,
should the loan interest rate on any adjustable-rate loan not be 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 these
adjustable-rate loans in full in order to refinance at a lower rate.
The loan interest rates on the adjustable-rate loans adjust periodically
based on Six-Month LIBOR. However, the interest rate on the notes adjusts
monthly based on One-Month LIBOR as described under "Description of the Notes"
in this prospectus supplement, subject to a net funds cap. The interest due on
the adjustable-rate loans during any Due Period may not equal the amount of
interest that would accrue on the notes during the related Accrual Period. To
the extent any shortfall is created as a result, the shortfall will only be paid
to noteholders to the extent and in the priority described under "Description of
the Notes--Payments on the Notes" 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 NOTES
The following information is given solely to illustrate the effect of
prepayments of the loans on the weighted average lives of the notes under
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 notes, refers to the average amount of time that will
elapse
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from the date of delivery of the notes until each dollar of principal of the
notes will be repaid to the investor on the notes. The weighted average lives of
the notes will be influenced by the rate
o at which principal of the loans is paid, which may be in the form of
scheduled amortization or prepayments,
o at which Excess Spread is paid to holders of the notes, the extent to
which any reduction in Overcollateralization Amount is paid to the
Residual Interest Certificates and
o of delinquencies and losses on the loans from time to time.
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--Overcollateralization" in this
prospectus supplement.
The model used in this prospectus supplement is the constant prepayment
rate (CPR) which 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. 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. The transferor believes that no existing statistics
of which it is aware provide a reliable basis for the holders of the notes to
predict the amount or the timing of receipt of prepayments on the loans.
MODELING
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
loans commencing on _______, 199_, 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;
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(4) the loan interest rate on each adjustable-rate loan is adjusted on
its next reset date and subsequent reset dates, if necessary, to equal the
sum of
(a) an assumed level of Six-Month LIBOR, equal to ___%, and
(b) the Gross Margin, subject to the periodic rate caps, the
lifetime cap and the lifetime floor;
(5) LIBOR remains constant at ______% per annum;
(6) (a) all loans prepay monthly at the specified percentage of CPR,
(b) no optional or other early termination of the notes occurs,
except with respect to the calculation of the "Weighted Average
Life-to-Call (Years)" figures in the table on page S-[__] of this
prospectus supplement, 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 notes is ________, 199_;
(9) each year will consist of twelve 30-day months;
(10) cash payments in full are received by the holders of the notes on
the ____ day of each month, commencing in _______ 199_;
(11) the Overcollateralization Target Amount will be _____% of the
cut-off date pool principal balance with respect to any payment date prior
to the Stepdown Date and the greater of
(a) ___% of the Pool Principal Balance and
(b) ___% of the cut-off date pool principal balance on or after
the Stepdown Date;
(12) the interest rate for the notes is a per annum rate equal to
One-Month LIBOR plus ____%. However, the Note Interest Rate on the notes
will be increased commencing on the date that the Residual
Certificateholders may elect to exercise their optional redemption right;
(13) all Servicing Fees and Master Servicer Fees assumed to be
deducted from the interest collections in respect of the loans equal ____%
of the pool principal balance;
(14) other fees and expenses assumed to be deducted from the interest
collections in respect of the loans equal ___% of the principal balance of
the notes;
(15) no reinvestment income from any trust account is earned and
available for payment; and
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(16) the pool consists of loans having the following characteristics:
<TABLE>
ASSUMED LOAN CHARACTERISTICS
<CAPTION>
REMAINING ORIGINAL GROSS GROSS
TERM TO TERM TO INITIAL SUBSEQUENT GROSS GROSS
SUB- CUT-OFF DATE LOAN MATURITY MATURITY GROSS PERIODIC PERIODIC LIFETIME LIFETIME
POOL TYPE PRINCIPAL BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP CAP CAP FLOOR
- ---- ---- ----------------- ---- -------- -------- ------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ % % % % ____%
2 $ % % % % ____%
3 $ % % % % ____%
4 $ % % % % ____%
5 $ % % % % ____%
6 $ % % % % ____%
7 $ % % % % ____%
8 $ % % % % ____%
9 $ % % % % ____%
10 $ % % % %
</TABLE>
The following table indicates the percentages of the initial principal
balance of the notes that would be outstanding, based on the specified
percentages of the CPR.
PERCENTAGE OF ORIGINAL NOTE PRINCIPAL BALANCE
DATE 0% 15% 25% 30% 35% 45%
- -------- --- --- --- --- --- ---
Weighted Average Life-to-Maturity (Years)
Weighted Average Life-to-Call (Years)
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 applicable payment of principal by the
number of years from the date of issuance to the related payment date,
(b) summing the results and
(c) dividing the sum by the aggregate payments of principal referred to in
clause (a) and rounding to two decimal places.
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This table has 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 of
the loans, and should be read in conjunction with these assumptions.
The pay-down scenarios for the notes set forth in the foregoing table is
subject to significant uncertainties and contingencies, including those
discussed above under this caption "Prepayment and Yield Considerations". As a
result, neither the foregoing pay-down scenarios nor the modeling assumptions on
which they were made will likely prove to be accurate. Indeed, the actual
weighted average lives of the notes will likely vary from those set forth in the
foregoing table. These variations may be shorter or longer, and may be greater
with respect to later years.
Furthermore, the loans in all likelihood will not prepay at a constant rate
or at the same rate. Moreover, the payment experience of the loans and other
factors affecting the payments on the notes will not conform to the modeling
assumptions. In fact, the characteristics and payment experience of the loans
will differ in many respects from the modeling assumptions. See "The Pool" in
this prospectus supplement. To the extent that the loans actually included in
the pool have characteristics and a payment experience that differ from those
assumed in preparing the foregoing tables, the notes are likely to have weighted
average lives that are shorter or longer than those set forth in the foregoing
tables. See "Risk Factors--Yield, Prepayment and Maturity Considerations" in
this prospectus supplement.
In light of the uncertainties inherent in the foregoing pay-down scenarios,
the inclusion of the weighted average lives of the notes in the foregoing table
should not be regarded as a representation by the transferor, the depositor, the
underwriters or any other person that any of the pay-down scenarios described in
this section will be experienced.
THE OWNER TRUST AND INDENTURE
GENERAL
_________ Home Loan Owner Trust 199_-_, the owner trust or the issuer is a
business trust to be formed under the laws of the State of Delaware pursuant to
the Owner Trust Agreement. On the closing date, the depositor will sell the
loans to the issuer pursuant to a Sale and Servicing Agreement. After its
formation, the issuer, as an owner trust, will not engage in any activity other
than the activities related to the notes, which will include:
o acquiring and holding the loans and the other assets of the Issuer and
proceeds therefrom,
o issuing the notes and the Residual Interest Certificates,
o making payments on the notes and distributions on the Residual Interest
Certificates, and
o engaging in other activities that are necessary, suitable or convenient
to accomplish the foregoing or are incidental thereto or in connection
therewith.
The Residual Interest Certificates represent the residual interest in the
assets of the issuer. The issuer will initially be capitalized with equity equal
to the value of the Residual Interest Certificates. The Residual Interest
Certificates, together with the notes, will be transferred by the
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issuer to the depositor as consideration for the loans pursuant to the Sale and
Servicing Agreement. The Residual Interest Certificates will be transferred by
the depositor to the transferor as partial consideration for the loans.
The assets of the issuer will consist primarily of the loans and all
amounts distributable on the loans. The assets of the issuer also will include
(1) amounts on deposit in the Collection Account, Note Payment Account
and the Certificate Distribution Account;
(2) payments of principal and interest in respect of the loans
received after the cut-off date;
(3) an assignment of the depositor's rights under the Home Loan
Purchase Agreement;
(4) an assignment of the transferor's rights under the Servicing
Agreement; and
(5) other ancillary or incidental funds, rights and properties related
to the foregoing. The issuer's principal offices will be located in
___________________________, in care of ________________, as the owner
trustee, at the address set forth below under "--The Owner Trustee."
THE OWNER TRUSTEE
_________________, a __________________, will act as the owner trustee
under the Owner Trust Agreement. ________________ is a ______________________
and its principal offices are located at _________________________.
Some functions of the owner trustee under the Owner Trust Agreement and the
Sale and Servicing Agreement will be performed by the indenture trustee. These
functions include maintaining the Certificate Distribution Account and making
distributions to the Residual Interest Certificates.
THE INDENTURE TRUSTEE
On the closing date, the issuer will pledge the loans and its other assets
under an Indenture between the issuer and ________________, a national banking
association (" "), as the indenture trustee. __________ also will act:
o as the paying agent under the Owner Trust Agreement
o as the custodian under the Custodial Agreement between the custodian,
the issuer and the indenture trustee, and
o as the administrator under the Administration Agreement among the
issuer, the administrator and the master servicer.
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DESCRIPTION OF THE NOTES
GENERAL
The issuer will issue one class of notes pursuant to the Indenture. The
assets of the issuer will secure the notes under the Indenture. The notes will
have an approximate aggregate original principal balance of $__________ and will
bear interest at a per annum rate equal to the lesser of:
(1) One-Month LIBOR plus _____%, provided that on any payment date on
or after the Call Option Date, this rate shall be One-Month LIBOR plus
___%; and
(2) the net interest rate.
The net interest rate for any payment date will be equal to the annualized
percentage derived from the fraction not be greater than 1,
o the numerator of which is the positive difference, if any, between the
amount of all interest due on the loans during the related Due Period
and the interest reduction amount and
o the denominator of which is the aggregate principal amount of the notes
immediately prior to the related payment date.
The interest reduction amount for any payment date will be equal to the sum of
the Servicing Fee, the Master Servicer Fee, the Indenture Trustee Fee and the
Guaranty Insurance Premium. However, on any payment date on or after the payment
date occurring in ________, 200_, the Interest Reduction Amount will be
increased by an amount equal to one-twelfth of the product of ____% and the
aggregate principal balance of the loans as of the first day of the related Due
Period.
The issuer will also issue the Residual Interest Certificates evidencing
the ownership interest in the issuer pursuant to the Owner Trust Agreement. The
Residual Interest Certificates are not being offered through this prospectus
supplement or the accompanying prospectus.
On each payment date the indenture trustee or its designee will be required
to pay to the persons in whose names the notes are registered on the last
business day of the month immediately preceding the month of the related payment
date, the portion of the aggregate payment to be made to each holder of a note
as described below. Before any termination of the book-entry provisions,
payments on the notes will be made to 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 notes may only be held in minimum
denominations of $25,000 and integral multiples of $1,000 in excess of that
denomination. However, one note may be issued in a denomination as may be
necessary to represent the remainder of the aggregate amount of notes.
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"ONE-MONTH LIBOR" means the London interbank offered rate for one-month
United States dollar deposits. One-Month LIBOR for each Accrual Period shall be
determined each LIBOR Determination Date, on the basis of the offered rates of
the Reference Banks for one month United States dollar deposits, as these rates
appear on the Telerate Screen Page 3750, as of 11:00 a.m. London time on the
related LIBOR Determination Date.
"REFERENCE BANKS" are the leading banks selected by the indenture trustee
and engaged in transactions in Eurodollar deposits in the international
Eurocurrency market:
(1) with an established place of business in London,
(2) whose quotations appear on the Telerate Screen Page 3750 on the
LIBOR Determination Date in question,
(3) which have been so designated by the indenture trustee and
(4) which are not controlling, controlled by or under common control
with the issuer, the depositor or the transferor.
On each LIBOR Determination Date, One-Month LIBOR will be established by
the indenture trustee as follows:
(a) If on the related LIBOR Determination Date two or more
Reference Banks provide these offered quotations, One-Month LIBOR
shall be the arithmetic mean, rounded upwards if necessary to the
nearest whole multiple of _______%, of the offered quotations.
(b) If on the related LIBOR Determination Date fewer than two
Reference Banks provide the offered quotations, One-Month LIBOR shall
be the greater of:
(1) One-Month LIBOR as determined on the previous LIBOR Determination
Date and
(2) the Reserve Interest Rate.
Listed below is monthly One-Month LIBOR on the last day of the related
calendar month beginning in 1995, as published by _____________. The following
does not purport to be a prediction of the performance of One-Month LIBOR in the
future.
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MONTH
January................................... % % % % %
February.................................. % % % % %
March..................................... % % % %
April..................................... % % % %
May....................................... % % % %
June...................................... % % % %
July...................................... % % % %
August.................................... % % % %
September................................. % % % %
October................................... % % % %
November.................................. % % % %
December.................................. % % % %
The establishment of One-Month LIBOR on each LIBOR Determination Date by
the indenture trustee and the indenture trustee's calculation of the interest
rate on the notes 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 indenture trustee at ________________.
PAYMENTS ON THE NOTES
Available Collection Amount. Payments on the notes on each payment date
will be made from the Available Collection Amount. The servicer will calculate
the Available Collection Amount on the ___ calendar day of each month or, if
this day is not a business day, then the immediately preceding business day.
On each payment date, interest and principal payments on the notes will be
made from the Available Payment Amount and any Insured Payments for the related
payment date. [If for any payment date the securities insurer is required to
make an Insured Payment, the indenture 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.
