<PAGE>
Rule 424(b)(5)
File No. 333-3911
SUPPLEMENT
(To Prospectus Dated November 13, 1995 and
Prospectus Supplement Dated November 13, 1995)
LEHMAN FHA TITLE I LOAN TRUST 1995-6
FHA Title I Loan Asset-Backed Certificates, Series 1995-6
Notional Amount Class S 0.4925% Certificate Rate
The First National Bank of Keystone,
as Seller
Lehman ABS Corporation,
as Depositor
The FHA Title I Loan Asset-Backed Certificates, Series 1995-6 (the
"Certificates"), consist of six Classes of senior Certificates (the "Senior
Certificates"): Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
(collectively, the "Class A Certificates") and Class S (the "Class S
Certificates") and one Class of subordinated Certificates (the "Class R
Certificates"). The Certificates were issued on November 17, 1995 (the "Closing
Date"). The Senior Certificates were previously offered for sale to the public
pursuant to the accompanying Prospectus Supplement dated November 13, 1995 (the
"Prospectus Supplement") and the accompanying Prospectus dated November 13,
1995 (the "Base Prospectus"). This Supplement updates certain information in
the Prospectus Supplement relating to the Class S Certificates. Only the Class
S Certificates are being offered hereby. The Prospectus Supplement, the Base
Prospectus and this Supplement are referred to herein as the "Prospectus."
The Certificates evidence in the aggregate the entire beneficial
interest in the Lehman FHA Title I Loan Trust 1995-6 (the "Trust") formed
pursuant to a pooling and servicing agreement (the "Agreement") among Lehman
ABS Corporation, as Depositor, The First National Bank of Keystone
("Keystone"), Norwest Bank Minnesota, N.A., as Master Servicer and Claims
Administrator, Coast Partners Acceptance Corporation, as Contract of Insurance
Holder and First Bank National Association, as Trustee. The property of the
Trust initially included funds on deposit in a trust account (the "Pre-Funding
Account") to be used for the purchase of additional Loans (as defined in the
Prospectus Supplement). During the Funding Period (as defined in the Prospectus
Supplement), substantially all the funds on deposit in the Pre-Funding Account
were used to purchase additional Loans (the "Subsequent Loans"). All of the
Initial Loans (as defined in the Prospectus Supplement) were acquired by Lehman
ABS Corporation (the "Depositor") from Keystone. All of the Subsequent Loans
were acquired by the Trust from Keystone with funds on deposit in the
Pre-Funding Account.
The Class S Certificateholders will be entitled to receive monthly
distributions only of interest on the Class S Notional Amount at the
Certificate Rate.
THE CLASS S CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT
REPRESENT INTERESTS IN OR OBLIGATIONS OF KEYSTONE, THE DEPOSITOR, THE MASTER
SERVICER, THE TRUSTEE, THE CONTRACT OF INSURANCE HOLDER OR ANY AFFILIATE
THEREOF, EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE CERTIFICATES
NOR THE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY,
OTHER THAN TO THE EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN. THESE
CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
Transfer of the Class S Certificates will be subject to certain
restrictions as described herein.
LEHMAN BROTHERS
November 20, 1996
<PAGE>
The initial Class S Notional Amount was equal to $135,996,958.88. The
Class S Notional Amount with respect to the Distribution Date in November 1996
is $187,555,253.66. With respect to any Distribution Date, the "Class S
Notional Amount" is the Pool Balance as of the close of business on the last
day of the second calendar month before such Distribution Date. The increase in
the Class S Notional Amount reflects the increase in the Pool Balance due to
the addition of the Subsequent Loans. No additional Subsequent Loans will be
added to the Trust.
The Class S Certificates are interest-only certificates. The yield to
investors in the Class S Certificates will be extremely sensitive to the rate
and timing of principal payments (including prepayments, repurchases, defaults
and liquidations) on the Loans, which may vary over time. A rapid rate of such
principal payments on the Loans could result in the failure of investors in the
Class S Certificates to fully recover their initial investments. See
"SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED AVERAGE LIFE OF THE CLASS S
CERTIFICATES" herein and "PREPAYMENT AND YIELD CONSIDERATIONS" in the
Prospectus Supplement.
Until ninety days after the date of this Supplement, all dealers
effecting transactions in the Class S Certificates, whether or not
participating in this distribution, may be required to deliver this Supplement,
the Prospectus Supplement and the Base Prospectus. This is in addition to the
obligation of dealers acting as underwriters to deliver this Supplement, the
Prospectus Supplement and the Base Prospectus with respect to their unsold
allotments or subscriptions.
This Supplement does not contain complete information about the
offering of the Class S Certificates. Additional information is contained in
the Prospectus Supplement and the Base Prospectus and investors are urged to
read this Supplement, the Prospectus Supplement and the Base Prospectus in
full. Sales of the Class S Certificates may not be consummated unless the
purchaser has received this Supplement, the Prospectus Supplement and the Base
Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to the Trust pursuant to Sections
13(a), 13(c), 14 and 15(d) of the Securities Exchange Act of 1934, as amended,
subsequent to the date of this Prospectus and prior to the termination of the
offering of the Class S Certificates shall be deemed to be incorporated by
reference into this Prospectus. Any statement contained in a document
incorporated or deemed to be incorporated by reference in this Prospectus shall
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute part of this Prospectus.
AVAILABLE INFORMATION
In addition to the locations specified under "Available Information"
in the Base Prospectus, the Commission maintains a Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants, including the Depositor, that file
electronically with the Commission.
S1-2
<PAGE>
GENERAL
The Prospectus Supplement and the Base Prospectus contain significant
additional information concerning the characteristics of the Class S
Certificates. The following is qualified in its entirety by reference to the
detailed information appearing in the Prospectus Supplement and in the Base
Prospectus, both of which should be read in conjunction with this Supplement.
Capitalized terms used in this Supplement and not otherwise defined herein have
the meanings assigned in the Prospectus Supplement or in the Base Prospectus.
RISK FACTORS
Investment in the Class S Certificates offered hereby involves a
number of significant risks. In addition to the information set forth elsewhere
herein and under "RISK FACTORS" in the Prospectus Supplement and in the Base
Prospectus, prospective investors should carefully consider the following
factors:
ERISA Restrictions
Transfer of the Class S Certificates will not be registered by the
Trustee unless the Trustee receives: (i) a representation from the transferee
of such Certificate, acceptable to and in form and substance satisfactory to
the Trustee, to the effect that such transferee is not an employee benefit plan
(a "Plan") subject to Section 406 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), or a plan or arrangement subject to Section
4975 of the Internal Revenue Code of 1986, as amended (the "Code"), nor a
person acting on behalf of any such plan or arrangement nor using the assets of
any such plan or arrangement to effect such transfer; (ii) if the purchaser is
an insurance company, a representation that the purchaser is an insurance
company which is purchasing such Certificates with funds contained in an
"insurance company general account" (as such term is defined in Section V(e) of
Prohibited Transaction Class Exemption 95-60 ("PTCE 95-60")) and that the
purchase and holding of such Certificates are covered under PTCE 95-60; or
(iii) an opinion of counsel satisfactory to the Trustee that the purchase or
holding of such Certificate by a Plan, any person acting on behalf of a Plan or
using such Plan's assets, will not result in the assets of the Trust being
deemed to be "plan assets" and subject to the prohibited transaction
requirements of ERISA and the Code and will not subject the Trustee to any
obligation in addition to those undertaken in the Agreement. In the event that
such representation is violated, or any attempt to transfer to a Plan or person
acting on behalf of a Plan or using such Plan's assets is attempted without
such opinion of counsel, such attempted transfer or acquisition shall be void
and of no effect. See "ERISA CONSIDERATIONS" in the Prospectus Supplement.
Legal Investment Considerations
The Class S Certificates will not constitute "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA") because some of the mortgages securing the Mortgage Loans are
not first mortgages. Accordingly, many institutions with legal authority to
invest in comparably rated securities based solely on first mortgages may not
be legally authorized to invest in the Class S Certificates. See "LEGAL
INVESTMENT CONSIDERATIONS" in the Prospectus Supplement and "LEGAL INVESTMENT"
in the Base Prospectus.
Lack of Delinquency and Loss Information
The following tables illustrate the delinquency and default experience
of the loans in existing Related Series Trusts, including the Trust and the
Lehman Home Improvement Loan Trust 1995-2, as of the date of this Supplement.
The information set forth in the following tables has been obtained from the
monthly master servicer reports for the applicable Related Series Trusts,
including the Trust
S1-3
<PAGE>
and the Lehman Home Improvement Loan Trust 1995-2, and neither the Depositor
nor any of its affiliates makes any representation as to the accuracy or
completeness of such information.
<TABLE>
<CAPTION>
Delinquency Experience
At At
December 31, September 30,
1995 1996
----------------------------------------------------------------
<S> <C> <C>
Outstanding Principal Balance $443,645,947.10 $830,524,708.68
30+ Day Delinquency(1) 3.79% 6.81%
60+ Day Delinquency(1) 0.97% 2.85%
</TABLE>
- ---------------
(1) As a percentage of outstanding principal balance.
<TABLE>
<CAPTION>
Default Experience
Year Ended Nine Months Ended
December 31, September 30,
1995 1996
----------------------------------------------------------------
<S> <C> <C>
Average Principal Balance(1) $406,511,724.64 $870,729,446.71
Aggregate Defaults(2) $ 4,695,279.76 $ 26,831,508.88
Default Percentage(3) 1.16% 3.08%
==========================================================================================================================
</TABLE>
(1) Average principal balance equals the sum of the average principal
balance for each Related Series Trust and the Lehman Home Improvement
Loan Trust 1995-2. The average principal balance for a Related Series
Trust or the Lehman Home Improvement Loan Trust 1995-2 is equal to (x)
the sum of the principal balances at the end of each Due Period during
the indicated period divided by (y) the number of Due Periods included
in such period for such Related Series Trust or the Lehman Home
Improvement Loan Trust 1995-2.
(2) Aggregate defaults equals the sum of the principal balances of all
Defaulted Loans in the Related Series Trusts and the Lehman Home
Improvement Loan Trust 1995-2 during the indicated period, where each
such principal balance equals the principal balance at the time such
Loan became a Defaulted Loan. A Defaulted Loan is a Loan with respect
to which: (i) a claim has been submitted pursuant to the Contract of
Insurance, (ii) foreclosure proceedings have been commenced, (iii) any
portion of a monthly payment is more than 150 days past due (without
giving effect to any grace period) or (iv) the Master Servicer has
determined, in good faith, in accordance with customary mortgage loan
servicing practices that all the amounts which it expects to receive
with respect to such Loan have been received.
(3) Default percentages are not annualized. With respect to the year ended
December 31, 1995, the Related Series Trusts and the Lehman Home
Improvement Loan Trust 1995-2 were outstanding from 2 to 12 months.
With respect to the nine months ended September 30, 1996, the Related
Series Trusts and the Lehman Home Improvement Loan Trust 1995-2 were
outstanding from 2 to 9 months.
While the above delinquency and default experience represents the
recent experience of the Related Series Trusts and the Lehman Home Improvement
Loan Trust 1995-2, there can be no assurance that the future delinquency and
default experience on the Loans will be similar. Potential investors should
make investment determinations based on the Loan underwriting criteria and
other information provided herein, and not solely on the prior delinquency and
default information provided above. More detailed statistically significant
delinquency and loss experience with respect to loans similar to the Loans
originated or purchased by the Approved Sellers is not available.
S1-4
<PAGE>
THE FIRST NATIONAL BANK OF KEYSTONE
As of September 30, 1996, Keystone has assets of approximately $542
million.
DESCRIPTION OF THE CERTIFICATES
The Certificates were issued pursuant to the Agreement. The following
summaries describe certain provisions of the Agreement. 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.
General
The Class S Certificates will have no principal balance, will not be
entitled to distributions of principal, and will receive distributions of
interest as described herein.
The Class S Certificates will be offered in fully registered,
certificated form in Percentage Interests of not less than 10%. The "Percentage
Interest" of the Class S Certificates as of any date of determination will be
equal to the percentage stated on the face of such Certificate.
Distributions will be made by check mailed to the address of the
person entitled thereto as it appears on the Certificate Register. However,
with respect to any holder of Class S Certificates evidencing, in the
aggregate, a minimum Percentage Interest of 30%, distributions will be made on
the Distribution Date by wire transfer in immediately available funds, provided
that the Trustee shall have been furnished with appropriate wiring instructions
not less than three Business Days prior to the related Distribution Date.
Distributions
On each Distribution Date, distributions on the Class S Certificates
will be made in accordance with the priorities described under "DESCRIPTION OF
THE CERTIFICATES -- Distributions" in the Prospectus Supplement.
Interest
The Class S Certificates will be entitled to a distribution in respect
of interest each month, to the extent of funds available therefor, in an amount
up to the Class Interest Distribution for the Class S Certificates. For each
Distribution Date and the Class S Certificates, the "Class Interest
Distribution" is the sum of (a) one month's interest at the related Certificate
Rate on the Class S Notional Amount for such Distribution Date (the "Class
Monthly Interest Distributable Amount") and (b) any Class Interest Carryover
Shortfall for the Class S Certificates for such Distribution Date. As to any
Distribution Date and the Class S Certificates, "Class Interest Carryover
Shortfall" is the sum of (a) the excess of the related Class Monthly Interest
Distributable Amount for the preceding Distribution Date and any outstanding
Class Interest Carryover Shortfall with respect to such Class on such preceding
Distribution Date, over the amount in respect of interest that is actually
distributed to the Class S Certificateholders on such preceding Distribution
Date plus (b) 30 days' interest on such excess, to the extent permitted by law,
at the related Certificate Rate on the basis of a 360-day year consisting of
twelve 30-day months.
Distributions of the related Class Interest Distribution to the Class
S Certificates will be made prior to the distribution of the Class Interest
Distribution to the Class A Certificates.
With respect to any Distribution Date, the "Class S Notional Amount"
is the Pool Balance as of the close of business on the last day of the second
calendar month before such Distribution Date.
S1-5
<PAGE>
The Class S Notional Amount with respect to the Distribution Date in
November 1996 is $187,555,253.66. The initial Class S Notional Amount was
$135,996,958.88. The increase in the Class S Notional Amount reflects the
increase in the Pool Balance due to the addition of the Subsequent Loans.
Interest on the Class S Certificates in respect of any Distribution Date will
accrue from the first day of the month preceding such Distribution Date through
the last day of the month preceding such Distribution Date (each such period,
an "Interest Period") on the basis of a 360-day year consisting of twelve
30-day months.
The Policy
The Policy was issued on the Closing Date by the Certificate Insurer
pursuant to the provisions of the Amended and Restated Insurance and
Reimbursement Agreement (the "Insurance Agreement") dated as of July 1, 1995,
as supplemented, among the Seller, the Master Servicer, Lomas Mortgage USA,
Inc., as master servicer for certain Related Series Trusts (as defined in the
Prospectus Supplement), the Trustee, the Depositor and the Certificate Insurer,
amending and restating the Insurance and Reimbursement Agreement dated as of
April 1, 1995, including without limitation all schedules, exhibits and
attachments thereto. Lomas Mortgage USA, Inc. has been replaced as master
servicer for certain Related Series Trusts by Norwest Bank Minnesota, N.A.
The Policy unconditionally and irrevocably guarantees accrued and
unpaid interest due on the Class S Certificates as described in the Prospectus
Supplement under "DESCRIPTION OF THE CERTIFICATES -- The Policy."
Transfer and Exchange of the Class S Certificates
Subject to the limitations on transferability described in the
Prospectus Supplement under "ERISA CONSIDERATIONS," the Class S Certificates
will be transferable only upon surrender for registration of transfer of any
Class S Certificate at the office or agency maintained by the Trustee. The
Trustee shall execute, authenticate and deliver in the name of the designated
transferee or trans-ferees, one or more new Class S Certificates in authorized
denominations of a like Percentage Interest dated the date of authentication by
the Trustee. At the option of a Certificateholder, Class S Certificates may be
exchanged for other Class S Certificates of authorized denominations of a like
Percentage Interest upon surrender of the Class S Certificates to be exchanged
at the office or agency referred to above.
The Certificate Registrar shall keep or cause to be kept, at the
office or agency maintained pursuant to this paragraph, a Certificate Register
for each Class of Certificates in which, subject to such reasonable regulations
as it may prescribe, the Trustee shall provide for the registration of
Certificates of such Class and of transfers and exchanges of such Certificates
as herein provided. The Trustee shall be the initial Certificate Registrar. The
Trustee shall maintain in The City of New York an office or offices or agency
or agencies where Certificates may be surrendered for registration of transfer
or exchange.
Every Class S Certificate presented or surrendered for registration of
transfer or exchange shall be duly endorsed by, or be accompanied by a written
instrument of transfer in form satisfactory to the Trustee duly executed by,
the Certificateholder or such Certificateholder's attorney duly authorized in
writing. Each Class S Certificate surrendered for registration of transfer or
exchange shall be cancelled and subsequently disposed of by the Certificate
Registrar in accordance with its customary practice. No service charge will be
made for any registration of exchange or transfer of the Class S Certificates,
but the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge.
S1-6
<PAGE>
DESCRIPTION OF THE LOANS
Information with respect to the Initial Loans as of November 1, 1995
(the "Cut-Off Date") is set forth in the Prospectus Supplement, which contains
substantial information concerning the Initial Loans, including the types of
dwelling units securing the Initial Loans, the geographic location of the
related Properties and information relating to the Initial Loans generally.
Investors are urged to read "DESCRIPTION OF THE LOANS" in the Prospectus
Supplement.
During the Funding Period, the Trust acquired approximately
$73,000,000 in aggregate principal balance of Subsequent Loans from Keystone
with funds on deposit in the Pre-Funding Account.
As of September 30, 1996 (the "Reference Date"), the Pool Balance is
$187,555,253.66 (the "Reference Date Principal Balance"), which is equal to the
sum of the aggregate Principal Balances of the Initial Loans and the Subsequent
Loans as of the Reference Date. As of the Reference Date, approximately 0.1% of
the Loans (by Reference Date Principal Balance) are Manufactured Housing
Contracts. The Properties are located in 44 states. No more than approximately
35.8% of the Loans (by Reference Date Principal Balance) have been originated
using criteria substantially similar to the Title I Program, but will not be
covered by FHA Insurance. Substantially all of the Loans are partially insured
by the FHA under the Title I Program. The Mortgaged Properties may be
owner-occupied (which includes second and vacation homes) and non-owner
occupied investment properties.
With respect to the Loans, the average Principal Balance as of the
Reference Date is approximately $15,803, the minimum Principal Balance as of
the Reference Date is approximately $144, the maximum Principal Balance as of
the Reference Date is approximately $59,513, the minimum Loan Rate and the
maximum Loan Rate on the Reference Date are 9.990% and 18.000% per annum,
respectively, and the weighted average Loan Rate on the Reference Date is
approximately 13.734% per annum. As of the Reference Date, the weighted average
remaining term to maturity of the Loans is approximately 182 months and the
remaining terms to maturity of the Loans range from 4 months to 230 months. No
Loan is expected to mature later than November, 2015.
