As filed with the Securities and Exchange Commission on July 19, 1999
Registration No. 333-79283
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
PRE-EFFECTIVE AMENDMENT NO. 1 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
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
- ----------
<FN>
(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) $417,000 was previously paid.
</FN>
</TABLE>
----------
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.
-2-
<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.
-3-
<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 ________________, which
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_, which provides
general information, some of which may not apply to the offered certificates for
the series 199_-_; and
(2) this prospectus supplement, which 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.............16
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.............................................................20
Description of the Loans..................................................21
General.................................................................21
Statistical Information.................................................21
Assignment of Loans.....................................................26
Trustee's Loan File.....................................................27
Representations and Warranties of the Transferor........................27
The Transferor and the Servicer...........................................28
General.................................................................28
Credit and Underwriting Guidelines......................................29
Delinquency and Foreclosure Information.................................31
Prepayment and Yield Considerations.......................................33
General.................................................................33
Modeling Assumptions....................................................34
Description of the Offered Certificates...................................42
General.................................................................42
Definitive Certificates.................................................42
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 Upon or Sale of Defaulted Loans.............................48
Servicing Fees and Other Compensation and Payment of Expenses...........50
Enforcement of Due-on-Sale Clauses......................................51
Maintenance of Insurance Policies and Errors and Omissions and
Fidelity Coverage.....................................................51
Servicer Reports........................................................53
Removal and Resignation of Servicer.....................................53
Amendment...............................................................54
The Trustee...............................................................55
[The Certificate Insurance Policy.........................................56
[The Certificate Insurer..................................................56
Certain Federal Income Tax Consequences...................................58
General.................................................................58
Discount and Premium....................................................59
Characterization of Investments in Certificates........................59
Erisa Considerations......................................................60
Legal Investment..........................................................60
Underwriting..............................................................62
[Experts..................................................................63
Ratings...................................................................64
Legal Matters.............................................................64
Glossary of Terms.........................................................66
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 such ___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 such
day is 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 upon 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
upon the aggregate unpaid principal balance as of
the cut-off date, which 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 such 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; however, 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 total of all payments or other collections, or
advances in lieu thereof, on or in respect of the
loans, but excluding prepayment premiums, that are
available for distributions of interest on and
principal of the offered certificates on any
distribution date is referred to as the available
distribution amount for that date. 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 such 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 thereon.]
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, which amounts are zero
prior to _____ 20__, and after paying the Class
A-6IO certificates, 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
overcollateralization amount has been reduced to
zero] as
S-8
<PAGE>
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, which 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 with the same
care as it customarily employs in servicing and
administering loans for its own account in
accordance with accepted mortgage servicing
practices of prudent lending institutions and
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.
OPTIONAL TERMINATION......... The servicer may, at its option [, and if this
option is not exercised by the servicer, the
certificate insurer 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
S-9
<PAGE>
than 10% of the aggregate unpaid principal
balances of the loans as of the cut-off date, by
purchasing from the trust on the next succeeding
distribution date all of the property of the
trust. 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............ 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,
excess interest will be generated. 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, pursuant to which it
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 will be entitled to
reimbursement from excess interest and the
overcollateralization amount for all insured
payments,
S-10
<PAGE>
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, except for one certificate of each
class which 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 such 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, which 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 ___%, will be
treated as a grantor trust.
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, which 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 such amount 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 ____], which generally
exempts from the application of certain of the
prohibited transaction provisions of ERISA, and
the excise taxes imposed on such 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 upon 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 upon:
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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<PAGE>
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 such 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 compensate for interest losses
or shortfalls in payments on the loans or to 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 such classes of certificates resulting from
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
S-15
<PAGE>
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 such 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 which could increase the risk
that you will suffer losses. 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 which could
increase the risk that you will suffer losses. [In the event 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 Upon Defaulted Loans" in this prospectus supplement,
and "Certain Legal Aspects of Residential Mortgage Loans--Foreclosure on
Mortgages" in the prospectus.
GEOGRAPHIC CONCENTRATION COULD INCREASE LOSSES ON THE LOANS
When measured by aggregate principal balance as of the cut-off date,
mortgaged properties and manufactured
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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
therefore might increase the rate of delinquencies, defaults and losses on the
loans, and 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,
which 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 such 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 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].
Salient among the FDIC's powers as receiver or conservator is the power to
disaffirm or repudiate any of the transferor's contracts or leases the
performance of which would be burdensome and the disaffirmance or repudiation of
which 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
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<PAGE>
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, including 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 upon
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, and such 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 such event, the
loans would not be part of the depositor's bankruptcy estate in the event of its
bankruptcy and would not be available to the depositor's creditors. In the event
of the insolvency of the depositor, 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.
In the event a bankruptcy or insolvency of the servicer, the bankruptcy
trustee or receiver may have the power to prevent [the certificate insurer,] the
trustee or the depositor from appointing a successor servicer.
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 upon 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 limit
the ability of the servicer to collect principal or interest on the loans, may
entitle the borrowers to a refund of amounts previously paid, and may subject
the servicer or the transferor to damages and administrative sanctions. The
inability to collect principal or interest on the loans because of violations of
Federal or state laws will likely cause the loans to
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<PAGE>
experience higher rates of delinquencies, defaults and losses which 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 such 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.
With respect to the year 2000 problem, DTC has informed members of the
financial community that it has developed and is implementing a program so that
its systems, as they relate to the timely payment of distributions, including
principal and interest payments, to security holders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately on and after
January 1, 2000. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon 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 upon 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 such
contingency plans as it deems appropriate.
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<PAGE>
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 upon 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, such
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 which could result in shortfalls
in the distributions due on your certificates.
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 such 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 which could result in
shortfalls in the distributions due on your certificates. 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
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. Such 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
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<PAGE>
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 and properties securing 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 upon full prepayment 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.
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<PAGE>
GEOGRAPHIC DISTRIBUTION OF LOANS
% OF
CUT-OFF
NUMBER AGGREGATE DATE
OF PRINCIPAL PRINCIPAL
JURISDICTION 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
NUMBER AGGREGATE DATE
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
NUMBER AGGREGATE DATE
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
NUMBER AGGREGATE DATE
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
NUMBER AGGREGATE DATE
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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OCCUPANCY STATUS
% OF
CUT-OFF
NUMBER AGGREGATE DATE
OF PRINCIPAL PRINCIPAL
OCCUPANCY LOANS BALANCE BALANCE
- --------- ------ --------- ---------
Owner Occupied............................... $ %
Non-Owner Occupied...........................
Second Home..................................
------ --------- ---------
Total...................................... $ 100.00%
====== ========= =========
PROPERTY TYPES
% OF
CUT-OFF
NUMBER AGGREGATE DATE
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%
====== ========= =========
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MONTHS SINCE ORIGINATION
% OF
CUT-OFF
NUMBER AGGREGATE DATE
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.
REMAINING TERMS TO MATURITY
% OF
CUT-OFF
NUMBER AGGREGATE DATE
RANGE OF REMAINING TERMS TO MATURITY OF PRINCIPAL PRINCIPAL
(IN 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 upon 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 sell,
transfer, assign, set over and otherwise convey without recourse to the trust in
trust for the benefit of the
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certificateholders [and the certificate insurer] all right, title and interest
in and to each loan. Each such 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, and the transferor reserves and
retains all its right, title and interest in and to principal, including
principal prepayments in full and curtailments, including partial prepayments,
due on each such loan on or prior to the cut-off date.
In connection with such 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 which is not executed, has not been received or is unrelated to the
loans, or 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]. The
transferor agrees to use reasonable efforts to cause to be remedied a material
defect in a document constituting part of a Trustee's Loan File of which it is
so notified by the trustee. If, however, within 120 days after the trustee's
notice to it respecting such defect the transferor has not caused to be remedied
the defect and the defect materially and adversely affects the value of the loan
or the interest of the certificateholders [or the certificate insurer] in such
loan, the transferor will be required to either:
(1) substitute in lieu of such loan a Qualified Substitute Loan and,
if the then unpaid principal balance of such Qualified Substitute Loan is
less than the principal balance of such loan as of the date of such
substitution plus accrued and unpaid interest thereon, deliver to the
servicer as part of the related monthly remittance remitted by the
servicer, the Substitution Adjustment; or
(2) purchase such 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, if any of the
certificateholders, the servicer, the transferor[, the certificate insurer] or
the trustee discover that any of the representations and warranties of the
transferor have been breached in any material respect as of the closing date,
and 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, notwithstanding that such representation and warranty was
made to the transferor's best
S-27
<PAGE>
knowledge, the party discovering such breach is required to give prompt written
notice to the others of such breach.
Within 120 days of the earlier to occur of the transferor's discovery or
its receipt of written notice of any such breach, the transferor will be
required to:
(1) promptly cure such breach in all material respects;
(2) remove each loan which has given rise to the requirement for action by
the transferor to substitute one or more Qualified Substitute Loans and, if the
unpaid principal balance of such Qualified Substitute Loans as of the date of
such 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
(3) purchase such loan at the Purchase Price and deposit such Purchase
Price into the Collection Account on the next succeeding Determination Date
after deducting any amounts received in respect of such repurchased loan or
loans and being held in the Collection Account or the Certificate Account for
future distribution to the extent such amounts have not yet been applied to
principal or interest on such loan;
provided, however, that any substitution of one or more Qualified Substitute
Loans pursuant to the preceding clause (2) must be effected not later than two
years after the closing date unless the trustee [and the certificate insurer]
receive an opinion of counsel that such 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 such breach or to
substitute or purchase any loan will constitute the sole remedy respecting a
material breach of any such 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, which 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, but no subservicing arrangement will discharge the servicer
from its obligations under the Pooling and Servicing Agreement.
S-28
<PAGE>
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 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 the equity in the collateral, the payment
history and debt-to-income ratio of the borrower, the property type, and 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 or, in the case of a balloon loan, generally
amortize 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 may be either owner occupied, which
includes second homes, or non-owner occupied investor properties which, in
either case, are single-family residences. These properties may be detached,
part of a two-or four-family dwelling, manufactured homes, condominium units or
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%, except that 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 with CLTVs under 50%. Appraisals are
performed by professional appraisers who have been approved by
S-29
<PAGE>
__________ 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 which 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, should
not exceed 45% of the applicant's gross monthly income, as certified by the
borrower on the application. 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 the senior loan balance, if any, the
payment status of the senior loans and 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, such as 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;
(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
S-30
<PAGE>
(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 whereas 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 such characteristics 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, many of which have been originated or acquired by the
transferor during the past twelve months, 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 NUMBER NUMBER NUMBER
OF DOLLAR OF DOLLAR OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT LOANS AMOUNT 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 which
loans were originated or acquired by the transferor. Such 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 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 such Class A certificate, the related
pass-through rate and the rate and timing of principal payments, including
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 such loans, such as the age of the loans, the geographic
S-32
<PAGE>
location of the related properties and the extent of the related borrowers'
equity in those properties, and 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 or
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 such 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 such 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," which 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 such
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 such loans in the first month
of the life of the loans and an additional approximate __% (precisely ____
multiplied by 1.00%) per annum in each month thereafter until the ___ month;
beginning in the ____ month and in 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,
S-33
<PAGE>
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) all scheduled principal payments on the loans are timely received
on the first day of a Due Period, which will begin on the first day of each
month and end on the thirtieth day of the month, with the first Due Period
for the loans commencing on ________, 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, 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) all loans prepay monthly at the specified percentages of the
Prepayment Assumption, 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 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;
(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:
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<PAGE>
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, including the assumptions regarding the characteristics and
performance of the loans which may
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<PAGE>
differ from their actual characteristics and performance, and should be read in
conjunction with these modeling assumptions.
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) such 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, which 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 such person's interest in the Class A certificates,
except as set forth below 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 such systems in Europe. See "Description of the Securities--Book-Entry
Registration of Securities" in the prospectus.
DEFINITIVE CERTIFICATES
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A Class A certificate, which will be issued initially as a book-entry
certificate, 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.
Upon the occurrence of any event described in the immediately preceding
paragraph, DTC will be required to notify all its participants of the
availability through DTC of Definitive Certificates. Upon delivery of Definitive
Certificates, the trustee will reissue the book-entry certificates as Definitive
Certificates to the beneficial owners. 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, but 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 such class of
certificates on such 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 as described in this prospectus supplement 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.
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
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(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, notwithstanding that the certificate principal balance
or notional amount may be higher during a portion of such Accrual Period, any
principal distributed during such Accrual Period being deemed to have been
distributed at the beginning of such 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 the distribution date which
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__. Except as otherwise
described below, all distributions will be made to the persons in whose names
the certificates are registered at the close of business on the related Record
Date . As to each such person 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 therefor, if such
certificateholder will have provided the trustee with written wiring
instructions no less than five business days prior to the related Record Date,
or otherwise by check mailed to such 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 upon
presentation and surrender of the certificate 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 such 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 such 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 and, to the extent not previously
paid, for all prior distribution dates;
(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;
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(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 such class has been reduced to zero, such that 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.
Notwithstanding the priorities set forth above, [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 such 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, pro rata
based on the amount then payable, 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, for
any Accrual Period other than the first Accrual Period, the rate for United
States dollar deposits for one month that appears on the Telerate Screen Page
3750 as of 11:00 a.m., London, England time, on the second LIBOR Business Day
prior to the first day of that Accrual Period. With respect to the first Accrual
Period, the rate for United States dollar deposits for one month that appears on
the Telerate Screen Page 3750 as of 11:00 a.m., London, England time, two LIBOR
Business Days prior to the closing date. If this rate does not appear on that
page or another page as may replace that page on that service, or if that
service is no longer offered, 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 upon notice to the trustee of either:
(1) the later of 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 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.
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The servicer may, at its option and at its sole cost and expense, and if
the servicer does not exercise that option[, the certificate insurer] may, in
accordance with the provisions of the Pooling and Servicing Agreement, at its
option and at its sole cost and expense, terminate the trust on any date on
which the aggregate unpaid principal balance of the loans, as of such date of
determination, is less than 10% of the cut-off date principal balance of the
loans. Upon termination, 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, disregarding accrued interest of the
loans and REO Properties, determined as the average of three written
bids, copies of which are to be delivered to the trustee [and the
certificate insurer] by the servicer and the reasonable cost of which
may be deducted from the final purchase price, made by nationally
recognized dealers and based on a valuation process which would be
used to value comparable loans and REO Property,
(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 thereon 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 such 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 such distribution date;
o the amount of such distribution allocable to principal and allocable to
interest;
o the aggregate outstanding certificate principal balance of each Principal
Balance Certificate as of such distribution date;
o [the amount of any Insured Payment included in such 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, and will have full power and authority to
do any and all things in connection with such 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. Notwithstanding any subservicing arrangement, 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, consistent with the
other terms of the Pooling and Servicing Agreement, to follow such collection
procedures as it would normally follow with respect to loans comparable to the
loans and which 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, 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 such funds from the Collection
Account to the Certificate Account.
The servicer is obligated to deposit or cause to be deposited in the
Collection Account on a daily basis, amounts representing the following payments
received and collections made by it after the cut-off date:
(1) all payments on account of principal, including unscheduled
principal prepayments, on the loans;
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(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 not later than the Servicer Remittance Date.
The trustee will be obligated to set up a Certificate Account.
Subject to the servicer's determination that an advance would not be
nonrecoverable, the servicer is required to deposit into the Collection Account
no later than the Servicer Remittance Date an amount 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) 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, any Periodic Advance.
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]. In the event that, notwithstanding
the servicer's good faith determination at the time the Periodic Advance was
made that it would not be a nonrecoverable Periodic Advance, the Periodic
Advance becomes nonrecoverable, the servicer will be entitled to reimbursement
therefor from the trust fund.
Subject to the servicer's determination that such 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, the servicer is required to make
Servicing Advances. Such Servicing Advances by the servicer are reimbursable to
the servicer subject to certain conditions and restrictions. In the event that,
notwithstanding the servicer's good faith determination at the time a Servicing
Advance was made, that it would not be a nonrecoverable advance, in the event
the Servicing Advance becomes a nonrecoverable advance, the servicer will be
entitled to reimbursement therefor from the trust fund.
Not later than the close of business on the business day immediately
following each Servicer Remittance Date, the servicer is required to remit to
the Certificate Account, the Compensating Interest, if any.
REALIZATION UPON OR SALE OF DEFAULTED LOANS
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Except as described below, the servicer will be required to foreclose upon
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, respecting which it shall reimburse itself for such expense 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, and in the event a deficiency judgment
is available against the borrower or any other person, may proceed for the
deficiency.
In the event that 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. Notwithstanding any acquisition
of title and cancellation of the related loan, that 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. Consistent with the foregoing, 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, notwithstanding that the indebtedness
evidenced by the related Mortgage Note or manufactured housing contract
shall have been discharged, such Mortgage Note or manufactured housing
contract and the related amortization schedule in effect at the time of any
acquisition of title, 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
remain in effect, except that the amortization schedule shall be adjusted
to reflect the application of proceeds received in any month pursuant to
the succeeding clause.
(2) Net proceeds after payment of servicer's expenses related to
disposition from such property received in any month shall be deemed to
have been 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, with the excess thereof, if any, being deemed to have been received
in respect of the delinquent principal installments that remained unpaid on
that date. Thereafter, net proceeds from that property received in any
month shall 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 such Mortgage Note or manufactured housing contract and
such amortization 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 those net proceeds on such 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 shall be
allocated to the Servicing Fee with respect thereto.
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In the event that 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] shall have 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 beyond such
period for which the property may be held, will not cause any of the trust
REMICs to be subject to the tax on prohibited transactions imposed by Code
Section 860F(a)(1), otherwise subject the trust fund or any of the trust
REMICs to tax or 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 (at the servicer's expense) or the servicer shall have
applied for, prior to the expiration of such period, an extension of such
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 it constitutes "foreclosure property" within the
meaning of Code Section 860G(a)(8) at all times, that the sale of such
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
that the trust fund does not derive any "net income from foreclosure
property" within the meaning of Code Section 860G(c)(2), with respect to
such property.
Instead of foreclosing upon 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.
Notwithstanding the foregoing, prior to instituting foreclosure proceedings
or accepting a deed-in-lieu of foreclosure with respect to any property, the
servicer shall make, or cause to be made, inspection of the property in
accordance with accepted servicing procedures, and, with respect to
environmental hazards, substantially comparable to such 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
upon the results of any such 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 shall be entitled with respect to each loan to
the Servicing Fee, which shall be payable monthly from amounts on deposit in the
Collection Account. In addition, the servicer shall be entitled to receive, as
additional servicing compensation, to the extent permitted by applicable
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law and the related Mortgage Notes or manufactured housing contract, any late
payment charges, prepayment penalties, assumption fees or similar items. The
servicer shall also be entitled to withdraw from the Collection Account any
interest or other income earned on deposits therein. The servicer shall pay all
expenses incurred by it in connection with its servicing activities under the
Pooling and Servicing Agreement and shall not be entitled to reimbursement
therefor 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 or, if not recovered from the borrower
on whose behalf such Periodic Advance or Servicing Advance was made, from late
collections on the related loan, including Liquidation Proceeds, released
mortgaged property proceeds[, Insurance Proceeds] and other amounts as may be
collected by the servicer from the borrower or otherwise relating to the loan,
or, in the case of Periodic Advances, from late collections of interest on any
loan. In the event a Periodic Advance or a Servicing Advance becomes a
nonrecoverable advance, the servicer may be reimbursed for such 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, such Periodic
Advance or Servicing Advance is not ultimately recoverable.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
When a property has been or is about to be conveyed by the borrower, the
servicer shall, to the extent it has knowledge of such conveyance or prospective
conveyance, 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; provided, however, that the servicer shall not
exercise any such right 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 such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the Mortgage Note or manufactured housing
contract and, unless prohibited by applicable law or the mortgage, Mortgage Note
or manufactured housing contract, the borrower remains liable thereon; provided,
however, that the loan interest rate of the related Mortgage Note or
manufactured housing contract and the payment terms shall not be changed. The
servicer is also authorized, except as provided in the Pooling and Servicing
Agreement, to enter into a substitution of liability agreement with that person,
pursuant to which the original borrower is released from liability and that
person 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, but the existence and/or maintenance of such 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 thereunder 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
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foreclosure or Liquidation Proceeds on such defaulted loan or by the applicable
credit enhancement. To the extent that the related mortgage documents or
manufactured housing contracts require the borrower under a loan to maintain a
fire and hazard insurance policy with extended coverage on the related property
in an amount not less than 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 monitor the status of insurance in varying degrees based upon
certain characteristics of the related loans, and will 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 or cause to be maintained fire and hazard insurance thereon 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
such property and
(2) the unpaid principal balance owing on the related loan at the time
of such foreclosure, deed in lieu of foreclosure or repossession, plus
accrued interest thereon and related liquidation expenses. Such 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,
for the purpose of calculating distributions to the certificateholders, be added
to the unpaid principal balance of the related loan, notwithstanding that the
terms of the loan may so permit. No earthquake or other additional insurance
other than flood insurance will be, under the Pooling and Servicing Agreement,
required to be maintained by any borrower or the servicer, other than pursuant
to the terms of the related mortgage documents or manufactured housing contracts
and thee applicable laws and regulations as shall at any time be in force and as
shall require such 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, nor will any loan be insured by any government or government
agency.
SERVICER REPORTS
The servicer is required to deliver to [the certificate insurer and] the
trustee not later than the last day of the [_____] month following the end of
the servicer's fiscal year (beginning with ___ __, 200_), an officers'
certificate 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 such officers' knowledge, based on such review, the
servicer has fulfilled all its obligations under the Pooling and Servicing
Agreement for that year, or, if there has been a default in the fulfillment
of any obligation, specifying each such default
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known to such officers and the nature and status thereof including the steps
being taken by the servicer to remedy each default.
Not later than the last day of the _____ month following the end of the
servicer's fiscal year (beginning with ___ 31, 200_), the servicer, at its
expense, is required to cause to be delivered to [the certificate insurer and]
the trustee from a firm of independent certified public accountants, who may
also render other services to the servicer, a statement to the effect that the
firm has examined certain documents and records relating to the servicing of the
loans during the preceding calendar year, or such longer period from the closing
date to the end of the following calendar year. Based on such 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 servicing has
been conducted in compliance with the Pooling and Servicing Agreement except for
those significant exceptions or errors in records that, in the opinion of such
firm, 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, in which case those exceptions and errors shall be so
reported.
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 upon the occurrence and continuation beyond the applicable cure period
of an event described below:
(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) any failure on the part of the servicer duly to observe or perform
in any material respect any other of the covenants or agreements on the
part of the servicer contained in the Pooling and Servicing Agreement, or
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 such failure or breach, requiring
the same to be remedied, shall have been 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) a decree or order of a court or agency or supervisory authority
having jurisdiction in an involuntary case under any present or future
federal or state bankruptcy, insolvency or similar law or for the
appointment of a conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings, or for the winding-up or liquidation of its affairs, shall
have been entered against the servicer and such decree or order shall have
remained in force, undischarged or unstayed for a period of 60 days;
(5) the servicer shall consent to the appointment of a conservator or
receiver or liquidator in any insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings of or relating to the
servicer or of or relating to all or substantially all of the servicer's
property;
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(6) the servicer shall admit in writing its inability to pay its debts
as they become due, file a petition to take advantage of any applicable
insolvency or reorganization statute, make an assignment for the benefit of
its creditors, or voluntarily suspend payment of its obligations; or
(7) 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 by mutual consent of [the certificate
insurer and] the trustee, or upon the determination that the servicer's duties
thereunder 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.
Upon removal or resignation of the servicer, the trustee has agreed to be
the successor servicer, provided, however, that the transfer of servicing will
be effected over a period of time not to exceed 90 days. Immediately upon such
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, in accordance
with the provisions of the Pooling and Servicing Agreement [and subject to the
approval of the certificate insurer any established loan servicing institution
acceptable to the certificate insurer] having a net worth of not less than
$15,000,000 as the successor servicer in the assumption of all or any part of
the responsibilities, duties or liabilities of the servicer.
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[, upon the prior
written consent of the certificate insurer, which consent shall not be withheld
if, in the opinion of counsel addressed to the trustee and the certificate
insurer, failure to amend would adversely affect the interests of the
certificateholders unless that consent would adversely affect the interests of
the certificate insurer]. A party may amend without notice to, or consent of,
the certificateholders, to cure any ambiguity, to correct or supplement any
provisions therein, to comply with any changes in the Internal Revenue Code, or
to make any other provisions with respect to matters or questions arising under
the Pooling and Servicing Agreement which shall not be inconsistent with the
provisions of the Pooling and Servicing Agreement, provided that the action
shall not, as evidenced by an opinion of counsel delivered to, but not obtained
at the expense of, the trustee, adversely affect in any material respect the
interests of any certificateholder of any outstanding class of certificates, or
100% of the class of certificateholders so affected shall have consented.
Furthermore, no amendment shall 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
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consent of the affected certificateholder, or change the rights or obligations
of any other party to the Pooling and Servicing Agreement without the consent of
such party.
The Pooling and Servicing Agreement may be amended from time to time by the
depositor, the servicer and the trustee [with the consent of the certificate
insurer, which consent shall not be withheld if, in the opinion of counsel
addressed to the trustee and the certificate insurer, failure to amend would
adversely affect the interests of the certificateholders unless that consent
would adversely affect the interests of the certificate insurer], 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. No such amendment shall 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, and provided further, that no this amendment
shall 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 such certificate or reduce the percentage
for each class the holders of which are required to consent to any such
amendment without the consent of the holders of 100% of each class of
certificates affected thereby.
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 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, authorized under such
laws to exercise corporate trust powers, having 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 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 shall become effective upon the acceptance of appointment by a successor
trustee [acceptable to the certificate insurer].
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. Upon
receiving notice of resignation, the servicer shall promptly appoint a successor
trustee or trustees meeting the eligibility requirements set forth above 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, and upon
acceptance of appointment by a successor trustee in the manner provided in the
Pooling and Servicing Agreement, the servicer will give notice thereof to the
certificateholders. If no successor trustee shall have been appointed and have
accepted appointment within 30 days after the giving of such notice of
resignation, the resigning trustee may petition any court of competent
jurisdiction for the
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appointment of a successor trustee. The court may thereupon, after the notice,
if any, as it may deem proper and prescribe, appoint a successor trustee.
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 under the conditions set forth in the Pooling and Servicing Agreement
and appoint a successor trustee in the manner set forth in the Pooling and
Servicing Agreement.
At any time, 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 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 to vest in such person or persons, in such capacity, such 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 such 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 such
information.
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The certificate insurer is a ______________________ corporation regulated
by the Office of the Commissioner of Insurance of the State of ____________ and
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.
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
________________ (which was filed with the Securities and Exchange Commission on
March 31, 199_; Commission File No. _________) and 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_, (which was filed with the Securities and Exchange Commission on
________, 199_, are hereby incorporated by reference into this prospectus
supplement and shall be deemed to be a part hereof. Any statement contained in a
document incorporated herein by reference shall be modified or superseded for
the purposes of this prospectus supplement to the extent that a statement
contained herein by reference herein also modified or supersedes such statement.
Any statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this prospectus supplement.
All financial statements of the 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 such 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.
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--------------------------
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
DECEMBER 31, DECEMBER DECEMBER 31, MARCH 31,
199_ 31, 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_
prepared in accordance with statutory accounting standards 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 and 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.]
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"
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in a REMIC and in the right to receive such basis risk payments. The beneficial
owner of a principal balance certificate will be required to allocate its basis
between such regular interest and the right to receive such basis risk payments.
The Class R certificates will represent the "residual interest" in each of the
trust REMICs. Upon issuance of the Offered certificates, Cadwalader, Wickersham
& Taft, special tax counsel to the depositor, will deliver its opinion generally
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 and the portion of the trust fund not so designated 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 such 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 such 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 such 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 and 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.
For purposes of accruing original issue discount, determining whether such
original issue discount is de minimis and amortizing any premium, the Prepayment
Assumption will be ___% CPR. 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, including
original issue discount, if any, on the offered certificates will be interest
described in Section 856(c)(3)(B) of the Code to the extent that such
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 such assets in
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their entirety. Furthermore, notwithstanding the foregoing, 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, but 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 such entities,
(4) any Plan and
(5) persons who have certain specified relationships to such 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, and the insurance company might be treated as a Party-in-Interest
with respect to a Plan by virtue of such 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 such 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 83-1, 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.
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) and on April 3,
1996, [the DOL issued to ___________ an individual administrative exemption,
Prohibited Transaction Exemption ______, __ Fed. Reg. ______, 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 either of the
Exemptions. Among the conditions that must be satisfied for the Exemption[s] to
apply are the following:
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(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 such 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 such 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 such 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 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) such 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
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(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 an underwriter, the trustee, the servicer, any
obligor with respect to the loans included in the trust, any entity deemed to be
a "sponsor" of the trust fund as this term is defined in the exemption, or any
affiliate of any such 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
such 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 such
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, such 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 in no respect 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.
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 Office of the Comptroller
of the Currency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of Thrift Supervision, the
National Credit Union Administration or state banking or insurance authorities
should review applicable rules, supervisory policies and guidelines of these
agencies before purchasing any of the offered certificates, since such 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.
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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
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Total...........
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CLASS A-5 CLASS A-6 CLASS A-6IO
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES
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PaineWebber Incorporated
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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 such 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.
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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, i.e., if they sell more offered
certificates than are set forth on page [ ] of this prospectus supplement, the
underwriter[s] may reduce that short position by purchasing offered certificates
in the open market.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of 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 such 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.
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 upon the report of _________,
independent certified public accountants, incorporated by reference in this
prospectus supplement, and upon the authority of said firm as experts in
accounting and auditing.]
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 such ratings may be obtained from
________________________________________ and _________________________________.
Such ratings will be the views only of such rating agencies. We cannot assure
that any such 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
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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 upon for the depositor and the underwriters by
Cadwalader, Wickersham & Taft, New York, New York.
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GLOSSARY OF TERMS
"ACCRUAL PERIOD" is the period from, 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, 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 such distribution date,
minus
(2) the sum of the
(a) trustee Fee for such distribution date [and
(b) the amount owed to the certificate insurer as a premium for
the certificate Insurance Policy for such 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 or cause to be deposited 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.
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"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:
DISTRIBUTION DATES LOCKOUT
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 such 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 such 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 such distribution
date, reduced by such class of certificate's allocable share, calculated as
described above under "--Allocation of Net Prepayment Interest Shortfalls", of
any Net Prepayment Interest Shortfalls for such distribution date. Distributable
Certificate Interest will be calculated on the basis of a 360-day year
consisting of twelve 30-day months, except that such interest calculated with
respect to the Class A 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
such distribution date or Determination Date occurs and ends on and includes the
last day of such month in which such 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 such 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 such 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
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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
(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 such 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 such distribution
date, or the related initial certificate principal balance or notional amount,
in the case of the initial 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 such 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 such Liquidated Loan, plus
accrued interest thereon, over
(2) Net Liquidation Proceeds with respect to such 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 such 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.