Payments of Interest. Interest on the Note Principal Balance will accrue
during each Accrual Period at the applicable interest rate. Interest will be
payable to the holders of the notes monthly on each payment date, commencing in
________.
On each payment date, interest payments on the notes will be made from the
Available Payment Amount [and any Insured Payments for the related payment
date]. Under some circumstances, [and if a Securities Insurer Default occurs],
the amount available for interest payments could be less than the amount of
interest payable on the notes on any payment date. In this event, each note will
receive its ratable share, based on the aggregate amount of interest due to the
notes, of the remaining amount available to be paid as interest. In addition,
any related interest deficiency will be carried forward as a Noteholders'
Interest Shortfall Amount, and will be paid to holders of the notes on
subsequent payment dates to the extent that sufficient funds are
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<PAGE>
available. 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 Noteholders'
Interest Shortfall Amount.
Payments of Principal. Principal payments will be made to the holders of
the notes on each payment date in an amount described under "--Priority of
Payments" below. The aggregate payments of principal to the notes will not
exceed the initial Note Principal Balance.
PRIORITY OF PAYMENTS
A. On each payment date, the Regular Payment Amount [and any Insured
Payments] will be paid in the following order of priority:
first, to the holders of the notes, the applicable portion of the
Noteholders' Interest Payment Amount required to be paid in respect of the
notes;
second, to pay principal of the notes, until the Note Principal
Balance is reduced to zero, in an amount up to the sum of the Regular
Principal Payment Amount and the Noteholders' Principal Deficiency Amount,
if any; and
third, any remaining amount to be applied together with Excess Spread
in the manner specified in the next paragraph.
B. On each payment date, the Excess Spread, if any, will be applied in the
following order of priority:
[first, to pay the securities insurer the Securities Insurer
Reimbursement Amount, if any;]
[second, in an amount up to the Overcollateralization Deficiency
Amount, if any, to pay principal of the notes, until the Note Principal
Balance is reduced to zero;]
third, to the holders of the notes, pro rata, Noteholders' Interest
Carry-Forward Amount due and unpaid, if any; and
fourth, any remaining amount
(A) first, concurrently, to the servicer in an amount needed to
reimburse any non-recoverable servicing advances, and to the master
servicer in an amount needed to reimburse any non-recoverable Monthly
Advances, and
(B) then to the Residual Interest Certificates.
[SECURITIES INSURER REIMBURSEMENT AMOUNT
On each payment date, after the holders of the notes have been paid all
amounts, other than the Overcollateralization Deficiency Amount and the
Noteholders' Interest Carry-Forward Amount, to which they are entitled and prior
to any distributions to the holders of the Residual Interest Certificates, the
securities insurer will be entitled to be reimbursed for
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o any unreimbursed Insured Payments in respect of the notes not
previously reimbursed 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 amounts at the rate specified
in the Insurance Agreement and any accrued and unpaid Guaranty Insurance
Premiums. In connection with each Insured Payment, the indenture 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 notes with respect to the
notes. This assignment will only be to the extent of Insured Payments,
including, without limitation, in respect of any amounts due to the holders of
the notes as a result of a securities law violation arising from the offer and
sale of the notes. If any Securities Insurer Reimbursement Amount is
outstanding, the holders of the Residual Interest Certificates will not be
entitled to receive distributions of any amounts of Excess Spread until the
securities insurer has been distributed the applicable Securities Insurer
Reimbursement Amount in full.]
OPTIONAL REDEMPTION
The holders of an aggregate percentage interest in the Residual Interest
Certificates in excess of 50% may, at their option, cause the issuer to effect
an early redemption of the notes on or after any payment date on which the pool
principal balance declines to __% or less of the cut-off date pool principal
balance. This redemption option will be effected by purchasing all of the loans
from the owner trust at a price equal to or greater than the Termination Price.
The proceeds from the related sale will be paid
(1) first, to the outstanding Issuer Fees and Expenses,
(2) second, to the servicer for unreimbursed Servicing Advances and to the
master servicer for unreimbursed Monthly Advances, including those advances
deemed to be nonrecoverable,
(3) third, to the holders of notes in an amount equal to the then
outstanding Note Principal Balance of the notes plus all accrued and unpaid
interest on the Note Principal Balance at the note interest rate determined
without application of any cap on the interest rate and all unpaid
Noteholder's Interest Carry-Forward Amounts,
[(4) fourth, to the securities insurer the Securities Insurer
Reimbursement Amount, if any,] and
(5) fifth, to the holders of the Residual Interest Certificates, in an
amount equal to the amount of proceeds remaining, if any, after the payments
specified in clauses (1) through (4) above.
On or after any payment date the pool principal balance declines to 5% or
less of the cut-off date pool principal balance, [the securities insurer or] the
servicer may, at each one's option, cause the issuer to effect an early
redemption of the notes if the Majority Residual Interest Certificateholders
fail to exercise their option to cause to the issuer to effect an early
redemption.
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In addition, if the events of default of the issuer occur as set forth in the
Indenture, including:
(1) a default in payment of any interest or principal amounts due the
holders of the notes,
(2) the failure by the issuer to observe or perform in any material
respect any of its covenants or agreements in the Indenture, which failure
continues unremedied for 30 days, and
(3) events of bankruptcy, insolvency or other similar proceedings relating
to the issuer, [then the securities insurer may, at its option, effect an
early redemption of the notes, by purchasing all of the loans from the owner
trustee at a price equal to the Termination Price.]
DESCRIPTION OF CREDIT ENHANCEMENT
[Credit enhancement with respect to the notes will be provided by the
Guaranty Policy. Additional credit enhancement with respect to the notes that
will be utilized before the Guaranty Policy will be provided by:
(1) the overcollateralization feature described below under
"--Overcollateralization," and
(2) the subordination of the right of the Residual Interest Certificates
to receive payments of any remaining amounts as described below under
"--Subordination."]
[FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the________________________________
does not purport to be complete and is qualified in its entirety by reference to
the Policy. The Policy will be filed under cover of Form 8-K shortly after the
closing date.
Simultaneously with the issuance of the notes, the securities insurer will
deliver the Guaranty Policy to the indenture trustee for the benefit of each
noteholder. Under the Guaranty Policy, the securities insurer unconditionally
and irrevocably guarantees to the indenture trustee for the benefit of each
holder of the notes the full and complete payment of
(1) Insured Payments, as defined below, on the notes; and
(2) the amount of any Insured Payment which subsequently is avoided in
whole or in part as a preference payment under applicable law.
Payment of claims on the Guaranty Policy made in respect of Insured Payments
will be made by the securities insurer following Receipt by the securities
insurer of the appropriate notice for payment on the later to occur of:
(1) 12:00 noon, New York City time, on the second business day following
receipt of this notice for payment, and
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(2) 12:00 noon, New York City time, on the date on which the related
payment was due on the notes.
If payment of any amount avoided as a preference under applicable bankruptcy,
insolvency, receivership or similar law is required to be made under the
Guaranty Policy, the securities insurer shall cause the related payment to be
made on the later of
(1) the date when due to be paid pursuant to an order to the
securities insurer or
(2) the first to occur of the ______ business day following receipt by the
securities insurer from the indenture trustee of
(A) a certified copy of the order of the court or other governmental
body which exercised jurisdiction to the effect that the noteholder is
required to return principal or interest paid on the notes during the
term of the Guaranty Policy because the related payments were avoidable
as preference payments under applicable bankruptcy law,
(B) a certificate of the noteholder that the order has been entered
and is not subject to any stay, and
(C) an assignment duly executed and delivered by the noteholder, in
the related form as is reasonably required by the securities insurer
and provided to the noteholder by the securities insurer, irrevocably
assigning to the securities insurer all rights and claims of the
noteholder relating to or arising under the notes against the issuer or
otherwise with respect to the applicable preference payment, or
(3) the date of receipt by the securities insurer from the indenture
trustee of the items referred to in clauses (A), (B) and (C) in (2) if, at
least four business days prior to the related date of receipt, the securities
insurer shall have received written notice from the indenture trustee that
these items were to be delivered on the related date and this date was
specified in that notice.
This avoided payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the order and not to the
indenture trustee or any noteholder directly, unless a noteholder has previously
paid the applicable amount to the receiver, conservator, debtor-in-possession or
trustee in bankruptcy named in the order. In this case, this payment shall be
disbursed to the indenture trustee for distribution to the related noteholder if
proof of payment reasonably satisfactory to the securities insurer is provided.
In connection with the foregoing, the securities insurer shall have the rights
provided pursuant to the Indenture.
"Receipt" and "received," with respect to the Guaranty Policy, mean actual
delivery to the securities insurer or its fiscal agent, if any, prior to 12:00
noon, New York City time, on a business day. Delivery either on a day that is
not a business day or after 12:00 noon, New York City time, shall be deemed to
be Receipt on the next succeeding business day. If any notice or certificate
given under the Guaranty Policy by the indenture trustee is not in proper form
or is not properly completed, executed or delivered, it shall be deemed not to
have been Received. As a
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result, the securities insurer, or its fiscal agent, if any, will promptly so
advise the indenture trustee and the indenture trustee may submit an amended
notice.
Under the Guaranty Policy, business day is any day other than:
(1) a Saturday or Sunday or
(2) a day on which banking institutions in the City of New York, New York,
the city in which the corporate trust office of the indenture trustee is
located or in the city in which the servicer's servicing operations or the
master servicer's master servicing operations are primarily located and are
authorized or obligated by law or executive order to be closed.
The securities insurer's obligations under the Guaranty Policy in respect of
Insured Payments will be discharged to the extent funds are transferred to the
indenture trustee as provided in the Guaranty Policy whether or not these funds
are properly applied by the indenture trustee.
The securities insurer will be subrogated to the rights of each noteholder to
receive payments of principal and interest under the notes to the extent of any
payment by the securities insurer under the Guaranty Policy. For a discussion of
the rights and powers of the securities insurer resulting from an event of
default under the Transfer and Servicing Agreements, see "Description of the
Transfer and Servicing Agreements" in this prospectus supplement.
To the fullest extent permitted by applicable law, the securities insurer
agrees under the Guaranty Policy not to assert, and waives, for the benefit of
each noteholder, all its rights, whether by counterclaim, setoff or otherwise,
and defenses. The waived defenses include, without limitation, the defense of
fraud, whether acquired by subrogation, assignment or otherwise. The securities
insurer waives these rights to the extent that these rights and defenses may be
available to the securities insurer to avoid payment of its obligations under
the Guaranty Policy in accordance with the express provisions of the Guaranty
Policy.
Claims under the Guaranty Policy constitute direct, unsecured and
unsubordinated obligations of the securities insurer ranking not less than pari
passu with other unsecured and unsubordinated indebtedness of the securities
insurer for borrowed money. Claims against the securities insurer under the
Guaranty Policy and claims against the securities insurer under each other
financial guaranty insurance policy issued thereby constitute pari passu claims
against the general assets of the securities insurer. The terms of the Guaranty
Policy cannot be modified or altered by any other agreement or instrument, or by
the merger, consolidation or dissolution of the Issuer. The Guaranty Policy may
not be cancelled or revoked prior to payment in full of the notes. The Guaranty
Policy is not covered by the property/casualty insurance security fund specified
in Article 76 of the New York Insurance Law.]
THE SECURITIES INSURER
[The information in this section regarding the securities insurer has been
supplied by the securities insurer, for inclusion in this prospectus supplement.
This information has not been reviewed or verified by _________, the servicer,
the depositor, the indenture trustee, the owner trustee, the underwriters or any
of their respective affiliates.]
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General. The principal executive offices of the securities insurer are
located at ____________________________________________________________________.
Reinsurance. Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the securities
insurer or its domestic [or Bermuda] operating insurance company subsidiaries
are generally reinsured among these companies on an agreed-upon percentage. This
percentage is substantially proportional to their respective capital, surplus
and reserves, and is subject to applicable statutory risk limitations. In
addition, the securities insurer reinsures a portion of its liabilities under
some of its financial guaranty insurance policies with other reinsurers under
various treaties and on a transaction-by-transaction basis. This reinsurance is
utilized by the securities insurer as a risk management device and to comply
with statutory and rating agency requirements; it does not alter or limit the
securities insurer's obligations under any financial guaranty insurance policy.
Ratings. The securities insurer's insurance financial strength is rated
"____" by _______________. The securities insurer's insurer financial strength
is rated "_________" by _____________. The securities insurer's claims-paying
ability is rated "____" by _____________. Investment Information, Inc. These
ratings reflect only the views of the respective rating agencies, and are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by the rating agencies.
Capitalization. The following table sets forth the capitalization of the
securities insurer and its wholly owned subsidiaries on the basis of generally
accepted accounting principles as of ________________, as well as the
capitalization as adjusted to give effect to specific transactions entered into
during ___________:
_______________, 199_
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
Deferred Premium Revenue (net of prepaid reinsurance
premiums).............................................
--------- ---------
Surplus Notes.........................................
--------- ---------
Minority Interest.....................................
--------- ---------
Shareholder's Equity:
Common Stock........................................
Additional Paid-In Capital..........................
Accumulated Other Comprehensive Income (net of
deferred income taxes)..............................
Accumulated Earnings................................
--------- ---------
Total Shareholder's Equity............................
--------- ---------
Total Deferred Premium Revenue, Surplus Notes,
Minority Interest and Shareholder's Equity............
========= =========
For further information concerning the securities insurer, see the
Consolidated Financial Statement of the Securities Insurer and Subsidiaries, and
the notes thereto, incorporated by reference to this prospectus supplement. The
securities insurer's financial statements are
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included as exhibits to the Annual Reports on Form 10-K and Quarterly Reports on
Form 10-Q filed with the Securities and Exchange Commission and at the Holdings
web site, http://www.[ ]. Copies of the statutory quarterly and annual
statements filed with the State of New York Insurance Department by the
securities insurer are available by request to the State of New York Insurance
Department.