As of the Reference Date, the Loans included 11,868 loans, having the
additional characteristics described below. The percentages in the tables below
may not add to 100.0% because of rounding.
S1-7
<PAGE>
CERTAIN STATISTICAL CHARACTERISTICS OF THE LOANS
REFERENCE DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
Percent of Reference
Number of Reference Date Date Principal
Range of Principal Balances ($) Loans Principal Balance Balance
- --------------------------------- -------------- ---------------------------- --------------------
<S> <C> <C> <C>
0.01 to 5,000.00............................ 785 $ 2,856,850.53 1.5%
5,000.01 to 10,000.00............................ 2,703 21,178,318.14 11.3
10,000.01 to 15,000.00............................ 2,868 37,429,520.58 20.0
15,000.01 to 20,000.00............................ 1,496 26,756,257.68 14.3
20,000.01 to 25,000.00............................ 3,939 95,868,178.35 51.1
25,000.01 to 30,000.00............................ 9 246,169.82 0.1
30,000.01 to 35,000.00............................ 10 327,650.12 0.2
35,000.01 to 40,000.00............................ 15 545,696.95 0.3
40,000.01 to 45,000.00............................ 5 214,409.27 0.1
45,000.01 to 50,000.00............................ 9 428,106.94 0.2
50,000.01 to 55,000.00............................ 1 53,030.83 0.0
55,000.01 to 60,000.00............................ 28 1,651,064.45 0.9
-------------- ---------------------------- ----------------
Total......................................... 11,868 $187,555,253.66 100.0%
============== ============================ ================
</TABLE>
LOAN RATES AS OF REFERENCE DATE
<TABLE>
<CAPTION>
Percent of Reference
Number of Reference Date Date Principal
Range of Loan Rates Loans Principal Balance Balance
- ------------------- ------------------ --------------------------- ---------------------
<S> <C> <C> <C>
9.501% to 10.000%............................. 16 $ 300,178.37 0.2%
10.001% to 10.500%............................. 10 332,637.59 0.2
10.501% to 11.000%............................. 162 3,563,935.43 1.9
11.001% to 11.500%............................. 83 1,324,373.29 0.7
11.501% to 12.000%............................. 1,412 24,165,159.65 12.9
12.001% to 12.500%............................. 259 3,191,241.98 1.7
12.501% to 13.000%............................. 2,068 38,097,972.05 20.3
13.001% to 13.500%............................. 356 5,002,730.42 2.7
13.501% to 14.000%............................. 3,588 57,486,720.84 30.7
14.001% to 14.500%............................. 767 9,559,105.02 5.1
14.501% to 15.000%............................. 1,853 29,290,866.81 15.6
15.001% to 15.500%............................. 270 3,028,562.63 1.6
15.501% to 16.000%............................. 851 10,109,263.71 5.4
16.001% to 16.500%............................. 41 408,432.14 0.2
16.501% to 17.000%............................. 92 1,360,629.23 0.7
17.001% to 17.500%............................. 8 75,000.98 0.0
17.501% to 18.000%............................. 32 258,443.52 0.1
------------------ --------------------------- -----------------
Total................................ 11,868 $187,555,253.66 100.0%
================== =========================== =================
</TABLE>
S1-8
<PAGE>
SEASONING
<TABLE>
<CAPTION>
Range of Percent of Reference
Months Number of Reference Date Principal Date Principal
of Seasoning Loans Balance Balance
- ------------ --------------- ---------------------------- --------------------
<S> <C> <C> <C>
< 12...................................... 3,232 $54,051,946.80 28.8%
-
13 to 18...................................... 7,961 124,517,142.87 66.4
19 to 24...................................... 207 2,684,366.42 1.4
25 to 36...................................... 65 959,348.86 0.5
37 to 48...................................... 119 1,718,087.60 0.9
49 to 60...................................... 121 1,532,568.17 0.8
61 to 72...................................... 85 1,124,576.06 0.6
73 to 84...................................... 57 735,987.58 0.4
85 to 96...................................... 14 178,064.90 0.1
97 to 108...................................... 5 43,313.00 0.0
109 to 120...................................... 2 9,851.40 0.0
--------------- ---------------------------- -----------------
Total................................. 11,868 $187,555,253.66 100.0%
=============== ============================ =================
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
Range of Percent of Reference
Remaining Terms Number of Reference Date Principal Date Principal
(in months) Loans Balance Balance
- --------------- --------------- ---------------------------- --------------------
<S> <C> <C> <C>
1 to 12...................................... 15 $ 20,861.34 0.0%
13 to 24...................................... 61 185,114.29 0.1
25 to 36...................................... 58 209,902.04 0.1
37 to 48...................................... 398 2,020,588.06 1.1
49 to 60...................................... 165 915,129.66 0.5
61 to 72...................................... 375 2,272,191.02 1.2
73 to 84...................................... 197 1,449,431.55 0.8
85 to 96...................................... 73 708,325.19 0.4
97 to 108...................................... 1,504 14,424,264.67 7.7
109 to 120...................................... 392 4,097,348.49 2.2
121 to 132...................................... 254 3,023,909.86 1.6
133 to 144...................................... 120 1,484,226.12 0.8
145 to 156...................................... 41 582,118.08 0.3
157 to 168...................................... 3,546 55,366,732.90 29.5
169 to 180...................................... 964 16,218,772.20 8.6
181 to 192...................................... 4 95,159.90 0.1
193 to 204...................................... 18 389,821.33 0.2
205 to 216...................................... 23 454,605.60 0.2
217 to 228...................................... 2,826 64,363,320.28 34.3
229 to 240...................................... 834 19,273,431.08 10.3
--------------- ---------------------------- ----------------
Total................................. 11,868 $187,555,253.66 100.0%
=============== ============================ ================
</TABLE>
S1-9
<PAGE>
GEOGRAPHICAL DISTRIBUTION BY STATE(1)
<TABLE>
<CAPTION>
Percent of Reference
Number of Reference Date Principal Date Principal
State Loans Balance Balance
- ------------ --------------- ---------------------------- --------------------
<S> <C> <C> <C>
California 4,976 $101,655,567.34 54.2%
Texas 1,341 14,359,306.73 7.7
Florida 471 6,175,598.07 3.3
Colorado 425 5,999,630.66 3.2
Arizona 335 5,775,030.41 3.1
Pennsylvania 436 5,162,606.40 2.8
Arkansas 486 4,900,884.76 2.6
Washington 365 4,895,398.29 2.6
Nevada 248 4,804,679.57 2.6
North Carolina 334 3,721,337.17 2.0
Illinois 327 3,718,901.43 2.0
New York 196 3,501,313.69 1.9
Georgia 255 3,011,156.94 1.6
Mississippi 235 2,766,539.14 1.5
Ohio 192 2,211,244.13 1.2
Oregon 166 2,189,370.45 1.2
New Jersey 115 1,806,181.61 1.0
Tennessee 164 1,717,266.43 0.9
Louisiana 113 1,524,400.54 0.8
Oklahoma 132 1,339,186.13 0.7
Missouri 88 1,020,044.86 0.5
South Carolina 93 1,011,776.27 0.5
Indiana 67 823,836.16 0.4
Virginia 53 586,971.79 0.3
Kansas 37 414,308.57 0.2
Michigan 48 340,840.02 0.2
Utah 17 297,906.94 0.2
Wyoming 26 270,523.24 0.1
Kentucky 24 226,216.44 0.1
Iowa 19 207,190.69 0.1
Hawaii 11 178,162.12 0.1
Connecticut 12 175,067.92 0.1
New Mexico 12 142,174.75 0.1
Nebraska 11 116,194.47 0.1
Rhode Island 7 114,994.62 0.1
Idaho 10 88,825.39 0.0
Maryland 5 84,009.80 0.0
Massachusetts 4 62,582.12 0.0
Vermont 3 43,424.02 0.0
Alabama 1 36,949.04 0.0
West Virginia 5 32,890.50 0.0
New Hampshire 1 24,420.56 0.0
North Dakota 1 13,447.65 0.0
Wisconsin 1 6,895.83 0.0
-------------- ----------------------------- ---------------
Total..................................... 11,868 $187,555,253.66 100.0%
============== ============================= ===============
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related
Property.
Based on information in the Master Servicer's monthly certificate for
the October 1996 Distribution Date, as of the Reference Date, approximately
7.90% of the Loans (by Reference Date Principal Balance) were 30 or more days
delinquent, approximately 3.35% of the Loans (by Reference Date Principal
Balance) were 60 or more days delinquent, and the Cumulative Default Percentage
(as
S1-10
<PAGE>
defined below) was approximately 3.60%. Such information has not been
independently verified by the Depositor, Lehman Brothers Inc. or any person
acting on their behalf.
"Cumulative Default Percentage" means, as of any Determination Date,
the aggregate of the Principal Balances (at the time each such Loan became a
Defaulted Loan) of the Defaulted Loans (as defined in the Prospectus
Supplement) from the Cut-Off Date to the prior Monthly Cut-Off Date, divided by
the aggregate of the Cut-Off Date Principal Balances of all Loans.
HISTORICAL PAYMENTS OF PRINCIPAL
The Certificates were issued on November 17, 1995. Set forth below is
information as to principal payments on the Loans for the periods indicated.
The information in the table below is from the Master Servicer's monthly
certificates covering the months indicated. Neither the Depositor, Lehman
Brothers Inc., nor any person acting on their behalf has independently verified
the information below.
Payments of Principal of the Loans
<TABLE>
<CAPTION>
Aggregate Principal
Balance of Loans at Adjustments Foreclosures Total
Due Beginning Regular Full to (Claim Funds Principal
Period of Due Period(1) Installments Curtailments Prepayments Principal Received) Collections
------ ------------------- ------------ ----------- ----------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
11/1-11/30/95 $135,997,026.18 $457,028.72 $77,356.09 $644,375.76 $ 0.00 $ 0.00 $1,178,760.57
12/1-12/31/95 192,621,923.76 402,668.28 88,669.66 1,025,967.54 0.00 0.00 1,517,305.48
1/1- 1/31/96 206,476,012.65 431,594.48 117,593.21 1,060,557.83 0.00 0.00 1,609,745.52
2/1- 2/29/96 204,866,267.13 429,586.61 85,057.47 1,282,879.32 0.00 0.00 1,797,523.40
3/1- 3/31/96 202,532,549.14 411,706.10 237,601.01 1,344,178.62 6,011.38 0.00 1,999,497.11
4/1- 4/30/96 200,194,877.85 405,202.19 110,428.71 1,083,148.39 6,625.84 0.00 1,605,405.13
5/1- 5/31/96 197,386,069.14 408,785.81 150,219.77 1,776,899.08 8,831.23 (316.30) 2,344,419.59
6/1- 6/30/96 194,085,516.17 383,399.05 91,294.06 1,851,502.09 (2,406.40) 31.98 2,323,820.78
7/1- 7/31/96 190,676,723.64 420,596.49 83,689.87 1,667,271.16 (9.61) (12,873.12) 2,158,674.79
8/1- 8/31/96 186,747,425.22 400,744.41 94,286.76 1,970,763.12 (4,004.41) (580.83) 2,461,209.05
9/1- 9/30/96 182,509,923.30 377,811.40 108,002.21 1,894,211.74 879.12 (65,524.07) 2,315,380.40
</TABLE>
- -------------------
(1) Represents aggregate Principal Balance of Loans less total amount of
Defaulted Loans.
The prepayment history of the Loans underlying the Certificates is
relatively short and cannot be relied upon as an indicator of the rate of
prepayments on the Loans to be experienced over the life of the Class S
Certificates. Further, the rate of prepayment of a pool of loans during any
period should be considered in light of the amount of time elapsed since the
origination of such loans and the absolute levels of, and changes in,
prevailing market interest rates during such period. For a further discussion
S1-11
<PAGE>
of the factors affecting the rate of prepayments on loans, see "PREPAYMENT AND
YIELD CONSIDERATIONS" in the Prospectus Supplement. Investors are urged to make
an independent decision as to the appropriate prepayment assumptions to be used
in deciding whether to purchase a Class S Certificate.
SENSITIVITY OF THE PRE-TAX YIELD AND WEIGHTED
AVERAGE LIFE OF THE CLASS S CERTIFICATES
The Prospectus Supplement contains important information concerning factors
that will affect the yield and weighted average life of the Class S
Certificates. Investors are urged to read "PREPAYMENT AND YIELD CONSIDERATIONS"
in the Prospectus Supplement.
Because amounts distributable to the holders of the Class S Certificates
consist entirely of interest, the yield to maturity of the Class S Certificates
will be extremely sensitive to the repurchase, prepayment and default
experience of the Loans, and prospective investors should fully consider the
associated risks, including the risk that such investors may not fully recover
their initial investment. In particular, investors in the Class S Certificates
should be aware that, with the consent of the Certificate Insurer, a
termination of the Trust may occur when the aggregate outstanding Principal
Balance of the Loans is less than 10%, if such right of termination is
exercised by the Master Servicer, or 5%, if such right of termination is
exercised by Keystone, of the sum of (a) the initial Pool Balance and (b) the
original Pre-Funded Amount.
The yield to investors in the Class S Certificates will be highly sensitive
to the timing of defaults, the timing of receipt of prepayments, the overall
rate of defaults and the overall rate of principal prepayment on the Loans,
which overall rate may fluctuate significantly from time to time. An investor
in the Class S Certificates should fully consider the associated risks,
including the risk that a rapid rate of defaults and principal payments
(including prepayments) could result in the failure of such investor to fully
recover its initial investment.
Prepayments on loans are commonly measured relative to a prepayment
standard or model. The model used herein is the prepayment assumption (the
"Prepayment Assumption"), which represents an assumed rate of prepayment
relative to the then outstanding principal balance of a pool of loans for the
life of such loans. The Prepayment Assumption assumes a voluntary prepayment
("CRR") of 3% per annum in the first month of the life of the loans and an
additional approximate 0.64% (precisely 7/11 of 1%) in each month thereafter
until the twelfth month; beginning in the twelfth month and in each month
thereafter during the life of the loans, a CRR of 10% per annum is assumed. In
addition, beginning in the thirteenth month of the life of the loans, a default
rate ("CDR") of 0.75% per annum is assumed, which increases by approximately
0.84% in each month thereafter until the twenty-fourth month; beginning in the
twenty-fourth month and in each month thereafter during the life of the loans,
a CDR of 10% per annum is assumed. The CRR and CDR curves are then combined to
form the Prepayment Assumption. 100% of the Prepayment Assumption results in
the approximate per annum conditional prepayment rate ("CPR") for each month as
set forth below:
S1-12
<PAGE>
Loan
Age CPR
--- ---
0 3.00%
1 3.64%
2 4.27%
3 4.91%
4 5.55%
5 6.18%
6 6.82%
7 7.45%
8 8.09%
9 8.73%
10 9.36%
11 10.00%
12 10.68%
13 11.44%
14 12.21%
15 12.97%
16 13.73%
17 14.50%
18 15.26%
19 16.02%
20 16.79%
21 17.55%
22 18.31%
23 19.08%
The table below indicates the sensitivity to various rates of prepayment on
the Loans of the pre-tax yield, on a corporate bond equivalent ("CBE") basis,
at various percentages of the Prepayment Assumption. Such calculations are
based on the following assumptions:
(i) the Loans consist of pools of loans with the following
characteristics:
S1-13
<PAGE>
<TABLE>
<CAPTION>
Remaining
Principal Loan Term to Loan
Loan Balance Rate Maturity Age
- ---- ------- ---- -------- ---
<S> <C> <C> <C> <C>
1 $ 3,348,993.80 13.927% 84 12
2 3,493,388.74 13.820 113 11
3 4,846,168.15 13.734 168 12
4 16,229,430.60 13.576 169 11
5 6,860,534.43 13.543 228 12
6 19,273,431.08 13.444 229 11
7 2,708,797.43 14.175 63 14
8 6,720,316.17 14.001 106 14
9 35,762,334.19 13.676 165 14
10 43,150,518.29 13.634 226 14
11 2,659,391.46 14.450 59 17
12 4,962,888.58 14.250 103 17
13 15,039,952.81 14.089 162 16
14 13,512,943.94 13.814 223 17
15 1,805,420.38 14.613 91 58
16 5,412,491.56 13.787 136 44
17 1,768,252.05 13.301 212 28
</TABLE>
(ii) the assumptions described in clauses (i), (iii), (iv) and (vi) of the last
full paragraph beginning on page S-31 of the Prospectus Supplement, (iii) the
Class S Certificates will be purchased on November 22, 1996 for an aggregate
purchase price indicated in the table below, plus accrued interest from
November 1, 1996 to (but not including) November 22, 1996, (iv) distributions
to holders of Class S Certificates will be made on the 25th day of each month
commencing in December 1996, (v) scheduled monthly payments of principal and
interest on the Loans will be timely received on the first day of each month
(with no defaults), commencing in November 1996, (vi) principal prepayments on
the Loans will be received on the last day of each month commencing in November
1996 at the respective percentages of the Prepayment Assumption set forth in
the table and there are no prepayment interest shortfalls and (vii) the Class S
Notional Amount applicable to the Distribution Date occurring in December 1996
will be calculated based on (a) the aggregate Reference Date Principal Balances
of the Loans, (b) an
S1-14
<PAGE>
assumption that each Loan will amortize in accordance with its terms, and (c)
an assumption that prepayments will occur at the rates set forth in the table
below.
As used in the table below, 85% Prepayment Assumption assumes prepayment
rates equal to 85% of the Prepayment Assumption and so forth.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant percentage of the Prepayment Assumption.
Neither the Prepayment Assumption nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Loans in the Trust. Variations in the actual prepayment
experience and the balance of the Loans that prepay may occur even if the
average prepayment experience of all such Loans equals any of the specified
percentages of the Prepayment Assumption.
Pre-Tax Yield(1) -- Sensitivity of the Class S Certificates to Prepayments
<TABLE>
<CAPTION>
Percentage of the Prepayment Assumption
-------------------------------------------------------------------------------------
85% 95% 100% 105% 115% 125% 135%
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
No Optional Termination
At a price of
1.359375%(2) 14.68% 12.43% 11.30% 10.16% 7.86% 5.53% 3.17%
At a price of
1.375000%(2) 14.23 11.99 10.85 9.71 7.42 5.09 2.74
At a price of
1.390625%(2) 13.79 11.55 10.42 9.28 6.98 4.66 2.31
At a price of
1.406250%(2) 13.36 11.12 9.99 8.85 6.56 4.24 1.89
----- ----- ----- ----- ---- ---- ----
Weighted Average Life
(years)(4) 4.42 4.08 3.93 3.79 3.52 3.29 3.08
Optional Termination(3)
At a price of
1.359375%(2) 13.72% 11.06% 9.76% 8.36% 5.50% 2.56% (0.42)%
At a price of
1.375000%(2) 13.25 10.58 9.28 7.87 5.01 2.06 (0.93)
At a price of
1.390625%(2) 12.78 10.11 8.81 7.40 4.52 1.57 (1.42)
At a price of
1.406250%(2) 12.32 9.65 8.34 6.93 4.05 1.09 (1.90)
Weighted Average Life
(years)(4) 4.10 3.77 3.62 3.48 3.22 3.00 2.80
</TABLE>
- -----------------
(1) Represents a corporate bond equivalent yield.