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"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.
"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 such 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 such 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 such distribution date, after taking into account the
distribution of the Base Principal Distribution Amount, but not the Extra
Principal Distribution Amount, on such distribution date.
"OVERCOLLATERALIZATION DEFICIENCY AMOUNT" for any distribution date is the
excess, if any, of the related Overcollateralization Target Amount for the
distribution date over the related Overcollateralization Amount for the
distribution date, calculated for this purpose 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, but not the Extra 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, of interest on the unpaid principal balance of the loan related to
such REO Property at the related loan interest rate, net of the Servicing
Fee, for the related Due Period for the related loan over the net income
from the REO
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Property to be transferred to the Certificate Account for such
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
such funds from such 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 such entities.
"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 such 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 such principal prepayment in full less the Servicing Fee
for such loan in such 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, which Purchase Price shall be deposited in the Collection
Account on the next succeeding Determination Date after deducting therefrom
any amounts received in respect of such repurchased loan or loans and
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being held in the Collection Account for future distribution to the extent
such amounts have not yet been applied to principal or interest on such
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 such 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 thereof, not substantially less and not more than the unpaid
principal balance of the deleted loan as of such 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, as
follows: the arithmetic mean, rounded upwards, if necessary, to the nearest one
sixteenth of one percent, of the offered rates for United States dollar deposits
for one month which are offered by the Reference Banks, which shall be four
major banks specified in the Pooling and Servicing Agreement, as of 11:00 a.m.,
London, England time, on the second LIBOR business day prior to the first day of
such Accrual Period to prime banks in the London interbank market for a period
of one month in amounts approximately equal to the outstanding certificate
principal balance of the Class A-1 certificates; provided, that at least two
such Reference Banks provide such rate. If fewer than two offered rates appear,
the Reference Bank Rate will be the arithmetic mean of the rates quoted by one
or more major banks in New York City, selected by the trustee after consultation
with the servicer, as of 11:00 a.m., New York time, on such date for loans in
U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the outstanding certificate principal balance of the
Class A-1 certificates. If no such 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:
(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
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(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 such 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 such 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
(h) that portion of Net Foreclosure Profits with respect to loans
otherwise due to the servicer as provided in the Pooling and Servicing
Agreement.
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"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 such 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 such loan on the unpaid principal balance of such 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 such
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
(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.
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"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
such 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................................................................... 5
RISK FACTORS..............................................................14
FORWARD-LOOKING STATEMENTS................................................20
DEFINED TERMS.............................................................20
DESCRIPTION OF THE LOANS..................................................21
THE TRANSFEROR AND THE SERVICER...........................................28
PREPAYMENT AND YIELD CONSIDERATIONS.......................................33
DESCRIPTION OF THE OFFERED CERTIFICATES...................................42
SERVICING OF THE LOANS....................................................47
THE TRUSTEE...............................................................54
[THE CERTIFICATE INSURANCE POLICY.........................................56
[THE CERTIFICATE INSURER..................................................56
CERTAIN FEDERAL INCOME TAX CONSEQUENCES...................................58
ERISA CONSIDERATIONS......................................................60
LEGAL INVESTMENT..........................................................62
UNDERWRITING..............................................................63
[EXPERTS..................................................................64
RATINGS...................................................................64
LEGAL MATTERS.............................................................65
GLOSSARY OF TERMS.........................................................66
PROSPECTUS
Page
----
Available Information......................................................
Reports to Securityholders.................................................
Incorporation of Certain Information by Reference..........................
prospectus 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......................................................
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>
----------
$___________ (APPROXIMATE)
______________ HOME
EQUITY TRUST 199_-_
HOME EQUITY ASSET
BACKED CERTIFICATES,
SERIES 199_-_
PAINEWEBBER MORTGAGE ACCEPTANCE
CORPORATION IV
(DEPOSITOR)
______________________
(TRANSFEROR AND SERVICER)
- --------------------------------------------------------------------------------
PROSPECTUS SUPPLEMENT
- --------------------------------------------------------------------------------
PAINEWEBBER INCORPORATED
_____________, 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 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......................................................................5
Risk Factors.................................................................15
Basis Risk May Adversely Affect Yield.....................................15
Actual Yield to Maturity May Be Less Than Anticipated.....................16
Unpredictability of Prepayments Could Adversely Affect Yield..............16
Limited Liquidity May Adversely Affect Market Value of Notes..............16
Credit Enhancement May Not Be Adequate....................................16
Noteholders' Rights Are Limited by Securities Insurer.....................17
Risks Relating to Non-Conforming Underwriting Guidelines..................17
Transfers of Servicing May Adversely Affect Payments on the Notes ........18
Inadequacy of Value of Properties Could Affect Severity of Losses.........18
Bankruptcy of Borrower May Adversely Affect Payments on the Notes.........18
Geographic Concentration Could Increase Losses on the Loans...............19
Non-Recordation of Assignments Could Increase Losses on the Loans.........19
Insolvency of Transferor May Adversely Affect Payments on the Notes.......19
Bankruptcy of Other Parties May Adversely Affect Payments on the
Notes..................................................................20
Violations of Federal and State Laws May Adversely Affect Ability to
Collect on Loans.......................................................20
Failure of Servicer to Perform May Adversely Affect Payments on the
Notes..................................................................21
Transferor May Not Be Able To Repurchase or Replace Defective Loans.......21
Year 2000 Non-Compliance May Adversely Affect Payments on the Notes.......21
Forward-Looking Statements...................................................22
The Pool.....................................................................24
General...................................................................24
Payments on the Loans.....................................................24
Characteristics of the Loans..............................................26
Loan Statistics...........................................................27
Master Servicer..............................................................37
Master Servicer Duties....................................................37
Servicer.....................................................................39
General...................................................................39
Servicing Procedures......................................................39
Delinquency and Loss Experience May Not Be Applicable to the Pool.........41
Underwriting Criteria........................................................44
General...................................................................44
Prepayment and Yield Considerations..........................................49
General...................................................................49
Excess Spread and Reduction of Overcollateralization Amount...............53
Reinvestment Risk.........................................................54
Maturity Date.............................................................54
Yield Considerations Relating to Adjustable-Rate Loans....................54
Weighted Average Lives of the Notes.......................................55
Modeling..................................................................56
The Owner Trust and Indenture................................................59
General...................................................................59
The Owner Trustee.........................................................60
The Indenture Trustee.....................................................60
Description of the Notes.....................................................60
General...................................................................60
Payments on the Notes.....................................................62
Priority of Payments......................................................63
[Securities Insurer Reimbursement Amount..................................64
Optional Redemption.......................................................64
Description of Credit Enhancement............................................65
[Financial Guaranty Insurance Policy......................................65
The Securities Insurer....................................................68
Overcollateralization.....................................................70
Subordination.............................................................71
Description of the Transfer and Servicing Agreements.........................71
Sale and Assignment of the Loans..........................................72
Representations and Warranties............................................73
Repurchase of Loans.......................................................73
Fees and Expenses.........................................................74
Servicing.................................................................75
Collection Account, Note Payment Account and Certificate
Distribution Account...................................................76
Income From Accounts......................................................76
Collection and Other Servicing Procedures For Loans.......................77
Insurance.................................................................77
Realization Upon Defaulted Loans..........................................77
Evidence as to Compliance.................................................79
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<PAGE>
Certain Matters Regarding the Master Servicer.............................79
Master Servicer Events of Default.........................................80
Certain Matters Regarding the Servicer................................... 81
Servicer Determinations and Events of Default.............................81
Rights of Noteholders Upon Occurrence of Event of Default.................83
Restrictions on Noteholders' Rights.......................................83
The Owner Trustee and Indenture Trustee...................................84
Duties of the Owner Trustee And Indenture Trustee.........................84
Reports to Noteholders....................................................86
Federal Income Tax Consequences..............................................87
Classification of Investment Arrangement..................................88
Taxation of Holders.......................................................88
Backup Withholding and Information Reporting..............................89
ERISA Considerations.........................................................91
General...................................................................91
Prohibited Transactions...................................................91
Review by Plan Fiduciaries................................................92
Legal Investment.............................................................93
Use of Proceeds..............................................................93
Underwriting.................................................................93
Experts......................................................................94
Legal Matters................................................................94
Ratings......................................................................94
Glossary of Terms............................................................96
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<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
S-5
<PAGE>
____________________________. See "The Owner
Trust and Indenture--The Indenture Trustee" in
this prospectus supplement.
Owner Trustee..............
_________________________________________________.
________________'s address is
_____________________________. See "The Owner
Trust and 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................. 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
approximately two years after origination.
Approximately
S-6
<PAGE>
_____% 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 __%, and bearing 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 percentage
of the outstanding principal balance
of the notes.
S-7
<PAGE>
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.
Each accrual period is the period from and
including the closing date, in respect of the
first payment date, or the period from and
including the immediately preceding payment date,
in respect of all other payment dates, 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.
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
S-8
<PAGE>
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 advance delinquent
payments of interest and principal on the loans,
will pay compensating interest to cover prepayment
interest shortfalls to the extent described in
this prospectus supplement, will monitor the
servicing activities of the servicer and will be
available to assume the servicing upon a
termination of the servicer. 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 and the series 199_-_ notes will not be
entitled to the benefits of any other credit
enhancement. 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.
S-9
<PAGE>
[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, 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, until the
overcollateralization amount equals the increased
overcollateralization target amount.
If the delinquency or loss experience of the loans
does not exceed the levels established by the
securities insurer, then a decrease or stepdown in
the overcollateralization target amount may
initially occur when the outstanding 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:
S-10
<PAGE>
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, nor
does the guaranty policy 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:
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 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
S-11
<PAGE>
collected during the related due period, 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 upon
receipt of 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:
1. any deficiency resulting from the
available payment amount being less than
the accrued and unpaid interest due on
the notes and
2. 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
interest shortfalls on the notes resulting from
the Soldiers' and Sailors' Relief Act of 1940, as
amended, or 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 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, by purchasing all of the loans
at a price that will at least pay in full accrued
interest, interest carried forward due to the net
funds cap, together with accrued interest thereon,
unreimbursed servicing advances and 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
S-12
<PAGE>
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.
TAX STATUS................... Special counsel to the depositor and the
underwriters is of the opinion that under
existing law the notes will be characterized as
debt for federal income tax purposes and that
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
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<PAGE>
"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 accompanying prospectus for a
discussion of the primary factors upon 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.
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<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 upon 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, and in some cases, only after the expiration of the
related fixed-rate period, or with respect to fixed-rate loans, not at all,
subject to any applicable periodic cap, maximum mortgage rate and minimum
mortgage rate, 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.
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.
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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 upon:
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 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.
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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, which in turn will result in a lower level of
overcollateralization amount. See "Description of Credit
Enhancement--Overcollateralization" in this prospectus supplement.
LIMITATIONS ON SUBORDINATION. The holders of the residual interest
certificates are never obligated to refund payments previously distributed to
them to holders of the notes, including payments of excess spread, 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 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 which
could increase the risk that you will suffer losses. 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
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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 more attention to each account, earlier and more
frequent contact with borrowers in default and 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. In the event that 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 which could increase the risk that you will suffer
losses. In the event 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 Upon
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 upon
the mortgaged properties, enforce deficiency judgments or pursue collection
litigation with respect to defaulted loans. As a consequence, borrowers who have
defaulted on their loans and sought, or are considering seeking, relief under
bankruptcy or debtor relief laws will have substantially less incentive to repay
their loans, and 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
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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, and 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 lose the right to future payments of principal
and interest from the related loans and 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.]
Salient among the FDIC's powers as receiver or conservator is the power to
disaffirm or repudiate any of the transferor's contracts or leases the
performance of which would be
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burdensome and the disaffirmance or repudiation of which 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, such as 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 in the event of its
bankruptcy and would not be available to the depositor's creditors. In the event
of the insolvency of the depositor, 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.
In the event a bankruptcy or insolvency of the master servicer or servicer,
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.
In the event of the insolvency of the servicer, 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 since the collections
would not have been deposited in a segregated account within ten days after the
related collection, and the inclusion 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 upon 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
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with respect to some of these activities of the servicer, master servicer and
transferor. Violations of these Federal and state laws may limit the ability of
the servicer or master servicer to collect principal or interest on the loans,
may entitle the borrowers to a refund of amounts previously paid, and may
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, and
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
upon ________________ 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 by the master servicer [and
approved by the securities insurer] will assume the loan servicing functions
upon a termination of the servicer. 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
which could cause shortfalls in payments due on your notes. 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
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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.
In the event that computer problems arise out of a failure of these efforts to
be completed on time, or in the event that 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.
With respect to the year 2000 problem, DTC has informed members of the
financial community that it has developed and is implementing a program so that
its systems, as they relate to the timely payment of distributions, including
principal and interest payments, to security holders, book-entry deliveries, and
settlement of trades within DTC, continue to function appropriately on and after
January 1, 2000. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon 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 upon 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
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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, and
approximately ____% of the loans will be fully amortizing fixed-rate home loans
none of which are insured or guaranteed by any governmental agency. The loans
have been originated for the purpose of purchasing, and refinancing
single-family residences, consolidating debt, financing property improvements,
providing cash to the borrower for unspecified purposes or 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, and 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.
At loan interest rate reset dates occurring at end of the related six month,
two year or three year period and at six month intervals thereafter, the loan
interest rate on each adjustable-rate loan will be adjusted to a rate equal to
the sum of:
(1) Six-Month LIBOR, as published in The Wall Street Journal; and
(2) the number of basis points stated in the mortgage note. The new loan
interest rate will be rounded and may be subject to periodic rate
caps, lifetime caps and lifetime floors. A
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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, and 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 initial loan
interest rate at the cut-off date may not always bear interest at the same loan
interest rate 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 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 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
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<PAGE>
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. Generally,
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. Each regular scheduled payment made by the
borrower is, therefore, treated as containing a predetermined amount of interest
and principal. Scheduled monthly payments made by the borrowers on the loans
either earlier or later than their scheduled due dates will not affect the
amortization schedule or the relative application of 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 upon the characteristics of 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; provided, 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, including prepayments after the cut-off date
or the substitution or repurchase of loans after the closing date.
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<PAGE>
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 %
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 %
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<PAGE>
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.
GEOGRAPHIC DISTRIBUTION
% OF
CUT-OFF
AGGREGATE DATE
NUMBER PRINCIPAL PRINCIPAL
JURISDICTION OF LOANS BALANCE BALANCE
- ------------ -------- ------- -------
-------- ------- -------
Total...................................... 100.00%
======== ======= =======
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<PAGE>
PRINCIPAL BALANCES
% OF
CUT-OFF
AGGREGATE 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 $__________.
CURRENT LOAN RATES
% OF
CUT-OFF
AGGREGATE DATE
NUMBER PRINCIPAL PRINCIPAL
RANGE OF LOAN RATES OF LOANS BALANCE BALANCE
- ------------------- -------- ------- -------
$ %
-------- ------- -------
Total...................................... $ %
======== ======= =======
As of the cut-off date, the weighted average loan interest rate of the loans
was approximately _____% per annum.
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<PAGE>
CURRENT LOAN RATES--FIXED-RATE LOANs
% OF
CUT-OFF
DATE
PRINCIPAL
AGGREGATE BALANCE OF
NUMBER OF PRINCIPAL FIXED-RATE
RANGE OF LOAN RATES LOANS BALANCE LOANS
------------------- --------- --------- ---------
%
-------- ------- -------
Total...................................... $ %
======== ======= =======
As of the cut-off date, the weighted average loan interest rate of the
fixed-rate loans was approximately _______% per annum.
CURRENT LOAN RATES--ADJUSTABLE-RATE LOANS
% OF
CUT-OFF
DATE
PRINCIPAL
AGGREGATE BALANCE OF
NUMBER PRINCIPAL ADJUSTABLE-RATE
RANGE OF LOAN RATES OF LOANS BALANCE LOANS
- ------------------- -------- --------- --------------
$ %
-------- --------- ------------
Total........................... $ %
======== ========= ============
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
PRINCIPAL BALANCE
RANGE OF AGGREGATE OF
GROSS NUMBER OF PRINCIPAL 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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<PAGE>
DISTRIBUTION OF LIFETIME CAPS--ADJUSTABLE-RATE LOANS
% OF CUT-OFF
DATE PRINCIPAL
AGGREGATE BALANCE OF
RANGE OF NUMBER OF PRINCIPAL ADJUSTABLE-RATE
LIFETIME 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 PRINCIPAL
RANGE OF AGGREGATE BALANCE OF
LIFETIME NUMBER OF PRINCIPAL 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.
S-32
<PAGE>
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_.
S-33
<PAGE>
LOAN-TO-VALUE RATIOS
AGGREGATE % OF CUT-OFF
RANGE OF NUMBER PRINCIPAL DATE PRINCIPAL
LOAN-TO-VALUE RATIO OF 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
======== ======= =========
S-34
<PAGE>
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.
S-35
<PAGE>
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
======== ======= ==========
S-36
<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, or as of the cut-off date, with respect to the first Due
Period. In addition, the master servicer is entitled to receive on a monthly
basis additional compensation attributable to investment earnings from amounts
on deposit in the Collection Account, the Note Payment Account, a portion of
late payment charges, and 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_ and thereafter 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 cause to be remitted 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 master servicer out of its Master Servicer Compensation on any
payment date and 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 first, on the related payment date,
S-37
<PAGE>
from amounts that would otherwise be paid to the Residual
Certificateholder and 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
thereunder; 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
upon 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 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.
S-38
<PAGE>
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_ and thereafter 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, including economic, legal and technological developments, as well as the
refinement of the servicer's servicing and collection procedures, the servicer's
servicing policies and procedures for specific types of loans, including the
loans, may change from time to time. The manner in which the servicer performs
its servicing obligations will affect the amount and timing of principal and
interest payments on the loans, which in turn will affect payments to the
holders of the notes.
The servicer's loan servicing activities include responding to borrower
inquiries, processing and administering loan payments, reporting and remitting
principal and interest to trustees, investors and other interested parties,
collecting delinquent loan payments, evaluating and conducting loss mitigation
efforts, charging off uncollectible loans, and otherwise administering the
loans. The servicer has developed loss mitigation methodologies for conventional
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 customer complaint
monitoring, maintenance of daily delinquency information, analysis and
monitoring of legal remedies, including collection litigation, and foreclosure
proceedings and dispositions, accounting for principal and interest, contacting
delinquent borrowers, handling
S-39
<PAGE>
borrower defaults, recording mortgages and assignments, investor and
securitization reporting, and management portfolio reporting.
The servicer utilizes a computer-based loan servicing system. It provides
payment processing and cashier functions, automated payoff statements, on-line
collection, statement and notice mailing, along with a full range of investor
reporting information. The servicer has installed a predictive automated dialing
system and computerized telephone loan inquiry system to increase the
productivity of its 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. 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. Again, continuous effort will be made by
telephone to remain in contact with the borrower while the loan is being
approved for foreclosure and even during the foreclosure process 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.
Notwithstanding anything in the preceding sentence to the contrary, 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, and each sub-servicing
agreement shall 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
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<PAGE>
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,
in each case, of 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, whereas 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 and, accordingly, the actual
rates of delinquencies and foreclosures with respect to the loans.
S-41
<PAGE>
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
AT _______________, 199_
-------------------------------------
PERCENT
PERCENT BY
BY NO. BY DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ------ -------- ------
$ N/A
Total portfolio......................... -------- ------ -------- ------
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.
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.
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<PAGE>
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 and 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.
S-43
<PAGE>
UNDERWRITING CRITERIA
GENERAL
[The loans were underwritten or reunderwritten in accordance with ________'s
underwriting standards, which 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: the creditworthiness of a
borrower; 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 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 and is used to evaluate the
borrower's payment record and tendency to repay debts in a timely manner. A lack
of credit payment history will not necessarily preclude a loan if other
favorable borrower characteristics exist, including sufficient equity in the
property or an adequate debt-to-income ratio.
The calculation of the borrower's debt-to-income ratio involves a careful
review of all debts listed on the credit report and the loan application, as
well as the verification of gross income. A borrower's income is verified
through various means, including applicant interviews, written verifications
with employers, and the review of pay stubs, 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.
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<PAGE>
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 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 furnished 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.
Based on the data provided in the application, some verifications and the
appraisal or other valuation of the mortgaged property, 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. 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, which 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 and 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 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.
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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, provided, 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, and 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 or 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. 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
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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, provided, 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, and
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 or 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, 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 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, provided, 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, and 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, 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
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 and no notices of default within the last twelve months, or
eighteen months if the
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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, provided, 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, 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 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, provided, 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, 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 debt service-to-income ratio generally is
55% or less.
Loan Class D: For a loan to have been assigned to Loan Class D, the
prospective borrower will have experienced substantial credit problems in the
past, and generally will have overall poor credit. The prospective borrower's
credit history is poor and a notice of default on an existing mortgage loan may
have been filed against the borrower. As to non-mortgage credit, significant
prior defaults may have occurred, provided, 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
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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, 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 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 thereunder, 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, and 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 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
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(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, thereby resulting 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:
(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 which in particular instances
may result in longer
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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 which in some
instances 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
(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 Upon Defaulted Loans" in this prospectus
supplement. Some of the loans contain prepayment penalties, which 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.
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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, the rate of inflation,
unemployment levels, personal bankruptcy levels, prevailing interest rates,
consumer spending and saving habits, competition within the mortgage and
consumer finance industries, and consumer, bankruptcy and tax law developments.
For example, any further limitations on the rights of borrowers to deduct
interest payments on mortgage loans for federal income tax purposes may result
in a higher rate of prepayments on the loans. In addition, the rate of
prepayment on a pool of 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 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 the
particular factors that will affect the prepayment of the loans, as to the
relative importance of these factors, or as to the percentage of the principal
balances of the loans that will be paid as of any date.
Payments of principal to holders of the notes at a faster rate than
anticipated will increase the yields on the notes purchased at discounts but
will decrease the yields on the notes purchased at premiums, which payments of
principal may be attributable to scheduled payments and prepayments of principal
on the loans and to the application of Excess Spread. The effect on an
investor's yield due to payments of principal to the holders of the notes,
including, without limitation, prepayments on the loans, occurring at a rate
that is faster, or slower, than the rate anticipated by the investor during any
period following the issuance of the 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 and, accordingly, the weighted average lives
of the notes. 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
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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 and 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 the delinquencies,
defaults and losses: the outstanding loan principal balances; the related
Loan-to-Value Ratios; and 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
Upon 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, as may be evidenced by, among other factors, increasing unemployment or
falling property values.
EXCESS SPREAD AND REDUCTION OF OVERCOLLATERALIZATION AMOUNT
[The overcollateralization feature has been designed to accelerate the
principal amortization of the notes relative to the principal amortization of
the loans. If on any payment date, the Overcollateralization Target Amount
exceeds the Overcollateralization Amount, Excess Spread, if any, will be paid 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, thereby reducing the rate of,
and under some circumstances delaying, the principal amortization of related
notes, until the Overcollateralization Amount is reduced to the
Overcollateralization Target Amount.
The yield to maturity on notes purchased at a premium or discount will be
affected by the extent to which any Excess Spread is paid to holders of the
notes or is paid 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
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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.
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, 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
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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.
Notwithstanding prevailing market interest rates, in the event 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 loan in full
in order to refinance at a lower rate.
The loan interest rates on the adjustable-rate loans adjust periodically
based upon Six-Month LIBOR, whereas the interest rate on the notes adjusts
monthly based upon 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, and,
to the extent any shortfall is created as a result, any 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 or 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, and its 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 and, accordingly, 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 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 and is not a prediction of the prepayment rate
that may actually be experienced by the loans. Weighted
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average lives of the notes, refers to the average amount of time that will
elapse 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 at which principal of the
loans is paid, which may be in the form of scheduled amortization or
prepayments, the rate at which Excess Spread is paid to holders of the notes,
the extent to which any reduction in Overcollateralization Amount is paid to the
Residual Interest Certificates and the rate of delinquencies and losses on the
loans from time to time. For this purpose, the term "prepayment" includes
reductions of principal, including, without limitation, those resulting from
unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions and substitutions
and repurchases by or on behalf of the transferor. See "Description of Credit
Enhancement--Overcollateralization" in this prospectus supplement.
The model used in this prospectus supplement is the CPR - constant prepayment
rate - 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;
(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;
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(6) all loans prepay monthly at the specified percentage of CPR, 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 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 ____%; provided, however, that the Note Interest
Rate on the notes will be increased commencing on the date that the
Residual Certificate holders 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
(16) the pool consists of loans having the following
characteristics:
<TABLE>
ASSUMED LOAN CHARACTERISTICS
<CAPTION>
REMAINING ORIGINAL
CUT-OFF TERM TERM GROSS GROSS
DATE TO TO INITIAL SUBSEQUENT GROSS GROSS
PRINCIPAL LOAN MATURITY MATURITY GROSS PERIODIC PERIODIC LIFETIME LIFETIME
SUB-POOL TYPE BALANCE RATE (MONTHS) (MONTHS) MARGIN CAP CAP CAP FLOOR
- -------- ---- ------- ---- -------- -------- ------ --- --- --- -----
<S> <C> <C> <C> <C> <C> <C> <C>
1 $ % % % % % _____%
2 $ % % % % % _____%
3 $ % % % % % _____%
4 $ % % % % % _____%
5 $ % % % % % _____%
6 $ % % % % % _____%
7 $ % % % % % _____%
8 $ % % % % % _____%
9 $ % % % % % _____%
10 $ % % % % % _____%
</TABLE>
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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.
This table has been prepared based on the modeling assumptions, including the
assumptions regarding the characteristics and performance of the loans which may
differ from the actual characteristics and performance of the loans, and should
be read in conjunction with these assumptions.
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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, which variations may be shorter or longer, and which variations
may be greater with respect to later years. Furthermore, the loans in all
likelihood will not prepay at a constant rate or at the same rate. Moreover, 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 issuer to the
depositor as consideration for the loans pursuant to the Sale and Servicing
Agreement. The Residual Interest Certificates will thereupon be transferred by
the depositor to the transferor as partial consideration for the loans.
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The assets of the issuer will consist primarily of the loans and all amounts
distributable thereon. 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,
including 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.
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:
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(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, 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
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;
provided that 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; provided, however, that one note may be issued in a denomination
as may be necessary to represent the remainder of the aggregate amount of notes.
"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. As used in this paragraph, "business day"
means a day on which banks are open for dealing in foreign currency and exchange
in London and New York City; and "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,
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(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.
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
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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 no
later than 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
thereon during each Accrual Period at the applicable interest rate, and 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 in the event of a Securities Insurer
Default], the amount available for interest payments could be less than the
amount of interest payable on the notes on any payment date. In this event, each
note will receive its ratable share, based upon the aggregate amount of interest
due to the notes, of the remaining amount available to be paid as interest. In
addition, any 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 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:
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[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 any unreimbursed
Insured Payments in respect of the notes not previously reimbursed and any other
amounts owed to the securities insurer under the Insurance Agreement, including
legal fees and other expenses incurred by the securities insurer, together with
interest thereon at the rate specified in the Insurance Agreement 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, 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. In the event that any Securities Insurer Reimbursement Amount
is outstanding, the holders of the Residual Interest Certificates will not be
entitled to receive distributions of any amounts of Excess Spread until the
securities insurer has been distributed 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, 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,
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(3) third, to the holders of notes in an amount equal to the then
outstanding Note Principal Balance of the notes plus all accrued and unpaid
interest thereon 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.
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, which 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
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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
(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 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 which case this payment shall be
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disbursed to the indenture trustee for distribution to the related noteholder
upon proof of this payment reasonably satisfactory to the securities insurer. 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, and the securities insurer, or its fiscal agent, if any,
shall 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 shall 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 shall 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 upon 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, including, without limitation, the defense of fraud, whether
acquired by subrogation, assignment or otherwise, 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
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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
and 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.]
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
substantially proportional to their respective capital, surplus and reserves,
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..........................
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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 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.fsa.com. Copies of the statutory quarterly and annual statements
filed with the State of New York Insurance Department by the securities insurer
are available upon 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, which have been filed with the
Securities and Exchange Commission by Holdings and which are hereby 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 without charge to any person to whom this
prospectus supplement is delivered, upon the oral or written request of that
person, a copy of any or all of the foregoing financial statements incorporated
in this prospectus supplement by reference. 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, as
defined in the accompanying prospectus, shall be deemed to be a new registration
statement relating to the
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notes offered hereby, and the offering of the notes at that time 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, limits the business of this type of insurer to financial
guaranty insurance and related lines, requires that these insurers maintain a
minimum surplus to policy holders, establishes contingency, loss and unearned
premium reserve requirements for each applicable insurer, and 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, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
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 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--i.e., due to a reduction in the
Overcollateralization Amount as a result of Realized Losses or delinquencies or
due to an increase in the Overcollateralization Target Amount as a result of the
failure to satisfy 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,
to the extent of the Overcollateralization
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Reduction Amount, attributable to all or a portion of the Regular Principal
Payment Amount that would otherwise be paid to the holders of the notes.
The Overcollateralization Target Amount may decrease or "stepdown":
(1) as a result of the performance of the loans with respect to the
principal amortization of the loans declining to 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 so that the Overcollateralization Target Amount is decreased at any
time in the discretion of the securities insurer, but not below the amounts set
forth below.
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 sold, conveyed, transferred and assigned from the
transferor to the depositor and then from the depositor to the issuer. The
issuer, concurrently with the sale, conveyance, transfer and assignment 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 or cause to be
delivered, to the custodian, the related note endorsed in blank or to the order
of the indenture trustee without recourse, any assumption and modification
agreements and the mortgage, 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, an assignment of the
mortgage, if any, in the name of the indenture trustee in recordable form, a
title insurance policy and 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, and 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, or cause to be reviewed,
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 transferor
will be required to repurchase or replace loans as to which a material document
deficiency exists.
Although the recordation of the assignments of the mortgages in favor of the
indenture trustee is not necessary to effect a pledge of the loans to the
indenture trustee, if the transferor or the depositor were to sell, assign,
satisfy or discharge any loan prior to recording the related assignment in favor
of the 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
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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 and 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) as of the cut-off date, no more than approximately ____% of the loans
were 30 days or more past due; no more than approximately _____% of the loans
were 60 or more days past due; and ____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. 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 the principal
balance of the Defective Loan as of the date of repurchase, 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, 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.
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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 not
later than ___________,
(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,
(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
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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 in an amount 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 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"; provided,
however, the servicer will not be relieved of its servicing obligations and
duties with respect to any subserviced loans. The servicer will pay the fees of
any subservicer out of the amounts it receives as the servicing fee. In addition
to the servicing fee, the servicer is entitled to retain additional servicing
compensation in the form of assumption, modification and other administrative
fees, insufficient funds charges, and some other servicing-related penalties and
fees.