The consolidated financial statements of the securities insurer are included
in, or as exhibits to, the following documents. These documents have been filed
with the Securities and Exchange Commission by Holdings and are incorporated by
reference in this prospectus supplement:
(a) Annual Report on Form 10-K of Holdings for the year ended
__________, which Report includes as an exhibit the securities
insurer's audited consolidated financial statements for the year ended
___________; and
(b) Quarterly Report on Form 10-Q for the period ended ____________,
which report includes as an exhibit the securities insurer's unaudited
financial statements for the nine month period ended ________________.
All financial statements of the securities insurer included in documents
filed by Holdings pursuant to Section 13(a) 13(c), 14 or 15(d) of the Exchange
Act, subsequent to the date of this prospectus supplement and prior to the
termination of the offering of the notes shall be deemed to be incorporated by
reference into this prospectus supplement and to be a part of it from the
respective dates of filing the related documents.
The depositor will provide a copy of any or all of the foregoing financial
statements incorporated in this prospectus supplement by reference. These copies
will be provided without charge to any person to whom this prospectus supplement
is delivered, and only if requested by that person. Requests for these copies
should be directed to the depositor at 1285 Avenue of the Americas, New York,
New York 10019.
The depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the financial
statements of the securities insurer included in or as an exhibit to the annual
report of Holdings filed pursuant to section 13(a) or section 15(d) of the
Exchange Act that is incorporated by reference in the Registration Statement,
shall be deemed to be a new registration statement relating to the notes offered
by this prospectus supplement. The offering of the notes at the time of the
filing shall be deemed to be the initial bona fide offering of the notes.
The securities insurer is licensed and subject to regulation as a financial
guaranty insurance corporation under the laws of the State of New York, its
state of domicile. In addition, the securities insurer and its insurance
subsidiaries are subject to regulation by insurance laws of the various other
jurisdictions in which they are licensed to do business. As a financial guaranty
insurance corporation licensed to do business in the State of New York, the
securities insurer is subject to Article 69 of the New York Insurance Law which,
among other things,
o limits the business of this type of insurer to financial guaranty
insurance and related lines,
o requires that these insurers maintain a minimum surplus to policy holders,
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o establishes contingency, loss and unearned premium reserve requirements
for each applicable insurer, and
o limits the size of individual transactions and the volume of transactions
that may be underwritten by these insurers.
Other provisions of the New York Insurance Law, applicable to non-life insurance
companies like the securities insurer, regulate, among other things,
o permitted investments,
o payment of dividends,
o transactions with affiliates,
o mergers, consolidations, acquisitions or sales of assets and
o incurrence of liability for borrowings.]
OVERCOLLATERALIZATION
A limited acceleration of the principal amortization of the notes relative to
the principal amortization of the loans has been designed to increase the
Overcollateralization Amount over time. This is achieved by making additional
payments of principal to the holders of the notes from the payment of Excess
Spread until the Overcollateralization Amount is equal to the
Overcollateralization Target Amount.
If on any payment date there exists an Overcollateralization Deficiency
Amount, payments of Excess Spread, if any, will be made as an additional payment
of principal to the holders of the notes as set forth under "Description of the
Notes--Priority of Payments" in this prospectus supplement. These payments of
Excess Spread are intended to accelerate the amortization of the Note Principal
Balance relative to the amortization of the loans, thereby increasing the
Overcollateralization Amount. The relative percentage of the Note Principal
Balance to the pool principal balance will decrease as a result of the
application of Excess Spread to reduce the Note Principal Balance.
On any payment date with respect to which the Overcollateralization
Deficiency Amount is equal to zero, all or a portion of the Excess Spread may be
distributed to the holders of the Residual Interest Certificates as described in
this prospectus supplement rather than being paid as principal to the holders of
the applicable notes. This would have the effect of ceasing the acceleration of
principal amortization of the related notes in relation to the principal
amortization of the Pool until that time as the Overcollateralization Deficiency
Amount is greater than zero. This is due to a reduction in the
Overcollateralization Amount as a result of Realized Losses or delinquencies or
due to an increase in the Overcollateralization Target Amount as a result of the
failure to satisfy particular delinquency or loss criteria.
On any payment date occurring on or after a Stepdown Date or the date on
which the securities insurer has reduced the Overcollateralization Target
Amount, the holders of the Residual Interest Certificates may receive payments
attributable to all or a portion of the Regular
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Principal Payment Amount that would otherwise be paid to the holders of the
notes. The payments may not exceed the Overcollateralization Reduction Amount.
The Overcollateralization Target Amount may decrease or "stepdown":
(1) as a result of the performance of the loans with respect to the
principal amortization of the loans declining to specific levels and the
delinquency and default experience of the loans staying lower than particular
levels established by the securities insurer, and
(2) if following an increase in the rates of delinquencies and defaults on
the loans, these rates improve in relation to the levels established by the
securities insurer.
Pursuant to the Sale and Servicing Agreement, the securities insurer may
modify, without the requirement of an amendment to the Sale and Servicing
Agreement, the manner in which the Overcollateralization Target Amount is
determined. Accordingly, the Overcollateralization Target Amount may be
decreased at any time in the discretion of the securities insurer, but not below
the amounts set forth in the Insurance Agreement.
While the application of Excess Spread in the manner specified above has been
designed to produce and maintain a given level of overcollateralization, there
can be no assurance that Excess Spread will be generated in sufficient amounts
to ensure that this overcollateralization level will be achieved or maintained
at all times. In particular, a high rate of delinquencies on the loans during
any Due Period could cause the amount of interest received on the loans during
the related Due Period to be less than the amount of interest payable on the
notes on the related payment date. In this case, the Note Principal Balance
could decrease at a slower rate relative to the pool principal balance,
resulting in a possible reduction of the Overcollateralization Amount. In
addition, Realized Losses from Liquidated Home Loans and Defaulted Loans will
reduce the pool principal balance, which in turn will reduce the
Overcollateralization Amount. See "Risk Factors--Adequacy of Credit Enhancement"
in this prospectus supplement.
SUBORDINATION
Payments of interest will be made first to the notes. The rights of the
holders of the Residual Interest Certificate to receive any payments on any
payment date will be subordinated to the rights of the holders of the notes.
This subordination of the Residual Interest Certificates is intended to enhance
the likelihood of the regular receipt of interest and principal due to the
holders of the notes and to afford these holders protection against losses on
the loans. See "Risk Factors--Adequacy of Credit Enhancement" in this prospectus
supplement.
DESCRIPTION OF THE TRANSFER AND SERVICING AGREEMENTS
The following summary describes the Transfer and Servicing Agreements. Copies
of the Transfer and Servicing Agreements will be filed with the Commission
following the issuance of the notes. The summary does not purport to be complete
and is subject to, and qualified in its entirety by reference to, all the
provisions of the Transfer and Servicing Agreements. The following summary
supplements, and to the extent inconsistent therewith replaces, the description
of the general terms and provisions of the Transfer and Servicing Agreements set
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forth under the heading "Description of the Securities" in the accompanying
prospectus, to which description reference is hereby made.
SALE AND ASSIGNMENT OF THE LOANS
On the closing date, all of the transferor's right, title and interest in and
to the loans will be conveyed from the transferor to the depositor and then from
the depositor to the issuer. The issuer, concurrently with the conveyance of the
loans, will cause the notes and the Residual Interest Certificates to be
delivered to the depositor in exchange for the loans. The issuer will pledge and
assign the loans to the indenture trustee in exchange for the notes.
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 indenture
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 indenture
trustee in recordable form,
o a title insurance policy 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 indenture trustee in the real property
records of the related states. In these circumstances, the transferor will
deliver to the custodian the assignments of the mortgages in the name of the
indenture trustee and in recordable form. The transferor, in its capacity as the
master servicer, will retain the record title to the related mortgages under the
applicable real property records, on behalf of the issuer, the indenture trustee
and the Security Owners. In all other circumstances, pursuant to the direction
of the rating agencies or the securities insurer, assignments of the mortgages
to the indenture trustee will be recorded in the real property records for those
states in which this type of recording is deemed necessary to protect the
indenture trustee's interest in the loans against the claims of some 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 indenture trustee.
The custodian will agree, for the benefit of the holders of the notes, to
review each Indenture Trustee's Loan File delivered to it within __ days after
the pledge of the related loan to the indenture trustee to ascertain that all
required documents have been executed and received. Subject to particular cure
provisions set forth in the Transfer and Servicing Agreements, the
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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 indenture
trustee is generally not necessary to effect a pledge of the loans to the
indenture 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 indenture trustee, the other parties to this sale, assignment,
satisfaction or discharge may have rights superior to those of the indenture
trustee. In some states, in the absence of this type of recordation of the
assignments of the mortgages, the transfer to the indenture trustee of the loans
may not be effective against some 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 indenture
trustee, the holders of the notes 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--Adequacy of
Credit Enhancement" in this prospectus supplement.
REPRESENTATIONS AND WARRANTIES
In the Sale and Servicing Agreement, the transferor will represent and
warrant to the issuer and indenture trustee, among other things, that:
(1) the information with respect to each loan set forth in the schedule
appearing as an exhibit to the Sale and Servicing Agreement delivered to the
issuer, 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) (a) as of the cut-off date, no more than approximately ____% of the
loans were 30 days or more past due;
(b) no more than approximately _____% of the loans were 60 or more
days past due; and
(c) ____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.
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. The transferor
will also be obligated either to repurchase any Defective Loan or to remove a
Defective Loan and substitute a Qualified Substitute Loan.
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The repurchase of any loan, rather than the replacement of the loan through
substitution, will result in accelerated principal payments on the notes.
Unless waived by the securities insurer, the transferor is required
(1) within 60 days after discovery or notice of a 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
owner trustee, the securities insurer or the indenture trustee or as to which
a material document deficiency exists, or
(2) on or before the Determination Date next 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 closing date to but not including the date of repurchase
computed at the loan interest rate,
(c) plus the amount of any unreimbursed Servicing Advances and
Monthly Advances made by the servicer and master servicer,
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 within two years of
the closing date. If the aggregate outstanding principal balance plus all
accrued and unpaid interest of the qualified substitute loan(s) is less than the
outstanding principal balance of the Defective Loan(s) plus all accrued and
unpaid interest, the transferor will also remit for payment to the holders of
the notes any Substitution Adjustment. As used in this prospectus supplement, a
"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 - a "Deleted Loan" - 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., fixed-rate or adjustable-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
-----------,
(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 Sale and 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,
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(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.
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, or the sale or other
disposition of all or any significant portion of its assets. If the Transferor
is unable to repurchase or replace a Defective Loan, the servicer will utilize
other accepted servicing procedures to realize any reasonable recovery of net
proceeds from the Defective Loan.
FEES AND EXPENSES
The issuer fees and expenses for the series ______ consist of the following:
(1) as compensation for its services pursuant to the Sale and Servicing
Agreement and the Servicing Agreement, the servicer is entitled to the
Servicing Compensation and reimbursement as described under "--Servicing"
below, and the master servicer is entitled to the Master Servicer
Compensation as described under the "Master Servicer" in this prospectus
supplement;
(2) as compensation for its services pursuant to the applicable Transfer
and Servicing Agreements, the indenture trustee is entitled to a monthly
indenture trustee fee. The amount of this fee is equal to one twelfth of the
product of ______% 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 will be calculated at the servicing fee rate equal to
one-twelfth of the product of _____% and the principal balance of the related
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. See "--Servicer
Determinations and Events of Defaults". The servicer may subcontract its
servicing obligations pursuant to a subservicing agreement with each servicer,
in this capacity, a "subservicer." 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
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administrative fees, insufficient funds charges, and some other
servicing-related 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 related loan. However, the master servicer will
advance Monthly Advances. 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 a 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 accepted servicing procedures to
be nonrecoverable will be reimbursable from amounts in the Note Payment Account
after payments are made to the holders of the notes.
COLLECTION ACCOUNT, NOTE PAYMENT ACCOUNT AND CERTIFICATE DISTRIBUTION ACCOUNT
The servicer is required to use its best efforts to deposit in the Collection
Account, within one business day 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, Released
Mortgaged Property Proceeds,
(3) any amounts payable in connection with the repurchase or substitution
of any loan,
(4) interest and gains on funds held in the Collection Account and
(5) any amount required to be deposited in the Collection Account in
connection with the termination of the notes.
The foregoing requirements for deposit in the Collection Account will be
exclusive of payments on account of principal and interest collected on the
loans on or before the cut-off date. Withdrawals will be made from the
Collection Account only for the purposes specified in the Sale and Servicing
Agreement. The Collection Account may be maintained at any depository
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institution, which satisfies the requirements set forth in the definition of
Eligible Account in the Sale and Servicing Agreement.
The indenture trustee will establish and maintain a Note Payment Account. The
Note Payment Account will be in the name of the indenture trustee on behalf of
the holders of the notes. Deposits into the Note Payment Account will be from
amounts released from the Collection Account in respect of distributions on the
loans [and any proceeds from the Guaranty Policy] for payment to the holders of
notes. The indenture trustee will also establish and maintain a Certificate
Distribution Account. The Certificate Distribution Account will be in the name
of the owner trustee on behalf of the holders of the Residual Interest
Certificates. Deposits into the Certificate Distribution Account will be from
amounts released from the Collection Account or Note Payment Account for
distribution to the Residual Interest Certificates.