(2) As a percentage of the Class S Notional Amount as of the Reference
Date, determined based on the assumptions in clauses (vii)(a)-(c) of
the third preceding paragraph, plus accrued interest.
(3) Optional termination occurs when the Master Servicer, with the consent
of the Certificate Insurer, purchases all remaining property of the
Trust when the aggregate outstanding Principal Balance of the Loans is
less than 10% of the sum of (a) the initial Pool Balance and (b) the
original Pre-Funded Amount.
(4) "Weighted Average Life" of the Class S Certificates refers to the
average amount of time that will elapse from the date of issuance of
the Class S Certificates until the Class S Notional Amount is reduced
to zero.
On the basis of approximately 133% Prepayment Assumption, a purchase
price of 1.359375%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield of the Class S Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
S1-15
<PAGE>
133% Prepayment Assumption, based on such assumptions, an investor in the Class
S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 131% Prepayment Assumption, a purchase
price of 1.375000%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield of the Class S Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
131% Prepayment Assumption, based on such assumptions, an investor in the Class
S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 130% Prepayment Assumption, a purchase
price of 1.390625%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield of the Class S Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
130% Prepayment Assumption, based on such assumptions, an investor in the Class
S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 128% Prepayment Assumption, a purchase
price of 1.406250%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield of the Class S Certificates would be
approximately 0%. If the actual prepayment rate were to exceed approximately
128% Prepayment Assumption, based on such assumptions, an investor in the Class
S Certificates would not fully recover the initial purchase price thereof.
It is highly unlikely that the Loans will prepay at a rate consistent
with the indicated percentage of the Prepayment Assumption until maturity or
that all the Loans will prepay at the same rate. In fact, the Loans are likely
to prepay at different rates over time.
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flow to be paid on the Class S Certificates individually or in
the aggregate, would cause the discounted present value of such assumed cash
flows to equal the assumed purchase price of the Class S Certificates
individually or in the aggregate, plus accrued interest, and by converting such
monthly rates to corporate bond equivalent rates. Such calculations do not take
into account variations that may occur in the interest rates at which investors
may be able to reinvest funds received by them as distributions on the Class S
Certificates.
The Loans will not necessarily have the characteristics assumed above,
and there can be no assurance that (i) the Loans will prepay at any of the
rates shown in the table or at any other particular rate or will prepay
proportionately, (ii) the pre-tax yield on the Class S Certificates will
correspond to any of the pre-tax yields shown above or (iii) the purchase price
of any of the Class S Certificates will be equal to any of the purchase prices
assumed.
THE CERTIFICATE INSURER
The financial statements of CapMAC prepared in accordance with
generally accepted accounting principles as of December 31, 1995 and 1994 and
June 30, 1996 and for the years ended December 31, 1995, 1994 and 1993 and the
six months ended June 30, 1996 and 1995 are attached as exhibits to this
Supplement. Copies of CapMAC's financial statements prepared in accordance with
statutory accounting standards, which differ from generally accepted accounting
principles, and filed with the Insurance Department of the State of New York
are available upon request. CapMAC is located at 885 Third Avenue, New York,
New York 10022, and its telephone number is (212) 755-1155.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, the Trust is a real estate mortgage
investment conduit (a "REMIC"). The Class S Certificates are designated as
regular interests in the REMIC.
S1-16
<PAGE>
The Class S Certificates are treated as "regular interests in a REMIC"
for domestic building and loan associations and "real estate assets" for real
estate investment trusts, to the extent described in the Base Prospectus under
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the REMIC and its
Holders."
The yield used to calculate accruals of OID with respect to the Class
S Certificates will be the original yield to maturity of such Certificates,
determined by assuming that the Loans will prepay in accordance with 14% of
CPR. No representation is made as to the actual rate at which the Loans will
prepay.
See "SUMMARY--Certain Federal Income Tax Considerations" and "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES" in the Prospectus Supplement and "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS" in the Base Prospectus.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as
of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994
and 1993 have been included herein in reliance upon the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The report of KPMG Peat Marwick LLP covering the financial statements
noted above refers to Capital Markets Assurance Corporation's adoption at
December 31, 1993 of Financial Accounting Standard Board's Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities."
RATINGS
The Class S Certificates are rated "Aaa" by Moody's Investors Service,
Inc. and "AAAr" by Standard & Poor's Ratings Services, a division of the
McGraw-Hill Companies. See "RATINGS" in the Prospectus Supplement for a further
discussion of the ratings of the Certificates. The ratings on the Class S
Certificates do not address the possibility that, as a result of principal
prepayments, Certificateholders may receive a lower than anticipated yield or
the possibility that, as a result of prepayments, investors in the Class S
Certificates may fail to recoup their initial investment.
S1-17
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1994 and 1993
(With Independent Auditors' Report Thereon)
A-II-1
<PAGE>
[LETTERHEAD OF KMPG PEAT MARWICK LLP]
Independent Auditors' Report
----------------------------
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the related statements of
income, stockholder's equity and cash flows for each of the years in the
three-year period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1995 and 1994 and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995 in conformity with generally accepted accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, 'Accounting for
Certain Investments in Debt and Equity Securities,' at December 31, 1993.
/s/ KPMG Peat Marwick LLP
January 25, 1996
A-II-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
------
December 31 December 31
1995 1994
------- -------
Investments:
Bonds at fair value (amortized cost $210,651 at
December 31, 1995 and $178,882 at December 31, 1994) $215,706 172,016
Short-term investments (at amortized cost which
approximates fair value) 68,646 2,083
Mutual funds at fair value (cost $16,434 at
December 31, 1994) - 14,969
-------- -------
Total investments 284,352 189,068
-------- -------
Cash 344 85
Accrued investment income 3,136 2,746
Deferred acquisition costs 35,162 24,860
Premiums receivable 3,540 3,379
Prepaid reinsurance 13,171 5,551
Other assets 3,428 3,754
-------- -------
Total assets $343,133 229,443
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Liabilities:
Unearned premiums $ 45,767 25,905
Reserve for losses and loss adjustment expenses 6,548 5,191
Ceded reinsurance 2,469 1,497
Accounts payable and other accrued expenses 10,844 10,372
Current income taxes 136 -
Deferred income taxes 11,303 3,599
-------- -------
Total liabilities 77,067 46,564
-------- -------
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 205,808 146,808
Unrealized appreciation (depreciation) on investments,
net of tax 3,286 (5,499)
Retained earnings 41,972 26,570
-------- -------
Total stockholder's equity 266,066 182,879
-------- -------
Total liabilities and stockholder's equity $343,133 229,443
======== =======
See accompanying notes to financial statements.
A-II-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
Revenues:
Direct premiums written $ 56,541 43,598 24,491
Assumed premiums written 935 1,064 403
Ceded premiums written (15,992) (11,069) (3,586)
-------- ------- ------
Net premiums written 41,484 33,593 21,308
Increase in unearned premiums (12,242) (10,490) (3,825)
-------- ------- ------
Net premiums earned 29,242 23,103 17,483
Net investment income 11,953 10,072 10,010
Net realized capital gains 1,301 92 1,544
Other income 2,273 120 354
-------- ------- ------
Total revenues 44,769 33,387 29,391
-------- ------- ------
Expenses:
Losses and loss adjustment expenses 3,141 1,429 902
Underwriting and operating expenses 13,808 11,833 11,470
Policy acquisition costs 7,203 4,529 2,663
-------- ------- ------
Total expenses 24,152 17,791 15,035
-------- ------- ------
Income before income taxes 20,617 15,596 14,356
-------- ------- ------
Income Taxes:
Current income tax 2,113 865 1,002
Deferred income tax 3,102 2,843 2,724
-------- ------- ------
Total income taxes 5,215 3,708 3,726
-------- ------- ------
NET INCOME $ 15,402 11,888 10,630
======== ======= ======
See accompanying notes to financial statements.
A-II-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
Common stock:
Balance at beginning of period $ 15,000 15,000 15,000
-------- ------- -------
Balance at end of period 15,000 15,000 15,000
-------- ------- -------
Additional paid-in capital:
Balance at beginning of period 146,808 146,808 146,808
Paid-in capital 59,000 - -
-------- ------- -------
Balance at end of period 205,808 146,808 146,808
-------- ------- -------
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of period (5,499) 3,600 -
Unrealized appreciation (depreciation)
on investments 8,785 (9,099) 3,600
-------- ------- -------
Balance at end of period 3,286 (5,499) 3,600
-------- ------- -------
Retained earnings:
Balance at beginning of period 26,570 14,682 4,052
Net income 15,402 11,888 10,630
-------- ------- -------
Balance at end of period 41,972 26,570 14,682
-------- ------- -------
Total stockholder's equity $266,066 182,879 180,090
======== ======= =======
See accompanying notes to financial statements.
A-II-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollar in thousands)
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 15,402 11,888 10,630
--------- ------- --------
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Reserve for losses and loss
adjustment expenses 1,357 1,429 902
Unearned premiums 19,862 15,843 4,024
Deferred acquisition costs (10,302) (9,611) (9,815)
Premiums receivable (161) (2,103) (432)
Accrued investment income (390) (848) (110)
Income taxes payable 3,621 2,611 2,872
Net realized capital gains (1,301) (92) (1,544)
Accounts payable and other accrued
expenses 472 3,726 1,079
Prepaid reinsurance (7,620) (5,352) (199)
Other, net 992 689 1,201
--------- ------- --------
Total adjustments 6,530 6,292 (2,022)
--------- ------- --------
Net cash provided by operating
activities 21,932 18,180 8,608
--------- ------- --------
Cash flows from investing activities:
Purchases of investments (158,830) (77,980) (139,061)
Proceeds from sales of investments 49,354 39,967 24,395
Proceeds from maturities of investments 28,803 19,665 106,042
--------- ------- --------
Net cash used in investing activities (80,673) (18,348) (8,624)
--------- ------- --------
Cash flows from financing activities:
Capital contribution 59,000 - -
--------- ------- --------
Net cash provided by financing
activities 59,000 - -
--------- ------- --------
Net increase (decrease) in cash 259 (168) (16)
Cash balance at beginning of period 85 253 269
--------- ------- --------
Cash balance at end of period $ 344 85 253
========= ======= ========
Supplemental disclosure of cash flow
information:
Income taxes paid $ 1,450 1,063 833
========= ======= ========
See accompanying notes to financial statements.
A-II-6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1995 and 1994
1) Background
Capital Markets Assurance Corporation ("CapMAC" or "the Company") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guarantee and surety insurance. CapMAC is a wholly
owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is licensed
in all 50 states in addition to the District of Columbia, the Commonwealth
of Puerto Rico and the territory of Guam. CapMAC insures structured
asset-backed, corporate, municipal and other financial obligations in the
U.S. and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal and
other financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors Service,
Inc. ("Moody's"), "AAA" by Standard & Poor's Ratings Group ("S&P"), "AAA"
by Duff & Phelps Credit Rating Co. ("Duff & Phelps"), and "AAA" by Nippon
Investors Service, Inc., a Japanese rating agency. Such ratings reflect
only the views of the respective rating agencies, are not recommendations
to buy, sell or hold securities and are subject to revision or withdrawal
at any time by such rating agencies.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the accompanying
financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the basis of
generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by insurance
companies in reporting to state regulatory authorities.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Management
believes the most significant estimates relate to deferred acquisition
costs, reserve for losses and loss adjustment expenses and disclosures
of financial guarantees outstanding. Actual results could differ from
those estimates.
b) Investments
At December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No.
115, the Company can classify its debt and marketable equity
securities in one of three categories: trading, available-for-sale,
or held-to-maturity. Trading securities are bought and held
principally for the purpose of selling them in the near term.
Held-to-maturity securities are those securities in which the Company
has the ability and intent to hold the securities until maturity. All
other securities not included in trading or held-to-maturity are
classified as available-for-sale. As of December 31, 1995 and 1994,
all of the Company's securities have been classified as
available-for-sale.
A-II-7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Available-for-sale securities are recorded at fair value. Fair value
is based upon quoted market prices. Unrealized holding gains and
losses, net of the related tax effect, on available-for-sale
securities are excluded from earnings and are reported as a separate
component of stockholder's equity until realized. Transfers of
securities between categories are recorded at fair value at the date
of transfer.
A decline in the fair value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Short-term investments are those investments having a maturity of less
than one year at purchase date. Short-term investments are carried at
amortized cost which approximates fair value.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective
interest method. Dividend and interest income are recognized when
earned. Realized gains and losses are included in earnings and are
derived using the FIFO (first-in, first-out) method for determining
the cost of securities sold.
c) Revenue Recognition
Premiums which are payable monthly to CapMAC are reflected in income
when due, net of amounts payable to reinsurers. Premiums which are
payable quarterly, semi-annually or annually are reflected in income,
net of amounts payable to reinsurers, on an equal monthly basis over
the corresponding policy term. Premiums that are collected as a
single premium at the inception of the policy and have a term longer
than one year are earned, net of amounts payable to reinsurers, by
allocating premium to each bond maturity based on the principal amount
and earning it straight-line over the term of each bond maturity. For
the year ended December 31, 1995, 91% of net premiums earned were
attributable to premiums payable in installments and 9% were
attributable to premiums collected on an up-front basis.
d) Deferred Acquisition Costs
Certain costs incurred by CapMAC, which vary with and are primarily
related to the production of new business, are deferred. These costs
include direct and indirect expenses related to underwriting,
marketing and policy issuance, rating agency fees and premium taxes.
The deferred acquisition costs are amortized over the period in
proportion to the related premium earnings. The actual amount of
premium earnings may differ from projections due to various factors
such as renewal or early termination of insurance contracts or
different run-off patterns of exposure resulting in a corresponding
change in the amortization pattern of the deferred acquisition costs.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a
Supplemental Loss Reserve ("SLR") and a case basis loss reserve. The
SLR is established based on expected levels of defaults resulting from
credit failures on currently insured issues. This SLR is based on
estimates of the portion of earned premiums required to cover those
claims.
A-II-8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
A case basis loss reserve is established for insured obligations when,
in the judgement of management, a default in the timely payment of
debt service is imminent. For defaults considered temporary, a case
basis loss reserve is established in an amount equal to the present
value of the anticipated defaulted debt service payments over the
expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service
payments is recorded as a case basis loss reserve. Anticipated
salvage recoveries are considered in establishing case basis loss
reserves when such amounts are reasonably estimable.
Management believes that the current level of reserves is adequate to
cover the estimated liability for claims and the related adjustment
expenses with respect to financial guaranties issued by CapMAC. The
establishment of the appropriate level of loss reserves is an
inherently uncertain process involving numerous estimates and
subjective judgments by management, and therefore there can be no
assurance that losses in CapMAC's insured portfolio will not exceed
the loss reserves.
f) Depreciation
Leasehold improvements, furniture and fixtures are being depreciated
over the lease term or useful life, whichever is shorter, using the
straight-line method.
g) Income Taxes
Deferred income taxes are provided with respect to temporary
differences between the financial statement and tax basis of assets
and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse.
h) Reclassifications
Certain prior year balances have been reclassified to conform to the
current year presentation.
A-II-9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
3) Insured Portfolio
At December 31, 1995 and 1994, the principal amount of financial
obligations insured by CapMAC was $16.9 billion and $11.6 billion,
respectively, and net of reinsurance (net principal outstanding), was $12.6
billion and $9.4 billion, respectively, with a weighted average life of 6.0
years and 5.0 years, respectively. CapMAC's insured portfolio was broadly
diversified by geographic distribution and type of insured obligations,
with no single insured obligation in excess of statutory single risk
limits, after giving effect to any reinsurance and collateral, which are a
function of CapMAC's statutory qualified capital (the sum of statutory
capital and surplus and mandatory contingency reserve). At December 31,
1995 and 1994, the statutory qualified capital was approximately $240
million and $170 million, respectively.
Net Principal Outstanding
December 31, 1995 December 31, 1994
----------------- -----------------
Type of Obligations Insured ($ in millions) Amount % Amount %
- ------------------------------------------- ------- ----- ------ -----
Consumer receivables $ 6,959 55.1 $4,740 50.4
Trade and other corporate obligations 4,912 38.9 4,039 43.0
Municipal/government obligations 757 6.0 618 6.6
------- ----- ------ -----
Total $12,628 100.0 $9,397 100.0
======= ===== ====== =====
At December 31, 1995, approximately 85% of CapMAC's insured portfolio was
comprised of structured asset-backed transactions. Under these structures,
a pool of assets covering at least 100% of the principal amount guaranteed
under its insurance contract is sold or pledged to a special purpose
bankruptcy remote entity. CapMAC's primary risk from such insurance
contracts is the impairment of cash flows due to delinquency or loss on the
underlying assets. CapMAC, therefore, evaluates all the factors affecting
past and future asset performance by studying historical data on losses,
delinquencies and recoveries of the underlying assets. Each transaction is
reviewed to ensure that an appropriate legal structure is used to protect
against the bankruptcy risk of the originator of the assets. Along with
the legal structure, an additional level of first loss protection is also
created to protect against losses due to credit or dilution. This first
level of loss protection is usually available from reserve funds, excess
cash flows, overcollateralization, or recourse to a third party. The level
of first loss protection depends upon the historical losses and dilution of
the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
During 1995, the Company sold without recourse its interest in potential
cash flows from transactions included in its insured portfolio and
recognized $2,200,000 of income which has been included in other income in
the accompanying financial statements.
The following entities each accounted for, through referrals and otherwise,
10% or more of total revenues for each of the periods presented:
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- -----------------------------
% of % of % of
Name Revenues Name Revenues Name Revenues
----------------- ----------------- -----------------------------
Citicorp 15.2 Citicorp 16.3 Citicorp 13.7
Merrill Lynch & Co. 14.1
A-II-10
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
4) Investments
At December 31, 1995 and 1994, all of the Company's investments were
classified as available-for-sale securities. The amortized cost, gross
unrealized gains, gross unrealized losses and estimated fair value for
available-for-sale securities by major security type at December 31, 1995
and 1994 were as follows ($ in thousands):
December 31, 1995
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- --------- ---------- ---------- ---------
U.S. Treasury obligations $ 4,153 55 - 4,208
Mortgage-backed securities of
U.S. government instrumentalities
and agencies 100,628 313 79 100,862
Obligations of states,
municipalities and political
subdivisions 166,010 4,809 82 170,737
Corporate and asset-backed
securities 8,506 45 6 8,545
-------- ----- --- -------
Total $279,297 5,222 167 284,352
======== ===== === =======
December 31, 1994
- -------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
- ----------------------------- --------- ---------- ---------- ---------
U.S. Treasury obligations $ 4,295 - 153 4,142
Mortgage-backed securities of U.S.
government instrumentalities and
agencies 40,973 - 2,986 37,987
Obligations of states,
municipalities and political
subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual funds 16,434 - 1,465 14,969
-------- --- ----- -------
Total $197,399 379 8,710 189,068
======== === ===== =======
The Company's investment in mutual funds in 1994 represents an investment
in an open-end management investment company which invests primarily in
investment-grade fixed-income securities denominated in foreign and United
States currencies.