In the event of a delinquency or default with respect to a loan, the servicer
will have no obligation to advance scheduled monthly payments of principal or
interest with respect to the related loan. However, the master servicer will
advance Monthly Advances. The servicer will make reasonable and customary
expense advances - Servicing Advances - with respect to the loans in accordance
with accepted servicing procedures. 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, including 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.
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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 principal and interest, all
Net Liquidation Proceeds, Insurance Proceeds, Released Mortgaged Property
Proceeds, any amounts payable in connection with the repurchase or substitution
of any loan, interest and gains on funds held in the Collection Account and any
amount required to be deposited in the Collection Account in connection with the
termination of the notes. The foregoing requirements for deposit in the
Collection Account will be exclusive of payments on account of principal and
interest collected on the loans on or before the cut-off date. Withdrawals will
be made from the Collection Account only for the purposes specified in the Sale
and Servicing Agreement. The Collection Account may be maintained at any
depository institution, which satisfies the requirements set forth in the
definition of Eligible Account in the Sale and Servicing Agreement.
The indenture trustee will establish and maintain a Note Payment Account, in
the name of the indenture trustee on behalf of the holders of the notes, into
which 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 will be deposited and from which all payments to the holders of
the notes will be made. The indenture trustee will also establish and maintain a
Certificate Distribution Account in the name of the owner trustee on behalf of
the holders of the Residual Interest Certificates, into which amounts released
from the Collection Account or Note Payment Account for distribution to the
Residual Interest Certificates will be deposited and from which all
distributions to the Residual Interest Certificates will be made.
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 will have occurred and is continuing, amounts
on deposit in the trust accounts, the Note Payment Account, the Certificate
Distribution Account and the Collection Account, will be invested by the
indenture trustee, as directed by the master servicer in the case of the
Collection Account and the Note Payment Account, in one or more investments
permitted under the Sale and Servicing Agreement bearing interest or sold at a
discount. 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.
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COLLECTION AND OTHER SERVICING PROCEDURES FOR LOANS
The servicer has agreed to manage, service, administer and make collections
on the loans and perform the other actions required by the servicer under the
Servicing Agreement. In performing these obligations, the servicer is required
to act in good faith in a commercially reasonable manner and in accordance with
the terms of the Servicing Agreement. The servicer has full power and authority,
subject only to the specific requirements and prohibitions of the Servicing
Agreement and the respective loans, to do any and all things in connection with
servicing and administration which are consistent with its accepted servicing
procedures. Under the Servicing Agreement, the servicer's "accepted servicing
procedures" shall mean those servicing procedures that:
(1) meet at least the same standards the servicer would follow in
exercising reasonable care in servicing mortgage 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 cause to be maintained any fire and hazard
insurance with respect to any mortgaged property acquired by the owner trustee
in foreclosure.
REALIZATION UPON DEFAULTED LOANS
Subject to limitations in the Sale and Servicing Agreement, the servicer may
modify any provision of any loan if, in the servicer's good faith judgment, this
modification would minimize the loss that might otherwise be experienced with
respect to the related loan, only in the event of
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a payment default with respect to the related loan or if a payment default with
respect to the related loan is reasonably foreseeable by the servicer. For
example, the servicer must obtain the prior consent of the securities insurer to
effect modifications, substitutions of collateral, or dispositions of loans
through short sales or short pay-offs, if the aggregate of the principal
balances of 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, accept short pay-offs or short sales, enter into assumptions and
modifications, refer to a collection agency or attorney, pursue collection
litigation or alternative court proceedings to foreclosure actions, sell the
related loan to another person, institute foreclosure proceedings, exercise any
power of sale to the extent permitted by law, obtain a deed in lieu of
foreclosure, or otherwise acquire possession of or title to any mortgaged
property, by operation of law or otherwise. The servicer will be acting in the
best interests of the holders of the notes, when the servicer, in accordance
with the accepted servicing procedures, undertakes actions to collect a
defaulted loan that have a higher likelihood of a reasonable recovery within a
shorter time period, and foregoes taking actions that have a lower likelihood of
a larger recovery over a longer time period. See "Risk Factors--Realization Upon
Defaulted Loans" in this prospectus supplement.
Subject to the prior consent of the securities insurer, the servicer may, in
a manner consistent with the accepted servicing procedures, permit a borrower
who is selling his principal residence and relocating to another location, to
substitute as collateral for the related loan the borrower's new single family
residence in place of the mortgaged property being sold or any other real or
personal property of the borrower, which may include an interim substitution of
personal property pending the borrower's acquisition of a new residence.
Under 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, which 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, which will
result in a net loan loss from any unpaid principal shortfall, i.e., a short
payoff.
In connection with any applicable foreclosure proceeding, power of sale, deed
in lieu of foreclosure or other acquisition of a mortgaged property and any sale
or liquidation of the loan or
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related mortgaged property, the servicer shall comply with the requirements of
the Sale and Servicing Agreement, including the requirement that the servicer
follow the accepted servicing procedures for foreclosure and operation of
foreclosed property.
EVIDENCE AS TO COMPLIANCE
The Servicing Agreement provides that the servicer shall deliver to the
master servicer, and the Sale and Servicing Agreement provides that the master
servicer shall provide to the indenture trustee, the issuer, the depositor, the
securities insurer and the rating agencies an annual statement signed by an
officer of the servicer stating that the servicer has fulfilled its obligations
under the 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 to
the effect 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 and the firm's conclusion that 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) upon determination that the performance of its duties under the Sale and
Servicing Agreement are 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 shall become effective until a successor master servicer
acceptable to the securities insurer, the rating agencies and the indenture
trustee shall have 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 shall be a servicer meeting the criteria specified in the Sale
and Servicing Agreement, acceptable to the securities insurer, and shall be
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 shall be the successor to the master servicer under the
Sale and Servicing Agreement without the execution or filing of any paper or any
further act.
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The Sale and Servicing Agreement provides that neither the master servicer
nor any of its directors, officers, employees or agents shall 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, unless liability 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) some events of insolvency, readjustment of debt, marshalling of assets
and liabilities or similar proceedings relating to the master servicer and some
actions by the master servicer indicating insolvency, reorganization or
inability to pay its obligations or the master servicer shall dissolve or
liquidate, in whole or in part, in any material respect; 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.
Some events of default may be eliminated with the consent of the securities
insurer.
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If a Master Servicer Event of Default shall occur and be continuing, the
securities insurer, or the indenture trustee with the prior written consent of
the securities insurer, or the holders of notes representing more than 50% of
the aggregate voting interests of the note with prior written consent of the
securities insurer, by notice given in writing to the master servicer, and to
the indenture trustee, if given by the holders of notes, may terminate all of
the rights and obligations of the master servicer under the Sale and Servicing
Agreement, in which event another entity acceptable to the securities insurer
will become the successor master servicer. Upon the termination of the master
servicer, 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.
Upon the termination of the master servicer, the master servicer shall at its
own expense 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 thereunder.
CERTAIN MATTERS REGARDING THE SERVICER
The Servicing Agreement provides that the servicer shall not resign from its
obligations and duties thereunder except upon the determination that its duties
thereunder are 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, at the servicer's expense, to the effect 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
shall meet the qualifications of the servicer set forth in the Servicing
Agreement, shall be approved in advance by the master servicer and the
securities insurer in their sole discretion, and shall 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 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:
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(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) any involuntary petition in bankruptcy or any other similar petition
shall be filed against the servicer seeking any reorganization, arrangement,
composition, readjustment, liquidation, dissolution, or similar relief under
any present or future federal, state or other statute, law, or regulation,
and shall remain in force undischarged or unstayed for 45 days, or if any
custodian, trustee, receiver or liquidator of all or any substantial part of
the assets of the servicer shall be appointed or take possession of these
assets without the consent or acquiescence of the servicer and this
appointment remains unvacated for 45 days;
(5) the servicer shall consent to the appointment of a trustee,
conservator, or receiver or liquidator in any insolvency, readjustment of
debt, marshaling of assets and liabilities, or similar proceedings of, or
relating to, the servicer, or all or substantially all of the servicer's
property;
(6) the servicer shall admit in writing its inability to pay its debts
generally as they become due, file a petition to take advantage of any
applicable insolvency or reorganization statute, make an assignment for the
benefit of its creditors, or voluntarily suspend payment of its obligations
or take any corporate action in furtherance of the foregoing;
(7) 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
(8) 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
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accomplish all acts that in the securities insurer's judgment may be necessary
or appropriate to effect terminations with or without cause. The master servicer
is obligated to perform the duties of servicer under the Servicing Agreement
upon the termination of the servicer 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, and shall in
good faith cooperate fully to transfer the servicing and the management of the
loans. The Servicing Agreement requires that the servicer cooperate with the
master servicer to effect the termination of its responsibilities, rights, and
powers thereunder, including 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 UPON OCCURRENCE OF EVENT OF DEFAULT
Under the Indenture, a failure to pay the full amount of the portion of the
Noteholders' Interest Payment Amount payable to the notes within five days of
the payment date on which a related payment is due or the full amount of
principal thereon on the related Maturity Date, without regard to the amount of
the Available Collection Amount, will constitute an event of default under the
Indenture as will some 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.
Upon the occurrence of an event of default 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, with the prior
written consent of the securities insurer, may exercise their remedies under the
Indenture.
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; provided however, that without the consent of each holder of
the notes affected thereby, the securities insurer shall not 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. In the event of this appointment, all rights, powers, duties and
obligations conferred or imposed upon the owner trustee by the Sale and
Servicing Agreement and the Owner Trust Agreement and upon the indenture trustee
by the Sale and Servicing Agreement and the Indenture will be conferred or
imposed jointly upon the owner trustee and the indenture trustee, respectively,
and in each related case this separate trustee or co-trustee, or, in any
jurisdiction in which the owner trustee or indenture trustee will be incompetent
or unqualified to perform acts, singly upon this separate trustee or co-trustee
which 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, other than by reason
of a breach of any of its representations or warranties to be set forth in the
Owner Trust Agreement or Indenture, as the case may be.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the Owner Trust Agreement, the Securities, other than the
execution and authentication of the notes, or of
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any loans or related documents, and will not be accountable for the use or
application by the depositor or the servicer of any funds paid to the depositor
or the servicer in respect of the notes or the loans, or the investment of any
monies by the servicer before these monies are deposited into the trust
accounts. So long as no Event of Default will have occurred and be continuing,
the owner trustee will be required to perform only those duties specifically
required of it under the Owner Trust Agreement. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the owner trustee under the Owner Trust Agreement,
in which case they will only be required to examine 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 which 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 to exercise any of the rights
or powers vested in it by the Owner Trust Agreement or to make any investigation
of matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of Residual Interest Certificates, unless 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, and will not be accountable for the
use or application by the depositor or the servicer of any funds paid to the
depositor or the servicer in respect of the notes or the loans, or the
investment of any monies by the servicer before 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, in which case it will only be required to examine them to determine
whether they conform to the requirements of the Indenture and to the making of
monthly distributions to the Security Owners and the filing of claims under the
Guaranty Policy. The indenture trustee will not be charged with knowledge of a
failure by the servicer or the master servicer to perform its duties under the
Transfer and Sale Agreements which 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 to exercise any of the
rights or powers vested in it by the Indenture or to make any investigation of
matters arising thereunder or to institute, conduct or defend any litigation
thereunder or in relation thereto at the request, order or direction of any of
the holders of notes, unless the applicable holders have offered to the
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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 upon the
indenture trustee to institute a related proceeding in its own name as the
indenture trustee thereunder and have offered to the indenture trustee
reasonable indemnity and the indenture trustee has for 30 days neglected or
refused to institute any 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;
(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;
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(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;
(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 and, unless otherwise indicated below, is a United States
person, as defined in the accompanying prospectus. This summary does not address
special tax rules that may apply to 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 therewith. 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.
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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, but 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 on the basis of 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 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. Upon the sale, exchange,
retirement or other disposition of a note, a beneficial owner who holds the note
as a capital asset generally will recognize capital gain or loss equal to the
difference, if any, between the amount realized, adjusted for accrued stated
interest, on the sale or other disposition 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.
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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 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," including interest accruals, original issue discount, and, under some
circumstances, payments in respect of principal amount, unless, in general, the
beneficial owner complies with some procedures or is an exempt recipient. Any
amounts so withheld from payments on the notes would be refunded by the Internal
Revenue Service or allowed as a credit against the beneficial owner's federal
income tax. 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.
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See "Certain Federal Income Tax Consequences--Partnership Trust
Funds--Treatment of the Debt Securities as Indebtedness" in the accompanying
prospectus.
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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 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
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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, including,
(1)Prohibited Transaction Class Exemption 84-14, which exempts some
transactions effected on behalf of a Plan by a "qualified professional
asset manager,"
(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
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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, 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
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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, i.e., if they sell more notes than are set forth on the cover page
of this prospectus supplement, the underwriters may reduce that short position
by purchasing notes in the open market.
In general, purchase of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of 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.
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 upon for the depositor and for the underwriters by Cadwalader, Wickersham
& Taft, New York, New York.
RATINGS
It is a condition to the issuance of the notes that the notes be rated
________________________________________________________________________________
_______________________________________by_______________________________________
_____________________________________________________________and________________
___________________________by _______________________________________. The
ratings on the notes also address the
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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.
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 amounts not required to be deposited by the
servicer in the Collection Account and amounts permitted to be withdrawn by the
indenture trustee from the Collection Account;
(2) 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) upon 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.
"DEFAULTED LOANS" are loans to which an event of default has occurred under
the related note or mortgage.
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"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, the related note endorsed
in blank or to the order of the indenture trustee without recourse, any
assumption and modification agreements and 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, an
assignment of the mortgage, if any, in the name of the indenture trustee in
recordable form, a title insurance policy and 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
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incurred by the servicer in connection with the collection of those proceeds and
not otherwise reimbursed the servicer, but excluding 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 any insufficiency
resulting from the Available Payment Amount being less than the accrued and
unpaid interest due on the notes, less Noteholders' Interest Carry-Forward
Amounts and any shortfalls incurred by the imposition of the Soldiers' and
Sailors' Relief of 1940, as amended, and 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 upon 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 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.
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"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, any cash
amounts received from Liquidated Home Loans, whether through trustee's sale,
foreclosure sale, disposition of mortgaged properties or otherwise, other than
Insurance Proceeds and Released Mortgaged Property Proceeds, and any other cash
amounts received in connection with the management of the mortgaged properties
from defaulted loans, in each case, net of any reimbursements to the servicer 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 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.
"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:
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(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 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
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(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
(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, notwithstanding any of the preceding clauses (1) through (2), an
amount equal to 100% of the cut-off date pool principal balance; provided,
however, that with respect to any payment date occurring on or after an OC
Trigger Reversal Event, an amount determined pursuant to clause (1) or (2)
above, as applicable;
provided, however, with respect to any payment date, notwithstanding the
preceding clauses (1) through (3), 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.
S-101
<PAGE>
"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
(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 any accrued
and unpaid interest, due and unpaid Issuer Fees and Expenses[, amounts due and
owing the securities insurer under the Insurance Agreement] and unreimbursed
servicing advances and monthly advances owing to the servicer and the master
servicer, as applicable. Notwithstanding the foregoing, 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:
S-102
<PAGE>
(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, in the event that the indenture trustee can
determine no applicable arithmetic mean,
(2) 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.
S-103
<PAGE>
"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 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 interest rate with applying
any caps to the interest rate with applying any caps to the interest rate and
all unpaid Noteholders' Interest Carry-Forward Amounts through the last day of
the Accrual Period relating to such 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].
S-104
<PAGE>
"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
(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-105
<PAGE>
- -----------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER,
SALESMAN OR ANY OTHER PERSON TO GIVE
ANY INFORMATION OF REPRESENT ANYTHING $___________
NOT CONTAINED IN THIS PROSPECTUS AND
PROSPECTUS SUPPLEMENT. YOU MUST NOT
RELY ON ANY UNAUTHORIZED INFORMATION.
THIS PROSPECTUS AND PROSPECTUS HOME LOAN ASSET
SUPPLEMENT DOES NOT OFFER FOR SALE ANY BACKED NOTES
NOTES IN ANY JURISDICTION WHERE IT SERIES 199_-_
WOULD BE UNLAWFUL TO DO SO. THE
INFORMATION IN THIS PROSPECTUS AND _______
PROSPECTUS SUPPLEMENT IS CURRENT AS OF HOME LOAN
__________. 199_. OWNER TRUST 199_-_
Issuer
- ------------------------------
PAINEWEBBER MORTGAGE
TABLE OF CONTENTS ACCEPTANCE CORPORATION IV
Depositor
PROSPECTUS SUPPLEMENT
PAGE ______________________________
Transferor and Master Servicer
Summary........................S-5
Risk Factors..................S-15
The Pool......................S-24 ____________________________
Master Servicer...............S-37 Servicer
Servicer......................S-39
Underwriting Criteria.........S-44
Prepayment and Yield
Considerations.............S-49
The Owner Trust and Indenture.S-59
Description of the Notes......S-60
Description of Credit
Enhancement................S-65
Description of the Transfer and ---------------------------
Servicing Agreements.......S-71
Federal Income Tax PROSPECTUS SUPPLEMENT
Consequences...............S-87
ERISA Considerations..........S-91 ---------------------------
Legal Investment Matters......S-93
Use of Proceeds...............S-93
Underwriting..................S-93
Experts.......................S-94 PAINEWEBBER INCORPORATED
Legal Matters.................S-94
Ratings.......................S-94 ______________________
PROSPECTUS
Available Information.............. ___________, 199_
Reports to Securityholders.........
Incorporation of Certain
Information by Reference.........
Prospectus 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...........................
UNTIL _______, 199_, ALL DEALERS THAT EFFECT TRANSACTIONS IN THE NOTES, WHETHER
OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS
AND PROSPECTUS SUPPLEMENT. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS AND PROSPECTUS SUPPLEMENT WHEN ACTING AS
UNDERWRITERS WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
==============================================================================
<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 JULY 19, 1999
PROSPECTUS
JULY 19, 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
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
<PAGE>
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
Important Notice about Information Presented in this Prospectus
and Each Accompanying Prospectus Supplement..................................5
Summary of Terms.............................................................6
Risk Factors................................................................15
Limited Liquidity of Securities May Adversely Affect Market Value of
Securities..................................................... 15
Assets of Trust Fund Are Limited.................................. 15
Credit Enhancement Is Limited in Amount and Coverage..................15
Yield Is Sensitive to Rate of Principal Prepayment....................16
Borrower May Be Unable to Make Balloon Payment........................16
Nature of Mortgages Could Adversely Affect Value of Properties........17
Violations of Environmental Laws May Reduce Recoveries on Properties..19
Violations of Federal Laws May Adversely Affect Ability to Collect
on Loans...........................................................19
Rating of the Securities Are Limited and May be Withdrawn or Lowered..20
Book-Entry System for Certain Classes May Decrease Liquidity and
Delay Payment......................................................22
Unsecured Home Improvement Contracts May Experience Relatively
Higher Losses......................................................22
Mortgage Loans Underwritten as Non-Conforming Credits May Experience
Relatively Higher Losses...........................................23
Assets of the Trust Fund May Include Delinquent and Sub-Performing
Residential Loans..................................................23
Changes in the Market Value of Properties May Adversely Affect
Payments on the Securities.........................................23
Risks Associated with Year 2000 Compliance............................24
The Trust Funds.............................................................25
Residential Loans.....................................................25
Agency Securities.....................................................31
Stripped Agency Securities............................................36
Additional Information Concerning the Trust Funds.....................36
Use of Proceeds.............................................................38
Yield Considerations........................................................39
Maturity and Prepayment Considerations......................................40
The Depositor...............................................................43
Residential Loans...........................................................43
Underwriting Standards................................................43
Representations by Unaffiliated Sellers; Repurchases..................43
Sub-Servicing.........................................................45
Description of the Securities...............................................45
General...............................................................45
Assignment of Assets of the Trust Fund................................47
Deposits to the Trust Account.........................................50
Pre-Funding Account...................................................50
Payments on Residential Loans.........................................50
Payments on Agency Securities.........................................51
Distributions.........................................................52
Principal and Interest on the Securities..............................53
Available Distribution Amount.........................................55
Subordination.........................................................55
Advances..............................................................58
Statements to Holders of Securities...................................58
Book-Entry Registration of Securities.................................63
Collection and Other Servicing Procedures.............................62
Realization Upon Defaulted Residential Loans..........................64
Retained Interest, Administration Compensation and Payment of
Expenses...........................................................65
Evidence as to Compliance.............................................66
Certain Matters Regarding the Master Servicer, the Depositor and the
Trustee............................................................67
Deficiency Events.....................................................70
Events of Default.....................................................71
Amendment.............................................................75
Termination...........................................................76
Voting Rights.........................................................76
Description of Primary Insurance Coverage...................................77
Primary Credit Insurance Policies.....................................78
FHA Insurance and VA Guarantees.......................................77
Primary Hazard Insurance Policies.....................................79
Description of Credit Support...............................................81
Pool Insurance Policies...............................................82
Special Hazard Insurance Policies.....................................84
Bankruptcy Bonds......................................................87
Reserve Funds.........................................................87
Cross-Support Provisions..............................................87
Letter of Credit......................................................88
Insurance Policies and Surety Bonds...................................88
Excess Spread.........................................................88
Overcollateralization.................................................88
Certain Legal Aspects of Residential Loans..................................88
General...............................................................89
Mortgage Loans........................................................89
Cooperative Loans.....................................................90
Tax Aspects of Cooperative Ownership..................................91
Manufactured Housing Contracts Other Than Land Contracts..............92
Foreclosure on Mortgages..............................................94
Foreclosure on Cooperative Shares.....................................97
Repossession with respect to Manufactured Housing Contracts that are
not Land Contracts.................................................98
Rights of Redemption with respect to Residential Properties.......... 99
Notice of Sale; Redemption Rights with respect to Manufactured Homes.100
Anti-Deficiency Legislation, Bankruptcy Laws and Other Limitations
on Lenders........................................................100
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<PAGE>
Junior Mortgages.....................................................103
Consumer Protection Laws.............................................103
Enforceability of Certain Provisions.................................104
Prepayment Charges and Prepayments...................................105
Subordinate Financing................................................105
Applicability of Usury Laws..........................................105
Alternative Mortgage Instruments.....................................106
Environmental Legislation............................................106
Soldiers' and Sailors' Civil Relief Act of 1940......................109
Federal Income Tax Consequences............................................109
General..............................................................109
REMICS...............................................................110
Taxation of Owners of Regular Securities.............................114
Taxation of Owners of Residual Securities............................122
Taxes That May Be Imposed on the REMIC Pool..........................131
Taxation of Certain Foreign Investors................................133
Grantor Trust Funds..................................................135
Standard Securities..................................................135
Stripped Securities..................................................139
Partnership Trust Funds..............................................143
Taxation of Owners of Partnership Securities.........................144
State and Other Tax Consequences...........................................150
ERISA Considerations.......................................................150
Legal Investment...........................................................155
Plans of Distribution......................................................157
Incorporation of Certain Information by Reference..........................158
Legal Matters..............................................................159
Financial Information......................................................159
Rating.....................................................................159
Glossary of Terms..........................................................161
-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 separateapplicable. 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 consisting 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 and will
deposit them 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
-8-
<PAGE>
the trust fund are initially 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
which with the related proprietary lease or
occupancy agreement give the owner thereof 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
upon 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
home which is 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 with a fixed rate of
interest and level monthly payments to
maturity;
o fully amortizing loans with a fixed interest
rate providing for level monthly payments, or
for payments of interest that increase annually
at a predetermined rate until the loan is
repaid or for a specified number of years,
after which level monthly payments resume;
o 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;
o 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;
o fully amortizing loans with an interest rate
adjusted periodically, with corresponding
adjustments in the amount of monthly payments,
to equal the sum, which may be rounded, of a
fixed margin and an index as described in the
related prospectus supplement, which may
provide for an election, at the 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;
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, in the event
of an adjustment to the interest rate resulting
in an interest rate in excess of the interest
rate at origination of the loan, to extend the
term to maturity for such period as will result
in level monthly payments to maturity; or
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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 into which the master
servicer or the trustee will deposit, to the
extent described in this prospectus and in the
related prospectus supplement, 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. 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;
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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
and the manner of determining the amount of the
coverage provided by them 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.
PRE-FUNDING ACCOUNT...........The related prospectus supplement may specify if
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 only to the extent that
the master servicer determines that the
advances will be recoverable.
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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
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.
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
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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.
o A security rating is not a recommendation to
buy, sell or hold the securities of any series
and 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 which we believe 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 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
may be promptly released or remitted to the depositor, the master servicer, any
credit enhancement provider or any other person entitled to these amounts. 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 cover, or may only partially 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 which 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 of a series on a 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, and 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
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o timely sell the related residential property.
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 such that the outstanding balance of the related residential loans,
together with any senior financing on the residential properties, if applicable,
would equal or exceed the value of the residential properties. Among these 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 leading to delays in receiving your
proceeds because:
o foreclosure on a residential property securing a residential loan is
regulated by state statutes and rules and is subject to many of the delays
and expenses of other lawsuits if defenses or counterclaims are
interposed, sometimes requiring several years to complete; and
o in some states an action to obtain a deficiency judgment is not permitted
following a nonjudicial sale of a residential property.
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, including payments to
senior lienholders, legal fees and costs of legal action, real estate taxes and
maintenance and preservation expenses.
Liquidation expenses with respect to defaulted loans do not vary directly
with the outstanding principal balances of the loan at the time of default.
Therefore, assuming that a servicer took the same steps in realizing upon a
defaulted loan having a small remaining principal balance as it would in the
case of a defaulted loan having a large remaining principal balance, the amount
realized after expenses of liquidation would be smaller as a percentage of the
outstanding principal of the small loan than would be the case with the
defaulted loan having a large remaining principal balance. Since the mortgages
and deeds of trust securing certain mortgage loans, multifamily loans and home
improvement contracts may be primarily junior liens subordinate to the rights of
the mortgagee under the related senior mortgage(s) or deed(s) of trust, the
proceeds from the liquidation, insurance or condemnation proceeds will be
available to satisfy the outstanding balance of the junior lien only to the
extent that the claims of the senior mortgagees have been satisfied in full,
including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to any senior mortgage. If a junior
mortgagee forecloses, it must either pay the entire amount due on any senior
mortgage to the related senior mortgagee at or prior to the foreclosure sale or
undertake the obligation to make payments on the senior mortgage in the event
the borrower is in default 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, although 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 mortgage loan,
multifamily loan or home improvement contract in the aggregate, the trust fund,
as the holder of the junior lien, and, accordingly, holders of one or more
classes of the securities, to the extent not covered by credit enhancement, are
likely to:
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 upon.
In addition, the rate of default of junior mortgage loans, multifamily loans and
home improvement contracts may be greater than that of mortgage loans secured by
first liens on comparable properties.
Applicable state laws generally:
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, 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 and 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:
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;
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o apply on a mandatory basis to all mortgage loans originated on or after
October 1, 1995;
o impose specific statutory liabilities upon 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 and in addition 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 tohthe 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.
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:
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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 upon 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
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
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residential loans and, accordingly, 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 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 and DTC will then be required to credit the distributions to the
accounts of the participating organizations and 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 in the event of a default 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,
even if the portion of the borrower's assets made available to pay the
amount due and owing to the related trust fund as a general unsecured
creditor are sufficient to pay these amounts in whole or part; and
o the borrower may not demonstrate the same degree of concern over
performance of the borrower's obligations as if these obligations were
secured by the real estate owned by the borrower.
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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," which include borrowers whose
creditworthiness and repayment ability do not satisfy FNMA or FHLMC underwriting
guidelines.
A mortgage loan made to a "non-conforming credit" means a residential loan
that is:
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, since
the 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 residential loans to increase;
and
o in turn, losses may exceed the available credit enhancement forhthe series
and affect the yield on your securities.
See "The Trust Funds -- Residential Loans" in this prospectus.
CHANGES IN THE MARKET VALUE OF PROPERTIES MAY ADVERSELY AFFECT PAYMENTS ON THE
SECURITIES
We cannot assure you that the market value of the assets of the trust
fund or any other assets of a trust fund will at any time be equal to or greater
than the principal amount of the securities of the related series then
outstanding, plus accrued interest thereon. In the event the assets in the trust
fund have to be sold for any reason--for example, upon an event of default under
the
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agreement for a series leading to a sale of the assets in the trust
fund--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.
With respect to the year 2000 problem, DTC has informed members of the
financial community that it has developed and is implementing a program so that
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
upon 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 upon them the importance of these services being year 2000
compliant; and
o determine the extent of their efforts for year 2000 remediation, and, as
appropriate, testing, of their services.
In addition, DTC stated that it is in the process of developing contingency
plans as it deems appropriate.
If problems associated with the year 2000 problem arose with respect to DTC
and the services described above, you could experience delays or shortfalls in
the payments due on your securities.
DEFINED TERMS
We define and use capitalized terms in this prospectus to assist you in
understanding the terms of the offered securities and this offering. We define
the capitalized terms used in this prospectus are defined under the caption
prospectus."Glossary of Terms" in this prospectus on page [__].
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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;
(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, which 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;
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(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, in the event of an adjustment to the
interest rate resulting in an interest rate in excess of the interest rate at
origination of the loan, to extend the term to maturity for 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 such
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
o offered and distributed to the public pursuant to an effective
registration statement or 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; provided, a period of two years
elapsed since the later of the date the securities were acquired from such
issuer or from an affiliate of the issuer.
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 such mortgage securities; and
o any other residential loans included in the trust fund relating to such
series.
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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 and,
in turn, may cause losses to exceed the available credit enhancement for such
series and affect the yield on the securities of such series.
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.
Such a possibility could arise under any of a number of different circumstances:
o In the event that a holder of a senior lien forecloses on a mortgaged
property, the proceeds of the foreclosure or similar sale will be
applied:
o first, to the payment of court costs and fees in connection with the
foreclosure;
o second, to real estate taxes; and
o third, in satisfaction of all principal, interest, prepayment or
acceleration penalties, if any, and any other sums due and owing to
the holder of the senior lien.
The claims of the holders of senior liens will be satisfied in full out of
proceeds of the liquidation of the mortgage loan, if such proceeds are
sufficient, before the trust fund as holder of the junior lien receives any
payments in respect of the mortgage loan.
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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 such 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 In the event that such proceeds from a foreclosure or similar sale of
the related mortgaged property are insufficient to satisfy all senior
liens and the 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 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 upon;
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 junior mortgage loans do not
vary directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted junior mortgage loan having a small remaining principal balance
as it would in the case of a defaulted junior mortgage loan having a large
remaining principal balance, the amount realized after expenses of liquidation
would be smaller as a percentage of the outstanding principal balance of the
small junior mortgage loan than would be the case with the defaulted junior
mortgage loan having a large remaining principal balance. Because the average
outstanding principal balance of the mortgage loans is smaller relative to the
size of the average outstanding principal balance of the loans in a typical pool
of conventional first priority mortgage loans, liquidation proceeds may also be
smaller as a percentage of the principal balance of a mortgage loan than would
be the case in a typical pool of conventional first priority mortgage loans.