On the_____ business day before each payment date, the servicer will remit to
the indenture trustee for deposit into the Note Payment Account the applicable
portions of the Available Collection Amount by making the appropriate
withdrawals from the Collection Account in respect of payments on the loans. On
each payment date, the indenture trustee will make withdrawals from the Note
Payment Account for application of the amounts specified under "Description of
the Notes--Payments on the Notes" in this prospectus supplement and for deposit
to the Certificate Distribution Account.
INCOME FROM ACCOUNTS
So long as no Event of Default has occurred and is continuing, amounts on
deposit in the Note Payment Account, the Certificate Distribution Account and
the Collection Account, will be invested by the indenture trustee in one or more
investments permitted under the Sale and Servicing Agreement bearing interest or
sold at a discount. The master servicer will direct the indenture trustee with
respect to investing the funds in the Collection Account and the Note Payment
Account. No related investment in any account will mature later than the
business day immediately preceding the next payment date. All income or other
gain from investments in the Collection Account and the Note Payment Account
will be paid to the master servicer as part of the Master Servicer Compensation.
The master servicer will be obligated to reimburse the Collection Account and
the Note Payment Account for any realized investment losses that are incurred in
respect of investments of amounts in an account.
COLLECTION AND OTHER SERVICING PROCEDURES FOR LOANS
The servicer has agreed to manage, service, administer and make collections
on the loans and perform the other actions required by the servicer under the
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:
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(1) meet at least the same standards the servicer would follow in
exercising reasonable care in servicing mortgage and consumer loans as it
would for 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 consumer loan servicers that service comparable loans and the
reliance placed by the holders of the notes, the holders of the Residual
Interest Certificates and the securities insurer on the servicer for the
servicing of the loans.
If any payment due under any loan is not paid when the same becomes due and
payable, or if the related borrower fails to perform any other covenant or
obligation under the loan and this failure continues beyond any applicable grace
period, the servicer, in accordance with the accepted servicing procedures, must
take that action as it shall deem to be in the best interest of the Security
Owners. In determining whether to undertake 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.
INSURANCE
The servicer is required to maintain any fire and hazard insurance with
respect to any mortgaged property acquired by the owner trustee in foreclosure.
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 related loan. This modification is subject to
limitations in the Sale and Servicing Agreement and is permitted only if a
payment default with respect to the related 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, substitutions of
collateral, or dispositions of loans through short sales or short pay-offs, if
the aggregate of the principal balances of the related modified loans exceeds
____% of the cut-off date principal balance of the loans.
With respect to any loan in default and subject to the prior written consent
of the securities insurer and the master servicer, the servicer may, among other
things,
o accept short pay-offs or short sales,
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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 servicer will be acting in the best interests of the holders of the notes,
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--Realization On Defaulted Loans" in this
prospectus supplement.
The servicer may, subject to the prior consent of the securities insurer,
permit a borrower who is selling his principal residence and relocating to
another location, to substitute as collateral for the related loan the
borrower's new single family residence in place of the mortgaged property being
sold or any other real or personal property of the borrower. This substitution
may include an interim substitution of personal property pending the borrower's
acquisition of a new residence.
Under some circumstances, if the related borrower has received net proceeds
from the sale of the prior residence that will not be applied to the purchase of
the new residence, then the servicer, in its discretion, may require that the
related borrower either
(1) make a partial prepayment in reduction of the principal balance
of the loan, or
(2) place the related funds into a depository account or certificate of
deposit as collateral for the related loan.
If a borrower is selling its mortgaged property in a distressed situation or
a situation involving compensating factors, then the servicer, in a manner
consistent with the accepted servicing procedures, may
(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.
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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 Sale and Servicing Agreement. These
requirements include the requirement that the servicer follow the accepted
servicing procedures for foreclosure and operation of foreclosed 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
Sale and Servicing Agreement provides that the master servicer shall provide
this statement to the indenture trustee, the issuer, the depositor, the
securities insurer and the rating agencies. In this statement, the servicer is
required to certify that it has fulfilled its obligations under the Servicing
Agreement throughout the preceding year, except as specified in the related
statement.
Each year, within 90 days following the end of the servicer's fiscal year,
beginning in _____, the servicer will furnish to the master servicer, the
issuer, 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 Sale and
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 _____ and ends on ______.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Sale and Servicing Agreement provides that the master servicer may not
resign from its obligations and duties thereunder except
(1) with the consent of the owner trustee, the securities insurer and
indenture trustee or
(2) if the performance of its duties under the Sale and 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 owner
trustee, the securities insurer and the indenture 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 indenture
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 is a servicer meeting the criteria specified in the Sale and
Servicing Agreement, acceptable to the securities insurer, and is capable of
fulfilling the duties of the master servicer contained in the Sale and Servicing
Agreement. Any company into which the master servicer may be merged or
consolidated will be the
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successor to the master servicer under the Sale and Servicing Agreement without
the execution or filing of any paper or any further act.
The Sale and Servicing Agreement provides that neither the master servicer
nor any of its directors, officers, employees or agents will have any liability
to the issuer or to the Security Owners for any action taken, or for refraining
from taking any action, in good faith pursuant to the Sale and Servicing
Agreement or for errors in judgment. 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.
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 Sale
and 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 Sale and 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 Sale and
Servicing Agreement or Servicing Agreement, which failure continues
unremedied for 30 days after notice;
(3) events of insolvency occurring with respect to 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 Sale and Servicing Agreement;
(d) the master servicer has ceased to conduct its business in the
ordinary course; and
(e) some other events of default established by the securities
insurer as further described in the Sale and Servicing Agreement.
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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 indenture trustee may terminate all of the rights and
obligations of the master servicer under the Sale and 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 with
the prior written consent of the securities insurer, or the holders of notes
representing more than 50% of the aggregate voting interests of the note with
prior written consent of the securities insurer, by notice given in writing to
the master servicer, and to the indenture trustee, if given by the holders of
notes. If the master servicer is terminated, the indenture 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 of and acceptance of appointment by a successor master servicer, all
authority, power, obligations and responsibilities of the master servicer under
the Sale and Servicing Agreement shall 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 shall be entitled
to any compensation as the master servicer would have been entitled to under the
Sale and 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 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 shall 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,
o be approved in advance by the master servicer and the securities insurer
in their sole discretion, and
o expressly assume the obligations of the servicer under the Servicing
Agreement.
SERVICER DETERMINATIONS AND EVENTS OF DEFAULT
Under the Sale and Servicing Agreement and the Servicing Agreement, the term
of the servicer shall be extendable for successive 90 day terms until the notes
are paid in full, provided
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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 Sale and 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 shall have 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 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) events of insolvency occurring with respect to 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 thereunder or in the Sale and 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 Sale and Servicing Agreement shall terminate. The Servicing Agreement
provides that in that 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 Sale and 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
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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.
RIGHTS OF NOTEHOLDERS ON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, the following, among other things, will constitute
events of default
(1) a failure to pay the full amount of the portion of the Noteholders'
Interest Payment Amount payable to the notes within five days of the payment
date on which a related payment is due,
(2) a failure to pay the full amount of principal of the Notes on the
related Maturity Date, without regard to the amount of the Available
Collection Amount, and
(3) material breaches under the Insurance Agreement.
See also "Description of the Securities--Events of Default--Indenture" in the
accompanying prospectus for a description of some other Events of Default.
If an event of default occurs under the Indenture, the securities insurer or
holders of notes representing more than 50% of the aggregate of the voting
interests of the notes then outstanding may exercise their remedies under the
Indenture, if the securities insurer provides prior written consent.
RESTRICTIONS ON NOTEHOLDERS' 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 Sale and 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 Security Owners are entitled to exercise pursuant to
the Indenture and Owner Trust Agreement, without any consent of the related
Security Owners. However, without the consent of each holder of the notes
affected thereby, the securities insurer will not be entitled to exercise those
rights of the Security Owners to amend the indenture 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 note,
(2) adversely affect in any material respect the interests of the holders
of the notes or
(3) alter the rights of any Security Owner to consent to this type of
amendment.
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THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee and the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees.
For the purpose of meeting the legal requirements of various jurisdictions,
the servicer, the owner trustee and the indenture trustee acting jointly - or in
some instances, the owner trustee or the indenture trustee acting alone - will
have the power to appoint co-trustees or separate trustees of all or any part of
the issuer. If this appointment occurs, all rights, powers, duties and
obligations conferred or imposed on the owner trustee by the Sale and Servicing
Agreement and the Owner Trust Agreement will be conferred or imposed jointly on
the owner trustee and the indenture trustee. All rights, powers, duties and
obligations conferred or imposed on the indenture trustee by the Sale and
Servicing Agreement and the Indenture will be conferred or imposed jointly on
the owner trustee and the indenture trustee. In any jurisdiction in which the
owner trustee or indenture trustee will be incompetent or unqualified to perform
acts, all rights, powers, duties and obligations 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 owner trustee or the indenture trustee,
respectively.
The owner trustee may resign at any time, in which event the administrator
will be obligated to appoint a successor thereto acceptable to the securities
insurer. The administrator may remove the owner trustee if it ceases to be
eligible to continue as owner trustee under the Owner Trust Agreement, or
becomes legally unable to act or becomes insolvent. In these circumstances, the
administrator will be obligated to appoint a successor owner trustee acceptable
to the securities insurer. Any resignation or removal of the owner trustee and
appointment of a successor thereto will not become effective until acceptance of
the appointment by that successor.
The indenture trustee may resign at any time, in which event the master
servicer will be obligated to appoint a successor thereto acceptable to the
securities insurer. The holders of a majority in outstanding amount of the notes
with the prior written consent of the securities insurer, may remove the
indenture trustee and may appoint a successor thereto acceptable to the
securities insurer. The master servicer, with the prior written consent of the
securities insurer, will be obligated to remove the indenture trustee if the
indenture trustee ceases to be eligible to continue as indenture trustee under
the Indenture 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 Owner Trust Agreement and Indenture 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, the trustee
will not be held harmless from a breach of any of its representations or
warranties to be set forth in the Owner Trust Agreement or Indenture, as the
case may be.
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DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the Owner Trust Agreement, the Securities, other than the
execution and authentication of the notes, or of any loans or related documents.
The owner 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 notes or the loans, or the investment of any monies by the
servicer before these monies are deposited into the trust accounts. So long as
no Event of Default has occurred and is continuing, the owner trustee will be
required to perform only those duties specifically required of it under the
Owner Trust Agreement. Generally, those duties will be limited to the receipt of
the various certificates, reports or other instruments required to be furnished
to the owner trustee under the Owner Trust Agreement. Accordingly, the owner
trustee will only be required to examine those certificates, reports or other
instruments to determine whether they conform to the requirements of the Owner
Trust Agreement.
The owner trustee will not be charged with knowledge of a failure by the
servicer to perform its duties under the Owner Trust Agreement or the Sale and
Servicing Agreement. This failure constitutes a servicer Event of Default,
unless the owner trustee obtains the actual knowledge of a failure as specified
in the Owner Trust Agreement.
The owner trustee will be under no obligation, at the request, order or
direction of any of the holders of Residual Interest Certificates, to
(1) exercise any of the rights or powers vested in it by the Owner Trust
Agreement,
(2) make any investigation of matters arising under the Owner Trust Agreement
or
(3) institute, conduct or defend any litigation under or in relation to the
Owner Trust Agreement,
unless those holders have offered to the owner trustee reasonable security or
indemnity against the costs, expenses and liabilities that may be incurred as a
result. Subject to the rights or consent of the holders of notes, the securities
insurer and the indenture trustee, no holder of a Residual Interest Certificate
will have any right under the Owner Trust Agreement to institute any proceeding
with respect to the Owner Trust Agreement, unless the holder of the Residual
Interest Certificate previously has given to the owner trustee written notice of
the occurrence of a Servicer Event of Default and the Servicer Event of Default
arises from the servicer's failure to remit payments when due.
The indenture trustee will make no representations as to the validity or
sufficiency of the Indenture, the notes, other than the authentication of the
notes, or of any loans or related documents. The indenture 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 notes or the
loans, or the investment of any monies by the servicer before these monies are
deposited into the trust accounts. So long as no event of default under the
Indenture will have occurred and be continuing, the indenture trustee will be
required to perform only those duties specifically required of it under the
Indenture. Generally, those duties will be limited to the receipt of the various
certificates, reports or other instruments required to be furnished to the
indenture trustee under the Indenture. Accordingly, the indenture trustee will
only be required to examine them to
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determine whether they conform to the requirements of the Indenture and to the
making of monthly distributions to the Security Owners and the filing of claims
under the Guaranty Policy. The indenture trustee will not be charged with
knowledge of a failure by the servicer or the master servicer to perform its
duties under the Transfer and Sale Agreements. This failure constitutes an event
of default under the Indenture, unless the indenture trustee obtains the actual
knowledge of a failure as specified in the Indenture.
The indenture trustee will be under no obligation, at the request, order
or direction of any of the holders of notes, to
(1) exercise any of the rights or powers vested in it by the Indenture,
(2) make any investigation of matters arising under the Indenture or
(3) institute, conduct or defend any litigation under or in relation to the
Indenture,
unless the applicable holders have offered to the indenture trustee reasonable
security or indemnity against the costs, expenses and liabilities that may be
incurred as a result.