A-II-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1995 by contractual maturity are shown below
($ in thousands):
December 31, 1995
-----------------------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
----------------------------- --------- ----------
Less than one year to maturity $ 5,569 5,572
One to five years to maturity 37,630 38,553
Five to ten years to maturity 99,567 102,264
Greater than ten years to maturity 35,903 37,101
-------- -------
Sub-total 178,669 183,490
Mortgage-backed securities 100,628 100,862
-------- -------
Total $279,297 284,352
======== =======
Actual maturities may differ from contractual maturities because borrowers
may call or prepay obligations with or without call or prepayment
penalties.
Proceeds from sales of investment securities were approximately $49
million, $40 million and $24 million in 1995, 1994 and 1993, respectively.
Gross realized capital gains of $1,320,000, $714,000 and $1,621,000, and
gross realized capital losses of $19,000, $622,000 and $77,000 were
realized on those sales for the years ended December 31, 1995, 1994 and
1993, respectively.
Investments include bonds having a fair value of approximately $3,985,000
and $3,873,000 (amortized cost of $3,970,000 and $4,011,000) which are on
deposit at December 31, 1995 and 1994, respectively, with state regulators
as required by law.
Investment income is comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
Year Ended Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994 December 31, 1993
- -------------- ----------------- ----------------- -----------------
Bonds $11,105 9,193 7,803
Short-term investments 1,245 484 572
Mutual funds (162) 579 1,801
Investment expenses (235) (184) (166)
------- ------ ------
Total $11,953 10,072 10,010
======= ====== ======
A-II-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The change in unrealized appreciation (depreciation) on available-for-sale
securities is included in a separate component of stockholder's equity as
shown below:
Year Ended Year Ended
$ in thousands December 31, 1995 December 31, 1994
-------------- ----------------- -----------------
Balance at beginning of period $(5,499) 3,600
Change in unrealized
appreciation (depreciation) 13,386 (13,786)
Income tax effect (4,601) 4,687
------- -------
Net change 8,785 (9,099)
------- -------
Balance at end of period $ 3,286 (5,499)
======= =======
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as of
December 31, 1995.
5) Deferred Acquisition Costs
The following table reflects acquisition costs deferred by CapMAC and
amortized in proportion to the related premium earnings:
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
$ in thousands 1995 1994 1993
-------------- ----------- ------------ ------------
Balance at beginning of period $24,860 15,249 5,434
Additions 17,505 14,140 12,478
Amortization (policy
acquisition costs) (7,203) (4,529) (2,663)
------- ------ ------
Balance at end of period $35,162 24,860 15,249
======= ====== ======
6) Employee Benefits
On June 25, 1992, CapMAC entered into a Service Agreement with CapMAC
Financial Services, Inc. ("CFS"), which was then a newly formed wholly
owned subsidiary of Holdings. Under the Service Agreement, CFS has agreed
to provide various services, including underwriting, reinsurance, data
processing and other services to CapMAC in connection with the operation of
CapMAC's insurance business. CapMAC pays CFS an arm's length fee for
providing such services, but not in excess of CFS's cost for such services.
CFS incurred, on behalf of CapMAC, total compensation expenses, excluding
bonuses, of $13,484,000, $11,081,000 and $9,789,000 in 1995, 1994 and 1993,
respectively.
CFS maintains an incentive compensation plan for its employees. The plan
is an annual discretionary bonus award based upon Holdings' and an
individual's performance. CFS also has a health and welfare plan and a
401(k) plan to cover substantially all of its employees. CapMAC reimburses
CFS for all out-of-pocket expenses incurred by CFS in providing services to
CapMAC, including awards given under the incentive compensation plan and
benefits provided under the health and welfare plan. For the years ended
December 31, 1995, 1994 and 1993, the Company had provided approximately
$7,804,000, $5,253,000 and $3,528,000, respectively, for the annual
discretionary bonus plan.
A-II-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
On June 25, 1992, certain officers of CapMAC were granted 182,633
restricted stock units ("RSU") at $13.33 a share in respect of certain
deferred compensation. On December 7, 1995, the RSU's were converted to
cash in the amount of approximately $3.7 million, and such officers agreed
to defer receipt of such cash amount in exchange for receiving the same
number of new shares of restricted stock of Holdings as the number of RSU's
such officers previously held. The cash amount will be held by Holdings
and invested in accordance with certain guidelines. Such amount, including
the investment earnings thereon, will be paid to each officer upon the
occurrence of certain events but no later than December, 2000.
7) Employee Stock Ownership Plan
On June 25, 1992, Holdings adopted an Employee Stock Ownership Plan
("ESOP") to provide its employees the opportunity to obtain beneficial
interests in the stock of Holdings through a trust (the "ESOP Trust"). The
ESOP Trust purchased 750,000 shares at $13.33 per share of Holdings' stock.
The ESOP Trust financed its purchase of common stock with a loan from
Holdings in the amount of $10 million. The ESOP loan is evidenced by a
promissory note delivered to Holdings. An amount representing unearned
employee compensation, equivalent in value to the unpaid balance of the
ESOP loan, is recorded as a deduction from stockholder's equity
(unallocated ESOP shares).
CFS is required to make contributions to the ESOP Trust, which enables the
ESOP Trust to service its loan to Holdings. The ESOP expense is calculated
using the shares allocated method. Shares are released for allocation to
the participants and held in trust for the employees based upon the ratio
of the current year's principal and interest payment to the sum of
principal and interest payments estimated over the life of the loan. As of
December 31, 1995 approximately 262,800 shares were allocated to the
participants. Compensation expense related to the ESOP was approximately
$2,087,000, $2,086,000 and $1,652,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
8) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a case
basis loss reserve and the SLR.
In 1995 CapMAC incurred its first claim on a financial guarantee policy.
Based on its current estimate, the Company expects the aggregate amount of
claims and related expenses not to exceed $2.7 million, although no
assurance can be given that such claims and related expenses will not
exceed that amount. Such loss amount was covered through a recovery under
a quota share reinsurance agreement of $0.2 million and a reduction in the
SLR of $2.5 million. The portion of such claims and expenses not covered
under the quota share agreement is being funded through payments to CapMAC
from the Lureco Trust Account (see note 12).
A-II-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The following is a summary of the activity in the case basis loss reserve
account and the components of the liability for losses and loss adjustment
expenses ($ in thousands):
Case Basis Loss Reserve:
Net balance at January 1, 1995 $ -
----------------------------------------------------------------------
Incurred related to:
Current year 2,473
Prior years -
------
Total incurred 2,473
------
Paid incurred to:
Current year 1,853
Prior years -
------
Total paid 1,853
------
Balance at December 31, 1995 620
------
Reinsurance recoverable 69
------
Supplemental loss reserve 5,859
------
Total $6,548
======
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is included
in Holdings' consolidated U.S. Federal income tax return. The Company's
annual Federal income tax liability is determined by computing its pro rata
share of the consolidated group Federal income tax liability.
Total income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 35% in 1995 and 34% in 1994 and 1993:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, 1995 December 31, 1994 December 31, 1993
$ in thousands Amount % Amount % Amount %
-------------- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed at
the statutory rate $ 7,216 35.0 $ 5,303 34.0 $ 4,881 34.0
Increase (decrease) in tax
resulting from:
Tax-exempt interest (2,335) (11.3) (1,646) (10.6) (1,140) (7.9)
Other, net 334 1.6 51 0.4 (15) (0.1)
-------- ----- ------- ----- ------- ----
Total income tax expense $ 5,215 25.3 $ 3,708 23.8 $ 3,726 26.0
======== ===== ======= ===== ======= ====
</TABLE>
A-II-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1995 December 31, 1994
-------------- ----------------- -----------------
<S> <C> <C>
Deferred tax assets:
Unrealized capital losses on investments $ - (2,833)
Deferred compensation (1,901) (1,233)
Losses and loss adjustment expenses (1,002) (936)
Unearned premiums (852) (762)
Other, net (98) (228)
----------- ------
Total gross deferred tax assets (3,853) (5,992)
----------- ------
Deferred tax liabilities:
Deferred acquisition costs 12,307 8,453
Unrealized capital gains on investments 1,769 -
Deferred capital gains on investments 654 726
Other, net 426 412
----------- ------
Total gross deferred tax liabilities 15,156 9,591
----------- ------
Net deferred tax liability $ 11,303 3,599
=========== ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Management
believes that the deferred tax assets will be fully realized in the future.
10) Insurance Regulatory Restrictions
CapMAC is subject to insurance regulatory requirements of the State of New
York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may be
paid without obtaining approval for such dividends from the Superintendent
of Insurance to the lower of (i) net investment income as defined or (ii)
10% of statutory surplus as of December 31 of the preceding year. No
dividends were paid by CapMAC to Holdings during the years ended December
31, 1995, 1994 and 1993. No dividends could be paid during these periods
because CapMAC had negative earned surplus. Statutory surplus at December
31, 1995 and 1994 was approximately $195,018,000 and $139,739,000,
respectively. Statutory surplus differs from stockholder's equity
determined under GAAP principally due to the mandatory contingency reserve
required for statutory accounting purposes and differences in accounting
for investments, deferred acquisition costs, SLR and deferred taxes
provided under GAAP. Statutory net income was $9,000,000, $4,543,000 and
$4,528,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Statutory net income differs from net income determined
under GAAP principally due to deferred acquisition costs, SLR and deferred
income taxes.
A-II-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
11) Commitments and Contingencies
On January 1, 1988, the Company assumed from Citibank, N.A. the obligations
of a sublease agreement for space occupied in New York. On November 21,
1993, the sublease was terminated and a new lease was negotiated which
expires on November 20, 2008. CapMAC has a lease agreement for its London
office beginning October 1, 1992 and expiring October 1, 2002. As of
December 31, 1995, future minimum payments under the lease agreements are
as follows:
$ in thousands Payment
------------------------------------------------------------------------
1996 $ 2,255
1997 2,948
1998 3,027
1999 3,476
2000 and thereafter 36,172
-------
Total $47,878
=======
Rent expense, commercial rent taxes and electricity for the years ended
December 31, 1995, 1994 and 1993 amounted to $1,939,000, $2,243,000 and
$2,065,000, respectively.
CapMAC has available a $100,000,000 standby corporate liquidity facility
(the "Liquidity Facility") provided by a consortium of banks, headed by
Bank of Montreal, as agent, which is rated "A-1+" and "P-1" by S&P and
Moody's, respectively. Under the Liquidity Facility, CapMAC will be able,
subject to satisfying certain conditions, to borrow funds from time to time
in order to enable it to fund any claim payments or payments made in
settlement or mitigation of claim payments under its insurance contracts.
For the years ended December 31, 1995, 1994 and 1993, no draws had been
made under the Liquidity Facility.
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily
designed to minimize losses from large risks and protect the capital and
surplus of CapMAC.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
Years Ended December 31
-------------------------------------------------------------------
1995 1994 1993
------------------- ------------------- ------------------
$ in thousands Written Earned Written Earned Written Earned
-------------- ------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Direct $56,541 36,853 43,598 28,561 24,491 20,510
Assumed 935 761 1,064 258 403 364
Ceded (15,992) (8,372) (11,069) (5,716) (3,586) (3,391)
------- ------ ------- ------ ------ ------
Net Premiums $41,484 29,242 33,593 23,103 21,308 17,483
======= ====== ======= ====== ====== ======
</TABLE>
A-II-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of
insurers for financial statement purposes to treat reinsured risks as
though they were risks for which the ceding insurer was only contingently
liable. A contingent liability exists with respect to the aforementioned
reinsurance arrangements which may become a liability of CapMAC in the
event the reinsurers are unable to meet obligations assumed by them under
the reinsurance contracts. At December 31, 1995 and 1994, CapMAC had ceded
loss reserves of $69,000 and $0, respectively and had ceded unearned
premiums of $13,171,000 and $5,551,000, respectively.
In 1994, CapMAC entered into a reinsurance agreement (the "Lureco Treaty")
with Luxembourg European Reinsurance LURECO S.A. ("Lureco"), a
European-based reinsurer. The agreement is renewable annually at the
Company's option, subject to satisfying certain conditions. The agreement
reinsured and indemnified the Company for any loss incurred by CapMAC
during the agreement period up to the limits of the agreement. The Lureco
Treaty provides that the annual reinsurance premium payable by CapMAC to
Lureco, after deduction of the reinsurer's fee payable to Lureco, be
deposited in a trust account (the "Lureco Trust Account") to be applied by
CapMAC, at its option, to offset losses and loss expenses incurred by
CapMAC in connection with incurred claims. Amounts on deposit in the
Lureco Trust Account which have not been applied against claims are
contractually due to CapMAC at the termination of the treaty.
The premium deposit amounts in the Lureco Trust Account have been reflected
as assets by CapMAC during the term of the agreement. Premiums in excess
of the deposit amounts have been recorded as ceded premiums in the
statements of income. In the 1994 policy year, the agreement provided $5
million of loss coverage in excess of the premium deposit amounts of $2
million retained in the Lureco Trust Account. No losses were applied
against the Lureco Trust Account or ceded to the Lureco Treaty in 1994.
The agreement was renewed for the 1995 policy year and provides $5 million
of loss coverage in excess of the premium deposit amount of $4.5 million
retained in the Lureco Trust Account. Additional coverage is provided for
losses incurred in excess of 200% of the net premiums earned up to $4
million for any one agreement year. In September 1995, a claim of
approximately $2.5 million on an insurance policy was applied against the
Lureco Trust Account.
In addition to its capital (including statutory contingency reserves) and
other reinsurance available to pay claims under its insurance contracts, on
June 25, 1992, CapMAC entered into a Stop Loss Reinsurance Agreement (the
"Stop-loss Agreement") with Winterthur Swiss Insurance Company
("Winterthur") which is rated "AAA" by S&P and "Aaa" by Moody's. At the
same time, CapMAC and Winterthur also entered into a Quota Share
Reinsurance Agreement (the "Winterthur Quota Share Agreement") pursuant to
which Winterthur had the right to reinsure on a quota share basis 10% of
each policy written by CapMAC.
The Winterthur Stop-loss Agreement had an original term of seven years and
was renewable for successive one-year periods. In April 1995, Winterthur
notified CapMAC that it was canceling the Winterthur Stop-loss Agreement
and the Winterthur Quota Share Agreement effective June 30, 1996.
CapMAC elected to terminate the Winterthur Stop-loss Agreement effective
November 30, 1995 and, on the same date, entered into a Stop-loss
Reinsurance Agreement with Mitsui Marine (the "Mitsui Stop-loss
Agreement"). Under the Mitsui Stop-loss Agreement, Mitsui
A-II-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Marine would be required to pay any losses in excess of $100 million in the
aggregate incurred by CapMAC during the term of the Mitsui Stop-loss
Agreement on the insurance policies in effect on December 1, 1995 and
written during the one-year period thereafter, up to an aggregate limit
payable under the Mitsui Stop-loss Agreement of $50 million. The Mitsui
Stop-loss Agreement has a term of seven years and is subject to early
termination by CapMAC in certain circumstances.
The Winterthur Quota Share Agreement was canceled November 30, 1995. On
January 1, 1996, CapMAC reassumed the liability, principally unearned
premium, for all policies reinsured by Winterthur. As a result, CapMAC
reassumed approximately $1.4 billion of principal insured by Winterthur as
of December 31, 1995. In connection with the commutation, Winterthur will
return the unearned premiums as of December 31, 1995, net of ceding
commission and federal excise tax. Such amount is expected to total
approximately $2.0 million.
13) Disclosures About Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1995 and 1994. SFAS
No. 107, "Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing
parties.
December 31, 1995 December 31, 1994
-------------------- -------------------
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
-------------- -------- ---------- -------- ----------
Financial Assets:
Investments $284,352 284,352 189,068 189,068
Off-Balance-Sheet Instruments:
Financial Guarantees Outstanding $ - 147,840 - 93,494
Ceding Commission $ - 44,352 - 28,048
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments summarized above:
Investments
The fair values of fixed maturities and mutual funds are based upon quoted
market prices. The fair value of short-term investments approximates
amortized cost.
A-II-19
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Financial Guarantees Outstanding
The fair value of financial guarantees outstanding consists of (1) the
current unearned premium reserve, net of prepaid reinsurance and (2) the
fair value of installment revenue which is derived by calculating the
present value of the estimated future cash inflow to CapMAC of policies in
force having installment premiums, net of amounts payable to reinsurers, at
a discount rate of 7% at December 31, 1995 and 1994. The amount calculated
is equivalent to the consideration that would be paid under market
conditions prevailing at the reporting dates to transfer CapMAC's financial
guarantee business to a third party under reinsurance and other agreements.
Ceding commission represents the expected amount that would be paid to
CapMAC to compensate CapMAC for originating and servicing the insurance
contracts. In constructing estimated future cash inflows, management makes
assumptions regarding prepayments for amortizing asset-backed securities
which are consistent with relevant historical experience. For revolving
programs, assumptions are made regarding program utilization based on
discussions with program users. The amount of installment premium actually
realized by the Company could be reduced in the future due to factors such
as early termination of insurance contracts, accelerated prepayments of
underlying obligations or lower than anticipated utilization of insured
structured programs, such as commercial paper conduits. Although increases
in future installment revenue due to renewals of existing insurance
contracts historically have been greater than reductions in future
installment revenue due to factors such as those described above, there can
be no assurance that future circumstances might not cause a net reduction
in installment revenue, resulting in lower revenues.
14) Capitalization
The Company's certificate of incorporation authorizes the issuance of
15,000,000 shares of common stock, par value $1.00 per share. Authorized,
issued and outstanding shares at December 31, 1995 and 1994 were 15,000,000
at $1.00 per share.
In 1995, $59.0 million of the proceeds received by Holdings from the sale
of shares in connection with an Initial Public Offering and private
placements were contributed to CapMAC.
A-II-20
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
JUNE 30, 1996
(Unaudited)
A-II-21
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
ASSETS
June 30, 1996
(Unaudited) December 31, 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Investments:
Bonds at fair value (amortized cost $282,241 at June 30,
1996 and $210,651 at December 31, 1995) $ 280,706 215,706
Short-term investments (at amortized cost which
approximates fair value) 15,664 68,646
- -------------------------------------------------------------------------------------------------------
Total investments 296,370 284,352
- -------------------------------------------------------------------------------------------------------
Cash 459 344
Accrued investment income 3,715 3,136
Deferred acquisition costs 39,904 35,162
Premiums receivable 3,232 3,540
Prepaid reinsurance 16,175 13,171
Other assets 3,537 3,428
- -------------------------------------------------------------------------------------------------------
Total assets $ 363,392 343,133
=======================================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $ 56,743 45,767
Reserve for losses and loss adjustment expenses 8,369 6,548
Ceded reinsurance 2,395 2,469
Accounts payable and other accrued expenses 9,582 10,844
Current income taxes 278 136
Deferred income taxes 12,145 11,303
- -------------------------------------------------------------------------------------------------------
Total liabilities 89,512 77,067
- -------------------------------------------------------------------------------------------------------
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 208,475 205,808
Unrealized (depreciation) appreciation on investments,
net of tax (998) 3,286
Retained earnings 51,403 41,972
- -------------------------------------------------------------------------------------------------------
Total stockholder's equity 273,880 266,066
- -------------------------------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 363,392 343,133
=======================================================================================================
</TABLE>
See accompanying notes to financial statements.