MULTIFAMILY LOANS. The Multifamily Loan will be evidenced by mortgage
notes secured by mortgages creating first or junior liens on rental apartment
buildings or projects containing five or more dwelling units. The related
prospectus supplement will specify the original terms to stated maturity of the
Multifamily Loans, which are generally not more than 30 years. The related
prospectus supplement may specify that the Multifamily Loans are FHA loans.
Mortgaged properties which secure Multifamily Loans may include high-rise,
mid-rise and garden apartments. See "The Trust Funds -- Residential Loans -- FHA
Loans and VA Loans" and "Description of Primary Insurance Coverage -- FHA
Insurance and VA Guarantees" in this prospectus.
The related prospectus supplement may specify that the Multifamily Loans:
o contain a Lockout Period;
o prohibit prepayments entirely; or
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o require the payment of a prepayment penalty upon prepayment in full or in
part.
In the event that 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),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating, air
conditioning, and electrical systems contained in such manufactured home; except
that such term shall include any structure which meets all the requirements of
this paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
this chapter."
The related prospectus supplement may specify that the Manufactured Housing
Contracts are FHA loans or VA loans. See "The Trust Funds -- Residential
Loans -FHA Loans and VA Loans" and "Description of Primary Insurance Coverage --
FHA Insurance and VA Guarantees" in this prospectus.
BUYDOWN LOANS. The related prospectus supplement may specify that
residential loans are subject to temporary buydown plans . The monthly payments
made by the borrower in the early years of these loans, known as the buydown
period, will be less than the scheduled payments on these loans. The resulting
difference will be recovered from:
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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 oneto 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 such 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 and, as
described in the related prospectus supplement, up to an amount equal to 90% of
the sum of the unpaid principal of the FHA loan, a portion of the unpaid
interest and certain other liquidation costs.
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 such loans made under Sections 221(d)(3) and
(d)(4) by HUD/FHA and a HUD-approved co-insurer. Generally the term of
such a Multifamily Loan may be up to 40 years and the ratio of the
loan amount to property replacement cost can be up to 90%.
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, but repairs may be made for up to, in general, the greater of 15% of
the value of the project and a dollar amount per apartment unit
established from time to time by HUD. In general the loan term may not
exceed 35 years and a loan-to-value ratio of no more than 85% is required
for the purchase of a project and 70% for the refinancing of a project.
VA loans will be partially guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended . The Servicemen's Readjustment Act 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.
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However, no VA loan will have an original principal amount greater
than five times the partial VA guarantee for such VA loan. The maximum
guarantee that may be issued by the VA under this program will be set forth in
the related prospectus supplement. See "Description of Primary Insurance
Coverage -- FHA Insurance and VA Guarantees" 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 such 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 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 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 upon the age
and condition of the manufactured housing unit and the quality and
condition of the mobile home park in which it is situated, if applicable.
Residential properties may be subject to subordinate financing at the time of
origination. As is customary in residential lending, subordinate financing may
be obtained with respect to a residential property after the origination
of the residential loan without the lender's consent.
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 such 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, such losses will be borne, at least in part, by you. See
"Description of the Securities" and "Description of Credit Support" in this
prospectus.
AGENCY SECURITIES
The agency securities will consist of any combination of "fully modified
pass-through" mortgage-backed certificates guaranteed by the GNMA, guaranteed
mortgage pass-through securities issued by the FNMA and mortgage participation
certificates issued by the FHLMC.
GNMA. Government National Mortgage Association is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title III of the Housing Act authorizes GNMA to
guarantee the timely
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payment of the principal of and interest on certificates that are based on and
backed by a pool of FHA Loans, VA Loans or by pools of other eligible
residential loans.
Section 306(g) of the Housing Act provides that "the full faith and credit of
the United States is pledged to the payment of all amounts which may be required
to be paid under any guaranty under this subsection." In order to meet its
obligations under such guaranty, GNMA is authorized, under Section 306(d) of the
Housing Act, to borrow from the United States Treasury with no limitations as to
amount, to perform its obligations under its guarantee.
GNMA CERTIFICATES. Each GNMA Certificate will be a "fully modified
pass-through" mortgage-backed certificate issued and serviced by an issuer
approved by GNMA or FNMA as a seller-servicer of FHA loans or VA loans, except
as described below with respect to Stripped Agency Securities. 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 such 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 such GNMA Certificates. Generally, such 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 such FHA loan or VA loan
over the GNMA Certificates' pass-through rate. In addition, each payment to a
holder of a GNMA Certificate will include proportionate pass-through payments to
such holder of any prepayments of principal of the FHA loans or VA loans
underlying the GNMA Certificates and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any the FHA loan or VA loan.
The GNMA Certificates do not constitute a liability of, or evidence any
recourse against, the issuer of the GNMA Certificates, the depositor or any
affiliates thereof. 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:
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o collecting payments from borrowers and remitting such 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
such issuer on the loans backing the GNMA Certificates are less than the
amounts due on such 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 such payment. Upon
the notification and request, GNMA will make such payments directly to the
registered holder of the GNMA Certificate. In the event no payment is made by
the issuer and the issuer fails to notify and request GNMA to make such payment,
the registered holder of the GNMA Certificate has recourse against only GNMA to
obtain such payment. The trustee or its nominee, as registered holder of the
GNMA Certificates included in a trust fund, is entitled to proceed directly
against GNMA under the terms of the guaranty agreement or contract relating to
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 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
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o is either a conventional mortgage loan, an FHAnloan 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 such
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 and, accordingly, monthly distributions to
the holders of FNMA Certificates would be affected by delinquent payments and
defaults on such loans. FNMA Certificates evidencing interests in pools of
mortgage loans formed on or after May 1, 1985, other than FNMA Certificates
backed by pools containing graduated payment mortgage loans or Multifamily
Loans, are available in book-entry form only. With respect to a FNMA Certificate
issued in book-entry form, distributions on that certificate will be made by
wire, and 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 such FNMA
Certificates and underlying mortgage loans meet the criteria of the rating
agency or rating agencies rating the certificates of the related series. These
FNMA Certificates and underlying mortgage loans will be described in the related
prospectus supplement.
FHLMC. The Federal Home Loan Mortgage Corporation is a corporate
instrumentality of the United States created pursuant to Title III of the
Emergency Home Finance Act of 1970, as amended. FHLMC was established primarily
for the purpose of increasing the availability of mortgage credit for the
financing of needed housing. It seeks to provide an enhanced degree of liquidity
for residential mortgage investments primarily by assisting in the development
of secondary markets for conventional mortgages. The principal activity of FHLMC
currently consists of purchasing first lien, conventional residential mortgage
loans or participation interests in such 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
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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 such 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 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 such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro
rata share. FHLMC's guarantee of timely payment of scheduled principal
will be limited to the extent set forth in the prospectus supplement.
o FHLMC also guarantees ultimate collection of scheduled principal payments,
prepayments of principal and the remaining principal balance in the event
of a foreclosure or other disposition of a mortgage loan. FHLMC may remit
the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage loan, but not later than
30 days following the latest of:
o foreclosure sale;
o payment of the claim by any mortgage insurer; and
o the expiration of any right of redemption; but in any event no later
than one year after demand has been made upon the borrower for
accelerated payment of principal.
In taking actions regarding the collection of principal after default on the
mortgage loans underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its servicing judgment with
respect to the mortgage loans in the same manner as for mortgage loans which it
has purchased but not sold. The length of time
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necessary for FHLMC to determine that a mortgage loan should be accelerated
varies with the particular circumstances of each borrower, and FHLMC has not
adopted servicing standards that require that the demand be made within any
specified period.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States. If FHLMC were unable to satisfy such
obligations, distributions to holders of FHLMC Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on 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 such 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 such entity guarantees the underlying securities backing such Stripped
Agency Securities or to the extent described above with respect to a Stripped
Agency Security backed by a pool of mortgage loans . The prospectus supplement
for securities of each series evidencing interests in a trust fund including
Stripped Agency Securities will set forth additional information regarding the
characteristics of the assets underlying the Stripped Agency securities, the
payments of principal and interest on the Stripped Agency Securities and other
relevant matters with respect to the Stripped Agency Securities.
ADDITIONAL INFORMATION CONCERNING THE TRUST FUNDS
Each prospectus supplement relating to a series of securities will contain
information, as of the date of such prospectus supplement, if applicable and to
the extent specifically known to the depositor, with respect to the residential
loans or agency securities contained in the related trust fund, including, but
not limited to:
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;
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o the types of related residential properties, e.g., one- to four-family
dwellings, multifamily residential properties, shares in cooperative
housing corporations and the related proprietary leases or occupancy
agreements, condominiums and planned-unit development units, vacation and
second homes and 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, and specific information will be set forth
in a report made available at or before the issuance of those securities, which
information will be included in a report on Form 8-K which will be available to
purchasers of the related securities at or before the initial issuance of those
securities and will be filed with the SEC within fifteen days after the initial
issuance of those securities.
The depositor will cause the residential loans comprising each trust fund, or
mortgage securities evidencing interests in such 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
such other parties specified in the related prospectus supplement, and will
receive a fee for such 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 such 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
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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, and distributions on such 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 such services. The agency securities and any
moneys attributable to distributions on the agency securities will not be
subject to any right, charge, security interest, lien or claim of any kind in
favor of the trustee or any person claiming through it. The trustee will not
have the power or authority to assign, transfer, pledge or otherwise dispose of
any assets of any trust fund to any person, except to a successor trustee, to
the depositor or the holders of the securities to the extent they are entitled
to those assets of the trust fund or to other persons specified in the related
prospectus supplement and except for its power and authority to invest assets of
the trust fund in certain permitted instruments in compliance with the trust
agreement. The trustee will have no responsibility for distributions on the
securities, other than to pass through all distributions it receives with
respect to the agency securities to the holders of the related securities
without deduction, other than for any applicable trust administration fee
payable to the trustee, certain expenses of the trustee, if any, in connection
with legal actions relating to the agency securities, any applicable withholding
tax required to be withheld by the trustee and as otherwise described in the
related prospectus supplement.
USE OF PROCEEDS
The depositor will apply all or substantially all of the net proceeds from
the sale of each series of securities for one or more of the following purposes:
o to purchase the related assets of the trust fund;
o to repay indebtedness which was incurred to obtain funds to acquire such
assets of the trust fund;
o to establish any Reserve Funds or other funds described in the related
prospectus supplement; and
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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 thereof. 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.
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 upon prepayment 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.
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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 and 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.
In the event of a default by a borrower, these restrictions, among other things,
may impede the ability of the master servicer to foreclose on or sell the
mortgaged property or to obtain liquidation proceeds sufficient to repay all
amounts due on the related mortgage loan. In addition, the master servicer will
be entitled to deduct from related liquidation proceeds all expenses reasonably
incurred in attempting to recover amountsdue on defaulted mortgage loans and not
yet reimbursed, including payments to senior lienholders, legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses.
Liquidation expenses with respect to defaulted mortgage loans do not vary
directly with the outstanding principal balance of the loan at the time of
default. Therefore, assuming that a servicer took the same steps in realizing
upon a defaulted mortgage loan having a small remaining principal balance as it
would in the case of a defaulted mortgage loan having a large remaining
principal balance, the amount realized after expenses of liquidation would be
smaller as a percentage of the remaining principal balance of the small mortgage
loan than would be the case with the other defaulted mortgage loan having a
large remaining principal balance.
Applicable state laws generally regulate interest rates and other charges,
require certain disclosures, and require licensing of certain originators and
servicers of residential loans. In addition, most states have other laws, public
policy and general principles of equity relating to the protection of consumers,
unfair and deceptive practices and practices which may apply to the origination,
servicing and collection of the residential loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
master servicer to collect all or part of the principal of or interest on the
residential loans, may entitle the borrower to a refund of amounts previously
paid and, in addition, could subject the 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 upon 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.
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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, including
assumptions that prepayments on the related residential loans or residential
loans underlying the agency securities are made at rates corresponding to
various percentages of the prepayment standard or model specified in the
prospectus supplement.
It is unlikely that prepayment of the 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 such 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:
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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;
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 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 upon
further encumbrance by the borrower of the underlying residential property. In
general, where a "due-on-sale" or "due-on-encumbrance" clause is contained in a
conventional residential loan under a FHLMC or the FNMA program, the lender's
right to accelerate the maturity of the residential loan upon transfer or
further encumbrance of the property must be exercised, so long as such
acceleration is permitted under applicable law.
With respect to a series of securities evidencing interests in a trust fund
including residential loans, the master servicer generally is required to
enforce any provision limiting prepayments and any due-on-sale or
due-on-encumbrance clause, to the extent it has knowledge of the conveyance or
encumbrance or the proposed conveyance or encumbrance of the underlying
residential property and reasonably believes that it is entitled to do so under
applicable law. 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
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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.
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:
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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 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 described
below 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 such 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, within a specified period after
initial issuance of the related series of securities, to cause the removal of
the breached residential loan from the trust fund and substitute in its place
one or more other residential loans, in accordance with the standards
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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 and any 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, which
will 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 pooling and servicing agreement pursuant to which a series of
securities is issued will provide that, if for any reason the master servicer
for the series of securities is no longer acting in that capacity, the trustee
or any successor master servicer must recognize the sub-servicer's rights and
obligations under any sub-servicing agreement.
DESCRIPTION OF THE SECURITIES
GENERAL
The certificates of each series evidencing interests in a trust fund will be
issued pursuant to a separate pooling and servicing agreement or trust
agreement. Each series of notes, or, in certain instances, two or more series of
notes, will be issued pursuant to an indenture, and the issuer of the notes will
be a trust established by the depositor pursuant to an owner trust agreement or
another entity as may be specified in the related prospectus supplement. As to
each series of notes where the issuer is an owner trust, the ownership of the
trust fund will be evidenced by equity certificates issued under the owner trust
agreement, which may be offered by the related prospectus supplement.
Forms of each of the agreements referred to above are filed as exhibits to
the Registration Statement of which this prospectus is a part. The agreement
relating to each series of securities will be filed as an exhibit to a report on
Form 8-K to be filed with the SEC within fifteen days after the initial issuance
of the securities and a copy of the agreement will be available for inspection
at the corporate trust office of the trustee specified in the related prospectus
supplement. The following summaries describe certain provisions of the
agreements. The summaries do not purport to be complete and are subject to, and
are qualified in their entirety by reference to, all of the provisions of the
agreement for each trust fund and the related prospectus supplement.
As to each series, the securities will be issued in authorized denominations
evidencing a portion of all of the securities of the related series as set forth
in the related prospectus supplement. Each trust fund will consist of:
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o residential loans, including any mortgage securities, or agency
securities, exclusive of 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 exclusive of 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
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, but
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
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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;
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, except in states where,
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in the opinion of counsel acceptable to the trustee, this 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 thereon, except for any
mortgage not returned from the public recording office, in which case the
depositor will deliver or cause to be delivered a copy of the mortgage
certified by the related Unaffiliated Seller that it is a true and
complete copy of the original of such mortgage submitted for recording;
and
o with respect to Home Equity Loans and secured Home Improvement Contracts,
an assignment in recordable form of the mortgage to the trustee.
The related prospectus supplement may specify that the depositor or another
party will be required to promptly cause the assignment of each related Home
Equity Loan and secured Home Improvement Contract to be recorded in the
appropriate public office for real property records, except 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
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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,
except 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 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, in accordance with the procedures established by the
issuer or guarantor for registration of the securities with a member of the
Federal Reserve System, and distributions on the 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 such 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, and the master servicer will 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.
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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 such 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, or the funds held in the Trust Account may be invested pending the
distribution on each distribution date in United States government securities
and other high quality investments. The prospectus supplement will specify who
is entitled to the interest or other income earned on funds in the Trust
Account. In respect of any series of securities having distribution dates
occurring less frequently than monthly, the master servicer may obtain from an
entity named in the related prospectus supplement a guaranteed investment
contract to assure a specified rate of return on funds held in the Trust
Account. If permitted by each rating agency rating the securities of such
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 PaineWebber 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,
other than 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;
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(2) all payments on account of interest on the residential loans,
exclusive of any portion thereof representing interest in excess of the Net
Interest Rate, unless such excess amount is required to be deposited pursuant
to the related agreement, and, if provided in the related prospectus
supplement, prepayment penalties;
(3) all proceeds of
o any Primary Hazard Insurance Policies and any special hazard
insurance policy, to the extent such proceeds are not applied to the
restoration of the property or released to the borrower in
accordance with the master servicer's normal servicing procedures,
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, and
o all other cash amounts received, by foreclosure, eminent domain,
condemnation or otherwise, in connection with the liquidation of
defaulted residential loans included in the related trust fund
liquidation proceed, together with 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;
(4) any advances made as described under "Advances" in this prospectus;
(5) all amounts required to be transferred to the Trust Account from a
Reserve Fund, if any, as described below under "Subordination" in this
prospectus;
(6) all proceeds of any residential loan or property in respect thereof
purchased by any Unaffiliated Seller as described under "Residential Loan
Program -- Representations by Unaffiliated Sellers; Repurchases," exclusive
of the Retained Interest, if any, in respect of such residential loan, and
all proceeds of any residential loan repurchased as described under
"Termination" in this prospectus;
(7) 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;
(8) 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;
(9) any amounts required to be transferred to the Trust Account pursuant
to any guaranteed investment contract; and
(10) 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 for each trust fund including agency securities as and when
received, unless otherwise provided in the related trust agreement, all
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distributions received by the trustee with respect to the related agency
securities, other than payments due on or before the Cut-Off Date and exclusive
of any trust administration fee and amounts representing the Retained Interest,
if any.
DISTRIBUTIONS
Distributions of principal and interest on the securities of each series will
be made by or on behalf of the trustee or the master servicer on the
distribution dates and at the intervals, which may be monthly, quarterly,
semi-annual or other intervals, specified in the related prospectus supplement,
to the persons in whose names the securities are registered at the close of
business on the record date specified in the related prospectus supplement. The
amount of each distribution will be determined as of the close of business on
each determination date specified in the related prospectus supplement.
Distributions will be made either:
o by wire transfer in immediately available funds to the account of a
holder of securities at a bank or other entity having appropriate
facilities for the transfer, if the holder of securities has so notified
the trustee or the master servicer and holds securities in any requisite
amount specified in the related prospectus supplement, or
o by check mailed to the address of the person entitled to such check as it
appears on the security.
o Security Register.
However, the final distribution in retirement of the securities will be made
only upon presentation and surrender of the securities at the office or agency
of the Security Registrar specified in the notice to holders of securities of
the final distribution. The related prospectus supplement may specify that
distributions made to the holders of securities of any series on each
distribution date 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, based on certain 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 such class of
securities will depend upon, 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 upon their particular
characteristics, as well as on the prevailing level of interest rates from time
to time and other economic factors, and 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
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a senior/subordinate series, may cause the actual last distribution date of
certain classes of securities to occur after their final distribution date.
SPECIAL DISTRIBUTIONS. With respect to any series of securities with
distribution dates occurring at intervals less frequently than monthly, the
securities may be subject to special distributions under the circumstances and
in the manner described below if and to the extent provided in the related
prospectus supplement. If applicable, the master servicer will be required to
make or cause to be made special distributions allocable to principal and
interest on securities of a series
o out of, and to the extent of, the amount available for the
distributions in the related Trust Account,
o on the day specified in the related prospectus supplement,
o in the amount described below if, as a result of substantial payments of
principal on the assets of the trust fund, low rates then available for
reinvestment of payments on assets of the trust fund, substantial Realized
Losses or some combination of the foregoing, and based on the assumptions
specified in the related agreement, it is determined that the amount
anticipated to be on deposit in the Trust Account on the next distribution
date or on some intervening date as provided in the related prospectus
supplement, together with, if applicable, the amount available to be
withdrawn from any related Reserve Fund, may be insufficient to make
required distributions on the securities of the related series on the
distribution date or such intervening date as may be provided in the
related prospectus supplement.
The amount of any special distribution that is allocable to principal will not
exceed the amount that would otherwise be distributed as principal on the next
distribution date from amounts then on deposit in the Trust Account. All special
distributions will include interest at the applicable Trust Interest Rate on the
amount of the special distribution allocable to principal to the date specified
in the related prospectus supplement.
All special distributions of principal will be made in the same priority and
manner as distributions in respect of principal on the securities on a
distribution date. Special distributions of principal with respect to securities
of the same class will be made on a pro rata basis. Notice of any special
distributions will be given by the master servicer or trustee prior to the
special distribution date.
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.
As to each series of securities, 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
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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,
in the event of shortfalls in collections of interest resulting from prepayments
of residential loans that are not covered by payments by the master servicer out
of its servicing fees or by application of prepayment penalties, with such
shortfall allocated among all of the securities of that series in proportion to
the respective amounts of Accrued Security Interest that would have been payable
on such securities absent such reductions and absent any delinquencies or
losses. The related prospectus supplement may specify that neither the trustee,
the master servicer nor the depositor will be obligated to fund shortfalls in
interest collections resulting from prepayments. See "Yield Considerations" and
"Maturity and Prepayment Considerations" in this prospectus.
Distributions of Accrued Security Interest that would otherwise be payable on
any class of Accrual Securities of a series will be added to the security
principal balance of the Accrual Securities on each distribution date until the
time specified in the related prospectus supplement on and after which payments
of interest on the Accrual Securities will be made. See "--Distributions --
Final distribution date" in this prospectus.
Some securities will have a security principal balance that, at any time,
will equal the maximum amount that the holder will be entitled to receive in
respect of principal out of the future cash flow on the assets of the trust fund
and other assets included in the related trust fund. With respect to each of
those securities, distributions generally will be applied to accrued and
currently payable interest, and then to principal. The outstanding security
principal balance of a security will be reduced to the extent of distributions
in respect of principal, and in the case of securities evidencing interests in a
trust fund that includes residential loans, by the amount of any Realized Losses
allocated to the securities.
Some securities will not have a security principal balance and will not be
entitled to principal payments. The initial aggregate security principal balance
of a series and each class of the related series will be specified in the
related prospectus supplement. The initial aggregate security principal balance
of all classes of securities of a series may be based on the aggregate principal
balance of the assets in the related trust fund. Alternatively, the initial
security principal balance for a series of securities may equal the initial
aggregate Cash Flow Value of the related assets of the trust fund as of the
applicable Cut-Off Date.
The aggregate of the initial Cash Flow Values of the assets of the trust fund
included in the trust fund for a series of securities will be at least equal to
the aggregate security principal balance of the securities of that series at the
date of initial issuance of that series.
With respect to any series as to which the initial security principal balance
is calculated on the basis of Cash Flow Values of the assets of the trust fund,
the amount of principal distributed for such 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
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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 a series of securities that includes two or more classes
of securities, the timing, sequential order and amount of distributions,
including distributions among multiple classes of senior securities or
subordinate securities, in respect of principal on each such class will be as
provided in the related prospectus supplement. Distributions in respect of
principal of any class of securities will be made on a pro rata basis among all
of the securities of the class.
AVAILABLE DISTRIBUTION AMOUNT
As more specifically set forth in the related prospectus supplement, all
distributions on the securities of each series on each distribution date will
generally be made from the "Available Distribution Amount" which consists of the
following amounts:
(1) the total amount of all cash on deposit in the related Trust Account
as of a determination date specified in the related prospectus supplement,
exclusive of certain amounts payable on future distribution dates and certain
amounts payable to the master servicer, any applicable sub-servicer, the
trustee or another person as expenses of the trust fund;
(2) any principal and/or interest advances made with respect to such
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 and distribute the same
or cause the same 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.
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SHIFTING INTEREST SUBORDINATION. With respect to any series of securities as
to which credit support is provided by shifting interest subordination, in the
event of any Realized Losses on residential loans not in excess of the
limitations described below, the rights of the 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, through foreclosure sale, disposition of the related
residential property if acquired on behalf of the holders of securities by deed
in lieu of foreclosure, repossession, or otherwise, 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 such 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 such series includes more than
one class of more senior securities, either on a pro rata basis among all of the
more senior securities in proportion to their respective outstanding security
principal balances, or as provided in the related prospectus supplement. With
respect to certain Realized Losses resulting from physical damage to residential
properties which are generally of the same type as are covered under a special
hazard insurance policy, the amount that may be allocated to the
subordinate securities of the related series may be limited to an amount
specified in the related prospectus supplement. See "Description of Credit
Support -- Special Hazard Insurance Policies" in this prospectus. If so, any
Realized Losses which are not allocated to the subordinate classes may be
allocated among all outstanding classes of securities of the related series,
either on a pro rata basis in proportion to their outstanding security principal
balances, regardless of whether any subordinate securities remain outstanding,
or as provided in the related prospectus supplement.
As set forth above, the rights of holders of the various classes of
securities of any series to receive distributions of principal and interest is
determined by the aggregate security principal balance of each class. The
security principal balance of any security will be reduced by all amounts
previously distributed on the security in respect of principal, and, if so
provided in the related prospectus supplement, by any Realized Losses allocated
to the security. However, to the extent so provided in the related prospectus
supplement, holders of senior securities may be entitled to receive a
disproportionately larger amount of prepayments received in certain
circumstances, which 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.
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CASH FLOW SUBORDINATION. With respect to any series of securities as to which
credit support is provided by cash flow subordination, in the event of losses on
the residential loans not in excess of the Available Subordination Amount, the
rights of the 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 such
Reserve Fund, the excess will be withdrawn and distributed in the manner
specified in the related prospectus supplement.
In the event any Reserve Fund is depleted before the Available Subordination
Amount is reduced to zero, the holders of senior securities will nevertheless
have a preferential right to receive current distributions from the trust fund
to the extent of the then Available Subordination Amount. However, under these
circumstances, if current distributions are insufficient, the holders of senior
securities could suffer shortfalls of amounts due to them. The holders of senior
securities will bear their proportionate share of any losses realized on the
trust fund in excess of the Available Subordination Amount.
Amounts remaining in any Reserve Fund after the Available Subordination
Amount is reduced to zero will no longer be subject to any claims or rights of
the holders of senior securities of such 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. In the event that the security principal
balances of the various classes of securities comprising a senior/subordinate
series are based upon the Cash Flow Value of the residential loans, a shortfall
in amounts distributable to holders of senior securities on any distribution
date will occur to the extent that the senior percentage of the decline in the
Cash Flow Value of the residential loans during the related Deposit Period
exceeds all collections. If so provided in the related prospectus supplement,
advances in respect of the residential loans, minus Accrued Security Interest on
the security principal balances of the senior securities for such distribution
date. The loss attributable to any liquidated residential loan will
generally be equal to the excess, if any, of the Cash Flow Value of the
residential loan over all net proceeds recovered and allocable to principal.
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,
as the losses are described in the immediately preceding paragraph, in respect
of other liquidated residential loans without affecting the remaining
subordination, and this excess may 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
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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, in an
amount equal to the aggregate of payments of principal and/or interest, adjusted
to the applicable Net Interest Rate, on the residential loans that were due
during the related Due Period and that were delinquent, and not advanced by any
sub-servicer, on the applicable determination date. Any amounts held for future
distribution and so used will be replaced by the master servicer on or before
any future distribution date to the extent that funds in the Trust Account on
the distribution date will be less than payments to holders of securities
required to be made on the distribution date.
The related prospectus supplement may specify that the obligation of the
master servicer to make advances may be subject to the good faith determination
of the master servicer that the advances will be reimbursable from related late
collections, Insurance Proceeds or Liquidation Proceeds. See "Description of
Credit Support" in this prospectus. As specified in the related prospectus
supplement with respect to any series of securities as to which the trust fund
includes mortgage securities, the master servicer's advancing obligations, if
any, will be pursuant to the terms of such 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 such amounts were advanced,
or, to the extent that the master servicer determines that any such advance
previously made will not be ultimately recoverable from Insurance Proceeds or
Liquidation Proceeds, a nonrecoverable advance, from any cash available in the
Trust Account. 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 such 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, which may include the
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following, which, in the case of information furnished pursuant to (1), (2) and
(3) below, the amounts will be expressed as a dollar amount per minimum
denomination security:
(1) the amount of such distribution, if any, allocable to principal,
separately identifying the aggregate amount of principal prepayments and, if
applicable, related prepayment penalties received during the related
Prepayment Period;
(2) the amount of such 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;
(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 such distribution date, after giving effect to distributions made
on the related distribution date;
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(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.
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 setting forth the aggregate of amounts reported pursuant to (1),
(2) and (3) above for the related calendar year or in the event 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 such statements or information as
may be required by the Code or applicable procedures of the IRS.
BOOK-ENTRY REGISTRATION OF SECURITIES
As described in the related prospectus supplement, 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 such systems, or indirectly through organizations which are Participants in
such systems.
The book-entry securities will be issued in one or more certificates which
equal the aggregate principal balance of the securities and will initially be
registered in the name of Cede & Co., the nominee of DTC. CEDEL and Euroclear
will hold omnibus positions on behalf of their Participants through customers'
securities accounts in CEDEL's and Euroclear's names on the books of their
respective depositaries which in turn will hold 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.
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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 such 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 such securities
settled during this processing will be reported to the relevant Euroclear or
CEDEL Participants on that business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant or Euroclear
Participant to a DTC Participant will be received with value on the DTC
settlement date but will be available in the relevant CEDEL or Euroclear cash
account only as of the business day following settlement in DTC.
Transfers between Participants will occur in accordance with the rules
creating and affecting DTC and its operations. Transfers between CEDEL
Participants and Euroclear Participants will occur in accordance with their
respective rules and operating procedures.
Under a book-entry format, beneficial owners of the book-entry securities may
experience some delay in their receipt of payments, since the trustee will
forward payments to Cede & Co. Distributions with respect to securities held
through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the relevant depositary. These
distributions will be subject to tax reporting in accordance with the relevant
United States tax laws and regulations. See "Federal Income Tax Consequences" in
this prospectus. Because DTC can only act on behalf of Financial Intermediaries,
the ability of a beneficial owner to pledge book-entry securities to persons or
entities that do not participate in the depository system, or otherwise take
actions in respect of such book-entry securities, may be limited due to the lack
of physical certificates for such entry securities. In addition, issuance of the
book-entry securities in book-entry form may reduce the liquidity of such
securities in the secondary market
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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 upon request, in accordance
with the rules, regulations and procedures creating and affecting the
depository, and to the Financial Intermediaries to whose DTC accounts the
book-entry securities of 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 such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
securities which conflict with actions taken with respect to other securities.