No holder of notes will have any right under the Indenture to institute any
proceeding with respect to the Indenture, unless the applicable holder has
obtained the prior written consent of the securities insurer and the applicable
holder gave to the indenture trustee prior written notice of the occurrence of
an event of default under the Indenture and
(1) the event of default arises from the servicer's failure to remit
payments when due or
(2) holders of notes representing more than 25% of the aggregate voting
interests of the notes then outstanding have made written request of the
indenture trustee to institute a related proceeding in its own name as the
indenture trustee under the Indenture and have offered to the indenture
trustee reasonable indemnity and the indenture trustee has for 30 days
neglected or refused to institute any related proceedings.
REPORTS TO NOTEHOLDERS
On each payment date, the indenture trustee is required to distribute, based
on information provided by the servicer, a monthly distribution statement to the
depositor, the holders of notes [, the securities insurer,] and the rating
agencies, stating the date of original issuance of the notes and various other
information, including the following:
(1) the Available Collection Amount and Available Payment Amount, the
Regular Payment Amount, the Insured Payment and the Excess Spread for the
related payment date;
(2) the Note Principal Balance, as applicable, of the notes before and
after giving effect to payments made to the holders of the related notes on
the relevant payment date, and the pool principal balance as of the first and
last day of the related Due Period;
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(3) the Note Factor with respect to the notes then outstanding. "Note
Factor" means with respect to the notes and any date of determination, the
then applicable Note Principal Balance divided by its initial Note Principal
Balance;
(4) the amount of principal, if any, and interest to be paid to the notes
on the related payment date;
(5) as of the related payment date, the Overcollateralization Amount, the
Overcollateralization Target Amount and any Overcollateralization Deficiency
Amount, or any Overcollateralization Reduction Amount,] and any related
amount to be paid to the holders of the notes or paid to the holders of the
Residual Interest Certificates on the appropriate payment date;
(6) the servicing compensation, the master servicer compensation and the
indenture trustee fee, if any, for the appropriate payment date and the
Guaranty Insurance Premium;
(7) the Overcollateralization Amount on the related payment date and the
Overcollateralization Target Amount as of the related payment date;]
(8) the weighted average maturity of the loans and the weighted average
loan interest rate of the loans;
(9) particular performance information with respect to the related Due
Period, including, without limitation, delinquency and foreclosure
information with respect to the loans;
(10) the number of and aggregate principal balance of all loans in
foreclosure proceedings and the percent of the aggregate principal balances
of the related loans to the aggregate principal balances of all loans, all as
of the close of business on the last day of the related Due Period;
(11) the number of and the aggregate principal balance of the loans in
bankruptcy proceedings and the percent of the aggregate principal balances of
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) 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;
(13) during the related Due Period, and cumulatively, from the closing
date through the most current Due Period, the number and aggregate principal
balance of loans for each of the following that became defaulted loans,
Liquidated Home Loans, Deleted Loans as a result of the Deleted Loans being
Defective Loans, and Deleted Loans as a result of the Deleted Loans being a
loan in default or imminent default;
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(14) the scheduled principal payments and the principal prepayments
received with respect to the loans during the Due Period; and
(15) the number and aggregate principal balance of loans that were 30, 60
or 90 days delinquent as of the close of business on the last day of the
related Due Period.
FEDERAL INCOME TAX CONSEQUENCES
Set forth below is a summary of some United States federal income tax
considerations relevant to the beneficial owner of a note that holds the note as
a capital asset. Unless otherwise indicated below, this beneficial owner is a
United States person, as defined in the accompanying prospectus. This summary
does not address special tax rules that may apply to specific types of
investors, including banks, insurance companies and securities dealers, and
investors that hold notes as part of an integrated investment. This summary
supplements the discussion contained in the accompanying prospectus under the
heading "Certain Federal Income Tax Consequences," and supersedes that
discussion to the extent that it is inconsistent with that discussion. The
authorities on which this discussion is based are subject to change or differing
interpretations, and any change or interpretation could apply retroactively.
This discussion reflects the applicable provisions of the Code, as well as
regulations promulgated by the U.S. Department of the Treasury. Investors should
consult their own tax advisors in determining the federal, state, local and any
other tax consequences to them of the purchase, ownership and disposition of the
notes.
CLASSIFICATION OF INVESTMENT ARRANGEMENT
In the opinion of Cadwalader, Wickersham & Taft, special counsel to the
depositor, the issuer will not be treated as an association or a publicly traded
partnership taxable as a corporation or a taxable mortgage pool for federal
income tax purposes. Rather the issuer will be ignored and treated as a mere
security device when there is a single beneficial owner of the issuer, or will
be treated as a domestic partnership when there are two or more beneficial
owners of the issuer.
TAXATION OF HOLDERS
Characterization of the Notes. There are no regulations, published rulings or
judicial decisions addressing the characterization for federal income tax
purposes of securities with terms that are substantially the same as those of
the notes. A basic premise of United States federal income tax law is that the
economic substance of a transaction generally will determine the United States
federal income tax consequences of the transaction. The determination of whether
the economic substance of a loan secured by an interest in property is instead a
sale of a beneficial ownership interest in the property has been made by the
Internal Revenue Service and the courts. This determination is based on numerous
factors designed to determine whether the issuer has relinquished, and the
investor has obtained, substantial incidents of ownership in that property.
Among those factors, the primary factors examined are whether the investor has
the opportunity to gain if the property increases in value, and has the risk of
loss if the property decreases in value. Based on an assessment of these
factors, in the opinion of Cadwalader, Wickersham & Taft, special counsel to the
depositor, the notes will be treated as indebtedness
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for federal income tax purposes and not as an ownership interest in the loans or
an equity interest in the Issuer.
Interest and Original Issue Discount. Interest on the notes will be treated
as income to beneficial owners as those amounts are paid or accrue in accordance
with the holder's method of accounting. It is anticipated that the notes will
not be issued with original issue discount for federal income tax purposes. Any
premium or de minimis original issue discount with respect to the notes will be
determined in the same manner as described under "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of Regular Securities--Premium" and
"--Original Issue Discount" in the accompanying prospectus. The prepayment
assumption that will be used for accruing original issue discount, for
determining if original issue discount is de minimis or for amortizing premium
for federal income tax purposes is 30% CPR.
Sale, Exchange, Retirement or Other Disposition. After the sale, exchange,
retirement or other disposition of a note, a beneficial owner who holds the note
as a capital asset generally will recognize capital gain or loss. The amount of
this capital gain or loss is equal to the difference, if any, between the amount
realized, adjusted for accrued stated interest, on the sale or other disposition
of the owner's note and the owner's cost for the note, increased by any original
issue discount or accrued market discount reported as income or decreased by any
amortized bond premium. Long-term capital gains of non-corporate investors
generally, gains on notes held for more than one year - would be subject to a
lower maximum tax rate than ordinary income or short-term capital gains of those
holders. Corporations are subject to the same tax rate on ordinary income and
capital gains.
Taxation of Certain Foreign Investors. Interest, including original issue
discount, payable to beneficial owners of notes who are nonresident aliens,
foreign corporations, or other non-U.S. Persons, i.e., any person who is not a
"U.S. Person," 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) with respect to the depositor or the issuer and
(2) provides the owner trustee, or the person who would otherwise be
required to withhold tax from distributions under Code Section 1441 or 1442,
with an appropriate statement, signed under penalties of perjury, identifying
the beneficial owner and stating, among other things, that the beneficial
owner of the note is a non-U.S. Person.
If this statement, or any other required statement, is not provided, 30%
withholding will apply unless reduced or eliminated pursuant to an applicable
tax treaty or unless the interest on the note is effectively connected with the
conduct of a trade or business within the United States by a non-U.S. Person. In
the latter case, the non-U.S. Person will be subject to United States federal
income tax at regular rates. Investors who are non-U.S. Persons should consult
their own tax advisors regarding the specific tax consequences to them of owning
an Offered certificate.
The IRS recently issued final, new regulations which would provide
alternative methods of satisfying the beneficial ownership certification
requirement described above. The new
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regulations are effective January 1, 2000, although valid withholding
certificates that are held on December 31, 1999, remain valid until the earlier
of December 31, 2000 or the due date of expiration of the certificate under the
rules as currently in effect. The new regulations would require, in the case of
notes held by a foreign partnership, that (x) the certification described above
be provided by the partners rather than by the foreign partnership and (y) the
partnership provide 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.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments made on the notes and proceeds from the sale of notes to or through
some brokers may be subject to a "backup" withholding tax of 31% of "reportable
payments," unless, in general, the beneficial owner complies with some
procedures or is an exempt recipient. The reportable payments include interest
accruals, original issue discount, and, under some circumstances, payments in
respect of principal amount. Any amounts so withheld from payments on the notes
would be refunded by the Internal Revenue Service or allowed as a credit against
the beneficial owner's federal income tax. The new regulations change some of
the rules relating to 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.
Reports of interest, original issue discount and information needed to
compute accrued market discount will be made annually to the Internal Revenue
Service and to beneficial owners that are not excepted from the reporting
requirements.
See "Certain Federal Income Tax Consequences--Partnership Trust
Funds--Treatment of the Debt Securities as Indebtedness" in the accompanying
prospectus.
ERISA CONSIDERATIONS
GENERAL
Title I of ERISA, and section 4975 of the Internal Revenue Code of 1986, as
amended, impose some restrictions on retirement plans and other employee
benefits plans or arrangements subject thereto and on persons who are parties in
interest or disqualified persons with respect to these Plans. Some employee
benefit plans, including governmental plans and church plans, if no election has
been made under section 410(d) of the Code, are not subject to the restrictions
of ERISA, and assets of these plans may be invested in the notes without regard
to the ERISA considerations described below, subject to other applicable federal
and state law. However, any governmental or church plan which is qualified under
section 401(a) of the Code and exempt from taxation under section 501(a) of the
Code is subject to the prohibited transaction rules set forth in section 503 of
the Code.
Any Plan fiduciary which proposes to cause a Plan to acquire any of the notes
should consult with its counsel with respect to the potential consequences under
ERISA and the Code of the Plan's acquisition and ownership of the notes. See
"ERISA Considerations" in the accompanying prospectus. Investments by Plans are
also subject to ERISA's general fiduciary
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requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
General. Section 406 of ERISA prohibits Parties in Interest with respect to a
Plan from engaging in some transactions, including loans, involving a Plan and
its assets unless a statutory or administrative exemption applies to the
transaction. Section 4975 of the Code imposes excise taxes, or, in some cases, a
civil penalty may be assessed pursuant to section 502(i) of ERISA, on Parties in
Interest which engage in non-exempt prohibited transactions.
Plan Asset Regulation. The United States Department of Labor has issued
regulations concerning the definition of what constitutes the assets of a Plan
for purposes of ERISA and the prohibited transaction provisions of the Code. The
regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be "plan assets" in a manner that any
person who exercises control over those assets would be subject to ERISA's
fiduciary standards. Under the regulation, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of that
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulation provides that, if a Plan acquires an "equity interest" in an entity,
the assets of the entity will be treated as assets of the Plan investor unless
exceptions not applicable here apply.
Under the regulation, the term "equity interest" is defined as any interest
in an entity other than an instrument that is treated as indebtedness under
"applicable local law" and which has no "substantial equity features." If the
notes are not treated as equity interests in the issuer for purposes of the
regulation, a Plan's investment in these notes would not cause the assets of the
issuer to be deemed Plan assets. However, the depositor, the servicer, the
indenture trustee, and the owner trustee may be the sponsor of or investment
advisor with respect to one or more Plans. Because these parties may receive
benefits in connection with the sale of notes, the purchase of notes using Plan
assets over which any of the parties has investment authority might be deemed to
be a violation of the prohibited transaction rules of ERISA and the Code for
which no exemption may be available. Accordingly, notes may not be purchased
using the assets of any Plan if the depositor, the servicer, the indenture
trustee, or the owner trustee has investment authority with respect to the
assets.
In addition, some affiliates of the issuer might be considered or might
become Parties in Interest with respect to a Plan. Also, any holder of Residual
Interest Certificates, because of its activities or the activities of its
respective affiliates, may be deemed to be a Party in Interest with respect to
some Plans, including but not limited to Plans sponsored by the related holder.
In either case, the acquisition or holding of notes by or on behalf of this type
of Plan could be considered to give rise to an indirect prohibited transaction
within the meaning of ERISA and the Code, unless it is subject to one or more
exemptions. These exemptions include,
(1) Prohibited Transaction Class Exemption 84-14, which exempts some
transactions effected on behalf of a Plan by a "qualified professional asset
manager,"
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(2) Prohibited Transaction Class Exemption 90-1, which exempts some
transactions involving insurance company pooled separate accounts,
(3) Prohibited Transaction Class Exemption 91-38, which exempts some
transactions involving bank collective investment funds.
(4) Prohibited Transaction Class Exemption 95-60, which exempts some
transactions involving insurance company general accounts, or
(5) Prohibited Transaction Class Exemption 96-23, which exempts some
transactions effected on behalf of a Plan by some "in-house asset managers."
Each purchaser or transferee of a note that is a Plan or is investing assets of
a Plan shall be deemed to have represented that the relevant conditions for
exemptive relief under at least one of the foregoing exemptions have been
satisfied.