A-II-22
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Direct premiums written $ 18,622 16,000 32,777 32,838
Assumed premiums written 150 669 1,024 823
Ceded premiums written (5,103) (2,553) (7,013) (5,646)
- -------------------------------------------------------------------------------------------------------------------
Net premiums written 13,669 14,116 26,788 28,015
Increase in unearned premiums (3,681) (6,813) (7,972) (13,611)
- -------------------------------------------------------------------------------------------------------------------
Net premiums earned 9,988 7,303 18,816 14,404
Net investment income 4,112 2,956 7,989 5,593
Net realized capital gains 19 20 168 85
Other income 25 12 79 24
- -------------------------------------------------------------------------------------------------------------------
Total revenues 14,144 10,291 27,052 20,106
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,109 762 2,184 1,458
Underwriting and operating expenses 3,385 3,638 7,362 7,376
Policy acquisition costs 2,059 1,734 4,123 3,459
- -------------------------------------------------------------------------------------------------------------------
Total expenses 6,553 6,134 13,669 12,293
- -------------------------------------------------------------------------------------------------------------------
Income before income taxes 7,591 4,157 13,383 7,813
- -------------------------------------------------------------------------------------------------------------------
Income Taxes:
Current federal income tax 1,316 344 1,981 664
Deferred federal income tax 1,148 457 1,971 976
- -------------------------------------------------------------------------------------------------------------------
Total income taxes 2,464 801 3,952 1,640
- -------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5,127 3,356 9,431 6,173
===================================================================================================================
</TABLE>
A-II-23
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
- --------------------------------------------------------------------------------
<S> <C>
Common stock:
Balance at beginning of period $ 15,000
- --------------------------------------------------------------------------------
Balance at end of period 15,000
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of period 205,808
Capital contribution 2,667
- --------------------------------------------------------------------------------
Balance at end of period 208,475
- --------------------------------------------------------------------------------
Unrealized (depreciation) appreciation
on investments, net of tax:
Balance at beginning of period 3,286
Unrealized depreciation on investments (4,284)
- --------------------------------------------------------------------------------
Balance at end of period (998)
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of period 41,972
Net income 9,431
- --------------------------------------------------------------------------------
Balance at end of period 51,403
- --------------------------------------------------------------------------------
Total stockholder's equity $ 273,880
================================================================================
</TABLE>
A-II-24
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 9,431 6,173
- -------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Reserve for losses and loss adjustment expenses 1,821 1,458
Unearned premiums 10,977 15,463
Deferred acquisition costs (4,742) (5,428)
Premiums receivable 308 (3,603)
Accrued investment income (579) (290)
Income taxes payable 2,113 1,123
Net realized capital gains (168) (85)
Accounts payable and other accrued expenses 2,581 6,408
Prepaid reinsurance (3,004) (1,852)
Other, net (183) 692
- -------------------------------------------------------------------------------------------------------------
Total adjustments 9,124 13,886
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,555 20,059
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (121,115) (53,597)
Proceeds from sale of investments 19,875 7,829
Proceeds from maturities of investments 82,800 25,874
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (18,440) (19,894)
- -------------------------------------------------------------------------------------------------------------
Net increase in cash 115 165
Cash balance at beginning of period 344 85
- -------------------------------------------------------------------------------------------------------------
Cash balance at end of period $ 459 250
=============================================================================================================
Supplemental disclosures of cash flow
information:
Income taxes paid $ 1,725 150
Tax and loss bonds purchased $ 112 18
=============================================================================================================
</TABLE>
A-II-25
See accompanying notes to financial statements.
<PAGE>
Capital Markets Assurance Corporation
Notes to Unaudited Financial Statements
June 30, 1996
1. Background
Capital Markets Assurance Corporation ("CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in
the business of financial guaranty and surety insurance. CapMAC is a
wholly-owned subsidiary of CapMAC Holdings Inc. ("Holdings"). CapMAC is
licensed in all 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures
structured asset-backed, corporate, municipal and other financial
obligations in the U.S. and international capital markets. CapMAC also
provides financial guaranty reinsurance for structured asset-backed,
corporate, municipal and other financial obligations written by other
major insurance companies.
CapMAC's claims-paying ability is rated triple-A by Moody's Investors
Service, Inc., Standard & Poor's Ratings Services, Duff & Phelps Credit
Rating Co., and Nippon Investors Service, Inc., a Japanese rating
agency. Such ratings reflect only the views of the respective rating
agencies, are not recommendations to buy, sell or hold securities and
are subject to revision or withdrawal at any time by such rating
agencies.
2. Basis of Presentation
CapMAC's unaudited interim financial statements have been prepared on
the basis of generally accepted accounting principles and, in the
opinion of management, reflect all adjustments necessary for a fair
presentation of the CapMAC's financial condition, results of operations
and cash flows for the periods presented. The results of operations for
the six months ended June 30, 1996 may not be indicative of the results
that may be expected for the full year ending December 31, 1996. These
financial statements and notes should be read in conjunction with the
financial statements and notes included in the audited financial
statements of CapMAC as of December 31, 1995 and 1994, and for each of
the years in the three-year period ended December 31, 1995.
3. Reclassifications
Certain prior period balances have been reclassified to conform to the
current period presentation.
A-II-26
<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED NOVEMBER 13, 1995)
$205,041,000
LEHMAN FHA TITLE I LOAN TRUST 1995-6
FHA TITLE I LOAN ASSET BACKED CERTIFICATES, SERIES 1995-6
$68,600,000 CLASS A-1 6.68% CERTIFICATES
$32,340,000 CLASS A-2 6.63% CERTIFICATES
$42,140,000 CLASS A-3 6.68% CERTIFICATES
$12,740,000 CLASS A-4 7.06% CERTIFICATES
$49,221,000 CLASS A-5 7.32% CERTIFICATES
0.4925% CLASS S CERTIFICATES
------------------
THE FIRST NATIONAL BANK OF KEYSTONE,
AS SELLER
------------------
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------
The FHA Title I Loan Asset Backed Certificates, Series 1995-6 (the
'Certificates'), will consist of six Classes of senior Certificates (the 'Senior
Certificates'): Class A-1 Certificates, Class A-2 Certificates, Class A-3
Certificates, Class A-4 Certificates, Class A-5 Certificates (collectively, the
'Class A Certificates') and Class S Certificates (the 'Class S Certificates')
and one Class of subordinated Certificates (the 'Class R Certificates'). Only
the Class A and Class S Certificates are being offered hereby.
The Certificates will evidence in the aggregate the entire beneficial
interest in the Lehman FHA Title I Loan Trust 1995-6 (the 'Trust') to be formed
pursuant to a pooling and servicing agreement dated as of November 1, 1995 (the
'Agreement') among Lehman ABS Corporation, as Depositor, The First National Bank
of Keystone ('Keystone'), Norwest Bank Minnesota, N.A., as Master Servicer and
Claims Administrator, Coast Partners Acceptance Corporation, as Contract of
Insurance Holder and First Bank National Association, as Trustee. The property
of the Trust will include a pool of fixed-rate residential first and junior lien
home improvement loans and retail installment sale contracts (the 'Initial
Loans'), any additional home improvement loans and retail installment sale
contracts and manufactured housing installment sale contracts and installment
loan agreements conveyed to the Trust during the Funding Period, as described
herein (the 'Subsequent Loans' and together with the Initial Loans, the
'Loans'), all monies due thereunder, as described herein, liens on the
properties which secure the Loans, a financial guaranty insurance policy, funds
on deposit in a trust account (the 'Pre-Funding Account') and certain other
property. Substantially all of the Loans will be partially insured by the
Federal Housing Administration (the 'FHA') of the United States Department of
Housing and Urban Development under Title I of the National Housing Act of 1934.
All of the Initial Loans will be acquired by Lehman ABS Corporation (the
'Depositor') from Keystone. The aggregate undivided interest in the Trust
represented by the Class A Certificates initially will equal $205,041,000, which
is approximately 98% of the sum of the outstanding Principal Balances of the
Initial Loans as of the Cut-Off Date and $73,229,131.70 on deposit in the
Pre-Funding Account. The Class S Certificates will have no Class Principal
Balance and will only receive distributions of interest, calculated as specified
herein, on the Class S Notional Amount.
Distributions on the Certificates will be made on the 25th day of each month
or, if such date is not a Business Day, then on the succeeding Business Day
(each, a 'Distribution Date'), commencing in December, 1995. On each
Distribution Date, holders of the Certificates will be entitled to receive, from
and to the limited extent of funds available in the Distribution Account (as
defined herein), distributions with respect to interest and, with respect to the
Class A Certificates, principal, calculated as set forth herein. The
Certificates are not guaranteed by the Depositor, Keystone, the Master Servicer,
the Trustee or any affiliate thereof. However, the Senior Certificates will have
the benefit of an irrevocable and unconditional financial guaranty insurance
policy (the 'Policy') issued by Capital Markets Assurance Corporation (the
'Certificate Insurer') covering principal payments on the Class A Certificates
plus accrued and unpaid interest due on the Senior Certificates. See
'DESCRIPTION OF THE CERTIFICATES--The Policy' herein.
(Continued on next page)
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
OFFERED CERTIFICATES, SEE PAGE S-15 HEREIN AND PAGE 12 OF THE ACCOMPANYING
PROSPECTUS.
------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF KEYSTONE, THE DEPOSITOR, THE MASTER SERVICER,
THE TRUSTEE, THE CONTRACT OF INSURANCE HOLDER OR ANY AFFILIATE THEREOF,
EXCEPT TO THE EXTENT PROVIDED HEREIN. NEITHER THE CERTIFICATES NOR THE
LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY, OTHER THAN
TO THE EXTENT OF THE FHA INSURANCE DESCRIBED HEREIN. THESE
CERTIFICATES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Senior Certificates are being offered by the Underwriters from time to
time in negotiated transactions or otherwise at varying prices to be determined,
in each case, at the time of sale.
The aggregate proceeds to the Depositor from the sale of the Senior
Certificates will be approximately $204,227,591 plus accrued interest, before
deducting expenses payable by the Depositor, estimated to be $300,000 in the
aggregate.
------------------
The Class A Certificates are offered subject to prior sale and subject to
the Underwriters' right to reject orders in whole or in part. It is expected
that delivery of the Class A Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, CEDEL S.A. and the
Euroclear System and that the Class S Certificates will be delivered at the
offices of Lehman Brothers Inc. in New York, New York, in each case on or about
November 17, 1995. The Class A Certificates will be offered in Europe and the
United States of America.
------------------
LEHMAN BROTHERS COAST PARTNERS SECURITIES, INC.
November 13, 1995
<PAGE>
(Continued from previous page)
The Agreement provides that the Subsequent Loans may be purchased by the
Trust from time to time on or before February 15, 1996 from funds on deposit in
the Pre-Funding Account. On the Closing Date an aggregate cash amount of
approximately $73,229,131.70 will be deposited with the Trustee in the
Pre-Funding Account. Such aggregate amount will be funded from the sale of the
Senior Certificates and may be used to acquire Subsequent Loans.
There is currently no market for the Senior Certificates offered hereby and
there can be no assurance that such a market will develop or, if it does
develop, that it will continue. See 'RISK FACTORS' herein.
An election will be made to treat the assets of the Trust as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. As
described more fully herein and in the Prospectus, the Senior Certificates will
constitute 'regular interests' in the REMIC. See 'Certain Federal Income Tax
Consequences' in the Prospectus.
------------------------
The Class S Certificates are interest-only Certificates. The yield to
investors on the Class S Certificates will be extremely sensitive to the rate
and timing of principal payments (including prepayments, repurchases, defaults
and liquidations) on the Loans, which may vary over time. A rapid rate of such
principal payments on the Loans could result in the failure of investors in the
Class S Certificates to recover their initial investments. See 'RISK
FACTORS--Nature of Class S Certificates,' and 'PREPAYMENT AND YIELD
CONSIDERATIONS' herein.
Until ninety days after the date of this Prospectus Supplement, all dealers
effecting transactions in the Senior Certificates, whether or not participating
in this distribution, may be required to deliver a Prospectus Supplement and
Prospectus. This is in addition to the obligation of dealers acting as
underwriters to deliver a Prospectus Supplement and Prospectus with respect to
their unsold allotments or subscriptions.
The Senior Certificates offered hereby constitute part of a separate series
of FHA Title I Asset Backed Certificates being offered by Lehman ABS Corporation
from time to time pursuant to its Prospectus dated November 13, 1995. This
Prospectus Supplement does not contain complete information about the offering
of the Senior Certificates. Additional information is contained in the
Prospectus and investors are urged to read both this Prospectus Supplement and
the Prospectus in full. Sales of the Senior Certificates may not be consummated
unless the purchaser has received both this Prospectus Supplement and the
Prospectus.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Depositor with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
'1934 Act'), and are incorporated herein by reference and made a part of this
Prospectus Supplement and Prospectus:
(a) the Depositor's Annual Report on Form 10-K for the fiscal year
ended November 30, 1994; and
(b) the Depositor's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1995.
There are incorporated herein by reference all documents filed by the
Depositor with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the 1934 Act, on or subsequent to the date of this Prospectus and prior to the
termination of the offering of the Class A Certificates made by this Prospectus
Supplement. The Depositor will provide without charge to each person to whom
this Prospectus Supplement and Prospectus are delivered, on request of such
person, a copy of any or all of the documents incorporated herein by reference
other than the exhibits to such documents (unless such exhibits are specifically
incorporated by reference in such documents). Requests should be directed to the
Corporate Secretary of Lehman ABS Corporation in writing at Three World
Financial Center, New York, New York 10285, or by telephone at (212) 526-7000.
S-2
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and the accompanying Prospectus. Certain capitalized terms
used in the Summary are defined elsewhere in the Prospectus Supplement or in the
Prospectus. Reference is made to the Index of Defined Terms herein and the
Glossary of Terms in the Prospectus for the definitions of certain capitalized
terms.
<TABLE>
<S> <C>
Trust......................... Lehman FHA Title I Loan Trust 1995-6 (the 'Trust') will be formed pursuant to a
pooling and servicing agreement (the 'Agreement') dated as of November 1, 1995
among Lehman ABS Corporation, as depositor (the 'Depositor'), The First National
Bank of Keystone ('Keystone' or the 'Seller'), Norwest Bank Minnesota, N.A., as
master servicer and claims administrator (together with any successor in such
capacity, the 'Master Servicer' and 'Claims Administrator,' respectively), Coast
Partners Acceptance Corporation, as contract of insurance holder (the 'Contract
of Insurance Holder'), and First Bank National Association, as trustee (the
'Trustee'). The property of the Trust will include: a pool of closed-end
fixed-rate home improvement loans and retail installment sale contracts (the
'Initial Loans'), secured by first and junior mortgages, deeds of trust and
security deeds on residences (which are primarily condominiums, townhouses and
one- to four-family residences), including investment properties, any additional
closed-end fixed-rate home improvement loans and retail installment sale
contracts and fixed-rate manufactured housing installment sale contracts and
installment loan agreements conveyed to the Trust during the Funding Period (the
'Subsequent Loans' and together with the Initial Loans, the 'Loans'); payments in
respect of the Initial Loans received on or after November 1, 1995, and in the
case of the Subsequent Loans, payments received in respect thereof on or after
the first day of the month in which the transfer to the Trust occurs (in each
case, a 'Cut-Off Date'); property that secured a Loan which has been acquired by
foreclosure or deed in lieu of foreclosure; an assignment of the Depositor's
rights under the Purchase Agreement (as defined herein); rights under certain
hazard insurance policies covering the Properties; and certain other property, as
described more fully herein. In addition, the Depositor will cause the
Certificate Insurer (as defined below) to issue an irrevocable and unconditional
financial guaranty insurance policy (the 'Policy') for the benefit of the Senior
Certificateholders pursuant to which it will guarantee payments to Senior
Certificateholders as described herein.
The Trust property will include the unpaid principal balance of each Loan as of
the related Cut-Off Date (the 'Cut-Off Date Principal Balance'). With respect to
any date, the 'Pool Balance' will be equal to the aggregate of the Principal
Balances of all Loans as of such date. The 'Principal Balance' of a Loan on any
day is equal to its related Cut-Off Date Principal Balance, minus all collections
credited against the Principal Balance of such Loan since such Cut-Off Date. If
the Master Servicer determines that it has received all amounts that it expects
to receive with respect to a Loan (including amounts in respect of liquidation of
the related Property and any FHA Insurance on any FHA Loans (as defined herein)),
the Principal Balance of such Loan will be deemed to be zero.
Securities Offered............ The FHA Title I Loan Asset Backed Certificates, Series 1995-6 (the
'Certificates') consist of six Classes of senior certificates (the 'Senior
Certificates')--the Class A-1 Certificates, Class A-2 Certificates, Class A-3
</TABLE>
S-3
<PAGE>
<TABLE>
<S> <C>
Certificates, Class A-4 Certificates and Class A-5 Certificates (collectively,
the 'Class A Certificates') and the Class S Certificates (the 'Class S
Certificates') and one Class of subordinated certificates (the 'Class R
Certificates'). The Certificates will be issued pursuant to the Agreement. Only
the Class A and Class S Certificates are offered hereby. Each Class A Certificate
represents the right to receive payments of interest at the applicable rate set
forth on the cover hereof (each, a 'Certificate Rate'), subject to certain
limitations described herein, payable monthly, and payments of principal to the
extent provided below. The aggregate undivided interest in the Trust represented
by the Class A Certificates as of the Closing Date will equal $205,041,000 of
principal (the 'Original Aggregate Class A Principal Balance'), which represents
approximately 98% of the sum of the aggregate Cut-Off Date Principal Balance of
the Initial Loans, and $73,229,131.70 to be held in the Pre-Funding Account. The
principal amount of a Class of Class A Certificates (each a 'Class A Principal
Balance') on any date is equal to the applicable Class A Principal Balance set
forth on the cover hereof as of the Closing Date (defined below) minus the
aggregate of amounts actually distributed as principal to the holders of such
Class A Certificates. On any date, the 'Aggregate Class A Principal Balance' is
the aggregate of the Class A Principal Balances on such date. Each Class S
Certificate represents the right to receive interest at a Certificate Rate of
0.4925% per annum, payable monthly, on the Class S Notional Amount. The Class S
Certificates have no class principal balance. The Class R Certificates have no
class principal balance and are not entitled to distributions of interest. See
'DESCRIPTION OF THE CERTIFICATES' herein.