Definitive Securities will be delivered to beneficial owners of securities
(or their nominees) only if:
(1) DTC is no longer willing or able properly to discharge its
responsibilities as depository with respect to the securities, and the depositor
is unable to locate a qualified successor,
(2) the depositor or trustee, at its sole option, elects to terminate the
book-entry system through DTC, or
(3) after the occurrence of an event of default under the pooling and
servicing agreement, Security Owners representing a majority in principal amount
of the securities of any class then outstanding advise DTC through a Participant
of DTC in writing that the continuation of a book-entry system through DTC or a
successor thereto is no longer in the best interest of the Security Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the trustee will notify all beneficial owners of the
occurrence of such event and the availability through DTC of Definitive
Securities. Upon surrender by DTC of the global certificate or certificates
representing the book-entry securities and instructions for reregistration, the
trustee will issue Definitive Securities, and thereafter the trustee will
recognize the holders of such Definitive Securities as 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 such
procedures and may discontinue such 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.
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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 make reasonable efforts to collect all required payments
under the residential loans and will be required to 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, provided the procedures are 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, but only if
the exercise of such rights is permitted by applicable law and will not impair
or threaten to impair any recovery under any related Insurance Instrument. If
these conditions are not met or if the master servicer or sub-servicer
reasonably believes it is unable under applicable law to enforce the due-on-sale
or due-on-encumbrance clause, the master servicer or sub-servicer will enter
into or cause to be entered into an assumption and modification agreement with
the person to whom such 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 and, to the extent permitted by applicable law,
the borrower remains liable thereon and provided that coverage under any
Insurance Instrument with respect to such residential loan is not adversely
affected.
The master servicer can enter into a substitution of liability agreement with
such person, 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 and legally permitted and to take
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such 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. In the event that 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 UPON 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, and will be required to take reasonable steps as are
necessary to receive payment or to permit recovery under such Insurance
Instrument with respect to defaulted residential loans. As set forth above, all
collections by or on behalf of the master servicer under any Insurance
Instrument, other than amounts to be applied to the restoration of a residential
property or released to the borrower, are to be deposited in the Trust Account
for the related trust fund, subject to withdrawal as described. 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 thereunder.
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 such normal practices and procedures
as it deems necessary, and appropriate for the type of defaulted residential
loan, or advisable to realize upon the defaulted residential loan. If the
proceeds of any liquidation of the property securing the defaulted residential
loan are less than:
o the outstanding principal balance of the defaulted residential loan, or
the Cash Flow Value of such mortgage loan in the event that security
principal balances are based upon Cash Flow Values);
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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. In the event that 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 such 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 such amount is legally permissible, the
insurer will exercise its right under any related pool insurance policy to
purchase such property and realize for itself any excess proceeds. See
"Description of Primary Insurance Coverage" and "Description of Credit Support"
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 in the case of a trust fund consisting
of agency securities, the trustee)
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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, 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.
Notwithstanding the foregoing, with respect to a series of securities as to
which the trust fund includes mortgage securities, the compensation payable to
the master servicer 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, if any, may be
entitled to retain all assumption fees and late payment charges, if any, to the
extent collected from borrowers, and any prepayment fees collected from the
borrowers and any excess recoveries realized upon liquidation of a defaulted
residential loan. Any interest or other income that may be earned on funds held
in the Trust Account pending monthly, quarterly, semiannual or other periodic
distributions, as applicable, or any sub-servicing account may be paid as
additional compensation to the trustee, the master servicer or the
sub-servicers, as the case may be. The prospectus supplement will further
specify any allocations for these amounts.
With respect to a series of securities relating to residential loans, the
master servicer will pay from its administration compensation its regular
expenses incurred in connection with its servicing of the residential loans,
other than expenses relating to foreclosures and disposition of property
acquired upon 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, including 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, in the case of a pool of agency
securities or mortgage securities, the trustee, at its expense shall cause a
firm of independent public accountants who may also render other services to the
master servicer, or the trustee or any affiliate which is a member of the
American Institute of Certified Public Accountants to furnish a statement to the
trustee to the effect that such firm as part of their examination of the
financial statements of the master servicer or the trustee, as the case may be,
has performed tests in accordance with generally accepted accounting principles
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regarding the records and documents relating to residential loans or agency
securities serviced and that their examination disclosed no exceptions that, in
their opinion, were material. In rendering that statement, the firm may rely, as
to matters relating to direct servicing of residential loans by sub-servicers,
upon comparable statements for examinations conducted substantially in
compliance with generally accepted accounting principles in the residential loan
servicing industry, rendered within one year of such statement, of independent
public accountants with respect to the related sub-servicer.
Each 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, 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 upon a determination that its duties under the related
agreement are no longer permissible under applicable law; and
o the resignation will not become effective until a successor master
servicer meeting the eligibility requirements set forth in the servicing
agreement has assumed, in writing, the master servicer's obligations and
responsibilities under the servicing agreement.
Each servicing agreement will further provide that neither the master
servicer nor any director, officer, employee, or agent of the master servicer
shall be under any liability to the related trust fund or holders of securities
for any action taken or for refraining from the taking of any action in good
faith pursuant to the servicing agreement, or for errors in judgment; provided,
however, that 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
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,
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employee or agent of the master servicer will be entitled to indemnification by
the trust fund and will be held harmless against any loss, liability, or expense
incurred in connection with any legal action relating to the servicing agreement
or the securities, the Pool Insurance Policy, the special hazard insurance
policy and the Bankruptcy Bond, if any, other than any loss, liability, or
expense related to any specific residential loan or residential loans, except
any loss, liability, or expense otherwise reimbursable pursuant to the servicing
agreement, and any loss, liability, or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties 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 and the
master servicer will be entitled to be reimbursed therefor out of the Trust
Account, this right of reimbursement being 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, provided that the successor or surviving entity
meets the qualifications specified in the related prospectus supplement.
The related prospectus supplement may specify that the master servicer's
duties may be terminated upon payment of a termination fee, 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; provided, however, that
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;
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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 undertake any such action which it may deem necessary
or desirable with respect to the related agreement and the rights and duties of
the parties 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, and the depositor will be
entitled to be reimbursed for those expenses out of the Trust Account, this
right of reimbursement being 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.
In the event of that appointment, all rights, powers, duties and obligations
conferred or imposed upon the trustee by the agreement relating to the series
shall be conferred or imposed upon the trustee and the separate trustee or
co-trustee jointly, or, in any jurisdiction in which the trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform 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
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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, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it under an agreement, the trustee will be required to examine
those documents and to determine whether they conform to the requirements of the
agreement.
Each agreement will further provide that neither the trustee nor any
director, officer, employee, or agent of the trustee shall be under any
liability to the related trust fund or 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; provided, however, that 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 will further provide that the
trustee and any director, officer, employee or agent of the trustee will be
entitled to indemnification by the trust fund and will be held harmless against
any loss, liability, or expense incurred in connection with any legal action
relating to the agreement, the securities or the agency securities, if any other
than any loss, liability, or expense incurred by reason of willful misfeasance,
bad faith or gross negligence in the performance of duties 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.
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Upon the occurrence of a deficiency event, the trustee or master servicer, as
set forth in the related prospectus supplement, will be required to determine
whether or not the application on a monthly basis, regardless of frequency of
regular distribution dates, of all future scheduled payments on the residential
loans included in the related trust fund and other amounts receivable with
respect to the trust fund towards payments on the securities, in accordance with
the priorities as to distributions of principal and interest set forth in the
securities will be sufficient to make distributions of interest at the
applicable security interest rates and to distribute in full the principal
balance of each security on or before the latest final distribution date of any
outstanding securities of the related series.
The trustee or master servicer will obtain and rely upon an opinion or report
of a firm of independent accountants of recognized national reputation as to the
sufficiency of the amounts receivable with respect to 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.
In the event that the trustee or master servicer makes a positive
determination, the trustee or master servicer will apply all amounts received in
respect of the related trust fund, after payment of expenses of the trust fund,
to distributions on the securities of such series in accordance with their
terms, except that the distributions shall be made monthly and without regard to
the amount of principal that would otherwise be distributable on any
distribution date. Under certain circumstances following the positive
determination, the trustee or master servicer may resume making distributions on
the securities expressly in accordance with their terms.
If the trustee or master servicer is unable to make the positive
determination described above, the trustee or master servicer will apply all
amounts received in respect of the related trust fund, after payment of
expenses, to monthly distributions on the securities of the series pro rata,
without regard to the priorities as to distribution of principal set forth in
these securities. Also, these securities will, to the extent permitted by
applicable law, accrue interest at the highest security interest rate borne by
any security of the series, or in the event any class of the series shall have
an adjustable or variable security interest rate, at the weighted average
security interest rate, calculated on the basis of the maximum security interest
rate applicable to the class having the initial security principal balance of
the securities of that class. In such event, the holders of securities
evidencing a majority of the voting rights allocated to the securities may
direct the trustee to sell the related trust fund, any such direction being
irrevocable and binding upon the holders of all securities of the series and
upon the owners of any residual interests in the trust fund. In the absence of
such a direction, the trustee may not sell all or any portion of the trust fund.
EVENTS OF DEFAULT
POOLING AND SERVICING AGREEMENTS. Events of default 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 of the related series, or if
the trustee is required to make these distributions, the failure of the
master servicer to remit funds to the trustee for such distribution, any
required payment which continues unremedied for five days or another
period specified
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in the servicing agreement after the giving of written
notice of such 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
shall, by notice in writing to the master servicer terminate all of the rights
and obligations of the master servicer under the pooling and servicing agreement
and in and to the residential loans and the proceeds 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.
In the event that 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
such capacity. The trustee and the successor may agree upon the administration
compensation to be paid, which in no event may be greater than the compensation
to the master servicer under the pooling and servicing agreement.
No 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 such 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 upon 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
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o the trustee for sixty days after receipt of notice, request and offer of
indemnity has neglected or refused to institute any such proceeding.
The trustee, however, is generally under no obligation to exercise any of the
trusts or powers vested in it by any pooling and servicing agreement or to make
any investigation of matters arising thereunder or to institute, conduct, or
defend any litigation thereunder or in relation thereto at the request, order or
direction of any of the holders of certificates covered by the pooling and
servicing agreement, unless these holders of the certificates have offered to
the trustee reasonable security or indemnity against the costs, expenses and
liabilities which may be incurred in such 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 of the related series, or if the trustee is required to make
the payments, the failure of the master servicer to remit funds to the
trustee for the payment, any required payment 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 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, other than
any right of the master servicer as noteholder or as holder of the Equity
Certificates and other than the right to receive servicing compensation and
expenses for servicing the mortgage loans during any period prior to the date of
the termination. 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.
In the event that the trustee would be obligated to succeed the master
servicer but is unwilling so to act, it may appoint, or if it is unable so to
act, it shall appoint, or petition a court of competent jurisdiction for the
appointment of an approved mortgage servicing institution with a net worth of 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 upon
the servicing compensation to be paid, which in no event may be greater than the
compensation to the initial master servicer under the servicing agreement.
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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 a period of thirty days, or another
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 certificate or other writing delivered pursuant to the
indenture or in connection with the indenture with respect to or affecting
the series having been incorrect in a material respect as of the time
made, and the breach is not cured within thirty days, or another period
specified in the related indenture, after notice of such 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 such series
to be due and payable immediately. This declaration may, under certain
circumstances, be rescinded and annulled by the holders of a majority in
aggregate outstanding amount of the related notes.
If following an event of default with respect to any series of notes, the
notes of the series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding acceleration, elect to maintain possession of
the collateral securing the notes of the series and to continue to apply
payments on the collateral as if there had been no declaration of acceleration
if the collateral continues to provide sufficient funds for the payment of
principal of and interest on the notes of the series as they would have become
due if there had not been a declaration. In addition, the trustee may not sell
or otherwise liquidate the collateral securing the notes of a series following
an event of default, unless
o the holders of 100% of the voting rights allocated to the notes of the
series consent to the sale,
o the proceeds of the sale or liquidation are sufficient to pay in full the
principal of and accrued interest, due and unpaid, on the outstanding
notes of the series at the date of the sale,
o the trustee determines that the collateral would not be sufficient on an
ongoing basis to make all payments on the notes as the payments would have
become due if the related notes had not been declared due and payable, and
the trustee obtains the consent of the holders of 66 2/3 % of the then
aggregate outstanding amount of the notes of the series, or
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o the trustee satisfies the other requirements as may be set forth in the
related indenture.
In the event that 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, upon the occurrence of an event of default 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.
In the event the principal of the notes of a series is declared due and
payable, as described above, the holders of any such notes issued at a discount
from par may be entitled to receive no more than an amount equal to the unpaid
principal amount of the related note less the amount of the discount that is
unamortized.
No noteholder generally will have any right under an indenture to institute
any proceeding with respect to the related agreement unless permitted by the
indenture and
o the holder previously has given to the trustee written notice of default
and the continuance of a default;
o the holders of notes or Equity Certificates of any class evidencing not
less than 25% of the voting rights allocated to the notes, or another
percentage specified in the indenture:
o have made written request upon the trustee to institute such
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 exercise any of
the trusts or powers vested in it by the indenture or to 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:
(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;
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(3) to make any other provisions with respect to matters or questions
arising under the agreement; and
(4) if such amendment, as evidenced by an opinion of counsel, is
reasonably necessary to comply with any requirements imposed by the Code (or
any successor or mandatory statutes or any temporary or final regulation,
revenue ruling, revenue procedure or other written official announcement or
interpretation relating to federal income tax law or any proposed action
which, if made effective, would apply retroactively to the trust fund at
least from the effective date of the amendment,
each without the consent of any of the holders of securities of the related
series, 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; provided, however, that no amendment may (a) reduce
in any manner the amount of, or delay the timing of, payments received on assets
of the trust fund which are required to be distributed on any security without
the consent of the holder of the security; or (b) reduce the aforesaid
percentage of voting rights required for the consent to the amendment without
the consent of the holders of all securities of the related series then
outstanding, or as otherwise provided in the related agreement.
TERMINATION
The obligations created by the agreement for each series of securities will
generally terminate upon 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, following the final payment or other
liquidation, including the disposition of all property acquired upon foreclosure
or repossession, of the last trust fund asset remaining in the related trust
fund or, the purchase of all of the assets of the trust fund by the party
entitled to effect such termination, under the circumstances and in the manner
set forth in the related prospectus supplement, whichever occurs first. In no
event, however, will the trust created by the agreement continue beyond the
period specified in the related prospectus supplement. Written notice of
termination of the agreement will be given to each holder of securities, and the
final distribution will be made only upon surrender and cancellation of the
securities at an office or agency appointed by the trustee which will be
specified in the notice of termination.
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.
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DESCRIPTION OF PRIMARY INSURANCE COVERAGE
The prospectus supplement may specify that each residential loan may be
covered by a Primary Hazard Insurance Policy and, if required as described in
the related prospectus supplement, a Primary Credit Insurance Policy. In
addition, the prospectus supplement may specify that a trust fund may include
any combination of a Pool Insurance Policy, a special Hazard Insurance Policy, a
bankruptcy bond or another form of credit support, as described under
"Description of Credit Support."
The following is only a brief description of certain insurance policies and
does not purport to summarize or describe all of the provisions of these
policies. This insurance is subject to underwriting and approval of individual
residential loans by the respective insurers.
PRIMARY CREDIT INSURANCE POLICIES
The prospectus supplement will specify whethern 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 Upon 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 upon its being so named, or upon the
extent to which information in this regard is furnished by borrowers. All
amounts collected by the master servicer under any policy will be required to be
deposited in the Trust Account. The master servicer will 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 unless the master servicer 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, in the event of
default by the borrower, 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
(if applicable), protection and preservation expenses and foreclosure
and related costs;
o in the event of any physical loss or damage to the residential property,
have the residential property restored to at least its condition at the
effective date of the Primary Credit Insurance Policy, with ordinary wear
and tear excepted; and
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o tender to the insurer good and merchantable title to, and possession of,
the residential property.
FHA INSURANCE AND VA GUARANTEES
Residential loans designated in the related prospectus supplement as insured
by the FHA will be insured by the FHA as authorized under the United States
Housing Act of 1934, as amended. Certain residential loans will be insured under
various FHA programs including the standard FHA 203(b) program to finance the
acquisition of one- to four-family housing units, the FHA 245 graduated payment
mortgage program and the FHA Title I Program. These programs generally limit the
principal amount and interest rates of the mortgage loans insured. The
prospectus supplement relating to securities of each series evidencing interests
in a trust fund including FHA loans will set forth additional information
regarding the regulations governing the applicable FHA insurance programs. The
following, together with any further description in the related prospectus
supplement, describes FHA insurance programs and regulations as generally in
effect with respect to FHA loans.
The insurance premiums for FHA loans are collected by lenders approved by the
Department of Housing and Urban Development or by the master servicer or any
sub-servicer and are paid to the FHA. The regulations governing FHA
single-family mortgage insurance programs provide that insurance benefits are
payable either upon foreclosure or other acquisition of possession and
conveyance of the mortgage premises to the United States of America or upon
assignment of the defaulted loan to the United States of America. With respect
to a defaulted FHA-insured residential loan, the master servicer or any
sub-servicer will be limited in its ability to initiate foreclosure proceedings.
When it is determined, either by the master servicer or any sub-servicer or HUD,
that default was caused by circumstances beyond the borrower's control, the
master servicer or any sub-servicer is expected to make an effort to avoid
foreclosure by entering, if feasible, into one of a number of available forms of
forbearance plans with the borrower. These forbearance plans may involve the
reduction or suspension of regular mortgage payments for a specified period,
with the payments to be made upon or before the maturity date of the mortgage,
or the recasting of payments due under the mortgage up to or, other than
residential loans originated under the Title I Program of the FHA, beyond the
maturity date. In addition, when a default caused by circumstances beyond a
borrower's control is accompanied by certain other criteria, HUD may provide
relief by making payments, which 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 upon default for an
amount equal to the principal amount of any debenture.
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Other than in relation to the Title I Program of the FHA, the amount of
insurance benefits generally paid by the FHA is equal to the entire unpaid
principal amount of the defaulted residential loan adjusted to reimburse the
master servicer or sub-servicer for certain costs and expenses and to deduct
certain amounts received or retained by the master servicer or sub-servicer
after default. When entitlement to insurance benefits results from foreclosure
or other acquisition of possession and conveyance to HUD, the master servicer or
sub-servicer will be compensated for no more than two-thirds of its foreclosure
costs, and will be compensated for interest accrued and unpaid prior to this
date but in general only to the extent it was allowed pursuant to a forbearance
plan approved by HUD. When entitlement to insurance benefits results from
assignment of the residential loan to HUD, the insurance payment will include
full compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA-insured residential loan,
bears interest from a date 30 days after the borrower's first uncorrected
failure to perform any obligation to make any payment due under the mortgage
and, upon assignment, from the date of assignment to the date of payment of the
claim, in each case at the same interest rate as the applicable HUD debenture
interest rate as described above.
Residential loans designated in the related prospectus supplement as
guaranteed by the VA will be partially guaranteed by the VA under the
Serviceman's Readjustment Act of 1944, as amended. The Serviceman's
Readjustment Act of 1944, as amended, permits a veteran, or in certain instances
the spouse of a veteran, to obtain a mortgage loan guarantee by the VA covering
mortgage financing of the purchase of a one- to four-family dwelling unit at
interest rates permitted by the VA. The program has no mortgage loan limits,
requires no down payment from the purchaser and permits the guarantee of
mortgage loans of up to 30 years' duration. However, no residential loan
guaranteed by the VA will have an original principal amount greater than five
times the partial VA guarantee for the related residential loan. The prospectus
supplement relating to securities of each series evidencing interests in a trust
fund including VA loans will set forth additional information regarding the
regulations governing the applicable VA insurance programs.
With respect to a defaulted VA guaranteed residential loan, the master
servicer or sub-servicer will be, absent exceptional circumstances, authorized
to announce its intention to foreclose only when the default has continued for
three months. Generally, a claim for the guarantee will be submitted after
liquidation of the residential property.
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,
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and in general will equal the lesser of the principal balance owing on such
residential loan and the amount necessary to fully compensate for any damage or
loss to the improvements on the residential property on a replacement cost
basis, but in either case not less than the amount necessary to avoid the
application of any co-insurance clause contained in the policy. The master
servicer, or the related sub-servicer, if any, will 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 upon its being so named, or upon the extent to which
information in this regard is furnished by borrowers. All amounts collected by
the master servicer under any policy, except for amounts to be applied to the
restoration or repair of the residential property or released to the borrower in
accordance with the master servicer's normal servicing procedures, subject to
the terms and conditions of the related mortgage and mortgage note, will be
deposited in the Trust Account.
Each servicing agreement provides that the master servicer may satisfy its
obligation to cause each borrower to maintain a hazard insurance policy by the
master servicer's maintaining a blanket policy insuring against hazard losses on
the residential loans. If the blanket policy contains a deductible clause, the
master servicer will generally be required to deposit in the Trust Account all
sums which would have been deposited in the Trust Account but for this clause.
The master servicer will also generally be required to maintain a fidelity bond
and errors and omissions policy with respect to its officers and employees that
provides coverage against losses that may be sustained as a result of an
officer's or employee's misappropriation of funds or errors and omissions in
failing to maintain insurance, subject to certain limitations as to amount of
coverage, deductible amounts, conditions, exclusions and exceptions.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the improvements of the property by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the residential loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms, and therefore will not contain identical terms and
conditions, the basic terms of those policies are dictated by respective state
laws, and most policies typically do not cover any physical damage resulting
from the following: war, revolution, governmental actions, floods and other
water-related causes, earth movement, including earthquakes, landslides and
mudflows, nuclear reactions, wet or dry rot, vermin, rodents, insects or
domestic animals, theft, and, in certain cases, vandalism. The foregoing list is
merely indicative of certain kinds of uninsured risks and is not intended to be
all-inclusive.
When a residential property is located at origination in a federally
designated flood area, each servicing agreement may require the master servicer
to cause the borrower to acquire and maintain flood insurance in an amount equal
in general to the lesser of:
(1) the amount necessary to fully compensate for any damage or loss to the
improvements which are part of the residential property on a replacement cost
basis; and
(2) the maximum amount of insurance available under the federal flood
insurance program, whether or not the area is participating in the program.
The hazard insurance policies covering the residential properties typically
contain a co-insurance clause that in effect requires the insured at all times
to carry insurance of a specified
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percentage (generally 80% to 90%) of the full replacement value of the
improvements on the property in order to recover the full amount of any partial
loss. If the insured's coverage falls below this specified percentage, this
clause generally provides that the insurer's liability in the event of partial
loss 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.
Since 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 thereon decrease, and since residential
properties have historically appreciated in value over time, the effect of
co-insurance in the event of partial loss may be that hazard Insurance Proceeds
may be insufficient to restore fully the damaged property. Under the terms of
the residential loans, borrowers are 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 upon the extent to which information in this
regard is furnished to the master servicer by borrowers. However, the related
prospectus supplement may specify that to the extent of the amount available to
cover hazard losses under the special hazard insurance policy for a series,
holders of securities may not suffer loss by reason of delinquencies or
foreclosures following hazard losses, whether or not subject to co-insurance
claims.
DESCRIPTION OF CREDIT SUPPORT
The related prospectus supplement will specify if the trust fund that
includes residential loans for a series of securities may include credit support
for this series or for one or more classes of securities comprising this series,
which credit support may consist of any combination of the following separate
components, any of which may be limited to a specified percentage of the
aggregate principal balance of the residential loans covered by this credit
support or a specified dollar amount:
o a Pool Insurance Policy;
o a special hazard insurance policy;
o a Bankruptcy Bond;
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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 upon satisfaction of certain
conditions, as described below and, if applicable, in the related prospectus
supplement.
Pool Insurance Policies do not cover losses arising out of the matters
excluded from coverage under Primary Credit Insurance Policies, FHA Insurance or
VA Guarantees or losses due to a failure to pay or denial of a claim under a
Primary Credit Insurance Policy, FHA Insurance or VA Guarantee, irrespective of
the reason for such 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, in the event that the
initial Collateral Value of the residential loan exceeded 80%, has been
kept in force until the Collateral Value is reduced to 80%;
o premiums on the Primary Hazard Insurance Policy have been paid by the
insured and real estate taxes (if applicable) and foreclosure, protection
and preservation expenses have been advanced by or on behalf of the
insured, as approved by the pool insurer;
o if there has been physical loss or damage to the residential property, it
has been restored to its physical condition at the time the residential
loan became insured under the Pool Insurance Policy, subject to reasonable
wear and tear; and
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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.
(1) Assuming the satisfaction of these conditions, the pool insurer typically
has the option to either 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, on condition that the pool insurer must be provided with
good and merchantable title to the residential property, unless the
property has been conveyed pursuant to the terms of the applicable Primary
Credit Insurance Policy; or
(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 (typically, 60 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, because the pool insurer will be required to remit only unpaid
interest through the date a claim is paid, rather than unpaid interest through
the end of the month in which the claim is paid.
In addition, holders of securities may experience losses in connection with
payments made under a Pool Insurance Policy to the extent that the master
servicer expends funds for the purpose of enabling it to make a claim under the
Pool Insurance Policy. These expenditures by the master servicer could include
amounts necessary to cover real estate taxes and to repair the related
residential property. The master servicer will be reimbursed for the
expenditures from
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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 and any further losses will be borne by
holders of securities of the related series.
In the event that 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 such Pool Insurance Policy, the coverage of the
replacement policy may be reduced to a level such that its premium rate does not
exceed the premium rate on the Pool Insurance Policy. However, in the event that
the pool insurer ceases to be a Qualified insurer solely because it ceases to be
approved as an insurer by FHLMC, FNMA, or any successor entity, the master
servicer will 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 and, even when the
damage is covered, 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, issued by the special hazard insurer specified in the
prospectus supplement covering any special hazard amount as described in the
immediately succeeding paragraph. The master servicer will be obligated to
exercise its best reasonable efforts to keep or cause to be kept a special
hazard insurance policy in full force and effect, unless coverage under the
policy has been exhausted through payment of claims; provided, however, that the
master servicer will be under no obligation to maintain the policy in the event
that a Pool Insurance Policy covering the series is no longer in effect. The
master servicer will be obligated to pay the premiums on each special hazard
insurance policy on a timely basis unless, as described in the related
prospectus supplement, payment of these premiums is otherwise provided for.
Claims under each special hazard insurance policy will generally be
limited to:
(1) a percentage set forth in the related prospectus supplement, which is
generally not greater than 1%, of the aggregate principal balance as of
the Cut-Off Date of the residential loans comprising the related
trust fund;
(2) twice the unpaid principal balance as of the Cut-Off Date of the largest
residential loan in the trust fund; or
(3) the greatest aggregate principal balance of residential loans secured by
residential properties located in any one California postal zip code area,
whichever is the greatest.
As more specifically provided in the related prospectus supplement, each
special hazard insurance policy will, subject to limitations of the kind
described below, typically protect holders of securities of the related series
from:
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o loss by reason of damage to residential properties caused by certain
hazards, including earthquakes and mudflows, not insured against under the
Primary Hazard Insurance Policies or a flood insurance policy if the
property is in a federally designated flood area; and
o loss from partial damage caused by reason of the application of the
co-insurance clause contained in the Primary Hazard Insurance Policies.
Special hazard insurance policies will typically not cover losses such as those
occasioned by normal wear and tear, war, civil insurrection, certain
governmental actions, errors in design, faulty workmanship or materials, except
under certain circumstances, nuclear or chemical reaction or contamination,
flood, if the property is located in a federally designated flood area, and
certain other risks.
Subject to the foregoing limitations, each special hazard insurance policy
will typically provide that, when there has been damage to property securing a
defaulted residential loan acquired by the insured and to the extent the damage
is not covered by the related Primary Hazard Insurance Policy or flood insurance
policy, the insurer will pay the lesser of:
(1) the cost of repair to the property; and
(2) upon transfer of the property to the insurer, 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 accrued
interest at the interest rate to the date of claim settlement and certain
expenses incurred by or on behalf of the master servicer with respect to
the property.
The amount of coverage under the special hazard insurance policy will be reduced
by the sum of:
(a) the unpaid principal balance plus accrued interest and certain expenses paid
by the insurer, less any net proceeds realized by the insurer from the sale of
the property, plus
(b) any amount paid as the cost of repair of the property.
Typically, restoration of the property with the proceeds described under
clause (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
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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 and funds received by the
insured in excess of the unpaid principal balance of the residential loan plus
interest thereon to the date of sale plus certain expenses incurred by or on
behalf of the master servicer with respect to the property, not to exceed the
amount actually paid by the special hazard insurer, must be refunded to the
special hazard insurer and, to that extent, coverage under the special hazard
insurance policy will be restored. If aggregate claim payments under a special
hazard insurance policy reach the policy limit, coverage 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 Primary Hazard Insurance Policy premiums, flood
insurance premiums, if the property is located in a federally designated flood
area, and, as approved by the special hazard insurer, real estate property
taxes, if applicable, property protection and preservation expenses and
foreclosure costs have been paid by or on behalf of the insured, and unless the
insured has maintained the Primary Hazard Insurance Policy and, if the property
is located in a federally designated flood area, flood insurance, as required by
the special hazard insurance policy.
If a special hazard insurance policy is canceled or terminated for any
reason, other than the exhaustion of total policy coverage, the master servicer
will be obligated to use its best reasonable efforts to obtain or cause to be
obtained from another insurer a replacement policy comparable to the special
hazard insurance policy with a 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 such special hazard
insurance policy as provided in the related prospectus supplement.
Since 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, each pooling and servicing agreement will generally provide
that, if the related Pool Insurance Policy shall have lapsed or terminated or
been exhausted through payment of claims, the master servicer will be under no
further obligation to maintain the special hazard insurance policy.
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BANKRUPTCY BONDS
The prospectus supplement with respect to a series of securities may specify
that the master servicer will be required to obtain a Bankruptcy Bond for the
series. The obligor on, and the amount of coverage of, any Bankruptcy Bond will
be set forth in the related prospectus supplement. The master servicer will be
required to exercise its best reasonable efforts to maintain or cause to be
maintained the Bankruptcy Bond in full force and effect, unless coverage under
the Bankruptcy Bond has been exhausted through payment of claims. The master
servicer will be required to pay or cause to be paid the premiums for each
Bankruptcy Bond on a timely basis, unless, as described in the related
prospectus supplement, payment of the premiums is otherwise provided for. See
"Certain Legal Aspects of Residential Loans -- Foreclosure on Mortgages" and "--
Repossession with respect to Manufactured Housing Contracts" in this prospectus.
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, which will be applied and
maintained in the manner and under the conditions specified in the prospectus
supplement. In the alternative or in addition to such deposit, to the extent
described in the related prospectus supplement, a Reserve Fund may be funded
through application of a portion of the interest payment on each mortgage loan
or of all or a portion of amounts otherwise payable on the subordinate
securities. Amounts in a Reserve Fund may be distributed to holders of
securities, or applied to reimburse the master servicer for outstanding
advances, or may be used for other purposes, in the manner and to the extent
specified in the related prospectus supplement. The related prospectus
supplement may specify that any Reserve Fund will not be deemed to be part of
the related trust fund.