If the notes are deemed to be equity interests in the issuer, the issuer
could be considered to hold Plan assets by reason of a Plan's investment in the
notes. In this an event, the servicer and other persons exercising management or
discretionary control over the assets of the issuer may be deemed to be
fiduciaries with respect to investing Plans and thus subject to the fiduciary
responsibility provisions of Title I of ERISA, including the prohibited
transaction provisions of section 406 of ERISA, and section 4975 of the Code
with respect to transactions involving the Issuer's assets. There can be no
assurance that any statutory or administrative exemption will apply to all
prohibited transactions that might arise in connection with the purchase or
holding of an equity interest in the issuer by a Plan.
REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to a related investment and the availability of any prohibited transaction
exemptions. The sale of notes to a Plan is in no respect a representation by the
depositor or the underwriter that this investment meets all relevant
requirements with respect to investments by Plans generally or any particular
Plan or that this investment is appropriate for Plans generally or any
particular Plan.
LEGAL INVESTMENT
The notes will constitute "mortgage related securities" for purposes of SMMEA
for as long as they are rated not lower than the second highest rating category
by one or more nationally recognized statistical rating organizations. In this
manner, the notes will be legal investments for some entities to the extent
provided in SMMEA and applicable state laws.
Except as noted above, no representation is made as to the proper
characterization of the notes for legal investment purposes, financial
institution regulatory purposes, or other purposes, or as to the ability of
particular investors to purchase the notes under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of the
notes. Accordingly, all institutions whose investment activities are subject to
legal investment laws and regulations,
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regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the notes constitute a legal investment or are subject to investment, capital or
other restrictions. See "Legal Investment" in the prospectus.
USE OF PROCEEDS
The depositor intends to use the net proceeds to be received from the sale of
the notes to acquire the loans and to pay other expenses associated with the
pooling of the loans and the issuance of the notes.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Depositor and PaineWebber Incorporated, __________________________
and _____________________, the depositor has agreed to sell to the underwriters,
and the underwriters have agreed to purchase from the depositor, the notes. The
depositor has been advised by the underwriters that the underwriters propose
initially to offer the notes to the public at a price equal to ______% of the
initial Note Principal Balance and to some dealers at those prices less a
concession not in excess of ____%, expressed as a percentage of the Note
Principal Balance. The underwriters may allow and those dealers may allow a
discount not in excess of ____%. The depositor estimates that its aggregate
expenses in connection with the issuance and offering of the notes, excluding
underwriting discounts and commissions, will be approximately $__________. The
underwriters will receive an underwriting discount equal to _____% of the
initial principal amount of the notes. In connection with the sale of the notes,
the underwriters will be deemed to have received compensation from the depositor
in the form of underwriting discounts equal to _____% of the initial Note
Principal Balance.
Until the distribution of the notes 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 notes. As an exception to these rules, the
underwriters are permitted to engage in transactions that stabilize the price of
the notes. These transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the notes.
If the underwriters create a short position in the notes in connection with
the offering, the underwriters may reduce that short position by purchasing
notes in the open market. A short position will result if the underwriters sell
more notes than are set forth on the cover page of this prospectus supplement.
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.
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 notes. 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.
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There is currently no secondary market for the notes. There can be no
assurance that a secondary market for the notes will develop or, if it does
develop, that it will continue.
The depositor has agreed to indemnify the underwriters against, or make
contributions to the underwriters with respect to liabilities, including
liabilities under the Securities Act of 1933, as amended.
In addition to the purchase of the notes pursuant to the Underwriting
Agreement, the 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
[ ]
LEGAL MATTERS
The validity of the notes and specific federal income tax matters will be
passed on for the depositor and for the underwriters by Cadwalader, Wickersham &
Taft, New York, New York.
RATINGS
It is a condition to the issuance of the notes that the notes be rated
- --------------------------------------------------------------------------------
_______________________by_______________________________________________________
_____________________________________________and________________________________
__________________________________________________________________by ___________
____________________________. The ratings on the notes also address the
structural, legal and issuer-related aspects of the notes, including the nature
of the loans. In general, the ratings on the notes address credit risk and not
prepayment risk. The ratings on the notes do not represent any assessment of the
likelihood that principal prepayments of the loans will be made by borrowers or
the degree to which the rate of the related prepayments might differ from that
originally anticipated. As a result, the initial ratings assigned to the notes
do not address the possibility that holders of the notes might suffer a lower
than anticipated yield in the event of principal payments on the notes resulting
from rapid prepayments of the loans, the payment of any Noteholders' Interest
Carry-Forward Amount, or the application of Excess Spread as described in this
prospectus supplement, or if the owner trust is terminated before the final
Maturity Date of the notes.
The depositor has not solicited ratings on the notes with any rating agency
other than the rating agencies. However, there can be no assurance as to whether
any other rating agency will rate the notes or, if it does, what rating would be
assigned by that rating agency. Any rating on the notes by another rating
agency, if assigned at all, may be lower than the ratings assigned to the notes
by the rating agencies.
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A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time by the assigning rating
organization. Each security rating should be evaluated independently of any
other security rating. If the ratings initially assigned to any of the notes by
the rating agencies are subsequently lowered for any reason, no person or entity
is obligated to provide any additional support or credit enhancement with
respect to those notes.
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GLOSSARY OF TERMS
"ACCRUAL PERIOD" is the period from and including the immediately preceding
payment date, or, in the case of the first payment date, from the closing date,
through but excluding the related payment date. Interest on the notes will be
calculated on the basis of the actual number of days elapsed in the Accrual
Period in a 360-day year.
"ADMINISTRATIVE AGREEMENT" is the agreement, dated [______], among the
issuer, the administrator and the master servicer.
"AVAILABLE COLLECTION AMOUNT is, with respect to each payment date, the
sum of:
(1) all amounts received on the loans or required to be paid by the master
servicer, the servicer or the transferor during the related Due Period or with
respect to prepayments and other unscheduled principal payments during the
related Due Period, 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 indenture trustee
from the Collection Account;
(2) the Purchase Price paid for any loans required to be repurchased and
the Substitution Adjustment to be deposited in the Collection Account in
connection with any substitution, in each case before the related Determination
Date; and
(3) after the exercise of an optional redemption by the Majority Residual
Interest Certificateholders, the servicer [or the securities insurer,] the
Termination Price.
"AVAILABLE PAYMENT AMOUNT" will equal, on each payment date, the related
Available Collection Amount deposited into the Note Payment Account and
remaining after providing for the payment of all Issuer Fees and Expenses for
the related payment date.
"CALL OPTION DATE" is the first date on which the Residual Certificateholders
may exercise their option to cause the issuer to redeem the notes. This will
occur when the pool principal balance is reduced to __% of the cut-off date pool
principal balance.
"CERTIFICATEHOLDER" A person who has beneficial ownership interests in a
Residual Interest Certificate.
"COLLECTION ACCOUNT" is an account established and maintained for the benefit
of the noteholders into which the servicer will deposit required payments and
collections.
"COMPENSATING INTEREST" is an amount paid by the master servicer or special
servicer to cover interest shortfalls which results from a borrower's prepayment
on a loan.
"CUSTODIAL AGREEMENT" is the agreement among the custodian, the issuer and
the indenture trustee.
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"DEFAULTED LOANS" are loans to which an event of default has occurred under
the related note or mortgage.
"DEFECTIVE LOANS" are loans which have a material document deficiency or as
to which the transferor has breached a representation or warranty with respect
to the loans which materially and adversely affect the value of the loan.
"DETERMINATION DATE" is the ___ calendar day of each month or, if that day is
not a business day, then the preceding business day.
"DUE PERIOD" is a period of time commencing on the [____] day of the month in
which the immediately preceding distribution date occurs, or on the day after
the cut-off date in the case of the first Due Period, and will end on the first
day of the month of the related distribution date.
"EXCESS SPREAD" means, with respect to any payment date, the excess, if
any, of
(1) the Available Payment Amount, over
(2) the Regular Payment Amount.
"EXCHANGE ACT" is the Securities Exchange Act of 1934, as amended.
"GROSS MARGIN" means the number of basis points stated in the mortgage
note.
"GUARANTEE INSURANCE PREMIUM" is the monthly amount payable to the securities
insurer under the Guarantee Policy.
"GUARANTEE POLICY" is the guaranty policy between ___________ and __________.
"HOME LOAN PURCHASE AGREEMENT" is the agreement between the depositor and
- -------------.
"INDENTURE" is the agreement between the issuer and ________, a national
banking association.
"INDENTURE TRUSTEE FEE" for any payment date, is the fee payable to the
indenture trustee on each loan, which is an amount equal to one-twelfth of the
Indenture Trustee Fee Rate on the unpaid principal balance of the loan at the
end of the related Due Period.
"INDENTURE TRUSTEE FEE RATE" will equal _______% per annum.
"INDENTURE TRUSTEE LOAN FILE" means for each loan:
(1) the related note endorsed in blank or to the order of the indenture
trustee without recourse;
(2) any assumption and modification agreements;
(3) the mortgage, deed of trust, or other similar security instruments,
with evidence of recording indicated thereon, except for any mortgage not
returned from the public recording office;
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(4) an assignment of the mortgage, if any, in the name of the indenture
trustee in recordable form;
(5) a title insurance policy; and
(6) any intervening assignments of the mortgage.
"INSURANCE AGREEMENT" means the Insurance and Indemnity Agreement among the
security insurer, the depositor, ___________ and the issuer.
"INSURANCE PROCEEDS" are, with respect to any payment date, the proceeds paid
to the servicer by any insurer pursuant to any insurance policy covering a loan,
mortgaged property or REO property or any other insurance policy that relates to
a loan, net of any expenses which are incurred by the servicer in connection
with the collection of those proceeds and not otherwise reimbursed the servicer.
Insurance Proceeds do not include insured payments, 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.
"INSURED PAYMENTS" are, on any payment date the sum of:
(1) any insufficiency resulting from the Available Payment Amount being
less than the accrued and unpaid interest due on the notes, less
(a) Noteholders' Interest Carry-Forward Amounts and
(b) any shortfalls incurred by the imposition of the Soldiers'
and Sailors' Relief of 1940, as amended, and
(2) any Noteholders' Principal Deficiency Amount.
"ISSUER FEES AND EXPENSES" consist of the following:
(1) the Servicing Compensation and the Master Servicer Compensation
(2) the Indenture Trustee Fee, and
(3) the Guaranty Insurance Premium.
"LIBOR DETERMINATION DATE" for each Accrual Period is the second business day
preceding the first day of that Accrual Period.
"LIQUIDATED HOME LOAN" is any home loan in respect of which a monthly payment
is in excess of 30 days past due and as to which the servicer has determined
that all recoverable liquidation and insurance proceeds have been received,
which will be deemed to occur on the earliest of:
(1) the liquidation of the related mortgaged property acquired through
foreclosure or similar proceedings or
(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
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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" is the risk category assigned to each loan pursuant to the
underwriting standards.
"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.
"MASTER SERVICER COMPENSATION" will equal the aggregate of the investment
earnings of funds in the Collection Account and Note Payment Account, late
payment charges and prepayment penalties collected on the loans and the Master
Servicer Fee.
"MASTER SERVICER FEE" with respect to each loan, is an amount equal to
one-twelfth of __% multiplied by the unpaid principal of the loan at the end of
the applicable Due Period.
"MATURITY DATE" is [ , 20[ ]].
"MONTHLY ADVANCE" is an advance of interest and principal required to be made
by the Master Servicer, net of the Servicing Fee and Master Servicer Fee, due
during the related Due Period but delinquent.
"NET LIQUIDATION PROCEEDS" are, with respect to any payment date:
(1) any cash amounts received from Liquidated Home Loans, whether through
trustee's sale, foreclosure sale, disposition of mortgaged properties or
otherwise, other than Insurance Proceeds and Released Mortgaged Property
Proceeds, and
(2) any other cash amounts received in connection with the management of
the mortgaged properties from defaulted loans,
in each case, net of
(a) any reimbursements to the servicer or the master servicer,
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
home loans or mortgaged properties.
"NOTE PAYMENT ACCOUNT" is an account established by the indenture trustee
from which the trustee will make payments to the holders of notes.
"NOTE PRINCIPAL BALANCE" means, with respect to the notes and as of any date
of determination, the original note principal balance of the notes reduced by
all amounts paid in respect of principal of the notes on all payment dates prior
to the related date of determination.
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"NOTEHOLDERS' INTEREST CARRY-FORWARD AMOUNT" means, with respect to any
payment date,
(1) if on that payment date the interest rate on the notes is capped, the
excess, if any, of the amount of interest that would have accrued on the notes
for the immediately preceding payment date if the interest rate were not capped
over the amount of interest that is due on the notes for that payment date at
the capped interest rate, plus
(2) any outstanding Noteholders' Interest Carry-Forward Amount remaining
unpaid from prior payment dates, together with interest at the applicable
interest rate.
"NOTEHOLDERS' INTEREST SHORTFALL AMOUNT" means, with respect to any payment
date, the excess, if any, of the Noteholders' Monthly Interest payment amount
for the preceding payment date over the amount in respect of interest that is
actually paid on that preceding payment date.
"NOTEHOLDERS' INTEREST PAYMENT AMOUNT" means, with respect to any payment
date, the sum of the Noteholders' Monthly Interest Payment Amount and the
Noteholders' Interest Shortfall Amount on that payment date.