With respect to any Distribution Date, the 'Class S Notional Amount' is the Pool
Balance as of the close of business on the last day of the second calendar month
before such Distribution Date.
The Loans..................... The Initial Loans will be conveyed to the Trust by the Depositor on or about
November 17, 1995 (the 'Closing Date') and are expected to consist of
$135,996,958.88 of closed-end fixed-rate home improvement loans and retail
installment sale contracts secured by first and junior mortgages, deeds of trust
and security deeds on residences (which are primarily condominiums, townhouses
and one- to four-family residences), including investment properties (the
'Mortgaged Properties'). The Pool Balance as of the Cut-Off Date is
$135,996,958.88. Interest on each Loan is payable monthly on the outstanding
Principal Balance thereof at a fixed rate per annum (the 'Loan Rate'). The Cut-
Off Date Principal Balances range from $293.14 to $60,000 and average $15,410.42.
As of the Cut-Off Date, the Loan Rates range from 9.990% to 18.000% and the
weighted average Loan Rate is 13.828%. See 'DESCRIPTION OF THE LOANS' herein.
Substantially all of the Initial Loans are and substantially all of the
Subsequent Loans will be partially insured under the Title I Program
(collectively, the 'FHA Loans'). See 'THE TITLE I LOAN PROGRAM AND THE CONTRACT
OF INSURANCE' herein. No more than $1,000,000 in principal amount (based on the
aggregate Principal Balances as of the applicable Transfer Date for such Loans)
will be originated using criteria substantially similar to the Title I Program,
but will not be insured under the FHA Insurance.
On the Closing Date, an aggregate cash amount of approximately $73,229,131.70
will be deposited in a trust account in the name of the Trustee (the 'Pre-Funding
Account'). It is intended that Subsequent Loans, each satisfying the criteria
specified in the Agreement, will be purchased by the Trust
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
from time to time on or before February 15, 1996 from funds on deposit in the
Pre-Funding Account. The Subsequent Loans may be home improvement loans and
retail installment sale contracts (each a 'Mortgage Loan') and may include
fixed-rate manufactured housing installment sale contracts and installment loan
agreements (the 'Manufactured Housing Contracts'), secured by either security
interests in manufactured homes purchased with the proceeds of such Manufactured
Housing Contracts (each a 'Manufactured Home') and/or liens on the real estate to
which the related Manufactured Homes are deemed permanently affixed (the
'Manufactured Home Properties' and together with the Manufactured Homes and
Mortgaged Properties, the 'Properties'). The addition of Subsequent Loans to the
Trust will increase the Pool Balance by an amount equal to the aggregate
Principal Balance of the Subsequent Loans so purchased and the amount in the
Pre-Funding Account will also decrease proportionately.
The Loans will not be insured by primary mortgage insurance policies, nor will
any pool insurance insure the Loans. The Agreement requires the Master Servicer
to service the FHA Loans in accordance with the standards and procedures required
by the FHA under the Title I Program. The Loans will not be guaranteed by the
Depositor or any affiliate thereof. The FHA Title I insurance claims
administration will be performed by the Claims Administrator.
Denominations................. The Class A Certificates are offered for purchase in minimum denominations of
$1,000 and multiples of $1 in excess thereof. The Class S Certificates will be
issued in fully registered, definitive form in percentage interests of not more
than 10%.
Registration of Class A
Certificates................ The Class A Certificates will initially be issued in book-entry form. Persons
acquiring beneficial ownership interests in the Class A Certificates
('Certificate Owners') will hold their Class A Certificate interests through The
Depository Trust Company ('DTC'), in the United States, or Centrale de Livraison
de Valeurs Mobilieres S.A. ('CEDEL') or the Euroclear System ('Euroclear'), in
Europe. Transfers within DTC, CEDEL or Euroclear, as the case may be, will be in
accordance with the usual rules and operating procedures of the relevant system.
So long as the Class A Certificates are Book-Entry Certificates (as defined
herein), such Certificates will be evidenced by one or more certificates
registered in the name of Cede & Co. ('Cede'), as the nominee of DTC or one of
the relevant depositaries. Cross-market transfers between persons holding
directly or indirectly through DTC, on the one hand, and counterparties holding
directly or indirectly through CEDEL or Euroclear, on the other, will be effected
in DTC through Citibank N.A. ('Citibank') or Morgan Guaranty Trust Company of New
York ('Morgan'), the relevant depositaries of CEDEL or Euroclear, respectively,
and each a participating member of DTC. The interests of such Certificate Owners
will be represented by book-entries on the records of DTC and participating
members thereof. No Certificate Owners will be entitled to receive a definitive
certificate representing such person's interest, except in the event that
Definitive Certificates (as defined herein) are issued under the limited
circumstances described herein. All references in this Prospectus Supplement to
any Class A Certificates reflect the rights of Certificate Owners only as such
rights may be exercised through DTC and its participating organizations for so
long as such Class A Certificates are held by DTC. See 'RISK FACTORS--Book-Entry
Certificates', 'DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates' and
'ANNEX I' hereto.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Depositor..................... Lehman ABS Corporation, a Delaware corporation (the 'Depositor'). The principal
executive offices of the Depositor are located at Three World Financial Center,
New York, New York 10285 (Telephone: (212) 526-7000). See 'THE DEPOSITOR' in the
Prospectus.
The Seller.................... Keystone, as Seller of the Loans under the Purchase Agreement, dated as of
November 1, 1995, between Keystone and the Depositor.
Master Servicer and
Claims Administrator........ Norwest Bank Minnesota, N.A. (the 'Master Servicer'), a national banking
association with its executive offices at Sixth and Marquette, Minneapolis,
Minnesota 55479 and its master servicing offices located at 11000 Broken Land
Parkway, Columbia, Maryland 21044.
The Originators............... All of the Loans were originated by originators (the 'Originators') that are not
affiliated with the Seller, and were purchased from the Originators by the Seller
in bulk. All of the Loans originated under the Title I Program have been re-
underwritten by the Seller for the purpose of determining whether each such Loan
was originated in accordance with the Title I Program. Each Originator is a HUD
approved Title I lender and holds a valid Title I contract of insurance. See 'THE
FIRST NATIONAL BANK OF KEYSTONE' herein.
Certificate Rate.............. The 'Certificate Rate' applicable to each Class of Senior Certificates on any
Distribution Date is the respective rate per annum set forth on the cover hereof.
Notwithstanding the foregoing, in no event will the Certificate Rate in respect
of a Class of Class A Certificates on any Distribution Date exceed a per annum
effective rate equal to the quotient of (a) the excess of (i) interest due on the
Loans during the preceding Due Period net of the portion thereof allocable to
Master Servicing Fees and Subservicing Fees over (ii) the sum of (x) the amounts
described in subparagraphs (i), (iv)-(vi) under 'Description of the
Certificates--Distributions' below and (y) the premium for the Policy, in each
case required to be paid or distributed by the Trust on such Distribution Date
and (b) the Aggregate Class A Principal Balance on such Distribution Date (prior
to giving effect to distributions made on such date). Interest on the Senior
Certificates in respect of any Distribution Date will accrue from the first day
of the month preceding such Distribution Date through the last day of the month
preceding such Distribution Date (each such period, an 'Interest Period') on the
basis of a 360-day year consisting of twelve 30-day months.
Distributions................. On the 25th day of each month, or if such a day is not a Business Day, then the
next succeeding Business Day, commencing in December 1995 (each such day, a
'Distribution Date'), the Trustee will be required to distribute from funds
available therefor in the Distribution Account (as described herein) to the
holders of the Senior Certificates (the 'Senior Certificateholders') of record as
of the last day of the calendar month immediately preceding the calendar month in
which such Distribution Date occurs (the 'Record Date'), to the extent and in the
priority described below, in the aggregate an amount equal to the sum of (a) the
related Class Interest Distribution (as defined below) to each Class of Senior
Certificates, and (b) the Class A Principal Distribution to the Class or Classes
of Class A Certificates then entitled to receive such distribution. So long as an
Insurer Default has not occurred and is continuing, distributions of the Class A
Principal Distribution will be applied, sequentially, to the distribution of
principal to the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
Certificates, in that order, such that no Class of Class A Certificates having a
higher numerical designation is entitled to distributions of principal until the
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
Class A Principal Balance of each such Class of Class A Certificates having a
lower numerical class designation has been reduced to zero. On any Distribution
Date during the continuance of an Insurer Default, the Class A Principal
Distribution will be applied to the distribution of principal of each Class of
the Class A Certificates outstanding on a pro rata basis in accordance with the
Class Principal Balance of each such Class.
Distributions of the related Class Interest Distribution to the Class S
Certificates will be made prior to the distribution of the Class Interest
Distribution to the Class A Certificates. See 'DESCRIPTION OF THE CERTIFICATES--
Distributions' herein.
Interest
On each Distribution Date, to the extent of funds available therefor as described
herein interest will be distributed with respect to each Class of Senior
Certificates in an amount (each a 'Class Interest Distribution') equal to the sum
of (a) one month's interest at the related Certificate Rate on the related Class
A Principal Balance or Class S Notional Amount, as applicable, at the end of the
preceding calendar month (the 'Class Monthly Interest Distributable Amount') and
(b) any Class Interest Carryover Shortfall (as defined herein) for such Class of
Senior Certificates for such Distribution Date. As to any Distribution Date and
Class of Senior Certificates, 'Class Interest Carryover Shortfall' is the sum of
(a) the excess of the related Class Monthly Interest Distributable Amount for the
preceding Distribution Date and any outstanding Class Interest Carryover
Shortfall with respect to such Class on such preceding Distribution Date, over
the amount in respect of interest that is actually distributed to such Class of
Senior Certificateholders on such preceding Distribution Date plus (b) interest
on such excess, to the extent permitted by law, at the related Certificate Rate
from such preceding Distribution Date through the current Distribution Date.
Principal
On each Distribution Date, to the extent of funds available therefor as described
herein, principal will be distributed to the holders of the Class A Certificates
then entitled to distributions of principal, in an amount equal to the lesser of
(A) the Aggregate Class A Principal Balance and (B) the Class A Principal
Distribution for such Distribution Date. 'Class A Principal Distribution' means,
with respect to any Distribution Date, the sum of the Class A Monthly Principal
Distributable Amount for such Distribution Date and any outstanding Class A
Principal Carryover Shortfall as of the close of the preceding Distribution Date.
'Class A Monthly Principal Distributable Amount' means, with respect to any
Distribution Date, the sum of the following amounts (without duplication) with
respect to the immediately preceding Due Period (as defined below): (i) that
portion of all payments on Loans allocable to principal, including all full and
partial principal prepayments, (ii) the Principal Balances of all Loans that
became Defaulted Loans for the first time during the related Due Period, (iii)
the portion of the Purchase Price allocable to principal of all Loans that became
Purchased Loans as of the last day of the calendar month preceding such
Distribution Date (the 'Monthly Cut-Off Date'), and, at the discretion of the
Certificate Insurer, the Principal Balance as of the Monthly Cut-Off Date of all
Loans that were required to be purchased or repurchased as of the related Monthly
Cut-Off Date but were not so purchased, (iv) the aggregate amount of
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
Cram Down Losses (as defined herein) that shall have occurred during the related
Due Period, (v) the Distributable Excess Spread, if any, (as defined below) in
respect of such Distribution Date, and (vi) funds remaining in the Pre-Funding
Account at the end of the Funding Period.
'Due Period' means, with respect to any Determination Date or Distribution Date,
the calendar month immediately preceding such Determination Date or Distribution
Date, as the case may be.
For a description of a 'Defaulted Loan' see 'DESCRIPTION OF THE
CERTIFICATES--Principal' herein.
'Excess Spread' means, with respect to any Distribution Date, the excess, if any,
of (x) the sum of the amounts deposited to the Distribution Account as described
in clauses (i) through (viii) under 'DESCRIPTION OF THE CERTIFICATES--Deposits to
the Collection Accounts and the Distribution Account' herein with respect to such
Distribution Date over (y) the amount required to be distributed pursuant to
priorities (i) through (ix) set forth under the heading 'DESCRIPTION OF
CERTIFICATES--Distributions' on such Distribution Date.
'Distributable Excess Spread' means, with respect to any Distribution Date, the
portion (not greater than 100%) of Excess Spread, if any, required to be
distributed on such Distribution Date to satisfy the Required OC
Amount (as defined under 'DESCRIPTION OF THE CERTIFICATES-- Overcollateralization
Provisions' herein) for such Distribution Date. The overcollateralization (i.e.,
the excess of the sum of the Pool Balance and the amount on deposit in the
Pre-Funding Account over the Aggregate Class A Principal Balance) in effect on
the Closing Date equals the Required OC Amount and absent losses on the Loans or
an increase in the Required OC Amount, no Distributable Excess Spread will be
distributed to the Class A Certificateholders on any Distribution Date.
Notwithstanding the foregoing, upon the occurrence and continuance of a Trigger
Event, the Certificate Insurer may require that all Excess Spread (net of certain
fees and expenses) on each succeeding Distribution Date be distributed as
principal to each Class of the Class A Certificates, pro rata, based on the
respective Class A Principal Balances. See 'DESCRIPTION OF THE
CERTIFICATES--Events of Master Servicing Termination; Trigger Events.'
Distributions to the Class A Certificateholders of Distributable Excess Spread
will result in acceleration of principal payments to the holders of the Class A
Certificates and reduce the weighted average lives of the Class A Certificates.
See 'DESCRIPTION OF CERTIFICATES--Overcollateralization Provisions' and
'PREPAYMENT AND YIELD CONSIDERATIONS' herein.
Credit Enhancement............ The credit enhancement provided for the benefit of the Certificateholders
consists of (x) FHA Title I Insurance to the extent described herein, (y) the
overcollateralization in effect on the Closing Date and created by the
application of the internal cash flows of the Trust, as described herein, and (z)
the Policy.
FHA Insurance Program and Contract of Insurance: The insurance provided by the
FHA pursuant to the Title I Program (the 'FHA Insurance') that is expected to be
available to the Claims Administrator in respect of the Initial Loans is
$33,343,300. Such amount of insurance represents the sum of (a) 10% of the
outstanding Principal Balance as of the Cut-Off Date of the Initial Loans that
were originated under the Title I Program (the 'Initial FHA Loans') and
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
(b) the amount of FHA Insurance coverage available as of the Cut-Off-Date from
the current Related Series Trusts (as defined herein) other than the Trust. Such
amount of insurance is expected to be reflected in an insurance coverage reserve
account maintained by FHA in the name of the Contract of Insurance Holder after
the Closing Date (the 'FHA Insurance Coverage Reserve Account'). The Initial FHA
Loans have been purchased from the Originators and the related FHA Insurance will
be requested to be transferred by FHA from the Originators to the Contract of
Insurance Holder after the Closing Date. The amount of FHA Insurance on the
Closing Date will be increased, following the end of the Funding Period, by an
amount equal to 10% of the lesser of the outstanding Principal Balance as of the
Subsequent Transfer Date of, and the purchase price paid for, the Subsequent
Loans purchased by the Trust that are FHA Loans. See 'RISK FACTORS--Limitations
on FHA Insurance,' 'THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE--FHA
Insurance Coverage' and '--The Contract Of Insurance'.
The Contract of Insurance Holder is Coast Partners Acceptance Corporation which
holds the Contract of Insurance for the benefit of the Trust, Lehman FHA Title I
Loan Trust 1995-3, Lehman FHA Title I Loan Trust 1995-4 and subsequent series of
trusts to which Title I Loans are sold directly or indirectly by Keystone and the
related certificates of which are insured by a financial guarantee insurance
policy issued by the Certificate Insurer (collectively, the 'Related Series
Trusts'). The Secretary of HUD will not earmark the monies in the FHA Insurance
Coverage Reserve Account for the benefit of any particular Related Series Trust;
however, the Contract of Insurance Holder has agreed not to hold other Title I
Loans other than loans included in Related Series Trusts. In the event the FHA
Insurance is applied to loans in a Related Series Trust other than the Trust,
there may be insufficient FHA Insurance to cover defaults on the Loans that are
FHA Loans.
Subject to the then remaining FHA Insurance Amount, each FHA Loan will be insured
by the FHA in an amount equal to 90% of the sum of the following: (i) the unpaid
principal and uncollected interest earned to the date of default, calculated on
the actuarial method, reduced by certain amounts received by the Contract of
Insurance Holder in connection with enforcing a lien on the Property prior to the
lien of the related FHA Loan; (ii) the unpaid amount of interest on the unpaid
principal from the date of default to the date of the claim's initial submission
to the FHA for payment plus 15 calendar days, but not for any period greater than
nine months from the date of default, calculated at 7% per annum (except for the
first month in which interest is calculated at the Loan Rate); and (iii) the
amount of certain uncollected court costs, attorneys' fees, and expenses for
recording the assignment of the related Loan to the United States of America. See
'THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE--General' herein. Since
the remaining FHA Insurance Amount is dependent upon future events, including
reductions for the payment of claims, no assurance can be given that the FHA
Insurance Amount will be adequate to cover 90% of the losses on such Loans.
On the Closing Date, the Contract of Insurance Holder will hold for the benefit
of the Trust a FHA contract of insurance (the 'Contract of Insurance') covering
all of the Initial FHA Loans. With respect to those Initial FHA Loans that are
not covered by the Contract of Insurance on the Closing Date, each of the related
Originators will be required to cause the balances in their respective insurance
coverage reserve accounts maintained by FHA to be transferred on the FHA's books
from the related Originator's contract of insurance to the Contract
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
of Insurance. If the FHA Insurance relating to any Initial FHA Loan has not been
transferred to the Contract of Insurance Holder on or before 150 days following
the Closing Date, the Seller will be required to repurchase such Initial Loan.
The Claims Administrator generally will be required to submit claims ('FHA
Claims') with respect to defaulted FHA Loans to the FHA. The Certificateholders
will not have any direct right to receive the FHA Insurance proceeds from the
FHA. All FHA Insurance proceeds received in respect of such FHA Claims shall be
deposited into the Collection Account. Similar procedures will apply to the
Subsequent Loans.
FHA Insurance Premium Account: A separate account (the 'FHA Premium Account') has
been established by the Trustee into which an initial deposit of $112,236 (the
'Initial FHA Premium Account Deposit') will be made on the Closing Date. No later
then the Business Day following each Determination Date, the Trustee will deposit
into the FHA Premium Account the FHA insurance premiums received from Obligors on
Invoiced Loans (as defined below). The Trustee will also deposit into the FHA
Premium Account, to the extent of funds available therefor in the Distribution
Account (the 'FHA Premium Account Deposit'), an amount equal to the greater of
(i) .75% of the aggregate principal balance of each outstanding FHA Loan, other
than Invoiced Loans, divided by 12 and (ii) the positive excess, if any, of (A)
the amount of the premium and other charges due under the Contract of Insurance
for the next succeeding Due Period over (B) the balance in the FHA Premium
Account as of the related Determination Date. 'Invoiced Loans' are FHA Loans with
respect to which the related Obligor is required to pay the premium on FHA
Insurance as a separate amount with respect to such Loan.