Amounts deposited in any Reserve Fund for a series will be invested in
Permitted Instruments by, or at the direction of, the master servicer or any
other person named in the related prospectus supplement.
CROSS-SUPPORT PROVISIONS
The related prospectus supplement may specify that the residential loans for
a series of securities may be divided into separate groups, each supporting a
separate class or classes of securities of a series, and credit support may be
provided by cross-support provisions requiring that distributions be made on
securities evidencing interests in one group of mortgage loans prior to
distributions on securities evidencing interests in a different group
of mortgage loans within the trust fund. The prospectus supplement relating to a
series that includes a cross-support provision will describe the manner and
conditions for applying such provisions.
The coverage provided by one or more forms of credit support may apply
concurrently to two or more related trust funds. If applicable, the related
prospectus supplement will identify the trust funds to which the credit
support relates and the manner of determining the amount of the coverage
provided by the credit support and of the application of the coverage to the
identified trust funds.
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LETTER OF CREDIT
The prospectus supplement relating to a series of securities may specify that
the residential loans in the related trust fund may be covered by one or more
letters of credit, issued by a bank or financial institution specified in the
prospectus supplement. Under a letter of credit, the issuing bank or financial
institution will be obligated to honor draws in an aggregate fixed dollar
amount, net of unreimbursed payments, equal to the percentage specified in the
related prospectus supplement of the aggregate principal balance of the
residential loans on the related Cut-Off Date or one or more classes of
securities. Any letter of credit may permit draws in the event of only certain
types of losses. The amount available under the letter of credit will, in all
cases, be reduced to the extent of the unreimbursed payments 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, with respect to one or more classes of
securities of the related series, timely distributions of interest and/or full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the related prospectus
supplement.
EXCESS SPREAD
The prospectus supplement relating to a series of securities may specify that
a portion of the interest payments on residential loans may be applied to reduce
the principal balance of one or more classes of securities to provide or
maintain a cushion against losses on the residential loans.
OVERCOLLATERALIZATION
The related prospectus supplement may specify that the subordination
provisions of a trust fund may be used to accelerate to a limited extent the
amortization of one or more classes of securities relative to the amortization
of the related assets of the trust fund. The accelerated amortization is
achieved by the application of certain excess interest to the payment of
principal of one or more classes of securities. This acceleration feature
creates, with respect to the assets of the trust fund, overcollateralization
which results from the excess of the aggregate principal balance of the related
assets of the trust fund, over the principal balance of the related class or
classes of securities. This acceleration may continue for the life of the
related security, or may be limited. In the case of limited acceleration, once
the required level of overcollateralization is reached, and subject to certain
provisions specified in the related prospectus supplement, the limited
acceleration feature may cease, unless necessary to maintain the required level
of overcollateralization.
CERTAIN LEGAL ASPECTS OF RESIDENTIAL LOANS
The following discussion contains general summaries of certain legal aspects
of loans secured by residential properties. Because the legal aspects are
governed by applicable state law, which may differ substantially, the summaries
do not purport to be complete nor to reflect the laws of any particular state,
nor to encompass the laws of all states in which the security for the
residential loans is situated. The summaries are qualified in their entirety by
reference to the applicable federal and state laws governing the residential
loans. In this regard, the following
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discussion does not fully reflect federal
regulations with respect to FHA loans and VA loans. See "The Trust Funds --
Residential Loans" and "Description of Primary Insurance Coverage -- FHA
Insurance and VA Guarantees" in this prospectus.
GENERAL
All of the residential loans, except as described below, are loans to
homeowners and all of the mortgage loans and Multifamily Loans are evidenced by
notes or bonds and secured by instruments which may be mortgages, deeds of
trust, security deeds or deeds to secure debt, depending upon the type of
security instrument customary to grant a security interest in real property in
the state in which the residential property is located. 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 thereby;
and
o the grant of a security interest in the related manufactured home or
with respect to Land Contracts, a lien on the real estate to which
the related manufactured homes are deemed to be affixed, and
including in some cases a security interest in the related
manufactured home, to secure repayment of this loan.
Generally, any of the foregoing types of encumbrance will create a lien upon, or
grant a title interest in, the subject property, the priority of which will
depend on the terms of the particular security instrument, if any, the knowledge
of the parties to such instruments, as well as the order of recordation or
filing of the instrument in the appropriate public office. 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 upon
the type of security instrument customary to grant a security interest according
to the prevailing practice in the state in which the property subject to a
mortgage loan or Multifamily Loan is located. Any of the foregoing types of
encumbrance creates a lien upon or conveys title to the real property encumbered
by 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
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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 upon, 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 the law of the state in which the real property is located, the
express provisions of the mortgage, deed of trust, security deed or deed to
secure debt and, in some cases, with respect to deeds of trust, the directions
of the beneficiary.
COOPERATIVE LOANS
The Cooperative owns all the real property or some interest 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, as is generally
the case, or an underlying lease of the land, as is the case in some instances,
the Cooperative, as mortgagor, or lessee, as the case may be, is also
responsible for meeting these blanket mortgage or rental obligations. A blanket
mortgage is ordinarily incurred by the Cooperative in connection with either the
construction or purchase of the Cooperative's apartment building or the
obtaining of capital by the Cooperative. The interests of the occupants under
proprietary leases or occupancy agreements as to which the Cooperative is the
landlord are generally subordinate to the interests of the holder of the blanket
mortgage and to the interest of the holder of a land lease.
If the Cooperative is unable to meet the payment obligations
(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,
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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 a security interest in the related Cooperative shares. The lender
generally takes possession of the share certificate and a counterpart of the
proprietary lease or occupancy agreement and a financing statement covering the
proprietary lease or occupancy agreement and the Cooperative shares is filed in
the appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in the
security agreement covering the assignment of the proprietary lease or occupancy
agreement and the pledge of Cooperative shares. See "Foreclosure on Cooperative
Shares" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP
In general, a "tenant-stockholder", as defined in Section 216(b)(2) of the
Code, of a corporation that qualifies as a "cooperative housing corporation"
within the meaning of Section 216(b)(1) of the Code is allowed a deduction for
amounts paid or accrued within his taxable year to the corporation representing
his proportionate share of certain interest expenses and certain real estate
taxes allowable as a deduction under Section 216(a) of the Code to the
corporation under Sections 163 and 164 of the Code. In order for a corporation
to qualify under Section 216(b)(1) of the Code for its taxable year in which
such items are allowable as a deduction to the corporation, 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. In the event that 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.
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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 such office, depending on state law.
The master servicer will generally be required to obtain possession of the
certificate of title, but, the related prospectus supplement may specify if it
will not be required to effect the notation or delivery of the required
documents and fees. The failure to effect the notation or delivery, or the
taking of action under the wrong law, under a motor vehicle title statute rather
than under the UCC, is likely to cause the trustee not to have a perfected
security interest in the manufactured home securing a Manufactured Housing
Contract.
As manufactured homes have become larger and often have been attached to
their sites without any apparent intention to move them, courts in many states
have held that manufactured homes may, under certain circumstances, become
subject to real estate title and recording laws. As a result, a security
interest in a manufactured home could be rendered subordinate to the interests
of other parties, including a trustee in bankruptcy claiming an interest in the
home under applicable state real estate law, notwithstanding compliance with the
requirements described above. In order to perfect a security interest in a
manufactured home under real estate laws, the holder of the security interest
must file either a "fixture filing" under the provisions of the UCC or a real
estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real estate records office of the
county where the home is located.
Generally, Manufactured Housing Contracts will contain provisions prohibiting
the 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
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secured party and, accordingly, the depositor or the Unaffiliated Seller will
continue to be named as the secured party on the certificates of title relating
to the manufactured homes. In most states, 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 notation of the lien of the depositor on the
certificate of title or delivery of the required documents and fees or, in
states where a security interest in manufactured homes is perfected pursuant to
Article 9 of the UCC, the filing of a financing statement, and continuation
statements before the end of each five year period, will be sufficient to
protect the trustee against the rights of subsequent purchasers of a
manufactured home or subsequent lenders who take a security interest in the
manufactured home. If there are any manufactured homes as to which the depositor
has failed to perfect or cause to be perfected the security interest assigned to
the trust fund, 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.
In the event that 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 obligee must surrender
possession of the certificate of title or it will receive notice as a result of
its lien noted thereon and accordingly will have an opportunity to require
satisfaction of the related manufactured housing conditional sales contract
before release of the lien. 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
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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 in the event 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 upon all parties
having an interest of record in the real property. Delays in completion of the
foreclosure may occasionally result from difficulties in locating necessary
party defendants. When the mortgagee's right to foreclose is contested, the
legal proceedings necessary to resolve the issue can be time consuming. After
the completion of a judicial foreclosure, the court generally issues a judgment
of foreclosure and appoints a referee or other court officer to conduct the sale
of the property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage in and to the mortgaged
property. It is regulated by statutes and rules and subject throughout to the
court's equitable powers. Generally, a borrower is bound by the terms of the
mortgage note and the mortgage as made and cannot be relieved from its own
default. However, since a foreclosure action is equitable in nature and is
addressed to a court of equity, 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, 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 upon default by the borrower 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
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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. However, because of the difficulty potential third party purchasers
at the sale might have in determining the exact status of title and because the
physical condition of the property may have deteriorated during the foreclosure
proceedings, it is uncommon for a third party to purchase the property at the
foreclosure sale.
In some states, potential buyers may be further unwilling to purchase a
property at a foreclosure sale as a result of the 1980 decision of the United
States Court of Appeals for the Fifth Circuit in Durrett v. Washington National
Insurance Company. The court in Durrett held that even a non-collusive,
regularly conducted foreclosure sale was a fraudulent transfer under section 67
of the former Bankruptcy Act 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 and, therefore, the burdens of
ownership, including obtaining casualty insurance, paying taxes and making such
repairs at its own expense as are necessary to render the property suitable for
sale. Depending upon market
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conditions, the ultimate proceeds of the sale of the property may not equal the
lender's investment in the property. Any loss may be reduced by the receipt of
any mortgage Insurance Proceeds, if any.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the borrower is
in default under such senior mortgage, in either event adding the amounts
expended to the balance due on the junior loan, and may be subrogated to the
rights of the senior mortgagees. In addition, in the event that the foreclosure
of a junior mortgage triggers the enforcement of a "due-on-sale" clause, the
junior mortgagee may be required to pay the full amount of the senior mortgages
to the senior mortgagees. Accordingly, with respect to those mortgage loans
which are junior mortgage loans, if the lender purchases the property, the
lender's title will be subject to all senior liens and claims and certain
governmental liens. The proceeds received by the referee or trustee from the
sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the 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; and, 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
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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. In
the event that title to a residential property was acquired on behalf of holders
of securities and cleanup costs were incurred in respect of the residential
property, the holders of securities might realize a loss if these costs were
required to be paid by the related trust fund.
FORECLOSURE ON COOPERATIVE SHARES
The Cooperative shares and proprietary lease or occupancy agreement owned by
the tenant-stockholder and pledged to the lender are, in almost all cases,
subject to restrictions on transfer as set forth in the Cooperative's
Certificate of Incorporation and By-laws, as well as in the proprietary lease or
occupancy agreement. These agreements may be canceled by the Cooperative, even
while pledged, for failure by the tenant-stockholder to pay rent or other
obligations or charges owed by such 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 upon the shares to which the proprietary lease or
occupancy agreement relates. In addition, the proprietary lease or occupancy
agreement generally permits the Cooperative to terminate this lease or agreement
in the event 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 in the event of a default
by the tenant-stockholder on its obligations under the proprietary lease or
occupancy agreement. A default by the tenant-stockholder under the proprietary
lease or occupancy agreement will usually constitute a default under the
security agreement between the lender and the tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate 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, subject, however, to the Cooperative's 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 in the event of a foreclosure on a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares or assigning the proprietary lease.
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Generally, the lender is not limited in any rights it may have to dispossess the
tenant-stockholders.
Foreclosure on the Cooperative shares is accomplished by a sale in accordance
with the provisions of Article 9 of the UCC and the security agreement relating
to those shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale. Generally, a
sale conducted according to the usual practice of similar parties selling
similar collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative to receive sums due under the
proprietary lease or occupancy agreement. If there are proceeds remaining, the
lender must account to the tenant-stockholder for the surplus. Conversely, if a
portion of the indebtedness remains unpaid, the tenant-stockholder is generally
responsible for the deficiency. See "Anti-Deficiency Legislation and Other
Limitations on Lenders" below.
REPOSSESSION WITH RESPECT TO MANUFACTURED HOUSING CONTRACTS THAT ARE NOT LAND
CONTRACTS
Repossession of manufactured housing is governed by state law. So long as a
manufactured home has not become so attached to real estate that it would be
treated as a part of the real estate under the law of the state where it is
located, repossession of the home in the event of a default 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 upon default 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, in the event that the
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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, upon notice to the debtor, and the method,
manner, time, place and terms of the sale must be commercially reasonable.
The UCC and consumer protection laws in most states place restrictions on
repossession sales, including requiring prior notice to the debtor.
(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
upon 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 upon payment of the
foreclosure sales price, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The exercise of a
right of redemption would defeat the title of any purchaser subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of
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ownership and maintenance of the property until the redemption period has
expired. In some states, there is no right to redeem property after a trustee's
sale under a deed of trust.
NOTICE OF SALE; REDEMPTION RIGHTS WITH RESPECT TO MANUFACTURED HOMES
While state laws do not usually require notice to be given debtors prior to
repossession, many states do require delivery of a notice of default and of the
debtor's right to cure defaults before repossession. The law in most states also
requires that the debtor be given notice of sale prior to the resale of the home
so that the owner may redeem at or before resale. In addition, the sale must
comply with the requirements, including the notice requirements, of the UCC.
ANTI-DEFICIENCY LEGISLATION, BANKRUPTCY LAWS AND OTHER LIMITATIONS ON LENDERS
States have taken a number of approaches to anti-deficiency and related
legislation:
o Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a
mortgage.
o In some states, statutes limit the right of the beneficiary or mortgagee
to obtain a deficiency judgment against the borrower following foreclosure
or sale under a deed of trust. A deficiency judgment is a personal
judgment against the former borrower equal in most cases to the difference
between the net amount realized upon 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 upon
collateral and/or enforce a deficiency judgment. For example, under the
Bankruptcy Code, virtually all actions, including foreclosure actions and
deficiency judgment proceedings, are automatically stayed upon the filing of a
bankruptcy petition, and, usually, no interest or principal payments are made
during the course of the bankruptcy case. Foreclosure of an interest in real
property of a debtor in a case under the Bankruptcy Code can typically occur
only if the bankruptcy court vacates the stay; an action the bankruptcy court
may
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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 such
junior lien.
A homeowner may file for relief under the Bankruptcy Code under any of three
different chapters of the Bankruptcy Code. Under Chapter 7, the assets of the
debtor are liquidated and a lender secured by a lien may "bid in", i.e., bid up
to the amount of the debt, at the sale of the asset. See "-Foreclosure on
Mortgages" 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, even though the lender accelerated the loan and a final
judgment of foreclosure had been entered in state court provided no sale of the
property had yet occurred, prior to the filing of the debtor's petition under
the Bankruptcy Code. Courts have approved Chapter 11 plans that have allowed
curing of defaults over a number of years. In certain circumstances, defaults
may be cured over a number of years even if the full amount due under the
original loan is never repaid, notwithstanding objection by the mortgagee. Under
a Chapter 13 plan, curing of defaults must be accomplished within the five year
maximum term permitted for repayment plans.
Generally, a repayment plan filed in a case under Chapter 13 may not modify
the claim of a mortgage lender if the borrower elects to retain the property,
the property is the borrower's principal residence and the property is the
lender's only collateral. Notwithstanding the forgoing restrictions, if the last
payment on the original payment schedule of a mortgage loan secured only by the
debtor's principal residence is due before the final date for payment under 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
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property as determined by the court, with a corresponding partial reduction of
the amount of the lender's security interest, if the value is less than the
amount due on the loan, leaving the lender a general unsecured creditor for the
difference between the value of the collateral and the outstanding balance of
the loan. A borrower's unsecured indebtedness will typically be discharged in
full upon payment of a substantially reduced amount. Other modifications may
include a reduction in the amount of each scheduled payment, which reduction may
result from a reduction in the rate of interest and/or the alteration of the
repayment schedule, with or without affecting the unpaid principal balance of
the loan, and/or an extension or reduction of the final maturity date. State
statutes and general principles of equity may also provide a borrower with means
to halt a foreclosure proceeding or sale and to force a restructuring of a
mortgage loan on terms a lender would not otherwise accept. Because many of the
mortgage loans will have loan-to-value ratios in excess of 100% at origination,
or such loan-to-value ratios otherwise may exceed 100% in cases where the market
value declined subsequent to origination, a potentially significant portion of
the unpaid principal amount of the related mortgage loan would likely be treated
as unsecured indebtedness in a case under Chapter 11.
In a bankruptcy or similar proceeding of a 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 upon the facts specific to a particular transaction.
A trustee in bankruptcy, in some cases, may be entitled to collect its costs
and expenses in preserving or selling the mortgaged property ahead of payment to
the lender. In certain circumstances, subject to the court's approval, a debtor
in a case under Chapter 11 of the Bankruptcy Code may have the power to grant
liens senior to the lien of a mortgage. Moreover, the laws of certain states
also give priority to certain tax and mechanics liens over the lien of a
mortgage. Under the Bankruptcy Code, if the court finds that actions of the
mortgagee have been unreasonable and inequitable, the lien of the related
mortgage may be subordinated to the claims of unsecured creditors.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the mortgage loans have been considered by Congress, and
more such proposed legislation may be considered in the future. No assurance can
be given that any particular proposal will or will not be enacted into law, or
that any provision so enacted will not differ materially from the proposals
described above.
The Code provides priority to certain tax liens over the lien of the
mortgage. This may have the effect of delaying or interfering with the
enforcement of rights in respect of a defaulted mortgage loan. In addition,
substantive requirements are imposed upon mortgage lenders in connection with
the origination and the servicing of mortgage loans by numerous federal and some
state consumer protection laws. The laws include the federal Truth-in-Lending
Act and Regulation Z, Real Estate Settlement Procedures Act and Regulation X,
Equal Credit Opportunity Act and Regulation B, Fair Credit Billing Act, Fair
Credit Reporting Act, Fair Housing Act, Housing and Community Development Act,
Home Mortgage Disclosure Act, Federal Trade Commission Act, Fair Debt Collection
Practices Act, Uniform Consumer Credit Code, Consumer Credit Protection Act,
Riegle Act, and related statutes and regulations. These
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federal laws impose specific statutory liabilities upon lenders who originate
mortgage loans and who fail to comply with the provisions of the law. In some
cases, this liability may affect assignees of the mortgage loans.
FOR COOPERATIVE LOANS. Generally, Article 9 of the UCC governs foreclosure
on Cooperative shares and the related proprietary lease or occupancy agreement.
Some courts have interpreted section 9-504 of the UCC to prohibit a deficiency
award unless the creditor establishes that the sale of the collateral, which, in
the case of a Cooperative Loan, would be the shares of the Cooperative and the
related proprietary lease or occupancy agreement, was conducted in a
commercially reasonable manner.
JUNIOR MORTGAGES
Some of the mortgage loans, Multifamily Loans and Home Improvement Contracts
may be secured by junior mortgages or deeds of trust, which are junior to senior
mortgages or deeds of trust which are not part of the trust fund. The rights of
the 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, including the prior rights
of the senior mortgagee or beneficiary to receive and apply hazard insurance and
condemnation proceeds and, upon default of the borrower, to cause a foreclosure
on the property. Upon completion of the foreclosure proceedings by the holder of
the senior mortgage or the sale pursuant to the deed of trust, the junior
mortgagee's or junior beneficiary's lien will be extinguished unless the junior
lienholder satisfies the defaulted senior loan or asserts its subordinate
interest in a property in foreclosure proceedings. See "-Foreclosure" 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. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the borrower or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee 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 upon creditors involved in consumer finance. These laws include the
federal Truth-in-Lending Act and Regulation Z, Real Estate Settlement Procedures
Act and Regulation X, Equal Credit Opportunity Act and Regulation B, Fair Credit
Billing Act, Fair Credit Reporting Act, Fair Housing Act, Housing and Community
Development Act, Home Mortgage Disclosure Act, Federal Trade Commission Act,
Fair Debt Collection Practices Act, Uniform Consumer Credit Code, Consumer
Credit Protection Act, Riegle Act, and related statutes and regulations. These
laws can impose specific statutory liabilities upon creditors who fail to comply
with their provisions and may affect the enforceability of 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
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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 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. This 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 such 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
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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",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, notwithstanding
the fact that a transfer of the property may have occurred. These include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years, the creation of a junior encumbrance and other instances where
regulations promulgated by the Director of the Office of Thrift Supervision,
successor to the Federal Home Loan Bank Board, prohibit such enforcement. To
date none of these regulations have been issued. Regulations promulgated under
the Garn-St. Germain Act prohibit the imposition of a prepayment penalty upon
the acceleration of a loan pursuant to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage loan
bearing an interest rate below the current market rate being assumed by a new
home buyer rather than being paid off, which may have an impact upon the average
life of the mortgage loans related to a series and the number of 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 obligee on the contract and permitting the
acceleration of the maturity of the related contracts by the obligee on the
contract upon any sale or transfer that is not consented to. The related
prospectus supplement may specify that the master servicer will, to the extent
it has knowledge of this conveyance or proposed conveyance, exercise or cause to
be exercised its rights to accelerate the maturity of the related Manufacturing
Housing Contracts through enforcement of "due-on-sale" clauses, subject to
applicable state law. In certain cases, the transfer may be made by a delinquent
borrower in order to avoid a repossession proceeding with respect to a
manufactured home.
In the case of a transfer of a manufactured home as to which the master
servicer desires to accelerate the maturity of the related Manufactured Housing
Contract, the master servicer's ability to do so will depend on the
enforceability under state law of the "due-on-sale" clause. The Garn-St. Germain
Act preempts, subject to certain exceptions and conditions, state laws
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prohibiting enforcement of "due-on-sale" clauses applicable to the manufactured
homes. Consequently, some states may prohibit the master servicer from enforcing
a "due-on-sale" clause in respect of certain manufactured homes.
PREPAYMENT CHARGES AND PREPAYMENTS
Generally, conventional mortgage loans, Cooperative Loans, Home Improvement
Contracts and Manufactured Housing Contracts, residential owner occupied FHA
loans and VA loans may be prepaid in full or in part without penalty. Generally,
multifamily residential loans, including multifamily FHA loans, may contain
provisions limiting prepayments on these loans, including prohibiting prepayment
for a specified period after origination, prohibiting partial prepayments
entirely or requiring the payment of a prepayment penalty upon prepayment in
full or in part.
The laws of certain states may render prepayment fees unenforceable after a
mortgage loan is outstanding for a certain number of years, or may limit the
amount of any prepayment fee to a specified percentage of the original principal
amount of the mortgage loan, to a specified percentage of the outstanding
principal balance of a mortgage loan, or to a fixed number of months' interest
on the prepaid amount. In certain states, prepayment fees payable on default or
other involuntary acceleration of a residential loan may not be enforceable
against the related borrower. Some state statutory provisions may also treat
certain prepayment fees as usurious if in excess of statutory limits.
SUBORDINATE FINANCING
When the borrower encumbers mortgaged property with one or more junior liens,
the senior lender is subjected to additional risk. First, the borrower may have
difficulty servicing and repaying multiple loans. In addition, if the junior
loan permits recourse to the borrower --as junior loans often do-- and the
senior loan does not, a borrower may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
borrower and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the borrower is
additionally burdened. Third, if the borrower defaults on the senior loan and/or
any junior loan or loans, the existence of junior loans and actions taken by
junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceedings by the senior lender.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980, provides that state usury limitations shall not
apply to certain types of 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.
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Certain states have taken action to reimpose interest rate limits and/or to
limit discount points or other charges.
The depositor believes that a court interpreting Title V would hold that
mortgage loans related to a series originated on or after January 1, 1980 are
subject to federal preemption. Therefore, in a state that has not taken the
requisite action to reject application of Title V or to adopt a provision
limiting discount points or other charges prior to origination of the mortgage
loans, any limitation under the state's usury law would not apply to the
mortgage loans.
In any state in which application of Title V has been expressly rejected or a
provision limiting discount points or other charges is adopted, no mortgage
loans originated after the date of this state action will be eligible for
inclusion in a trust fund if the mortgage loans bear interest or provide for
discount points or charges in excess of permitted levels. No mortgage loan
originated prior to January 1, 1980 will bear interest or provide for discount
points or charges in excess of permitted levels.
ALTERNATIVE MORTGAGE INSTRUMENTS
Adjustable rate mortgage loans originated by non-federally chartered lenders
have historically been subject to a variety of restrictions. These restrictions
differed from state to state, resulting in difficulties in determining whether a
particular alternative mortgage instrument originated by a state-chartered
lender complied with applicable law. These difficulties were simplified
substantially as a result of the enactment of Title VIII of the Garn-St. Germain
Act. Title VIII of the Garn-St. Germain Act which provides that, notwithstanding
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 state-chartered savings and loan associations, savings banks
and mutual savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the regulations
promulgated by the Federal Home Loan Bank Board, predecessor to the Office
of Thrift Supervision, with respect to origination of alternative mortgage
instruments by federal savings and loan associations.
Title VIII 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
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substances regardless of whether they have contaminated the property. CERCLA
imposes strict, as well as joint and several, liability on several classes of
potentially responsible parties, including current owners and operators of the
property who did not cause or contribute to the contamination. Furthermore,
liability under CERCLA is not limited to the original or unamortized principal
balance of a loan or to the value of the property securing a loan. Lenders may
be held liable under CERCLA as owners or operators unless they qualify for the
secured creditor exemption to CERCLA. This exemption exempts from the definition
of owners and operators those who, without participating in the management of a
facility, hold indicia of ownership primarily to protect a security interest in
the facility.
The Asset Conservation, Lender Liability and Deposit Insurance Act of 1996
amended, among other things, the provisions of CERCLA with respect to lender
liability and the secured creditor exemption. The Conservation Act offers
protection to lenders by defining certain activities in which a lender can
engage and still have the benefit of the secured creditor exemption. A lender
will be deemed to have participated in the management of a mortgaged property,
and will lose the secured creditor exemption, if it actually participates in the
operational affairs of the property of the borrower. The Conservation Act
provides that "merely having the capacity to influence, or unexercised right to
control" operations does not constitute participation in management. A lender
will lose the protection of the secured creditor exemption if it exercises
decision-making control over the borrower's environmental compliance and
hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the mortgaged property. The
Conservation Act also provides that a lender may continue to have the benefit of
the secured creditor exemption even if it forecloses on a mortgaged property,
purchases it at a foreclosure sale or accepts a deed-in-lieu of foreclosure
provided that the lender seeks to sell the mortgaged property at the earliest
practicable commercially reasonable time on commercially reasonable terms.
Other federal and state laws in certain circumstances may impose liability on
a secured party which takes a deed-in-lieu of foreclosure, purchases a mortgaged
property at a foreclosure sale, or operates a mortgaged property on which
contaminants other than CERCLA hazardous substances are present, including
petroleum, agricultural chemicals, hazardous wastes, asbestos, radon, and
lead-based paint. The cleanup costs may be substantial. It is possible that the
cleanup costs could become a liability of a trust fund and reduce the amounts
otherwise distributable to the holders of the related series of securities.
Moreover, certain federal statutes and certain states by statute impose an
environmental lien for any cleanup costs incurred by a state on the property
that is the subject of these types of cleanup costs. All subsequent liens on the
property generally are subordinated to the environmental lien and, in some
states, even prior recorded liens are subordinated to environmental liens. In
the latter states, the security interest of the trustee in a related parcel of
real property that is subject to an environmental lien could be adversely
affected.
The related prospectus supplement,supplement may specify that the mortgage
loan seller with respect to any mortgage loan included in a trust fund for a
particular series of securities 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
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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 Upon Defaulted Mortgage
Loans" in this prospectus.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, a borrower who enters military service after the origination of the
borrower's residential loan, including a borrower who was in reserve status and
is called to active duty after origination of the mortgage loan, may not be
charged interest, including fees and charges, above an annual rate of 6% during
the period of the borrower's active duty status, unless a court orders otherwise
upon application of the lender. The Relief Act applies to borrowers who are
members of the Army, Navy, Air Force, Marines, National Guard, Reserves, Coast
Guard, and officers of the U.S. Public Health Service assigned to duty with the
military. Because the Relief Act applies to borrowers who enter military
service, including reservists who are called to active duty, after origination
of the related mortgage loan, no information can be provided as to the number of
loans that may be affected by the Relief Act. Application of the Relief Act
would adversely affect, for an indeterminate period of time, the ability of the
master servicer to collect full amounts of interest on certain of the mortgage
loans. Any shortfalls in interest collections resulting from the application of
the Relief Act would result in a reduction of the amounts distributable to the
holders of the related series of securities, and the prospectus supplement may
specify that such shortfalls would not be covered by advances or, any form of
credit support provided in connection with such 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, in the event that 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 and does not purport to discuss all federal
income tax consequences that may be applicable to particular categories of
investors, some of which, such as banks, insurance companies and foreign
investors, may be subject to special rules. Further, the authorities on which
this discussion, and the opinion referred to below,
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are based are subject to change or differing interpretations, which could apply
retroactively. In addition to the federal income tax consequences described in
this prospectus, potential investors should consider the state and local tax
consequences, if any, of the purchase, ownership and disposition of the
securities. See "State and Other Tax Consequences" in this prospectus. Holders
of securities are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the securities offered under this prospectus.
The following discussion addresses securities of four general types:
(1) REMIC Securities,
(2) Grantor Trust Securities,
(3) Partnership Securities, and
(4) Debt Securities.
The prospectus supplement relating to each series of securities will indicate
which of the foregoing treatments will apply to the series and, if a REMIC
election or elections will be made for the related trust fund, will identify all
"regular interests" and "residual interests" in the REMIC. For purposes of this
tax discussion:
(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 upon the OID Regulations, and in
part upon 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. Upon the issuance of each series of REMIC
Securities, Cadwalader, Wickersham & Taft, special counsel to the depositor,
will deliver its opinion generally to the effect that, assuming compliance with
all provisions of the related pooling and servicing agreement, the related trust
fund, or each applicable portion of the related trust fund, will qualify as a
REMIC and 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
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portion of the assets of the REMIC Pool, as of the close of the third calendar
month beginning after the Startup Day and at all times after that date, may
consist of assets other than "qualified mortgages" and "permitted investments."