"NOTEHOLDERS' MONTHLY INTEREST PAYMENT AMOUNT" means, with respect to any
payment date, interest accrued for the related accrual period on the notes at
the interest rate on the note principal balance immediately preceding that
payment date, or, in the case of the first payment date, on the closing date,
after giving effect to all payments of principal to the holders of the notes on
or before the applicable preceding payment date.
"NOTEHOLDERS' PRINCIPAL DEFICIENCY AMOUNT" is:
(1) with respect to any payment date, other than as set forth in clause
(2) below, the excess, if any, of
(a) the Note Principal Balance as of the related payment date,
after giving effect to all payments of principal on the notes on the
related payment date, but without giving effect to payments in
respect of the Noteholders' Principal Deficiency Amount to be made
on the related payment date, over
(b) the pool principal balance as of the end of the related
Due Period and
(2) with respect to the Maturity Date of the notes, the excess of
(a) the Note Principal Balance, after giving effect to all
payments of principal on the notes on the related date, but without
giving effect to payments in respect of this Noteholders' Principal
Deficiency Amount to be made on the related date, over
(b) the Available Payment Amount remaining after the payment
of the Noteholders' Interest Payment Amount and Regular Principal
Payment Amount for that date.
"OC TRIGGER INCREASE EVENT" and "OC TRIGGER REVERSAL EVENT" are defined in
the Transfer and Servicing Agreements and are based on Excess Spread
requirements and delinquency and
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loss levels established by the securities insurer. The securities insurer may
change these delinquency and loss levels at any time.
"ONE-MONTH LIBOR" is the London interbank offered rate for one-month United
States dollar deposits.
"OVERCOLLATERALIZATION AMOUNT" with respect to any payment date, is the
amount equal to the excess, if any, of
(1) the pool principal balance as of the end of the preceding Due
Period, over
(2) the note principal balance, after giving effect to payments on the
notes on the related payment date.
"OVERCOLLATERALIZATION DEFICIENCY AMOUNT" means with respect to any date of
determination, the excess, if any, of the Overcollateralization Target Amount
over the Overcollateralization Amount.
"OVERCOLLATERALIZATION REDUCTION AMOUNT" means, with respect to any payment
date that occurs on or after the Stepdown Date, the lesser of
(1) the excess, if any, of
(a) the Overcollateralization Amount, assuming principal
payments of the notes on that payment date are equal to the Regular
Principal Payment Amount, without regard to this
Overcollateralization Reduction Amount, over
(b) the Overcollateralization Target Amount and
(2) the Regular Principal Payment Amount, as determined without the
deduction of this Overcollateralization Reduction Amount from that number, on
the related payment date.
Prior to the occurrence of a Stepdown Date, the Overcollateralization
Reduction Amount will be zero.]
"OVERCOLLATERALIZATION TARGET AMOUNT" means with respect to any payment date,
an amount determined as follows:
(1) with respect to any payment date occurring prior to the Stepdown Date,
the amount equal to ________of the cut-off date pool principal balance;
(2) with respect to any other payment date occurring on or after the
Stepdown Date, an amount equal to the greatest of
(a) an amount that may stepdown over a period generally equal
to six months to not less than ____% of the pool principal balance
as of the end of the related Due Period based on the formula set
forth in the Transfer and Servicing Agreements,
(b) _____ of the cut-off date pool principal balance and
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(c) an amount equal to the aggregate principal balance of the
three largest loans then outstanding; and
(3) with respect to any payment date occurring on or after an OC Trigger
Increase Event, an amount equal to 100% of the cut-off date pool principal
balance. However, with respect to any payment date occurring on or after an OC
Trigger Reversal Event, an amount determined pursuant to clause (1) or (2)
above, as applicable.
However, with respect to any payment date the Overcollateralization Target
Amount shall not exceed the note principal balance. The Overcollateralization
Target Amount will be subject to stepups and stepdowns based on delinquency and
loss tests and excess spread requirements with respect to the loans. The
securities insurer may reduce the Overcollateralization Target Amount, at any
time to, but not below,
(1) with respect to any payment date occurring prior to the Stepdown Date,
_____% of the cut-off date pool principal balance or
(2) with respect to any payment date occurring on or after the Stepdown
Date, an amount equal to the greater of
(a) _____% of the pool principal balance as of the end of
the related Due Period,
(b) _____% of the cut-off date pool principal balance or
(c) an amount equal to the aggregate principal balance of the
three largest loans then outstanding.
"OWNER TRUST AGREEMENT" is the owner trust agreement, dated [____], among the
depositor, the paying agent, the owner trustee and ___________.
"PARTIES IN INTEREST" has the definition given to it in Title I of ERISA.
"PLANS" are retirement plans and other employee benefit plans or arrangements
subject to Title I of ERISA.
"PURCHASE PRICE" is the amount paid for any loans which must be repurchased.
"REGULAR PAYMENT AMOUNT" is, with respect to any payment date, the lesser of
(1) the Available Payment Amount and
(2) the sum of
(a) the Noteholders' Interest Payment Amount and
(b) the Regular Principal Payment Amount.
"REGULAR PRINCIPAL PAYMENT AMOUNT" means, on each payment date, an amount,
but not in excess of the note principal balance immediately before the payment
date, equal to the sum of
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<PAGE>
(1) each scheduled payment of principal collected by the servicer in the
related Due Period,
(2) all full and partial principal prepayments received by the servicer
during that related Due Period,
(3) the principal portion of all Net Liquidation Proceeds, Insurance
Proceeds and Released Mortgaged Property Proceeds received during the related
Due Period,
(4) that portion of the purchase price of any repurchased loan which
represents principal received before the related Determination Date,
(5) the principal portion of any Substitution Adjustments required to be
deposited in the Collection Account as of the related determination date, and
(6) on the payment date on which the issuer is to be terminated pursuant
to the Sale and Servicing Agreement, the Termination Price, net of
(a) any accrued and unpaid interest, due and unpaid
Issuer Fees and Expenses,
(b) amounts due and owing the securities insurer under the
Insurance Agreement] and
(c) unreimbursed servicing advances and monthly advances owing
to the servicer and the master servicer, as applicable.
If the related payment date occurs on or after a Stepdown Date, then the Regular
Principal Payment Amount will be reduced, but not less than zero, by the
Overcollateralization Reduction Amount, if any, for that payment 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, which
proceeds are not released to the borrower in accordance with applicable law,
accepted servicing procedures and the Sale and Servicing Agreement.
"RESERVE INTEREST RATE" shall be the rate per annum that the indenture
trustee determines to be either:
(1) the arithmetic mean, rounded upwards, if necessary, to the nearest
whole multiple of _____%, of the one-month U.S. dollar lending rates which New
York City banks selected by the indenture trustee are quoting on the relevant
LIBOR Determination Date to the principal London offices of leading banks in the
London interbank market or,
S-107
<PAGE>
(2) if the indenture trustee can determine no applicable arithmetic mean,
the lowest one-month U.S. dollar lending rate which New York City banks selected
by the indenture trustee are quoting on the related LIBOR Determination Date to
leading European banks.
"RESIDUAL CERTIFICATEHOLDER" is a holder of a security representing a
residual interest in the assets of the issuer.
"RESIDUAL INTEREST CERTIFICATES" are securities which constitute residual
interests in the assets of the issuer.
"SALE AND SERVICING AGREEMENT" is the sale and master servicing agreement by
and among the issuer, the master servicer, the transferor, the depositor and the
indenture trustee.
"SECURITIES INSURER REIMBURSEMENT AMOUNT" is an amount equal to any
unreimbursed Insured Payments in respect of the notes and any other amounts owed
to the securities insurer under the Insurance Agreement.
"SERVICING COMPENSATION" for any payment date, is the Servicing Fee and all
other forms of compensation payable to the servicer under the Servicing
Agreement.
"SERVICING ADVANCES" are advances which the servicer is required to make
under the Servicing Agreement.
"SERVICING FEE" for any payment date and for each loan, is an amount equal to
one-twelfth of __% multiplied by the unpaid principal balance of the loan at the
end of the related Due Period.
"SECURITIES INSURER DEFAULT" is 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.
"SECURITY OWNER" is a person who acquires beneficial ownership interests in a
security.
"SERVICING AGREEMENT" is the servicing agreement, dated [_____], between the
master servicer and the special servicer.
"SIX-MONTH LIBOR" is the London interbank offered rate for six-month United
States dollar deposits.
"SMMEA" means the Secondary Mortgage Market Enhancement Act of 1984, as
amended.
"STEPDOWN DATE" is the first payment date occurring on the later of:
(1) _________; or
(2) the payment date on which the pool principal balance as of the end of
the related Due Period has been reduced to __% of the cut-off date pool
principal balance.
"SUBSTITUTION ADJUSTMENT" 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
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<PAGE>
unpaid principal balance that is less than the Defective Loan plus any
unreimbursed Servicing Advances for the Defective Loan.
"TERMINATION PRICE" is an amount equal to the greater of
(1) the sum of
(a) the then outstanding Note Principal Balance and all
accrued and unpaid interest on the Note Principal Balance at the
applicable interest rate and all unpaid Noteholders' Interest
Carry-Forward Amounts through the last day of the Accrual Period
relating to the payment date;
(b) any Issuer Fees and expenses due and unpaid on the
applicable date;
(c) any unreimbursed Servicing Advances and unreimbursed
Monthly Advances including related advances deemed to be
nonrecoverable[; and
(d) any unpaid Securities Insurer Reimbursement Amount and
(2) the sum of
(a) the principal balance of each loan included in the owner
trust as of the close of business on the first day of the month of
the applicable payment date;
(b) all unpaid interest accrued on the principal balance of
each related loan at the related interest rate to the applicable
date;
(c) the aggregate fair market value of each foreclosure
property included in the owner trust on the appropriate date, as
determined by an independent appraiser acceptable to the indenture
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" are the Indenture, the Sale and Servicing
Agreement, the Servicing Agreement, the Administration Agreement and the Owner
Trust Agreement.
"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
S-109
<PAGE>
(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, some trusts in
existence on August 20, 1996, which are eligible to elect to be treated as U.S.
Persons.
S-110
<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 HOME LOAN ASSET
PERMITTED. BACKED NOTES
SERIES 199_-_
---------------------
_______
TABLE OF CONTENTS HOME LOAN
OWNER TRUST 199_-_
PROSPECTUS SUPPLEMENT Issuer
PAGE
---- PAINEWEBBER MORTGAGE
Summary........................S-6 ACCEPTANCE CORPORATION IV
Risk Factors..................S-16 Depositor
Defined Terms.................S-25
The Pool......................S-25
Master Servicer...............S-39 ______________________________
Servicer......................S-41 Transferor and Master Servicer
Underwriting Criteria.........S-46
Prepayment and Yield ____________________________
Considerations.............S-51 Servicer
The Owner Trust and Indenture.S-62
Description of the Notes......S-64
Description of Credit
Enhancement................S-69
Description of the Transfer and
Servicing Agreements.......S-75
Federal Income Tax
Consequences...............S-93
ERISA Considerations..........S-95
Legal Investment Matters......S-97 _____________________
Use of Proceeds...............S-98
Underwriting..................S-98 PROSPECTUS SUPPLEMENT
Experts.......................S-99
Legal Matters.................S-99 _____________________
Ratings.......................S-99
Glossary of Terms............S-101
PAINEWEBBER INCORPORATED
PROSPECTUS
______________________
Available Information..............
Reports to Securityholders.........
Incorporation of Certain
Information by Reference......... ___________, 199_
Prespectus Supplement or Current
Report on Form 8-K...............
Summary of Terms...................
Risk Factors.......................
The Trust Funds....................
Use of Proceeds....................
Yield Considerations...............
Maturity and Prepayment
Considerations...................
The Depositor......................
Residential Loan Program...........
Description of the Securities......
Description of Primary Insurance
Coverage.........................
Description of Credit Support......
Certain Legal Aspects of
Residential Loans................
Certain Federal Income Tax
Consequences.....................
State and Other Tax Consequences...
ERISA Considerations...............
Legal Investment...................
Plans of Distribution..............
Legal Matters......................
Financial Information..............
Ratings............................
Glossary...........................
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 ___________, 199_.
====================================== ======================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL WE DELIVER A FINAL PROSPECTUS AND PROSPECTUS.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED AUGUST 20, 1999
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.