Overcollateralization: The credit enhancement provisions of the Trust include
overcollateralization in effect as of the Closing Date (i.e., the excess of the
sum of the Pool Balance and the amount on deposit in the Pre-Funding Account over
the Aggregate Class A Principal Balance). On the Closing Date, the
overcollateralization level satisfies the Required OC Amount and absent losses on
the Loans or an increase in the Required OC Amount, no Distributable Excess
Spread will be distributed to Class A Certificateholders. An increase in the
Required OC Amount will result if the delinquency or default experience on the
Loans exceeds certain levels set forth in the Agreement. In that event,
amortization of the Class or Classes of Class A Certificates then entitled to
receive distributions of principal would be accelerated until the level of
overcollateralization reaches its required level. The required level of
overcollateralization may be decreased, in the sole discretion of the Certificate
Insurer with the consent of the Rating Agencies, which will slow the amortization
of the Class A Certificates. Accelerated amortization and the resulting
overcollateralization is accomplished by distributing a portion of the interest
receipts on the Loans as a payment of principal on the Class A Certificates. See
'DESCRIPTION OF THE CERTIFICATES-- Overcollateralization Provisions.'
The Policy.................... On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the Amended and Restated Insurance and
Reimbursement Agreement (the 'Insurance Agreement') dated as of July 1, 1995, as
supplemented, among the Seller, the Master Servicer, Lomas Mortgage USA, Inc., as
master servicer for the Related Series Trusts other than the Trust, the Trustee,
the Depositor and the Certificate Insurer, amending and restating the Insurance
and Reimbursement Agreement dated as of April 1, 1995.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
The Policy will unconditionally and irrevocably guarantee principal payments on
the Class A Certificates plus accrued and unpaid interest due on the Senior
Certificates. On each Distribution Date, a draw will be made on the Policy equal
to the sum of (a) the amount by which the sum of interest accrued at (i) the
Certificate Rate on the Class S Notional Amount for the Class S Certificates and
(ii) the applicable Certificate Rate on the outstanding Class A Principal Balance
for each Class of Class A Certificates exceeds the amount on deposit in the
Distribution Account available to be distributed therefor on such Distribution
Date and (b) the amount (the 'Class A Guaranteed Principal Distribution Amount'),
if any, by which the Aggregate Class A Principal Balance exceeds the sum of the
Pool Balance at the end of the related Monthly Cut-Off Date and the amount, if
any, on deposit in the Pre-Funding Account on such date (after giving effect to
all amounts distributable and allocable to principal on any Class of Class A
Certificates on such Distribution Date). In addition, the Policy will guarantee
the payment in full of the Aggregate Class A Principal Balance on the
Distribution Date in November 2016 (after giving effect to all other amounts
distributable and allocable to principal on the Class A Certificates on such
Distribution Date).
In the absence of payments under the Policy, Certificateholders will directly
bear the credit and other risks associated with their undivided interest in the
Trust. See 'Description of the Certificate--The Policy.'
The Certificate Insurer....... Capital Markets Assurance Corporation ('CapMAC' or the 'Certificate Insurer'), a
monoline stock insurance corporation organized under the laws of the state of New
York. See 'THE CERTIFICATE INSURER' herein.
Pre-Funding Account........... On the Closing Date, an aggregate cash amount (the 'Pre-Funded Amount') of
approximately $73,229,131.70 will be deposited in an account which will be in the
name of, and maintained by, the Trustee on behalf of the Trust (the 'Pre-Funding
Account'). Such amount will be funded from the sale of the Senior Certificates
and is expected to be used to acquire Subsequent Loans. The Funding Period is the
period from the Closing Date until the earliest of (i) the date on which the
amount on deposit in the Pre-Funding Account is less than $100,000 and (ii)
February 15, 1996. The Pre-Funded Amount will be reduced during the Funding
Period by the amount thereof used to purchase Subsequent Loans in accordance with
the Agreement. Subsequent Loans purchased by and deposited in the Trust on any
date (each, a 'Subsequent Transfer Date' and together with the Closing Date, each
a 'Transfer Date') must satisfy the criteria set forth in the Agreement. The
approximate aggregate principal amount of Subsequent Loans which may be acquired
by the Trust is $73,229,131.70. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed as part of the Class A Monthly Principal
Distributable Amount to the Class or Classes of Class A Certificates entitled to
receive principal distributions on the Distribution Date following the end of the
Funding Period, which in no event shall be later than the Distribution Date in
February 1996, resulting in a partial principal prepayment to such Classes. See
'DESCRIPTION OF THE CERTIFICATES--Distributions.' Interest and other investment
earnings on amounts on deposit in the Pre-Funding Account will be deposited in
the Distribution Account. The Pre-Funding Account will not be an asset of the
REMIC (as defined herein).
Although no assurance can be given, it is intended that the principal amount of
Subsequent Loans sold to the Trust will require application of substantially all
of the Pre-Funded Amount and it is not intended that there will be any material
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
amount of principal prepaid to the holders of the Class A Certificates from the
Pre-Funding Account.
Capitalized Interest
Account..................... On the Closing Date, cash will be deposited in a trust account (the 'Capitalized
Interest Account') in the name of, and maintained by, the Trustee on behalf of
the Trust. The amount on deposit in the Capitalized Interest Account, including
reinvestment income thereon, will be used by the Trustee to fund the excess, if
any, on each of the first three Distribution Dates of (i) the sum of (a) the
amount of interest accruing (at the weighted average Certificate Rate on all
Class A Certificates) on the amount by which the Aggregate Class A Principal
Balance as of the last day of the preceding month exceeds the Pool Balance as of
such day and (b) the Trustee and Certificate Insurer fees accruing on such excess
balance over (ii) the amount of any reinvestment income on amounts in the Pre-
Funding Account deposited to the Distribution Account since the previous
Distribution Date. Any amounts remaining in the Capitalized Interest Account not
needed for such purpose will be paid to the Seller following the end of the
Funding Period. The Capitalized Interest Account will not be an asset of the
REMIC.
Servicing..................... The Master Servicer is responsible for (a) servicing, managing and making
collections on the Loans and (b) acting as Claims Administrator with respect to
claims filed under the Contract of Insurance. All collections in respect of the
Loans will be deposited into the Collection Account as described herein. Not
later than the fifth Business Day prior to each Distribution Date (the
'Determination Date'), the Trustee will calculate the amounts to be paid, as
described herein, to the Certificateholders on such Distribution Date. See
'DESCRIPTION OF THE CERTIFICATES--Distributions.' With respect to each Due Period
the Master Servicer will receive from payments in respect of interest on the
Loans, on behalf of itself, a portion of such payments as a monthly master
servicing fee (the 'Master Servicing Fee') in the amount of 0.12% per annum (the
'Master Servicing Fee Rate') on the Principal Balance of each Loan as of the
first day of each such Due Period as to which such a payment was made. The Master
Servicer has entered into subservicing agreements with servicers that are
approved to service Title I Loans (each, a 'Subservicer'). Each Subservicer will
receive from payments in respect of interest on the Loans a monthly subservicing
fee (the 'Subservicing Fee') in an amount ranging from 1.00% to 1.125% per annum
(the 'Subservicing Fee Rate') on the Principal Balance of each Loan serviced by
such Subservicer pursuant to the related subservicing agreement. See 'DESCRIPTION
OF THE CERTIFICATES--Servicing Compensation and Payment of Expenses.' In certain
limited circumstances, the Master Servicer may resign or be removed, in which
event either the Trustee or a third-party servicer will be appointed as a
successor Master Servicer. See 'DESCRIPTION OF THE CERTIFICATES-- Certain Matters
Regarding the Master Servicer.'
Trustee....................... First Bank National Association, a national banking association (the 'Trustee').
Notices and correspondence for the Trustee should be directed to First Bank
National Association, First Trust Center, 180 East Fifth Street, St. Paul, MN
55101.
Interest Advances............. The Master Servicer is required to remit to the Trustee no later than the close
of business on the Determination Date for each Distribution Date, for deposit in
the Distribution Account, an amount equal to the scheduled installment of
interest due on each Loan (other than a Defaulted Loan) but not received during
the
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
related Due Period, net of the related Sub-Servicing Fee (an 'Interest Advance').
The Master Servicer is not required to make any Interest Advances which it
determines would be nonrecoverable. Interest Advances are reimbursable to the
Master Servicer subject to certain conditions and restrictions, and are intended
to provide sufficient funds for the payment of interest on the Senior
Certificates. See 'DESCRIPTION OF THE CERTIFICATES--Interest Advances' herein.
Optional Termination by the
Master Servicer and
Keystone.................... The Master Servicer or Keystone, each with the consent of the Certificate
Insurer, may purchase from the Trust all (but not fewer than all) remaining Loans
and other property of the Trust, and thereby effect early retirement of the
Certificates, on any Distribution Date when the aggregate outstanding Principal
Balance of the Loans is less than 10%, in the case of a purchase by the Master
Servicer, or 5%, in the case of a purchase by Keystone, of the sum of (a) the
initial Pool Balance and (b) the original Pre-Funded Amount. See 'DESCRIPTION OF
THE CERTIFICATES--Termination of the Trust.'
Optional Purchase of
Loans....................... The Seller has the option, but is not obligated, to purchase from the Trust any
Loan 120 days or more delinquent at a purchase price equal to the outstanding
Principal Balance as of the date of purchase, plus all accrued and unpaid
interest on such Principal Balance through the date of purchase, computed at the
Loan Rate without regard to any Interest Advance made by the Master Servicer with
respect to such Loan (the 'Purchase Price'). The aggregate of the initial
Principal Balances of Loans purchased by the Seller at its option may not
exceed 5% of the sum of (a) the initial Pool Balance and (b) the original Pre-
Funded Amount. See 'DESCRIPTION OF THE CERTIFICATES--Optional Purchase of Loans'
herein.
Certain Federal Tax
Considerations.............. For federal income tax purposes, the Trust created by the Agreement (exclusive of
the Pre-Funding Account and the Capitalized Interest Account) will be treated as
a 'real estate mortgage investment conduit' ('REMIC'). The Senior Certificates
will constitute 'regular interests' in the REMIC and will be treated as debt
instruments of the Trust for federal income tax purposes with payment terms
equivalent to the terms of such Certificates. The Class R Certificates (the
'Residual Certificates') will constitute the sole Class of 'residual interests'
in the REMIC and will be the Class of Residual Certificates, as described in the
Prospectus.
Owners of the Senior Certificates will be required to include in income interest
on such Certificates in accordance with the accrual method of accounting. The
Class A Certificates may, depending on their issue price, and the Class S
Certificates will, be treated as having been issued with original issue discount
for federal income tax purposes. For further information regarding the federal
income tax consequences of investing in the Senior Certificates, see 'CERTAIN
FEDERAL INCOME TAX CONSEQUENCES' herein and in the Prospectus.
ERISA Considerations.......... The acquisition of a Senior Certificate by a pension or other employee benefit
plan (a 'Plan') subject to the Employee Retirement Income Security Act of 1974,
as amended ('ERISA'), could, in some instances, result in a 'prohibited
transaction' or other violation of the fiduciary responsibility provisions of
</TABLE>
S-13
<PAGE>
<TABLE>
<S> <C>
ERISA and Code Section 4975. Certain exemptions from the prohibited transaction
rules could be applicable to the acquisition of such Certificates. Any Plan
fiduciary considering whether to purchase any Senior Certificate on behalf of a
Plan should consult with its counsel regarding the applicability of the
provisions of ERISA and the Code. See 'ERISA CONSIDERATIONS' herein and in the
Prospectus.
Subject to the considerations and conditions described under 'ERISA
Considerations' herein, it is expected that the Senior Certificates (other than
the Class S Certificates) may be purchased by a Plan.
Legal Investment
Considerations.............. The Senior Certificates will not constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'),
because some of the mortgages securing the Mortgage Loans are not first
mortgages. Accordingly, many institutions with legal authority to invest in
comparably rated securities based solely on first mortgages may not be legally
authorized to invest in the Senior Certificates. See 'LEGAL INVESTMENT
CONSIDERATIONS' herein and 'LEGAL INVESTMENT' in the Prospectus.
Certificate Rating............ It is a condition to the issuance of the Senior Certificates that the Class A
Certificates receive ratings of 'AAA' by Standard & Poor's Rating Services, a
division of the McGraw Hill Company ('Standard & Poor's') and 'Aaa' by Moody's
Investors Service ('Moody's' and together with Standard & Poor's, each a 'Rating
Agency') and that the Class S Certificates receive ratings of 'AAAr' by S&P and
'Aaa' by Moody's. In general, ratings address credit risk and do not address the
likelihood of prepayments. See 'RATINGS' herein and 'RISK FACTORS--Rating of the
Certificates' in the Prospectus.
</TABLE>
S-14
<PAGE>
RISK FACTORS
Book-entry Certificates. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market since investors may be unwilling to purchase Class A Certificates
for which they cannot obtain physical certificates. See 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates' herein.
Since transactions in the Class A Certificates can be effected only through
DTC, CEDEL, Euroclear, participating organizations, indirect participants and
certain banks, the ability of a Certificate Owner to pledge a Class A
Certificate to persons or entities that do not participate in the DTC, CEDEL or
Euroclear system or otherwise to take actions in respect of such Certificates,
may be limited due to lack of a physical certificate representing the Class A
Certificates. See 'DESCRIPTION OF THE CERTIFICATES--Book-Entry Certificates'
herein.
Certificateholders may experience some delay in their receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the Trustee to DTC and DTC will credit such
distributions to the accounts of its Participants (as defined herein) which will
thereafter credit them to the accounts of Certificate Owners either directly or
indirectly through indirect participants. See 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates' herein.
Nature of Class S Certificates. As the owners of an interest-only security,
the Class S Certificateholders will be entitled to receive monthly distributions
only of interest, as described herein. The holders of the Class S Certificates
will not be entitled to receive any distributions of principal collected on the
Loans. Because they will not receive any distributions of principal, the Class S
Certificateholders will be affected by prepayments and liquidations and other
dispositions (including optional termination described herein) of the Loans to a
greater degree than will the Class A Certificateholders. As an extreme
illustration, in the event that the entire pool of Loans prepays in full during
the first month, then on the initial Distribution Date the Class A
Certificateholders will receive the full par value of their Certificates while
the Class S Certificateholders will suffer nearly a complete loss (except for
one month's interest) on their investment. Because, however, the pool of Loans
contains approximately 8,825 Initial Loans, the prepayment experience of any one
Loan will not be material to an investor's overall return.
Because the yield of the Class S Certificates is very sensitive to rates of
prepayment, it is advisable for potential investors in the Class S Certificates
to consider carefully, and to make their own evaluation of, the effect of any
particular assumption regarding the rates and the timing of prepayments. In
general, when interest rates decline, prepayments in a pool of loans such as the
Loans will increase as borrowers seek to refinance at lower rates. This will
have the effect of reducing the future stream of payments available to an owner
of an interest-only security based on such loan pool, thus adversely affecting
such investor's yield. Conversely, when interest rates increase, prepayments
will tend to decrease (because more attractive refinancing opportunities are not
available) and the future stream of payments available to such an owner of an
interest-only security may not decline as rapidly as originally anticipated,
thus positively affecting such investor's yield. See 'PREPAYMENT AND YIELD
CONSIDERATIONS--Projected Prepayment and Yields for the Class S Certificates'
herein for other factors which may also influence prepayment rates.
Prepayment Considerations. A portion of the Loans may be prepaid in whole
or in part at any time without penalty. However, none of the Loans contain
due-on-sale provisions and each of the Loans may be assumed, at the lender's
option, upon a sale of the Property. See 'PREPAYMENT AND YIELD CONSIDERATIONS'.
The rate of prepayments on fixed-rate home improvement loans and retail
installment sale contracts and manufactured housing installment sale contracts
and installment loan agreements, such as the Loans, may be sensitive to
prevailing interest rates. Generally, if prevailing interest rates on similar
loans fall significantly below the interest rates on the related Loans, such
Loans may be subject to higher prepayment rates than if prevailing rates remain
at or above the interest rates on such Loans. Conversely, if prevailing interest
rates rise significantly above the interest rates on the Loans, the rate of
prepayments may decrease. See 'PREPAYMENT AND YIELD CONSIDERATIONS'.
Manufactured Housing Contracts. Although none of the Initial Loans include
Manufactured Housing Contracts, up to $20,899,695 (based on the aggregate
Principal Balance as of the applicable Subsequent Transfer Date for such Loans)
of the Subsequent Loans may be Manufactured Housing Contracts. Manufactured
Homes
S-15
<PAGE>
generally depreciate in value. Consequently the market value of the Manufactured
Homes could be or become lower than the outstanding principal balance of the
Manufactured Housing Contracts. If the protection afforded by the FHA Insurance
and the overcollateralization is insufficient, and the Certificate Insurer does
not make a required payment under the Policy, then the Certificateholders will
bear the risk of loss on the Manufactured Housing Contracts and must rely on the
value of the Manufactured Homes for recovery of the outstanding principal of and
interest on any defaulted Manufactured Housing Contract which may be less than
such outstanding balance.
Risk of Higher Default Rates Associated with California Real
Property. Since a substantial portion (49.94% by Pool Balance as of the Cut-Off
Date) of the Mortgaged Properties is located in California, an overall decline
in the California residential real estate market could adversely affect the
values of the Mortgaged Properties securing such Mortgage Loans such that the
Principal Balances of the related Mortgage Loans, together with any primary
financing on such Mortgaged Properties, could equal or exceed the value of such
Mortgaged Properties. As the residential real estate market is influenced by
many factors, including the general condition of the economy and interest rates,
no assurances may be given that the California real estate market will not
weaken further. If the California residential real estate market should
experience an overall decline in property values after the dates of origination
of the Mortgage Loans, the rates of losses on the Mortgage Loans may be expected
to increase, and may increase substantially. Because a substantial portion of
the Mortgaged Properties are in California, the risk of occurrence of earthquake
damage exists that is not covered by any hazard insurance.
Certificate Rating. The rating of the Senior Certificates depends
primarily on an assessment by the Rating Agencies of the claims-paying ability
of the Certificate Insurer. Any reduction in a rating assigned to the claims-
paying ability of the Certificate Insurer below the rating initially given to
the Senior Certificates may result in a reduction in the rating of the Senior
Certificates. The rating by the Rating Agencies of the Senior Certificates is
not a recommendation to purchase, hold or sell the Senior Certificates, inasmuch
as such rating does not comment as to the market price or suitability for a
particular investor. There is no assurance that the ratings will remain in place
for any given period of time or that the ratings will not be lowered or
withdrawn by the Rating Agencies. In general, the ratings address credit risk
and do not address the likelihood of prepayments. The ratings of the Senior
Certificates do not address the possibility of the imposition of United States
withholding tax with respect to non-U.S. persons.