The REMIC Regulations provide a safe harbor pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of the
nonqualified assets is less than 1% of the aggregate adjusted basis of all the
REMIC Pool's assets. An entity that fails to meet the safe harbor may
nevertheless demonstrate that it holds no more than a de minimis amount of
nonqualified assets. A REMIC Pool also must provide "reasonable arrangements" to
prevent its residual interests from being held by "disqualified organizations"
or their agents and must furnish applicable tax information to transferors or
agents that violate this requirement. The pooling and servicing agreement with
respect to each series of REMIC certificates will contain provisions meeting
these requirements. See "Taxation of Owners of Residual Securities --
Tax-Related Restrictions on Transfer of Residual Securities -- Disqualified
Organizations" in this prospectus.
A qualified mortgage is any obligation that is principally secured by an
interest in real property and that is either transferred to the REMIC Pool on
the Startup Day or is purchased by the REMIC Pool within a three-month period
after that date pursuant to a fixed price contact in effect on the Startup Day.
Qualified mortgages include whole mortgage loans, and, generally, certificates
of beneficial interest in a grantor trust that holds mortgage loans and regular
interests in another REMIC, such as lower-tier regular interests in a tiered
REMIC. The REMIC Regulations specify that loans secured by timeshare interests
and shares held by a tenant stockholder in a cooperative housing corporation can
be qualified mortgages. A qualified mortgage includes a qualified replacement
mortgage, which is any property that would have been treated as a qualified
mortgage if it were transferred to the REMIC Pool on the Startup Day and that is
received either
(i) in exchange for any qualified mortgage within a three-month period after
that date; or
(ii) in exchange for a "defective obligation" within a two-year period
thereafter.
A "defective obligation" includes
(i) a mortgage in default or as to which default is reasonably
foreseeable;
(ii) a mortgage as to which a customary representation or warranty made at
the time of transfer to the REMIC Pool has been breached;
(iii) a mortgage that was fraudulently procured by the borrower; and
(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 such 90-day period.
Permitted investments include cash flow investments, qualified reserve
assets, and foreclosure property. A cash flow investment is an investment,
earning a return in the nature of interest, of amounts received on or with
respect to qualified mortgages for a temporary period, not exceeding 13 months,
until the next scheduled distribution to holders of interests in the REMIC Pool.
A qualified reserve asset is any intangible property held for investment that is
part of any reasonably required reserve maintained by the REMIC Pool to provide
for payments of expenses of the REMIC Pool or amounts due on the regular or
residual interests in the event of defaults (including delinquencies) on the
qualified mortgages, lower than expected reinvestment returns, prepayment
interest shortfalls and certain other contingencies. The Reserve Fund will be
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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 and
generally not held beyond the close of the third calendar year following the
year of acquisition, with one extension available from the Internal Revenue
Service.
In addition to the foregoing requirements, the various interests in a REMIC
Pool also must meet certain requirements. All of the interests in a REMIC Pool
must be either of the following:
(1) one or more classes of regular interests or
(2) a single class of residual interests on which distributions, if any,
are made pro rata.
A regular interest is an interest in a REMIC Pool that is issued on the
Startup Day with fixed terms, is designated as a regular interest, and
unconditionally entitles the holder to receive a specified principal amount, or
other similar amount, and provides that interest payments, or other similar
amounts, if any, at or before maturity either are payable based on a fixed rate
or a qualified 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 such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the trust
fund's income for the period in which the requirements for 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.
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CHARACTERIZATION OF INVESTMENTS IN REMIC SECURITIES. In general, the REMIC
Securities will be treated as "real estate assets" within the meaning of Section
856(c)(4)(A) of the Code and assets described in Section 7701(a)(19)(C) of the
Code in the same proportion that the assets of the REMIC Pool underlying REMIC
Securities would be treated. Moreover, if 95% or more of the assets of the REMIC
Pool qualify for either of the foregoing treatments at all times during a
calendar year, the REMIC Securities will qualify for the corresponding status in
their entirety for that calendar year. If the assets of the REMIC Pool include
Buydown Loans, it is possible that the percentage of assets constituting "loans
. . . secured by an interest in real property which is . . . residential real
property" for purposes of Code Section 7701(a)(19)(C)(v) may be required to be
reduced by the amount of the related funds paid on those loans. Interest,
including original issue discount, on the Regular Securities and income
allocated to the class of Residual Securities will be interest described in
Section 856(c)(3)(B) of the Code to the extent that those securities are treated
as "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code.
In addition, the Regular Securities will be "qualified mortgages" within the
meaning of Section 860G(a)(3) of the Code if transferred to another REMIC on its
Startup Day in exchange for regular or residual interests in such 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. Upon the issuance of any such series of REMIC Securities, Cadwalader,
Wickersham & Taft will deliver its opinion generally to the
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effect that, assuming compliance with all provisions of the related agreement
governing the REMIC Securities, the tiered REMICs will each qualify as a REMIC
and the REMIC Securities issued by the tiered REMICs, respectively, will be
considered to evidence ownership of Regular Securities or Residual Securities in
the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Securities will be "real
estate assets" within the meaning of Section 856(c)(4)(A) of the Code and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on those securities is interest described in
Section 856(c)(3)(B) of the Code, the tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REGULAR SECURITIES
GENERAL. In general, interest, original issue discount, and market
discount on a Regular Security will be treated as ordinary income to a Regular
Securityholder, and principal payments on a Regular Security will be treated as
a return of capital to the extent of the Regular Securityholder's basis in the
Regular Security allocable thereto. Regular Securityholders must use the accrual
method of accounting with regard to Regular Securities, regardless of the method
of accounting otherwise used by such Regular Securityholder.
ORIGINAL ISSUE DISCOUNT. Regular Securities may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any class
or subclass of Regular Securities having original issue discount generally must
include original issue discount in ordinary income for federal income tax
purpose as it accrues, in accordance with a constant yield method that takes
into account the compounding of interest, in advance of the receipt of the cash
attributable to 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 such
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
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underwriters. Although unclear under the OID Regulations, it is anticipated that
the trustee will treat the issue price of a class as to which there is no
substantial sale as of the issue date or that is retained by the depositor as
the fair market value of the class as of the issue date. The issue price of a
Regular Security also includes any amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the issue
date of the Regular Security, unless the Regular Securityholder elects on its
federal income tax return to exclude that amount from the issue price and to
recover it on the first distribution date. The stated redemption price at
maturity of a Regular Security always includes the original principal amount of
the Regular Security, but generally will not include distributions of interest
if those distributions constitute "qualified stated interest." Under the OID
Regulations, qualified stated interest generally means interest payable at a
single fixed rate or a qualified variable rate (as described below) 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 in the
event of default, it is anticipated that the trustee will treat interest with
respect to the Regular Securities as qualified stated interest. Distributions of
interest on Regular Securities with respect to which deferred interest will
accrue, will not constitute qualified stated interest, in which case the stated
redemption price at maturity of 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.
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A Regular Securityholder generally must include in gross income for any
taxable year the sum of the "daily portions", as defined below, of the original
issue discount on the Regular Security accrued during an accrual period for each
day on which it holds the Regular Security, including the date of purchase but
excluding the date of disposition. The trustee will treat the monthly period
ending on the day before each distribution date as the accrual period. With
respect to each Regular Security, a calculation will be made of the original
issue discount that accrues during each successive full accrual period, or
shorter period from the date of original issue, that ends on the day before the
related distribution date on the Regular Security. The Conference Committee
Report to the Code states that the rate of accrual of original issue discount is
intended to be based on the Prepayment Assumption. The original issue discount
accruing in a full accrual period would be the excess, if any, of (1) the sum
of:
(a) the present value of all of the remaining distributions to be made
on the Regular Security as of the end of that accrual period, and
(b) the distributions made on the Regular Security during the accrual
period that are included in the Regular Security's stated redemption price
at maturity, over
(2) the adjusted issue price of the Regular Security at the
beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on:
(1) the yield to maturity of the Regular Security at the issue
date,
(2) events, including actual prepayments, that have occurred prior to the end
of the accrual period, and
(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.
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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 upon the
anticipated payment characteristics of the class as a whole under the Prepayment
Assumption. In general, the original issue discount accruing on each Non-Pro
Rata Security in a full accrual period would be its allocable share of the
original issue discount with respect to the entire class, as determined in
accordance with the preceding paragraph. However, in the case of a distribution
in retirement of the entire unpaid principal balance of any Non-Pro Rata
Security, or portion of its unpaid principal balance:
(1) the remaining unaccrued original issue discount allocable to such
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, the numerator
of which is the excess of its purchase price over the adjusted issue price and
the denominator of which is the excess of the remaining stated redemption price
at maturity over the adjusted issue price. Alternatively, 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.
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An objective rate is any rate, other than a qualified floating rate, that is
determined using a single fixed formula and that is based on objective financial
or economic information, provided that such information is not (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
(1) bearing a rate that qualifies as a variable rate under the OID
Regulations that is tied to current values of a variable rate, or the highest,
lowest or average of two or more variable rates, including a rate based on the
average cost of funds of one or more financial institutions, or a positive or
negative multiple of 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) bearing 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, qualifies as a regular interest in a REMIC.
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," with the yield to maturity and future
payments on such Regular Security generally 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 such Regular Securityholder in that taxable
year or thereafter, in which case the interest deferral rule will not apply. See
"Election to Treat All Interest Under the Constant Yield Method" below regarding
an alternative manner in which 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, and therefore investors should consult
their own tax advisors regarding the application of these rules. Investors
should also consult Revenue Procedure 92-67 concerning the elections to include
market discount in income currently and to accrue market discount on the basis
of the constant yield method.
PREMIUM. A Regular Security purchased at a cost greater than its remaining
stated redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Securityholder holds 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, although it is unclear whether the
alternatives to the constant interest method described above under "--Market
Discount" are available. Amortizable bond premium will be treated as an offset
to interest income on a Regular Security, rather than as a separate deductible
item. See "--Election to Treat All Interest Under the Constant Yield Method"
below regarding an alternative manner in which the Code Section 171 election may
be deemed to be made.
ELECTION TO TREAT ALL INTEREST UNDER THE CONSTANT YIELD METHOD. A holder
of a debt instrument such as a Regular Security may elect to treat all interest
that accrues on the instrument using the constant yield method, with none of the
interest being treated as qualified stated interest. For purposes of applying
the constant yield method to a debt instrument subject to 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
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(2) the debt instrument is treated as if the instrument were issued on the
holder's acquisition date in the amount of the holder's adjusted basis
immediately after acquisition. It is unclear whether, for this purpose, the
initial Prepayment Assumption would continue to apply or if a new prepayment
assumption as of the date of the holder's acquisition would apply. A holder
generally may make this election on an instrument by instrument basis or for a
class or group of debt instruments. However, if the holder makes this election
with respect to a debt instrument with amortizable bond premium or with market
discount, the holder is deemed to have made elections to amortize bond premium
or to report market discount income currently as it accrues under the constant
yield method, respectively, for all premium bonds held or market discount bonds
acquired by the holder in the same taxable year or thereafter. The election is
made on the holder's federal income tax return for the year in which the debt
instrument is acquired and is irrevocable except with the approval of the
Internal Revenue Service. You should consult your own tax advisors regarding the
advisability of making this type of an election.
TREATMENT OF LOSSES. Regular Securityholders will be required to report
income with respect to Regular Securities on the accrual method of accounting,
without giving effect to delays or reductions in distributions attributable to
defaults or delinquencies on the mortgage loans, except to the extent it can be
established that those losses are uncollectible. Accordingly, the holder of a
Regular Security, particularly a subordinate security, may have income, or may
incur a diminution in cash flow as a result of a default or delinquency, but may
not be able to take a deduction, subject to the discussion below, for the
corresponding loss until a subsequent taxable year. In this regard, investors
are cautioned that while they may generally cease to accrue interest income if
it reasonably appears that the interest will be uncollectible, the Internal
Revenue Service may take the position that original issue discount must continue
to be accrued in spite of its uncollectibility until the debt instrument is
disposed of in a taxable transaction or becomes worthless in accordance with the
rules of Code Section 166. To the extent the rules of Code Section 166 regarding
bad debts are applicable, it appears that Regular Securityholders that are
corporations or that otherwise hold the Regular Securities in connection with a
trade or business should in general be allowed to deduct as an ordinary loss a
loss with respect to principal sustained during the taxable year on account of
any such Regular Securities becoming wholly or partially worthless, and that, in
general, Regular Securityholders that are not corporations and do not hold the
Regular Securities in connection with a trade or business should be allowed to
deduct as a short-term capital loss any loss sustained during the taxable year
on account of a portion of any such Regular Securities becoming wholly
worthless. Although the matter is not free from doubt, such non-corporate
Regular Securityholders should be allowed a bad debt deduction at a time when
the principal balance of such Regular Securities is reduced to reflect losses
resulting from any liquidated mortgage loans. The Internal Revenue
Service, however, could take the position that non-corporate holders will be
allowed a bad debt deduction to reflect 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
upon termination of the class. Regular Securityholders are urged to consult
their own tax advisors regarding the appropriate timing, amount and character of
any loss sustained with respect to Regular Securities. While losses attributable
to interest previously reported as income
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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 the cost of the Regular Security to the seller, increased
by any original issue discount or market discount previously included in the
seller's gross income with respect to the Regular Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller, by any amortized premium
and by any recognized losses.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the applicable
holding period described below. 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 such 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 such holder with respect
to the Regular Security.
In addition, gain or loss recognized from the sale of a Regular Security by
certain banks or thrift institutions will be treated as ordinary income or loss
pursuant to Code Section 582(c). Capital gains of non-corporate taxpayers
generally are subject to a lower maximum tax rate (20%) than ordinary income of
those taxpayers (39.6%) for capital assets held for more than one year. The
maximum tax rate for corporations is the same with respect to both ordinary
income and capital gains.
TAXATION OF OWNERS OF RESIDUAL SECURITIES
TAXATION OF REMIC INCOME. Generally, the "daily portions" of REMIC taxable
income or net loss will be includible as ordinary income or loss in determining
the federal taxable income
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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 interest, original issue discount income
and market discount income, if any, on the mortgage loans, reduced by
amortization of any premium on the mortgage loans, plus income from amortization
of issue premium, if any, on the Regular Securities, plus income on reinvestment
of cash flows and reserve assets, plus any cancellation of indebtedness income
upon allocation of realized losses to the Regular Securities. The REMIC Pool's
deductions include interest and original issue discount expense on the Regular
Securities, servicing fees on the mortgage loans, other administrative expenses
of the REMIC Pool and realized losses on the mortgage loans. The requirement
that Residual Holders report their pro rata share of taxable income or net loss
of the REMIC Pool will continue until there are no securities of any class of
the related series outstanding.
The taxable income recognized by a Residual Holder in any taxable year will
be affected by, among other factors, the relationship between the timing of
recognition of interest, original issue discount or market discount income or
amortization of premium with respect to the mortgage loans, on the one hand, and
the timing of deductions for interest, including original issue discount, or
income from amortization of issue premium on the Regular Securities, on the
other hand. In the event that an interest in the mortgage loans is acquired by
the REMIC Pool at a discount, and one or more of 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, and the discount on the
mortgage loans which is includible in income may exceed the deduction allowed
upon distributions on those Regular Securities on account of any unaccrued
original issue discount relating to those Regular Securities. When more than one
class of Regular Securities distributes principal sequentially, this mismatching
of income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier classes of Regular Securities to
the extent that those classes are not issued with substantial discount or are
issued at a premium. If taxable income attributable to a mismatching is
realized, in general, losses would be allowed in later years as distributions on
the later maturing classes of Regular Securities are made. Taxable income may
also be greater in earlier years than in later years as a result of the fact
that interest expense deductions, expressed as a percentage of the outstanding
principal amount of a series of Regular Securities, may increase over time as
distributions in reduction of principal are made on the lower yielding classes
of Regular Securities. By contrast, to the extent the REMIC Pool consists of
fixed rate mortgage loans, interest income with respect to any given mortgage
loan
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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 upon a Residual Holder's
after-tax rate of return. In addition, a Residual Holder's taxable income during
certain periods may exceed the income reflected by such Residual Holders for
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,
first, by a cash distribution from the REMIC Pool and, second, by the amount of
loss of the REMIC Pool reportable by the Residual Holder. Any loss that is
disallowed on account of this limitation may be carried over indefinitely with
respect to the Residual Holder as to whom a loss was disallowed and may be used
by the Residual Holder only to offset any income generated by the same REMIC
Pool.
A Residual Holder will not be permitted to amortize directly the cost of its
Residual Security as an offset to its share of the taxable income of the related
REMIC Pool. However, the taxable income will not include cash received by the
REMIC Pool that represents a recovery of the REMIC Pool's basis in its assets.
This recovery of basis by the REMIC Pool will have the effect of amortization of
the issue price of the Residual Securities over their life. However, in view of
the possible acceleration of the income of Residual Holders described above
under "--Taxation of REMIC Income", the period of time over which the issue
price is effectively amortized may be longer than the economic life of the
Residual Securities.
A Residual Security may have a negative value if the net present value of
anticipated tax liabilities exceeds the present value of anticipated cash flows.
The REMIC Regulations appear to treat the issue price of a residual interest as
zero rather than a negative amount for purposes of determining the REMIC Pool's
basis in its assets. The preamble to the REMIC Regulations states that the
Internal Revenue Service may provide future guidance on the proper tax treatment
of payments made by a transferor of a residual interest to induce the transferee
to acquire the interest, and Residual Holders should consult their own tax
advisors in this regard.
Further, to the extent that the initial adjusted basis of a Residual Holder,
other than an original holder, in the Residual Security is greater than the
corresponding portion of the REMIC Pool's basis in the mortgage loans, the
Residual Holder will not recover a portion of 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
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and "--Sale or Exchange of a Residual Security" below regarding possible
treatment of a loss upon termination of the REMIC Pool as a capital loss.
TREATMENT OF CERTAIN ITEMS OF REMIC INCOME AND EXPENSE. Although it is
anticipated that the trustee will compute REMIC income and expense in accordance
with the Code and applicable regulations, the authorities regarding the
determination of specific items of income and expense are subject to differing
interpretations. The depositor makes no representation as to the specific method
that will be used for reporting income with respect to the mortgage loans and
expenses with respect to the Regular Securities, and different methods could
result in different timing or reporting of taxable income or net loss to
Residual Holders or differences in capital gain versus ordinary income.
ORIGINAL ISSUE DISCOUNT AND PREMIUM. Generally, the REMIC Pool's deductions
for original issue discount and income from amortization of issue premium will
be determined in the same manner as original issue discount income on Regular
Securities as described above under "--Taxation of Owners of Regular Securities
- -- Original Issue Discount" and "-- Variable Rate Regular Securities," without
regard to the de minimis rule described 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 thereof to the REMIC Pool. The REMIC
Regulations provide that in the REMIC Pool's basis in the mortgage loans is
equal in the aggregate to the issue prices of all regular and residual interests
in the REMIC Pool. The accrued portion of the market discount would be
recognized currently as an item of ordinary income in a manner similar to
original issue discount. Market discount income generally should accrue in the
manner described above under "--Taxation of Owners of Regular Securities --
Market Discount."
PREMIUM. Generally, if the basis of the REMIC Pool in the mortgage loans
exceeds their unpaid principal balances, the REMIC Pool will be considered to
have acquired the mortgage loans at a premium equal to the amount of the excess.
As stated above, the REMIC Pool's basis in mortgage loans is the fair market
value of the mortgage loans, based on the aggregate of the issue prices of the
regular and residual interests in the REMIC Pool immediately after the transfer
thereof to the REMIC Pool. In a manner analogous to the discussion above under
"-- Taxation of Owners of Regular Securities -Premium," a person that holds a
mortgage loan as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on mortgage loans originated after September 27,
1985 under the constant yield method. Amortizable bond premium will be treated
as an offset to interest income on the mortgage loans, rather than as a separate
deduction item. Because substantially all of the 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 such
premium entirely to the final payment of principal.
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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 such 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 could not be offset by
net operating losses of its shareholders, would constitute unrelated business
taxable income for tax-exempt shareholders, and would be ineligible for
reduction of withholding to certain persons who are not U.S. Persons. The SBJPA
of 1996 has eliminated the special rule permitting Section 593 institutions --
"thrift institutions" -- to use net operating losses and other allowable
deductions to offset their excess inclusion income from Residual Securities that
have "significant value" within the meaning of the REMIC Regulations, effective
for taxable years beginning after December 31, 1995, except with respect to
Residual securities continuously held by a thrift institution since November 1,
1995.
In addition, the SBJPA of 1996 provides three rules for determining the
effect of excess inclusions on the alternative minimum taxable income of a
Residual Holder. First, alternative minimum taxable income for a Residual Holder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Holder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss
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deduction must be computed without regard to any excess inclusions. These rules
are effective for taxable years beginning after December 31, 1986, unless a
Residual Holder elects to have the rules apply only to taxable years beginning
after August 20, 1996.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES.
Disqualified Organizations. If any legal or beneficial interest in a
Residual Security is transferred to a Disqualified Organization,
a tax would be imposed in an amount equal to the product of:
(1) the present value of the total anticipated excess inclusions with respect
to a Residual Security for periods after the transfer and
(2) the highest marginal federal income tax rate applicable to
corporations.
The REMIC Regulations provide that the anticipated excess inclusions are
based on actual prepayment experience to the date of the transfer and projected
payments based on the Prepayment Assumption. The present value rate equals the
applicable Federal rate under Code Section 1274(d) as of the date of the
transfer for a term ending with the last calendar quarter in which excess
inclusions are expected to accrue. This rate is applied to the anticipated
excess inclusions from the end of the remaining calendar quarters in which they
arise to the date of the transfer. This tax generally would be imposed on the
transferor of the Residual Security, except that where a transfer is through an
agent, including a broker, nominee, or other middleman, for a Disqualified
Organization, the tax would instead be imposed on the agent. However, a
transferor of a Residual Security would in no event be liable for this tax with
respect to a transfer if the transferee furnished to the transferor an affidavit
stating that the transferee is not a Disqualified Organization and, as of the
time of the transfer, the transferor does not have actual knowledge that the
affidavit is false. The tax also may be waived by the Internal Revenue Service
if the Disqualified Organization promptly disposes of the Residual Security and
the transferor pays income tax at the highest corporate rate on the excess
inclusion for the period the Residual Security is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity," as defined in the second succeeding
paragraph, has excess inclusion income with respect to a Residual Security
during a taxable year and a Disqualified Organization is the record holder of an
equity interest in that entity, then a tax is imposed on that entity equal to
the product of:
(1) the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period that interest is held by the Disqualified
Organization, and
(2) the highest marginal federal corporate income tax rate. That tax would be
deductible from the ordinary gross income of the Pass-Through Entity for the
taxable year. The Pass-Through Entity would not be liable for the tax if it
received an affidavit from the record holder that it is not a Disqualified
Organization or stating the holder's taxpayer identification number and, during
the period the person is the record holder of the Residual Security, the
Pass-Through Entity does not have actual knowledge that the affidavit is false.
For taxable years beginning on or after January 1, 1998, if an "electing
large partnership," as defined in the immediately succeeding paragraph, holds a
Residual Security, all interests in the electing large partnership are treated
as held by Disqualified Organizations for purposes of the tax imposed upon a
Pass-Through Entity by Section 860E(c) of the Code. An exception to this tax,
otherwise available to a Pass-Through Entity that is furnished certain
affidavits by record
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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 thereof, any foreign government, any international
organization, any agency or instrumentality of any of the foregoing, provided,
that such term does not include an instrumentality if all of its activities are
subject to tax and a majority of its board of directors is not selected by any
such governmental entity, any cooperative organization furnishing electric
energy or providing telephone service or persons in rural areas as described in
Code Section 1381(a)(2)(C), and any organization, other than a farmers'
cooperative described in Code Section 531, that is exempt from taxation under
the Code unless such organization is subject to the tax on unrelated business
income imposed by Code Section 511;
(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 such interest, be treated as a
Pass-Through Entity; and
(3) an "electing large partnership" means any partnership having more than
100 members during the preceding tax year, other than certain service
partnerships and commodity pools, which elects to apply certain simplified
reporting provisions under the Code.
The applicable agreement with respect to a series will provide that no legal
or beneficial interest in a Residual Security may be transferred or registered
unless:
(1) the proposed transferee furnished to the transferor and the trustee an
affidavit providing its taxpayer identification number and stating that
the transferee is the beneficial owner of the Residual Security and is
not a Disqualified Organization and is not purchasing the Residual
Security on behalf of a Disqualified Organization, i.e., as a broker,
nominee or middleman of the Disqualified Organization; and
(2) the transferor provides a statement in writing to the trustee that it
has no actual knowledge that the affidavit is false.
Moreover, the related agreement will provide that any attempted or purported
transfer in violation of these transfer restrictions will be null and void and
will vest no rights in any purported transferee. Each Residual Security with
respect to a series will bear a legend referring to the restrictions on
transfer, and each Residual Holder will be deemed to have agreed, as a condition
of ownership thereof, 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
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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 conducted, at the time of the transfer, a reasonable
investigation of the financial condition of the transferee and found
that the transferee historically paid its debts as they came due and
found no significant evidence to indicate that the transferee would not
continue to pay its debts as they came due in the future, and
(2) the transferee represents to the transferor that it understands that, as
the holder of the non-economic residual interest, the transferee may
incur liabilities in excess of any cash flows generated by the interest
and that the transferee intends to pay taxes associated with holding the
residual interest as they become due.
The agreement with respect to each series of Securities will require the
transferee of a Residual Security to certify to the matters in the preceding
sentence as part of the affidavit described above under the heading
"--Disqualified Organizations."
FOREIGN INVESTORS. The REMIC Regulations provide that the transfer of a
Residual Security that has "tax avoidance potential" to a "foreign person" will
be disregarded for all federal tax purposes. This rule appears intended to apply
to a transferee who is not a U.S. Person, unless that transferee's income is
effectively connected with the conduct of a trade or business within the United
States. A Residual Security is deemed to have tax avoidance potential unless, at
the time of the transfer:
(1) the future value of expected distributions equals at least 30% of the
anticipated excess inclusions after the transfer, and
(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.
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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. Upon the sale or exchange of a
Residual Security, the Residual Holder will recognize gain or loss equal to the
excess, if any, of the amount realized over the adjusted basis, as described
above under "--Taxation of Owners of Residual Securities -- Basis and Losses,"
of 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, in which case, if the Residual Holder has an adjusted basis in its
Residual Security remaining when its interest in the REMIC Pool terminates, and
if it holds such Residual Security as a capital asset under Code Section 1221,
then it will recognize a capital loss at that time in the amount of the
remaining adjusted basis.
Any gain on the sale of a Residual Security will be treated as ordinary
income
(1) if a Residual Security is held as part of a "conversion transaction" as
defined in Code Section 1258(c), up to the amount of interest that would have
accrued on the Residual Holder's net investment in the conversion transaction at
120% of the appropriate applicable Federal rate in effect at the time the
taxpayer entered into the transaction minus any amount previously treated as
ordinary income with respect to any prior disposition of property that was held
as a part of the transaction or
(2) in the case of a non-corporate taxpayer, to the extent that taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates. In addition, gain or loss recognized
from the sale of a Residual Security by certain banks or thrift institutions
will be treated as ordinary income or loss pursuant to Code Section 582(c).
The Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to dispositions of Residual Securities 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.
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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.
Notwithstanding (1) and (4), 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 a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale or
due-on-encumbrance clause, or the conversion of an interest rate by a 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
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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
such adoption is deemed to occur, and sells all of its assets, other than cash,
within a 90-day period beginning on such date, the REMIC Pool will not be
subject to the prohibited transaction rules on the sale of its assets, provided
that the REMIC Pool credits or distributes in liquidation all of the sale
proceeds plus its cash, other than amounts retained to meet claims, to holders
of Regular Securities and Residual Holders within the 90-day period.
ADMINISTRATIVE MATTERS. The REMIC Pool will be required to maintain its
books on a calendar year basis and to file federal income tax returns for
federal income tax purposes in a manner similar to a partnership. The form for
such income tax return is Form 1066, U.S. Real Estate Mortgage Investment
Conduit Income Tax Return. The trustee will be required to sign the REMIC Pool's
returns. Treasury regulations provide that, except where there is a single
Residual Holder for an entire taxable year, the REMIC Pool will be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination by the Internal Revenue Service of any adjustments
to, among other things, items of REMIC income, gain, loss, deduction, or credit
in a unified administrative proceeding. The master servicer will be obligated to
act as "tax matters person", as defined in applicable Treasury regulations, with
respect to the REMIC Pool as agent of the Residual Holder holding the largest
percentage interest in the Residual Securities. If the Code or applicable
Treasury regulations do not permit the master servicer to act as tax matters
person in its capacity as agent of such Residual Holder, such Residual Holder or
such other person specified pursuant to Treasury regulations will be required to
act as tax matters person.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES. An investor who is an
individual, estate, or trust will be subject to limitation with respect to
certain itemized deductions described in Code Section 67, to the extent that
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 such 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,
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these expenses are not deductible at all for purposes of computing the
alternative minimum tax, and may cause investors of this type to be subject to
significant additional tax liability. Temporary Treasury regulations provide
that the additional gross income and corresponding amount of expenses generally
are to be allocated entirely to the holders of Residual Securities in the case
of a REMIC Pool that would not qualify as a fixed investment trust in the
absence of a REMIC election. However, this additional gross income and
limitation on deductions will apply to the allocable portion of these expenses
to holders of Regular Securities, as well as holders of Residual Securities,
where Regular Securities are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. Generally, all these expenses will be
allocable to the Residual Securities. In general, the allocable portion will be
determined based on the ratio that a REMIC Holder's income, determined on a
daily basis, bears to the income of all holders of Regular Securities and
Residual Securities with respect to a REMIC Pool. As a result, individuals,
estates or trusts holding REMIC Securities, either directly or indirectly
through a grantor trust, partnership, S corporation, REMIC, or certain other
Pass-Through Entities described in the foregoing temporary Treasury regulations,
may have taxable income in excess of the interest income at the pass-through
rate on Regular Securities that are issued in a single class or otherwise
consistently with fixed investment trust status or in excess of cash
distributions for the related period on Residual Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
REGULAR SECURITIES. Interest, including original issue discount,
distributable to Regular Securityholders who are non-resident aliens, foreign
corporations, or other non-U.S. Persons, will be considered "portfolio interest"
and, therefore, generally will not be subject to 30% United States withholding
tax, provided that the non-U.S. Person:
(1) is not a "10-percent shareholder" within the
meaning of Code Section 871(h)(3)(B) or a controlled foreign corporation
described in Code Section 881(c)(3)(C) and
(2) provides the trustee, or the person who would otherwise be required to
withhold tax from the distributions under Code Section 1441 or 1442, with an
appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security is a non-U.S. Person.
If the signed statement, or any other required
statement, is not provided, 30% withholding will apply unless reduced or
eliminated pursuant to an applicable tax treaty or unless the interest on the
Regular Security is effectively connected with the conduct of a trade or
business within the United States by such non-U.S. Person. In the
latter case, such non-U.S. Person will be subject to United States
federal income tax at regular rates. Investors who are non-U.S.