2
<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.............................22
Book-Entry System for Certain Classes May Decrease Liquidity and
Delay Payment......................................................23
Unsecured Home Improvement Contracts May Experience Relatively
Higher Losses......................................................23
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..................................................24
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.........................................................46
Description of the Securities.................................................47
General...............................................................47
Assignment of Assets of the Trust Fund................................48
Deposits to the Trust Account.........................................51
Pre-Funding Account...................................................52
Payments on Residential Loans.........................................52
Payments on Agency Securities.........................................53
Distributions.........................................................53
Principal and Interest on the Securities..............................55
Available Distribution Amount.........................................56
Subordination.........................................................57
Advances..............................................................59
Statements to Holders of Securities...................................60
Book-Entry Registration of Securities.................................61
Collection and Other Servicing Procedures.............................64
Realization On Defaulted Residential Loans............................65
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............................................................68
Deficiency Events.....................................................72
Events of Default.....................................................73
Amendment.............................................................77
Termination...........................................................78
Voting Rights.........................................................78
Description of Primary Insurance Coverage.....................................78
Primary Credit Insurance Policies.....................................79
FHA Insurance and VA Guarantees.......................................79
Primary Hazard Insurance Policies.....................................81
Description of Credit Support.................................................83
Pool Insurance Policies...............................................84
Special Hazard Insurance Policies.....................................86
Bankruptcy Bonds......................................................89
Reserve Funds.........................................................89
Cross-Support Provisions..............................................90
Letter of Credit......................................................90
Insurance Policies and Surety Bonds...................................90
Excess Spread.........................................................90
Overcollateralization.................................................91
Certain Legal Aspects of Residential Loans....................................91
General...............................................................91
Mortgage Loans........................................................92
Cooperative Loans.....................................................93
Tax Aspects of Cooperative Ownership..................................94
Manufactured Housing Contracts Other Than Land Contracts..............94
Foreclosure on Mortgages..............................................96
Foreclosure on Cooperative Shares....................................100
Repossession with respect to Manufactured Housing Contracts
that are not Land Contracts.......................................101
Rights of Redemption with respect to Residential Properties..........102
3
<PAGE>
Notice of Sale; Redemption Rights with respect to Manufactured
Homes.............................................................102
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations on
Lenders...........................................................103
Junior Mortgages.....................................................106
Consumer Protection Laws.............................................106
Enforceability of Certain Provisions.................................107
Prepayment Charges and Prepayments...................................109
Subordinate Financing................................................110
Applicability of Usury Laws..........................................110
Alternative Mortgage Instruments.....................................110
Environmental Legislation............................................111
Soldiers' and Sailors' Civil Relief Act of 1940......................112
Federal Income Tax Consequences..............................................113
General..............................................................113
REMICS...............................................................114
Taxation of Owners of Regular Securities.............................118
Taxation of Owners of Residual Securities............................127
Taxes That May Be Imposed on the REMIC Pool..........................135
Taxation of Certain Foreign Investors................................138
Grantor Trust Funds..................................................140
Standard Securities..................................................140
Stripped Securities..................................................144
Partnership Trust Funds..............................................148
Taxation of Owners of Partnership Securities.........................149
State and Other Tax Consequences.............................................155
ERISA Considerations.........................................................155
Legal Investment.............................................................160
Plans of Distribution........................................................162
Incorporation of Certain Information by Reference............................164
Legal Matters................................................................165
Financial Information........................................................165
Rating.......................................................................165
Glossary of Terms............................................................167
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, 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
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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 -- Advance." 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.
Notes will represent indebtedness of the
related trust fund. You are advised to
consult your tax advisors.
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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.
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.
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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.
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:
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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.
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:
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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.
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.
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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.
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
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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.
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
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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 substantial. As a result you may suffer losses. See "Residential
Loan Program -- 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.
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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 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.
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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 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;
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(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.
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.
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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 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;
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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.
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:
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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 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.
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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 Loan Program -- 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-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.
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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.
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.
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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
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.
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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 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
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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 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
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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.
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
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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
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.
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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;
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.
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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 Loan Program" 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 Loan Program -- 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 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
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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.
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.
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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,
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
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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 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.
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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;
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
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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 Loan Program --
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 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.
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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;
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
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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 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
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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;
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
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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.
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;
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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.
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.
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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 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
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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 Loan Program--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 Loan Program -- 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.
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
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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;
(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
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(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 Loan Program -- 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.
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
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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 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
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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.
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.
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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.
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
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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 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
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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 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
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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.
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
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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 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;
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(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.
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.
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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
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
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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.
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
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(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
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
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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 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.
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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.
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
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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.
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.
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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 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
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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
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
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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 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
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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,
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.
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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.
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.
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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;
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.
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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
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;
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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:
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.
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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
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:
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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;
(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
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(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.
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.
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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.
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
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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 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
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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.
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
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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,
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.
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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:
(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:
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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.
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%;
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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 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
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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" 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. 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
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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:
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:
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(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 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
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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.
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
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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.
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.
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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 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
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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.
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.
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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.
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
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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 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
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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.
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.
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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 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.
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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 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:
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(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 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
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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;
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.
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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.
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.
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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 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.
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(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 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
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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 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
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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 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
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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.
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,
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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 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,
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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 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
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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-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.
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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
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.
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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 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.
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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 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
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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 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
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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 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.
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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 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
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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
(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.
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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 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
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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 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
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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 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
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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 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
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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
(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:
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(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
(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
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(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 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.
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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:
(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
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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.
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.
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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 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.
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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
(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
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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,
(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
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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 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.
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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.
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
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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 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
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(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 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
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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 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
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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 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
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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
(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
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(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 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.
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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,
(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
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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:
(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.
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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 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).
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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.
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,
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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 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,
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(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:
(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).
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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 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
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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 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
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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 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
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(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 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:
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(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
(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.
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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 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
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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 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
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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.
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
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(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 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
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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.
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
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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 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.
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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 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
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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 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.
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- ------------------ COMPARISON OF HEADERS ------------------
- -HEADER 1-
- -HEADER 2-
Header Discontinued
- -HEADER 3-
SUBJECT TO COMPLETION, DATED August 20, 1999
- -HEADER 4-
Header Discontinued
- -HEADER 5-
Header Discontinued
- -HEADER 6-
Header Discontinued
- -HEADER 7-
Header Discontinued
- ------------------ COMPARISON OF FOOTERS ------------------
- -FOOTER 1-
173
- -FOOTER 2-
CWT\NYLIB1\ 367427.14 -3-
- -FOOTER 3-
367427.14
P
- -FOOTER 4-
CWT\NYLIB1\ 367427.14 -4-
I
- -FOOTER 5-
CWT\NYLIB1\ 367427.14 -5-
- -FOOTER 6-
367427.14367427.14367427.14367427.14367427.14367427.14367427.14367427.14
- -FOOTER 7-
CWT\NYLIB1\ 367427.14 -6-
- -FOOTER 8-
CWT\NYLIB1\ 367427.14 -71-
- -FOOTER 9-
CWT\NYLIB1\ 367427.14 -171-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses expected to be incurred in connection with the
issuance and distribution of the securities being registered, other than
underwriting compensation, are as set forth below. All such expenses except for
the registration and filing fees are estimated:
SEC Registration Fee............................... $ 695,000.00
Legal Fees and Expenses............................ 600,000.00
Accounting Fees and Expenses....................... 200,000.00
Trustee's Fees and Expenses
(including counsel fees)....................... 90,000.00
Printing and Engraving Expenses.................... 180,000.00
Rating Agency Fees................................. 240,000.00
Miscellaneous...................................... 100,000.00
-------------
Total $2,105,000.00
=============
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Subsection (a) of Section 145 of the General Corporation Law of
Delaware empowers a corporation to indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the corporation) by reason of the
fact that he is or was a director, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and in
a manner he reasonably believed to be in or not opposed to the best interests of
the corporation, and, with respect to any criminal action or proceeding, had no
cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all
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circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
Section 145 further provides that to the extent a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in the defense of any action, suit or proceeding referred to in
subsections (a) and (b), or in the defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith; that
indemnification and advancement of expenses provided by, or granted pursuant to,
Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
The By-laws of the Depositor provide, in effect, that to the full
extent permitted by law, the Depositor shall indemnify and hold harmless each
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative and whether or not by or in the right
of the Depositor, by reason of the fact that he is or was a director or officer,
or his testator or intestate is or was a director or officer of the Depositor,
or by reason of the fact that such person is or was serving at the request of
the Depositor as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise of any type or kind,
domestic or foreign, against expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement, actually and reasonably incurred as a
result of such action, suit or proceeding.
Pursuant to Section 145 of the General Corporation Law of
Delaware, liability insurance is maintained covering directors and principal
officers of the Depositor.
Section 6(b) of the proposed form of Underwriting Agreement
provides that each Underwriter severally will indemnify and hold harmless the
Depositor, each of its directors, each of its officers who signs the
Registration Statement, and each person, if any, who controls the Depositor
within the meaning of the Securities Act of 1933, as amended, against any
losses, claims, damages or liabilities to which any of them may become subject
under the Securities Act of 1933, the Securities Exchange Act of 1934 or other
federal or state law or regulation, at common law or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or an alleged untrue statement of a
material fact contained in the registration statement when it became effective,
or in the Registration Statement, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or omission
or alleged omission was made therein in reliance upon and in conformity with
certain written information furnished to the Depositor by such Underwriter,
specifically for use in the preparation thereof, and will reimburse the
Depositor
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for any legal or other expenses reasonably incurred by the Depositor in
connection with investigating or defending against such loss, claim, damage,
liability or action.
The Pooling and Servicing Agreement for each series of
Certificates and the Sale and Servicing Agreement for each series of Notes will
provide that no director, officer, employee or agent of the Depositor is liable
to the Trust Fund or the Certificateholders or the Issuer or the Noteholders, as
applicable, except for such person's own willful misfeasance, bad faith or gross
negligence in the performance of duties or reckless disregard of obligations and
duties. The Pooling and Servicing Agreement for each series of Certificates and
the Sale and Servicing Agreement for each series of Notes will further provide
that, with the exceptions stated above, a director, officer, employee or agent
of the Depositor is entitled to be indemnified against any loss, liability or
expense incurred in connection with legal action relating to such Pooling and
Servicing Agreement and related Certificates or such Sale and Servicing
Agreement and related Notes, as applicable, other than such expenses related to
particular Loans.
ITEM 16. EXHIBITS.
***1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
***4.1 Form of Pooling and Servicing Agreement.
***4.2 Form of Owner Trust Agreement.
***4.3 Form of Indenture.
***4.4 Form of Sale and Servicing Agreement (relating to Notes)
***5.1 Opinion of Cadwalader, Wickersham & Taft with respect to
legality.
***8.1 Opinion of Cadwalader, Wickersham & Taft with respect to certain
tax matters (included as part of Exhibit 5.1).
***23.1 Consent of Cadwalader, Wickersham & Taft (included as part of
Exhibit 5.1).
***24.1 Power of Attorney.
*99.1 Form of FHA Mortgage Insurance Certificate (28.1**).
*99.2 Form of VA Loan Guaranty (28.2**).
*99.3 Form of Pool Insurance Policy (28.3**).
*99.4 Form of Special Hazard Credit Insurance Policy (28.4**).
*99.5 Form of Bankruptcy Bond (28.5**).
*99.6 Form of Letter of Credit (28.6**).
- ------------
* Incorporated by reference from the Registration Statement on Form S-11
(File No. 33-14827).
** Exhibit number in Registration Statement on Form S-11 (File No.
33-14827).
*** Previously filed.
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes:
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(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended;
(ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the
information set forth in the registration statement; and
(iii) to include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply
if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, as amended, each such post-effective amendment
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
The Registrant hereby undertakes to file an application for the
purpose of determining eligibility of the trustee to act under subsection (a) of
section 310 of the Trust Indenture Act ("TIA") in accordance with the rules and
regulations prescribed by the Commission under section 305(b)(2) of the TIA.
The Registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, PaineWebber Mortgage Acceptance Corporation IV certifies that it has
reasonable grounds to believe that it meets all of the requirements for filing
on Form S-3, reasonably believes that the security rating requirement contained
in Transaction Requirement B.5 of Form S-3 will be met by the time of the sale
of the securities registered hereunder, and has duly caused this Pre-Effective
Amendment No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New York, State of New
York, on the 18th day of August, 1999.
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
By: /s/ Joseph Piscina
------------------
Name: Joseph Piscina
Title: President
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<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Pre-Effective Amendment No. 2 to the Registration Statement has
been signed by the following persons in the capacities indicated.
SIGNATURE TITLE DATE
/s/ Joseph Piscina President and Director August 18, 1999
- --------------------------- (Principal Executive Officer)
Joseph Piscina
/s/ Daniel Leyden Senior Vice President August 18, 1999
- --------------------------- (Principal Accounting and
Daniel Leyden Financial Officer)
/s/ Ramesh Singh Director August 18, 1999
- ---------------------------
Ramesh Singh
/s/ Michael T. Sullivan Director August 18, 1999
- ---------------------------
Michael T. Sullivan
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<PAGE>
EXHIBIT INDEX
Number Description of Document
- ------ -----------------------
***1.1 Form of Underwriting Agreement.
*3.1 Certificate of Incorporation of the Registrant.
*3.2 By-Laws of the Registrant.
***4.1 Form of Pooling and Servicing Agreement.
***4.2 Form of Owner Trust Agreement.
***4.3 Form of Indenture.
***4.4 Form of Sale and Servicing Agreement (relating to Notes).
***5.1 Opinion of Cadwalader, Wickersham & Taft with respect to
legality.
***8.1 Opinion of Cadwalader, Wickersham & Taft with respect to
certain tax matters (included as part of Exhibit 5.1).
***23.1 Consent of Cadwalader, Wickersham & Taft (included as
part of Exhibit 5.1).
***24.1 Power of Attorney.
*99.1 Form of FHA Mortgage Insurance Certificate (28.1**).
*99.2 Form of VA Loan Guaranty (28.2**).
*99.3 Form of Pool Insurance Policy (28.3**).
*99.4 Form of Special Hazard Credit Insurance Policy (28.4**).
*99.5 Form of Bankruptcy Bond (28.5**).
*99.6 Form of Letter of Credit (28.6**).
* Incorporated by reference from the Registration Statement on Form S-11
(File No. 33-14827).
** Exhibit number in Registration Statement on Form S-11 (File No.
33-14827).
*** Previously filed.
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