Persons should consult their own tax advisors regarding the specific tax
consequences to them of owning a Regular Security.
The 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:
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(1) the certification described above be provided by the partners
rather than by the foreign partnership and
(2) the partnership provide certain information, including a United
States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. Non-U.S.
Persons should consult their own tax advisors concerning the application of the
certification requirements in the New Regulations.
RESIDUAL SECURITIES. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Holders who are non-U.S. Persons
generally should be treated as interest for purposes of the 30%, or lower
treaty rate, United States withholding tax. Treasury regulations provide that
amount distributed to Residual Holders may qualify as "portfolio interest",
subject to the conditions described in "Regular Securities" above, but only to
the extent that:
(1) the mortgage loans were issued after July
18, 1984 and
(2) the trust fund or segregated pool of assets in that trust fund, as to
which a separate REMIC election will be made, to which the Residual Security
relates, consists of obligations issued in "registered form" within the meaning
of Code Section 163(f)(1).
Generally, mortgage loans will not be, but regular interests in another REMIC
Pool will be, considered obligations issued in registered form. Furthermore,
Residual Holders will not be entitled to any exemption from the 30% withholding
tax, or lower treaty rate to the extent of that portion of REMIC taxable income
that constitutes an "excess inclusion." See "--Taxation of Owners of Residual
Securities -Limitations on Offset or Exemption of REMIC Income" in this
prospectus. If the amounts paid to Residual Holders who are non-U.S. Persons are
effectively connected with the conduct of a trade or business within the United
States by non-U.S. Persons, 30% or lower treaty rate withholding will not apply.
Instead, the amounts paid to such Non-U.S.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," including interest distributions, original issue
discount, and, under certain circumstances, principal distributions, unless the
Regular Holder complies with certain reporting and/or certification procedures,
including the provision of its taxpayer identification number to the trustee,
its agent or the broker who effected the sale of the Regular Security, or 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
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certain of the rules relating to certain presumptions currently available
relating to information reporting and backup withholding. Non-U.S. Persons are
urged to contact their own tax advisors regarding the application to them of
backup withholding and information reporting.
REPORTING REQUIREMENTS. Reports of accrued interest, original issue discount
and information necessary to compute the accrual of market discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-exempt
and non-charitable trusts, and partnerships who are either holders of record of
Regular Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities, including corporations, non-calendar
year taxpayers, securities or commodities dealers, real estate investment
trusts, investment companies, common trust funds, thrift institutions and
charitable trusts)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 such
holders. Furthermore, under such regulations, information must be furnished
quarterly to Residual Holders, furnished annually to holders of Regular
Securities, and filed annually with the Internal Revenue Service concerning the
percentage of the REMIC Pool's assets meeting the qualified asset tests
described above under "--Characterization of Investments in REMIC Securities."
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS. With respect to each series of Grantor
Trust Securities, Cadwalader, Wickersham & Taft will deliver its opinion to the
effect that, assuming compliance with all provisions of the 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 such security in such
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 and will
be
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considered the beneficial owner of a pro rata undivided interest in each of the
mortgage loans, subject to the discussion below under "--Recharacterization of
Servicing Fees." Accordingly, the holder of a Standard Security of a particular
series will be required to report on its federal income tax return its pro rata
share of the entire income from the mortgage loans represented by its Standard
Security, including interest at the coupon rate on such mortgage loans, original
issue discount, if any, prepayment fees, assumption fees, and late payment
charges received by the servicer, in accordance with such holder's method of
accounting. 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 such amounts are
reasonable compensation for services rendered to that Grantor Trust Fund.
However, investors who are individuals, estates or trusts who own securities,
either directly or indirectly through certain pass-through entities, will be
subject to limitation with respect to certain itemized deductions described in
Code Section 67, including deductions under Code Section 212 for the servicing
fee and all 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, such expenses are not
deductible at all for purposes of computing the alternative minimum tax, and may
cause such investors to be subject to significant additional tax liability.
Moreover, where there is Retained Interest with respect to the mortgage loans
underlying a series of securities or where the servicing fees are in excess of
reasonable servicing compensation, the transaction will be subject to the
application of the "stripped bond" and "stripped coupon" rules of the Code, as
described below under "--Stripped Securities" and "--Recharacterization of
Servicing Fees," respectively.
TAX STATUS. Cadwalader, Wickersham & Taft has advised the depositor that:
1. A Standard Security owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans. . . secured by an interest in real property which is. . .
residential real property" within the meaning of Code Section
7701(a)(19)(C)(v), provided that the real property securing the mortgage
loans represented by that Standard Security is of the type described in 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, and 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 such 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 such
treatment must be reduced by the amount of the Buydown Funds. There is
indirect authority supporting treatment of an investment in a
Buydown Loan as entirely secured by real property if the fair market value
of the real property securing the loan exceeds the principal amount of the
loan at the time of issuance or acquisition, as the case may be. 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 upon
initial issuance of Standard Securities or subsequent acquisition.
PREMIUM. The treatment of premium incurred upon 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 such income.
Unless indicated otherwise in the related prospectus supplement, no prepayment
assumption will be assumed for purposes of such accrual. However, Code Section
1272 provides for a reduction in the amount of original issue discount
includible in the income of a holder of an obligation that acquires the
obligation after its initial issuance at a price greater than the sum of the
original issue price and the previously accrued original issue
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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 such trust could be viewed
as excluding the portion of the mortgage loans the ownership of which is
attributed to the Servicer,servicer, or as including such 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 upon 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. Upon sale or exchange of a Standard
Security, 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 such gain or loss
generally would be capital gain or loss if the Standard Security was held as a
capital asset. However, gain on the sale of a Standard Security will be treated
as ordinary income:
(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 such taxpayers (39.6%) for
capital assets held for more than one year. The maximum tax rate for
corporations is the same with respect to both ordinary income and capital gains.
STRIPPED SECURITIES
GENERAL. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some or all of the principal payments on an obligation from
ownership of the right to receive some or all of the interest payments results
in the creation of "stripped bonds" with respect to principal payments and
"stripped coupons" with respect to interest payments. For purposes of this
discussion, securities that are subject to those rules will be referred to as
"Stripped Securities." The securities will be subject to those rules if:
(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 such classes for the related period or
periods. The holder of a Stripped Security generally will be entitled to a
deduction each year in respect of the servicing fees, as described above under
"---Standard Securities -- General," subject to the limitation described in such
section.
Code Section 1286 treats a stripped bond or a stripped coupon generally as an
obligation issued on the date that such stripped interest is purchased. Although
the treatment of Stripped Securities for federal income tax purposes is not
clear in certain respects, particularly where 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 such 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 "real estate
assets" within the meaning of Code Section 856(c)(4)(A), "obligation[s]. . .
principally secured by an interest in real property" within the meaning of Code
Section 860G(a)(3)(A), and "loans. . . secured by an interest in real property"
within the meaning of Code Section 7701(a)(19)(C)(v), and interest including
original issue discount income attributable to Stripped Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B), provided that in each
case the mortgage loans and interest on those mortgage loans qualify for this
tax treatment. The application of such Code provisions to Buydown Loans is
uncertain. See "--Standard Securities -- Tax Status" above.
TAXATION OF STRIPPED SECURITIES. Original Issue Discount. Except as described
above under "General," each Stripped Security will be considered to have been
issued at an original issue discount for federal income tax purposes. Original
issue discount with respect to a Stripped Security must be included in ordinary
income as it accrues, in accordance with a constant yield method that takes into
account the compounding of interest, which 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 -- Origina 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, and 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 such
original issue discount will be either increased or decreased depending on the
relative interests in principal and interest on each mortgage loan represented
by the holder's Stripped Security. While the matter is not free from doubt, the
holder of a Stripped Security should be entitled in the year that it becomes
certain, assuming no further prepayments, that the holder will not recover a
portion of its adjusted basis in that Stripped Security to recognize a loss,
which may be a capital loss, equal to that portion of unrecoverable basis.
As an alternative to the method described above, the fact that some or all of
the interest payments with respect to the Stripped Securities will not be made
if the mortgage loans are prepaid could lead to the interpretation that those
interest payments are "contingent" within the
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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 such classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
POSSIBLE ALTERNATIVE CHARACTERIZATION. The characterizations of the Stripped
Securities discussed above are not the only possible interpretations of the
applicable Code provisions. For example, the holder of securities may be treated
as the owner of:
(1) one installment obligation consisting of such Stripped Security's pro
rata share of the payments attributable to principal on each mortgage loan and a
second installment obligation consisting of the respective Stripped Security's
pro rata share of the payments attributable to interest on each mortgage loan,
(2) as many stripped bonds or stripped coupons as there are scheduled
payments of principal and/or interest on each mortgage loan, or
(3) a separate installment obligation for each mortgage loan, representing
the Stripped Security's pro rata share of payments of principal and/or interest
to be made with respect to that Stripped Security. Alternatively, the holder of
one or more classes of Stripped Securities may be treated as the owner of a pro
rata fractional undivided interest in each mortgage loan to the extent that the
related Stripped Security, or classes of Stripped Securities in the aggregate,
represent the same pro rata portion of principal and interest on each mortgage
loan, and a stripped bond or stripped coupon, as the case may be, treated as an
installment obligation or contingent payment obligation, as to the remainder.
Treasury regulations regarding original issue discount on stripped obligations
make the foregoing interpretations less likely to be applicable. The preamble to
these regulations states that they are premised on the assumption that an
aggregation approach is appropriate for determining whether original issue
discount on a stripped bond or stripped coupon is de minimis, and solicits
comments on appropriate rules for aggregating stripped bonds and stripped
coupons under Code Section 1286.
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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, such
reporting will be based upon 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 such lower rate as may be provided for interest by an
applicable tax treaty. Accrued original issue discount recognized by the holder
of securities on the sale or exchange of that security also will be subject to
federal income tax at the same rate.
Treasury regulations provide that interest or original issue discount paid by
the trustee or other withholding agent to a non-U.S. Person evidencing ownership
interest in mortgage loans issued after July 18, 1984 will be "portfolio
interest" and will be treated in the manner, and these persons will be subject
to the same certification requirements, described above under "--REMICs --
Taxation of Certain Foreign Investors -Regular Securities."
PARTNERSHIP TRUST FUNDS
CLASSIFICATION OF PARTNERSHIP TRUST FUNDS. With respect to each series of
Partnership Securities or Debt Securities, Cadwalader, Wickersham & Taft will
deliver its opinion that the trust fund will not be a taxable mortgage pool or
an association, or publicly traded partnership, taxable as a corporation for
federal income tax purposes. This opinion will be based on the assumption that
the terms of the applicable agreement and related documents will be complied
with, and on counsel's conclusion that the nature of the income of the trust
fund will exempt it from the rule that certain publicly traded partnerships are
taxable as corporations.
CHARACTERIZATION OF INVESTMENTS IN PARTNERSHIP SECURITIES AND DEBT
SECURITIES. For federal income tax purposes:
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(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), but Partnership Securities held by a real estate investment trust
will qualify under those sections based on the real estate investments trust's
proportionate interest in the assets of the Partnership Trust Fund based on
capital accounts.
TAXATION OF DEBT HOLDER OF SECURITIES. Treatment of the Debt Securities as
Indebtedness. The Depositor will agree, and the holders of ssecurities 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,
and the timing and amount of income allocable to holders of such Debt Securities
may be different than as described in the following paragraph.
Debt Securities generally will be subject to the same rules of taxation as
Regular Securities issued by a REMIC, as described above, except that:
(1) income reportable on Debt Securities is not required to be reported under
the accrual method unless the holder otherwise uses the accrual method and
(2) the special rule treating a portion of the gain on sale or exchange of a
Regular Security as ordinary income is inapplicable to Debt Securities. See
"--Taxation of Owners of Regular Securities" above.
TAXATION OF OWNERS OF PARTNERSHIP SECURITIES
TREATMENT OF THE PARTNERSHIP TRUST FUND AS A PARTNERSHIP. The prospectus
supplement may specify that the Depositor will agree, and the holders of
securities will agree by their purchase of securities, to treat the Partnership
Trust Fund:
(1) as a partnership for purposes of federal and state income tax, franchise
tax and any other tax measured in whole or in part by income, with the assets of
the partnership being the assets held by the Partnership Trust Fund, the
partners of the Partnership being the holders of securities, including the
depositor, and the Debt Securities, if any, being debt of the partnership or
(2) if a single beneficial owner owns all of the Partnership Securities in a
trust fund, the trust fund will be ignored for federal income tax purposes and
the assets and Debt Securities of the trust fund will be treated as assets and
indebtedness of this beneficial owner.
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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 such 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, although no assurance can be given that
the IRS would not require a greater amount of income to be allocated to
securities. Moreover, even under the foregoing method of allocation, holders of
securities may be allocated income equal to the entire pass-through rate plus
the other items described above even though the trust fund might not have
sufficient cash to make current cash distributions of that amount. Thus, cash
basis holders will in effect be required to report income from the Partnership
Securities on the accrual basis and holders of securities may become liable for
taxes on Partnership Trust Fund income even if they have not received cash from
the Partnership Trust Fund to pay these taxes.
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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." Notwithstanding
that description, it is intended that the Partnership Trust Fund will make all
tax calculations relating to income and allocations to holders of securities on
an aggregate basis with respect to all mortgage loans held by the Partnership
Trust Fund rather than on a mortgage loan-by-mortgage loan basis. If the IRS
required calculations to be made separately for each mortgage loan, the
Partnership Trust Fund might be required to incur additional expense, but we
believe that there would not be a material adverse effect on holders of
securities.
DISCOUNT AND PREMIUM. The prospectus supplement may provide that the mortgage
loans will have been issued with original discount. However, it is not
anticipated that the mortgage loans will have been issued with original issue
discount and, therefore, the Partnership Trust Fund should not have original
issue discount income. However, the purchase price paid by the Partnership Trust
Fund for the mortgage loans may be greater or less than the remaining principal
balance of the mortgage loans at the time of purchase. If so, the mortgage loans
will have been acquired at a premium or discount, as the case may be. See " --
Standard Securities -- Premium and Discount" in this prospectus. As previously
indicated above, the Partnership Trust Fund will make this calculation on an
aggregate basis, but might be required to recompute it on a mortgage
loan-by-mortgage loan basis.
If the Partnership Trust Fund acquires the mortgage loans at a market
discount or premium, the Partnership Trust Fund will elect to include any
discount in income currently as it accrues over the life of the mortgage loans
or to offset any premium against interest income on the mortgage loans. As
indicated above, a portion of any market discount income or premium deduction
may be allocated to holders of securities.
SECTION 708 TERMINATION. Under Section 708 of the Code, the Partnership Trust
Fund will be deemed to terminate for federal income tax purposes if 50% or more
of the capital and profits interests in the Partnership Trust Fund are sold or
exchanged within a 12-month period. A termination of this type would cause a
deemed contribution of the assets of a Partnership Trust Fund --the "old
partnership"-- to a new Partnership Trust Fund --the "new partnership"-- in
exchange for interests in the new partnership. The interests in a new
Partnership Trust Fund would be deemed distributed to the partners of the old
partnership in liquidation of the old partnership, which would not constitute a
sale or exchange. The Partnership Trust Fund will not comply with certain
technical requirements that might apply when a constructive termination occurs.
As a result, the Partnership Trust Fund may be subject to certain tax penalties
and may
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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 such
Partnership Securities, and, upon sale or other disposition of some of the
Partnership Securities, 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 upon the retirement of the Partnership
Securities.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES. In general, the Partnership
Trust Fund's taxable income and losses will be determined each Due Period and
the tax items for a particular Due Period will be apportioned among the holders
of securities in proportion to the principal amount of Partnership Securities
owned by them as of the close of the last day of the related Due Period. As a
result, a holder purchasing Partnership Securities may be allocated tax items
attributable to periods before the actual transaction, which will affect its tax
liability and tax basis.
The use of this Due Period convention may not be permitted by existing
regulations. If a Due Period convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the Partnership Trust Fund might be reallocated among the holders of
securities. The depositor will be authorized to revise the Partnership Trust
Fund's method of allocation between transferors and transferees to conform to a
method permitted by future regulations.
SECTION 731 DISTRIBUTIONS. In the case of any distribution to a holder of
securities, no gain will be recognized to that holder of securities to the
extent that the amount of any money distributed with respect to that holder's
security exceeds the adjusted basis of that holder's interest in the security.
To the extent that the amount of money distributed exceeds that holder's
adjusted basis, gain will be currently recognized. In the case of any
distribution to a holder of
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securities, no loss will be recognized except upon a
distribution in liquidation of a holder's interest. Any gain or loss recognized
by a holder of securities will be capital gain or loss.
SECTION 754 ELECTION. In the event that 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. Such books will be maintained
for financial reporting and tax purposes on an accrual basis and the fiscal year
of the Partnership Trust Fund will be the calendar year. The trustee will file a
partnership information return on IRS Form 1065 with the IRS for each taxable
year of the Partnership Trust Fund and will report each holder's allocable share
of items of Partnership Trust Fund income and expense to holders and the IRS on
Schedule K-1. The trustee will provide the Schedule K-1 information to nominees
that fail to provide the Partnership Trust Fund with the information statement
described below and those nominees will be required to forward the information
to the beneficial owners of the Partnership Securities. Generally, holders must
file tax returns that are consistent with the information return filed by the
Partnership Trust Fund or be subject to penalties unless the holder notifies the
IRS of all inconsistencies.
Under Section 6031 of the Code, any person that holds Partnership Securities
as a nominee at any time during a calendar year is required to furnish the
Partnership Trust Fund with a statement containing certain information on the
nominee, the beneficial owners and the Partnership Securities so held. This
information includes:
(1) the name, address and taxpayer identification number of
the nominee and
(2) as to each beneficial owner:
(x) the name, address and identification number of the beneficial owner,
(y) whether the beneficial owner is a U.S. Person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and
(z) certain information on Partnership Securities that were held, bought or
sold on behalf of the beneficial owner throughout the year. In addition, brokers
and financial institutions that hold Partnership Securities through a nominee
are required to furnish directly to the trustee information as to themselves and
their ownership of Partnership Securities. A clearing agency registered under
Section 17A of the Exchange Act is not required to furnish any information
statement of this type to the Partnership Trust Fund. The information referred
to above for any calendar year must be furnished to the Partnership Trust Fund
on or before the following January 31. Nominees, brokers and financial
institutions that fail to provide the Partnership Trust Fund with the
information described above may be subject to penalties.
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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, 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 such security, or other investing or trading in stock or securities for
the holder's own account, is the only activity of the securityholder within the
United States and the securityholder is not a dealer in securities. Accordingly,
such securityholders will not be subject to withholding tax pursuant to Section
1446 of the Code, at a rate of 35% for non-U.S. Persons that are taxable as
corporations and 39.6% for all other foreign holders. The prospectus supplement
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 UPON A SECURITYHOLDER'S
PARTICULAR TAX SITUATION. PROSPECTIVE PURCHASERS SHOULD CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP
AND DISPOSITION OF REMIC SECURITIES, GRANTOR TRUST SECURITIES, PARTNERSHIP
SECURITIES AND DEBT SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL
OR OTHER TAX LAWS.
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STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "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
Plans and on persons who are fiduciaries with respect to such Plans. Certain
employee benefit plans, such as governmental plans as defined in Section 3(32)
of ERISA, and, if no election has been made under Section 410(d) of the Code,
church plans as defined in Section 3(33) of ERISA, are not subject to the ERISA
requirements discussed in this prospectus. Accordingly, assets of such plans may
be invested in securities without regard to the ERISA considerations described
below, subject to the provisions of applicable federal, state and local law. Any
such plan which is qualified and exempt from taxation under Sections 401(a) and
501(a) of the Code, however, is subject to the prohibited transaction rules set
forth in Section 503 of the Code.
In addition to the imposition of general fiduciary requirements, including
those of investment prudence and diversification and the requirement that a
Plan's investment be made in accordance with the documents governing the Plan,
Section 406(a) of ERISA and Section 4975(c)(1)(A), (B), (C) and (D) of the Code
prohibit a broad range of transactions involving assets of a Plan and persons
who have certain specified relationships to the Plan. In addition, Section
406(b) of ERISA and Section 4975(c)(1)(E) and (F) of the Code impose certain
prohibitions on Parties in Interest who are fiduciaries with respect to the
Plan. Certain Parties in Interest that participate in a prohibited transaction
may be subject to a penalty imposed under Section 502(i) of ERISA or an excise
tax pursuant to Sections 4975(a) and (b) of the Code, unless a statutory or
administrative exemption is available.
Certain transactions involving a trust fund might be deemed to constitute
prohibited transactions under ERISA and Section 4975 of the Code with respect to
a Plan that purchases securities if the residential loans, agency securities,
mortgage securities and other assets included in such trust fund are deemed to
be assets of the Plan. The U.S. Department of Labor 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," which include Plans, as well as any "employee benefit plan," as
defined in Section 3(3) of ERISA, which is not subject to Title I of ERISA, such
as governmental plans, as defined in Section 3(32) of ERISA, and church plans,
as defined in
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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 upon 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 such
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 if the Issuer, the
holder of an Equity Certificate or any of their respective affiliates is or
becomes a Party in Interest with respect to such Plan, or if the depositor, the
master servicer, any sub-servicer or any trustee has investment authority with
respect to the assets of such Plan.
Any person who has discretionary authority or control respecting the
management or disposition of plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the residential loans, agency securities, mortgage securities and other
assets included in a trust fund constitute plan assets, then any party
exercising management or discretionary control regarding those assets, such as
the master servicer or any sub-servicer, may be deemed to be a Plan "fiduciary"
subject to the fiduciary requirements of ERISA and the prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the assets included in a trust fund constitute plan assets, the
purchase or holding of securities by a Plan, as well as the operation of the
related trust fund, may constitute or involve a prohibited transaction under
ERISA and the Code.
Some of the transactions involving the securities that might otherwise
constitute prohibited transactions under ERISA or the Code might qualify for
relief from the prohibited transaction rules under certain administrative
exemptions, which may be individual or class exemptions. The 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, which generally exempts from the application of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes and civil
penalties imposed on such prohibited transactions pursuant to Section 4975(a)
and (b) of the Code and Section 502(i) of ERISA, certain transactions, among
others, relating to the servicing and operation of mortgage pools and the
purchase, sale and holding of pass-through certificates, such as a senior class
of certificates, underwritten by an underwriter, 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
(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.
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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" which 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) the sum of all payments made to and retained by the underwriter(s) must
represent not more than reasonable compensation for underwriting the
certificates; the sum of all payments made to and retained by the depositor
pursuant to the assignment of the assets of the trust fund to the related trust
fund must represent not more than the fair market value of those obligations;
and the sum of all payments made to and retained by the master servicer and any
sub-servicer must represent not more than reasonable compensation for 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 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.
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If the general conditions of the Exemption are satisfied, the Exemption may
provide an exemption from the restrictions imposed by Sections 406(a) and 407(a)
of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of the
Code by reason of Section 4975(c) of the Code) in connection with the direct or
indirect sale, exchange, transfer, holding or the direct or indirect acquisition
or disposition in the secondary market of certificates by Plans. However, no
exemption is provided from the restrictions of Sections 406(a)(1)(E), 406(a)(2)
and 407 of ERISA for the acquisition or holding of a certificate on behalf of an
"Excluded Plan" by any person who has discretionary authority or renders
investment advice with respect to the assets of such "Excluded Plan." For
purposes of the certificates, an Excluded Plan is a Plan sponsored by any member
of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with:
(1) the direct or indirect sale, exchange or transfer of certificates in the
initial issuance of certificates between 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 so
that the Exemption would provide an exemption from the restrictions imposed by
Sections 406(a) and (b) of ERISA, as well as the excise taxes imposed by
Sections 4975(a) and (b) of the Code by reason of Section 4975(c) of the Code,
for transactions in connection with the servicing, management and operation of
the related trust fund, provided that the general conditions of the Exemption
are satisfied.
The Exemption also may provide an exemption from the restrictions imposed by
Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code if such
restrictions are deemed to otherwise apply merely because a person is deemed to
be a Party in Interest with respect to an investing Plan, by virtue of providing
services to the Plan, or by virtue of having certain specified relationships to
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
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(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, which may provide relief from certain of the
prohibited transaction provisions of ERISA and the related excise tax provisions
of the Code, including PTCE 83-1, regarding transactions involving mortgage pool
investment trusts; PTCE 84-14, regarding transactions effected by a "qualified
professional asset manager"; PTCE 90-1, regarding transactions by insurance
company pooled separate accounts; PTCE 91-38, regarding investments by bank
collective investment funds; PTCE 95-60, regarding transactions by insurance
company general accounts; and PTCE 96-23, regarding transactions effected by an
"in-house asset manager."
In addition to any exemption that may be available under PTCE 95-60 for the
purchase, sale and holding of the securities by an insurance company general
account, the Small Business Job Protection Act of 1996 added a new Section
401(c) to ERISA, which provides certain exemptive relief from the provisions of
Part 4 of Title I of ERISA, including the prohibited transaction provisions, 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 which are to
provide guidance for the purpose of determining, in cases where insurance
policies supported by an insurer's general account are issued to or for the
benefit of a Plan on or before December 31, 1998, which general account assets
constitute plan assets. Section 401(c) of ERISA generally provides that, until
the date which is 18 months after the 401(c) regulations become final, no person
shall be subject to liability under Part 4 of Title I of ERISA and Section 4975
of the Code on the basis of a claim that the assets of an insurance company
general account constitute plan assets, unless:
(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. Any assets of an insurance company general account which support
insurance policies issued to a Plan after December 31, 1998 or issued to Plans
on or before December 31, 1998 for which the insurance company does not comply
with the 401(c) regulations may be treated as plan assets. In addition, because
Section 401(c) does not relate to insurance company separate accounts, separate
account assets are still treated as plan assets of any Plan invested in such
separate account. Insurance companies contemplating the investment of general
account assets in the securities should consult with their legal counsel with
respect to the applicability of Section 401(c) of ERISA, including the general
account's ability to continue to hold the Securitiessecurities after the date
which is 18 months after the date the 401(c) regulations become final. The
United States Department of Labor proposed such regulations on December 22,
1997, but they have not yet been finalized.
Any plan fiduciary which proposes to cause a Plan to purchase securities
should consult with its counsel with respect to the potential applicability of
ERISA and Section 4975 of the Code to
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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, state-chartered savings banks, commercial banks, savings and loan
associations and insurance companies, as well as trustees and state government
employee retirement systems, created pursuant to or existing under the laws of
the United States or of any state, including the District of Columbia and Puerto
Rico, whose authorized investments are subject to state regulation to the same
extent that, under applicable law, obligations issued by or guaranteed as to
principal and interest by the United States or any agency or instrumentality 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 upon 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: 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 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
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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 Supervisiohe 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-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, 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,
"prudent investor" provisions, percentage-of-assets limits, provisions which may
restrict or prohibit investment in securities which are not "interest bearing"
or "income paying," and, with regard to any securities issued in book-entry
form, provisions which may restrict or prohibit investments in securities which
are issued in book-entry form.
Except as to the status of certain classes of securities as "mortgage related
securities," no representation is made as to the proper characterization of the
securities for legal investment purposes, financial institution regulatory
purposes, or other purposes, or as to the ability of particular investors to
purchase securities under applicable legal investment restrictions. The
uncertainties described above, and any unfavorable future determinations
concerning legal investment or financial institution regulatory characteristics
of the securities, may adversely affect the liquidity of the securities.
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Accordingly, all investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult their own legal advisors in determining
whether and to what extent the securities constitute legal investments or are
subject to investment, capital or other restrictions and, if applicable, whether
SMMEA has been overridden in any jurisdiction relevant to such investor.
PLANS OF DISTRIBUTION
The securities offered 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 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. In the
event that 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 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 upon the difference between its purchase price and the sales price. The
prospectus supplement with respect to any series offered other than through
underwriters will contain information regarding the nature of 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 such 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 such 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 such other manner as may be specified in the related
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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 such
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, which 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, and any
commissions and discounts received by that dealer and any profit on the resale
or such 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, including 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.
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, upon written or oral request of any person, a copy of any or all
reports incorporated in this prospectus by reference, in each case 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.
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Copies of the registration statement may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, upon payment of the
prescribed charges, 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 th registration statement, including all exhibits to the
registration statement, through the EDGAR system and therefore such 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.
LEGAL MATTERS
The validity of the securities and certain federal income tax matters in
connection with the securities will be passed upon for the depositor by
Cadwalader, Wickersham & Taft, New York, New York.
FINANCIAL INFORMATION
A new trust fund will be formed with respect to each series of securities and
no trust fund will engage in any business activities or have any assets or
obligations prior to the issuance of the related series of securities.
Accordingly, no financial statements with respect to any trust fund will be
included in this prospectus or in the related prospectus supplement.
RATING
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 and 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 an assessment of the likelihood that
principal prepayments on the related residential loans will be made, the degree
to which the rate of prepayments might differ from that originally anticipated
or 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 such investor
to experience a lower than anticipated yield or that an investor purchasing a
security at a significant premium might fail to recoup its initial investment
under certain prepayment scenarios.
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
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judgment circumstances in the future so warrant. In addition to being lowered or
withdrawn due to any erosion in the adequacy of the value of the 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 upon an actuarial analysis of the behavior of
mortgage loans in a larger group. The foregoing analysis is often the basis upon
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 nor
any assurance that the data derived from a large pool of mortgage loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of residential loans. 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 and, accordingly, 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
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
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 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.
"BUYDOWN FUNDS" are funds paid on the related Buydown Loans.
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"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.
"DEBT SECURITIES" are securities which represent indebtedness of a
Partnership Trust Fund for federal income tax purposes.
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"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.
"LIQUIDATION PROCEEDS" are cash proceeds received by foreclosure, eminent
domain, condemnation or otherwise, excluding any proceeds from any insurance
policies along with the
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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 upon prepayment in full or in part.
"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
upon the request of 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.
"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
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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.
"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.
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"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:
(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
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(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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<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
II-1
<PAGE>
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
<PAGE>
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:
<PAGE>
(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
<PAGE>
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.
<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. 1 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 16th day of July, 1999.
PAINEWEBBER MORTGAGE
ACCEPTANCE CORPORATION IV
By: /s/ Joseph Piscina
------------------------------
Name: Joseph Piscina
Title: President
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Pre-Effective Amendment No. 1 to the Registration Statement has been signed
by the following persons in the capacities indicated.
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ Joseph Piscina President and Director July 16, 1999
- -------------------------- (Principal Executive Officer)
Joseph Piscina
/s/ Daniel Leyden Senior Vice President July 16, 1999
- -------------------------- (Principal Accounting and
Daniel Leyden Financial Officer)
/s/ Ramesh Singh Director July 16, 1999
- --------------------------
Ramesh Singh
/s/ Michael T. Sullivan Director July 16, 1999
- --------------------------
Michael T. Sullivan
<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.