Legal Considerations. The Mortgage Loans are secured by first mortgages
and junior liens and security deeds. Mortgage Loans secured by junior mortgages
are entitled to proceeds that remain from the sale of the related Mortgaged
Property after any related senior mortgage loan or mortgage loans and prior
statutory liens have been satisfied. In the event that such proceeds are
insufficient to satisfy such loans and prior liens in the aggregate, the FHA
Insurance, if applicable, is insufficient or unavailable and the Certificate
Insurer does not perform its obligations under the Policy, the Trust and,
accordingly, the Certificateholders, bear (i) the risk of delay in distributions
while a deficiency judgment against the borrower is obtained and (ii) the risk
of loss if the deficiency judgment cannot be obtained or is not realized upon.
See 'CERTAIN LEGAL ASPECTS OF THE LOANS' in the Prospectus.
Furthermore, Title I Loans generally are not required to be written with
any equity in the Property above the aggregate amount of the liens (including
the amount of the related Title I lien on the Property). In addition, a junior
lienholder may not foreclose on the property securing a junior lien unless it
forecloses subject to the senior lien(s), in which case it must either pay the
entire amount due on the senior lien(s) to the senior mortgagee at or prior to
the foreclosure sale or undertake the obligation to make payments on the senior
mortgage(s) in the event the mortgagor is in default thereunder. In servicing
Title I Loans in their portfolios, it is not the Master Servicer's or the
related Subservicers' practice to satisfy the senior lien(s) at or prior to the
foreclosure sale, nor to advance funds to keep the senior mortgage(s) current.
The Trust will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the senior mortgagee(s) or make payments due
to the senior mortgagee(s), and therefore, Certificateholders should not expect
that any senior mortgage(s) will be kept current by the Trust for the purpose of
protecting the Trust's junior lien. As a result, it is not expected that the
Master Servicer or related Subservicer will pursue foreclosure proceedings with
respect to the FHA Loans secured by a junior lien on Property, other than any
Manufactured Housing Contracts, which must be foreclosed upon prior to
S-16
<PAGE>
the Claims Administrator bringing a claim under the Contract of Insurance. See
'The Title I Loan Program and the Contract of Insurance' herein.
Any Manufactured Housing Contract will be secured by a security interest in
a Manufactured Home or by a Manufactured Home Property. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Manufactured Housing
Contracts are subject to a number of federal and state laws, including the
Uniform Commercial Code (the 'UCC') as adopted in each state and, in most
states, certificate of title statutes, but generally not state real estate laws.
The steps necessary to perfect the security interest in a Manufactured Home will
vary from state to state. Because of the expense and administrative
inconvenience involved, neither the Seller nor the Depositor will amend any
certificate of title to name the Trustee as the lienholder and will not deliver
any certificate of title to the Trustee or note thereon the Trustee's interest
unless the Seller fails to maintain a minimum capital percentage as specified in
the Agreement and the Certificate Insurer requires such action to be taken.
Consequently, in some states in the absence of such an amendment to the
certificate of title, the assignment to the Trustee of the security interest in
the Manufactured Home may not be effective or such security interest may not be
perfected. Accordingly, in the absence of such notation or delivery to the
Trustee, the assignment of the security interest in the Manufactured Home to the
Trustee may not be effective against creditors of the Seller or any conservator
or receiver appointed for the Seller.
The sale of the Loans from the Seller to the Depositor pursuant to the
Purchase Agreement will be treated by the Seller and the Depositor as a sale of
the Loans. The Seller will warrant that such transfer is a sale of its interest
in the Loans. In the event of an insolvency of the Seller, the receiver of the
Seller may attempt to recharacterize the sale of the Loans as a borrowing by the
Seller secured by a pledge of the Loans. If the receiver decided to challenge
such transfer, delays in payments on the Certificates and possible reductions in
the amount thereof could occur. The Depositor will warrant in the Agreement that
the transfer of the Initial Loans to the Trust is a valid transfer of all of the
Depositor's right, title and interest in the Initial Loans to the Trust.
The assignments to the Trustee (or any co-trustee appointed under the
Agreement) of any mortgage or deed of trust securing a Loan will be recorded in
the appropriate public office for real property records within the time period
specified in the Agreement, except where, in the opinion of counsel, such
recording is not required to protect the Trustee's interest in the related Loan
against the claim of any subsequent transferee or any successor to a creditor of
the Depositor or the Seller. See 'DESCRIPTION OF THE CERTIFICATES--The Trustee'
herein and 'CERTAIN LEGAL ASPECTS OF THE LOANS--Contracts Secured by Mortgages'
in the Prospectus.
The Subsequent Loans and the Pre-Funding Account. To the extent that
amounts on deposit in the Pre-Funding Account have not been fully applied to the
purchase of Subsequent Loans by the Trust by the end of the Funding Period, the
Class or Classes of Class A Certificateholders then entitled to receive
principal distributions will receive a prepayment of principal in an amount
equal to the Pre-Funded Amount remaining in the Pre-Funding Account on the
Distribution Date following the end of the Funding Period (in no event later
than the February 1996 Distribution Date). Although no assurances can be given,
the Depositor intends that the principal amount of Subsequent Loans sold to the
Trust will require the application of substantially all amounts on deposit in
the Pre-Funding Account and that there will be no material principal prepayment
to the Class A Certificateholders. See 'Social, Economic and Other Factors'
below.
The Seller will not select Subsequent Loans in a manner that it believes is
adverse to the interest of the Certificateholders. However, Subsequent Loans
purchased by the Seller and sold to the Trust may have been originated using
credit criteria different from those which were applied to the Initial Loans and
may be of a different credit quality. Therefore, following the transfer of
Subsequent Loans to the Trust, the aggregate characteristics of the Loans then
held in the Trust may vary from those of the Initial Loans. See 'DESCRIPTION OF
THE LOANS--Conveyance of Subsequent Mortgage Loans.'
The ability of the Trust to invest in Subsequent Loans is largely dependent
upon the ability of the Seller to purchase additional loans. The ability of the
Seller to purchase additional loans may be affected as a result of a variety of
social and economic factors. Economic factors include interest rates,
unemployment levels, the rate of inflation and consumer perception of economic
conditions generally. Other factors include changes in borrowers' housing needs
and borrowers' net equity in their homes. However, the Depositor is unable to
determine and has
S-17
<PAGE>
no basis to predict whether or to what extent economic or social factors will
affect the Seller's ability to purchase additional loans and therefore the
availability of Subsequent Loans.
Related Series Trusts. The Contract of Insurance will be held for the
benefit of Related Series Trusts. In the event the FHA Insurance coverage
reserves are applied to loans in a Related Series Trust, there may be
insufficient FHA Insurance coverage reserves to cover defaults on the FHA Loans.
Such an occurrence could result in shortfalls of interest on the Senior
Certificates and principal and interest on the Class A Certificates, to the
extent such shortfalls are not otherwise covered by the overcollateralization or
the Policy.
Limitations on FHA Insurance. The availability of FHA Insurance following
a default on a FHA Loan is subject to a number of conditions, including strict
compliance by the Contract of Insurance Holder, the Claims Administrator, the
Master Servicer, the Subservicers and the Originators with FHA Regulations in
originating and servicing the FHA Loan and limits on the aggregate insurance
coverage available with respect to all FHA Title I loans then owned and reported
for FHA Insurance by the Contract of Insurance Holder. Although the Contract of
Insurance Holder and the Seller have obtained representations from the
Originators that they have complied with all applicable FHA Regulations, such
regulations are susceptible to substantial interpretation. The Contract of
Insurance Holder is not required to obtain, and has not obtained, approval from
FHA of the origination and servicing practices of the Originators. Failure to
comply with all FHA Regulations may result in a denial of FHA Insurance claims,
and there can be no assurance that FHA's interpretation of its regulations will
not become stricter in the future. In addition, any claim paid by FHA will
cover, at most, 90% of the sum of the unpaid principal on the FHA Loan, a
portion of the unpaid interest and certain other liquidation costs up to the
Contract of Insurance Holder's aggregate amount of FHA insurance coverage. The
Seller and, in limited circumstances, the Master Servicer, has agreed in the
Agreement to purchase from the Trust any FHA Loan that is rejected by the FHA
for insurance benefits under the Contract of Insurance.
The FHA Insurance that is expected to be available to the Contract of
Insurance Holder in respect of the Initial FHA Loans is equal to $33,343,300,
which amount represents the sum of (a) 10% of the outstanding principal balance
of Initial FHA Loans and (b) the amount of FHA Insurance coverage available as
of the Cut-Off Date from the current Related Series Trusts other than the Trust.
The amount of FHA Insurance on the Closing Date will be increased at the end of
the Funding Period by an amount equal to 10% of the lesser of the outstanding
Principal Balance as of the Subsequent Transfer Date of, and the purchase price
paid for, the Subsequent Loans that are FHA Loans purchased by the Trust.
Lack of Delinquency and Loss Information. Delinquency and loss experience
with respect to loans similar to the Loans originated by the Originators is not
available. Potential investors will have to make an investment determination
based on the Loan underwriting criteria and other information provided herein,
and not on prior delinquency and loss information.
THE FIRST NATIONAL BANK OF KEYSTONE
Keystone, located in Keystone, West Virginia, is a national banking
association organized under the laws of the United States of America. Keystone
has assets of approximately $205 million as of November 1, 1995 and is primarily
engaged in the mortgage lending business. Keystone has managed its growth and
profitability over the last several years by capitalizing on the skills of its
management. The results of the utilization of innovative management has resulted
in Keystone being consistently rated as one of the top five performing banks in
the $50,000,000 to $1,000,000,000 asset category. Since 1992, Keystone has
pursued a Title I Loan acquisition program.
The Initial Loans will contain 8,825 loans purchased or originated and sold
to Keystone by twenty approved Title I lenders with aggregate outstanding
Principal Balances of $135,996,958.88. The Originators are Alta Loma Financial,
located in Rancho Cucamonga, California; Ameritex Residential Mortgage, Inc.,
located in Hurst, Texas; Carl I. Brown, located in Kansas City, Missouri;
Cerritos Valley Bank, located in Norwalk, California; City Mortgage Corporation,
located in Pittsburgh, Pennsylvania; Clearview Capital Corp., located in
Huntington Beach, California; Commonwealth Thrift & Loan, located in Torrance,
California; Empire Funding Corporation, located in Austin, Texas; Federal
Finance Corporation, located in Chicago, Illinois; Fidelity Union Mortgage
Corporation/V.I., located in Phoenix, Arizona; Financial Research Service,
located in Miami, Florida; First
S-18
<PAGE>
Pacific Financial Inc., located in Costa Mesa, California; Homeowners Mortgage &
Equity, Inc., located in Austin, Texas; Interbank Funding Group, located in San
Diego, California; Industrial Bank, located in Van Nuys, California; Pacwest
Services, Inc., located in Spokane, Washington; North County Bank, located in
Escondido, California; Trust One Mortgage Corporation, located in Irvine,
California; United California Systems International, Inc., located in Culver
City, California; and WoodBai, Inc. d/b/a Unlimited Financial Resources, located
in Durham, North Carolina. Keystone re-underwrote each of the Loans acquired by
it using underwriting standards which would satisfy and/or exceed the standards
of the Title I Program, and intends to visit a random sample of the properties
improved by, or purchased with the proceeds of the Loans.
ORIGINATION AND UNDERWRITING GUIDELINES
TITLE I PROGRAM
The following is a brief description of the underwriting policies
customarily employed by the Seller for re-underwriting Title I Loans with
respect to single family and nonresidential property improvement loans and
manufactured home loans, which includes manufactured home purchase, lot and
combination loans. The Seller considers all aspects of the applicant's credit
before approving or rejecting a loan for purchase. The Seller evaluates the
applicant's income (present and past), assets, liabilities and net worth in
relation to the proposed mortgage payments and to the applicant's demonstrated
ability to manage financial affairs. The Seller evaluates each applicant's
creditworthiness on a case by case basis to assure sound credit underwriting.
In evaluating a borrower for creditworthiness key factors viewed by the
Seller are the housing to income and debt to income ratios. The monthly housing
to income ratio (first and all junior lien payments plus impounds for real
estate taxes, insurance premiums and leasehold payments) may normally not exceed
approximately 45% (with respect to home improvement loans) and 29% or 31% (with
respect to manufactured home loans originated before or on and after August 15,
1994, respectively) of the applicant's stable monthly income. If the property is
subject to any homeowner's association fees or common elements, property charges
or maintenance charges, they must be included in the monthly housing expense
when calculating the housing to income ratio.
Additionally, the total amount of the monthly housing expenses as described
above plus other monthly payments on all installment debts having a remaining
term of more than ten (10) months may normally not exceed 45% (with respect to
home improvement loans) and 41% or 43% (with respect to manufactured home loans
originated before or on and after August 15, 1994, respectively) of the
applicant's stable monthly income. Alimony, child support and maintenance
payments are considered long-term monthly obligations unless such obligations
terminate in less than ten (10) months.
Other matters considered by the Seller in its evaluation process include
the applicant's overall credit history and net worth (accumulation of net worth
is considered a strong indication of creditworthiness).
Exceptions to the Seller's underwriting guidelines may be made by a senior
officer of the Seller. The factors considered when determining if an exception
to the general underwriting standards should be made include quality and value
of the property, how long the applicant has owned the property, amounts of
disposable income, length and type of employment, credit history, current and
pending debt obligations, payment habits, status of past and other existing
mortgages and special circumstances that explain a brief variation from the
underwriting guidelines.
THE TITLE I LOAN PROGRAM AND THE CONTRACT OF INSURANCE
THE TITLE I PROGRAM
Substantially all of the Initial Loans are FHA Loans that are partially
insured under the Title I Program and substantially all of the Subsequent Loans
will have been originated under the Title I Program. Under the Title I Program,
the FHA is authorized and empowered to insure qualified lending institutions
against losses on eligible loans. The Title I Program operates as a coinsurance
program in which the FHA insures up to 90% of certain losses incurred on an
individual insured loan, including the unpaid Principal Balance of the loan, but
only to the extent of the insurance coverage available in the lender's FHA
insurance coverage reserve account. The owner of the loan bears the uninsured
loss on each loan.
S-19
<PAGE>
Title I Loans are made to finance actions or items that substantially
protect or improve the basic livability or utility for several types of
properties and for the purchase of manufactured homes and lots for manufactured
homes. Any references herein to 'Title I Loans' shall mean only loans under the
Title I Program.
There are two basic methods of lending or originating loans which include a
'direct loan' or a 'dealer loan.' With respect to a direct loan, the borrower
makes application directly to a lender without any assistance from a dealer.
Such application must be executed by the borrower and any co-maker or co-signer.
The lender may disburse the loan proceeds solely to the borrower or jointly to
the borrower and other parties to the transaction. With respect to a dealer
loan, the dealer, who has a direct or indirect financial interest in the loan
transaction assists the borrower in preparing the loan application or otherwise
assists the borrower in obtaining the loan from the lender. The lender may
disburse proceeds solely to the dealer or the borrower or jointly to the
borrower and the dealer or other parties. A dealer may be a seller, a contractor
or supplier of goods or services. The FHA Loans include direct and dealer loans.
Title I Loans are required to have fixed interest rates and, generally,
provide for equal installment payments due weekly, biweekly, semi-monthly, or
monthly, except that a loan may be payable quarterly or semi-annually in certain
circumstances in order to correspond with the borrower's irregular flow of
income. The first or last payments (or both) may vary in amount but may not
exceed 150% of the regular installment payment, and the first payment may be due
no later than 60 days from the date the loan is funded. The note must contain a
provision permitting full or partial prepayment of the loan. The interest rate
must be negotiated and agreed to by the borrower and the lender and must be
fixed for the term of the loan and recited in the note. Interest on a Title I
Loan must accrue from the date of the loan and be calculated according to the
actuarial method. The lender must assure that the note and all other documents
evidencing the loan are in compliance with applicable Federal, state and local
laws.
The Title I Program requires each lender to use prudent lending standards
in underwriting loans and to satisfy the applicable loan underwriting
requirements under the Title I Program prior to its approval of the loan.
Generally, the lender must exercise prudence and diligence to determine whether
the borrower and any co-maker is solvent and an acceptable credit risk, with a
reasonable ability to make payments on the loan. The lender's credit application
and review must determine whether the borrower's income will be adequate to meet
the periodic payments required by the loan, as well as the borrower's other
housing and recurring expenses, which determination must be made in accordance
with the expense-to-income ratios published by the Secretary of HUD unless the
lender determines and documents in the loan file the existence of compensating
factors concerning the borrower's creditworthiness which support approval of the
loan.
UNDER THE TITLE I PROGRAM, THE FHA DOES NOT REVIEW OR APPROVE FOR
QUALIFICATION FOR INSURANCE ANY LOAN INSURED THEREUNDER AT THE TIME OF APPROVAL
BY THE LENDING INSTITUTION (AS IS TYPICALLY THE CASE WITH OTHER FEDERAL LOAN
INSURANCE PROGRAMS). If, after a loan has been made and reported for insurance
under the Title I Program, the lender discovers any material misstatement of
fact or that the loan proceeds have been misused by the borrower, dealer or any
other party, the lender is required promptly to report this to the FHA. In such
case, provided that the validity of any lien on the property has not been
impaired, the insurance of the loan under the Title I Program will not be
affected unless such material misstatement of fact or misuse of loan proceeds
was caused by (or was knowingly sanctioned by) the lender or its employees.
REQUIREMENTS FOR TITLE I LOANS
Home Improvement Loans. The maximum principal amounts for home improvement
loans insured under the Title I Program must not exceed the actual cost of the
project plus any applicable fees and charges allowed under the Title I Program.
The following is the maximum loan amount for certain types of loans: (i) $25,000
for a single family property improvement loan; and (ii) the lesser of $60,000 or
an average of $12,000 per dwelling unit for multifamily property improvement
loans. Any Title I home improvement loan to a single borrower in excess of
$25,000 require the prior approval of the Secretary of HUD. Generally, the term
of a Title I home improvement loan may not be less than six months nor greater
than 20 years and 32 days. A borrower may obtain multiple Title I home
improvement loans with respect to multiple properties, and a borrower may obtain
more than one Title I home improvement loan with respect to a single property,
as long as the total outstanding balance of all Title I home improvement loans
on the same property does not exceed the maximum loan amount for the type of
Title I home improvement loan thereon.
S-20
<PAGE>
Borrower eligibility for a Title I home improvement loan requires that the
borrower have at least a one-half interest in either fee simple title to the
real property, a lease thereof for a term expiring at least six months after the
final maturity of the Title I home improvement loan or a properly recorded land
installment contract for the purchase of the real property. Any Title I home
improvement loan originated after August 1994 in excess of $7,500 must be
secured by a recorded lien on the improved property which is evidenced by a
mortgage or deed of trust executed by the borrower and all other owners in fee
simple. Prior to August 1994, any Title I home improvement loan in excess of
$5,000 was required to be secured by such a recorded lien. A Title I home
improvement loan in excess of $15,000 secured by non-owner occupied property
must have an appraised loan-to-value ratio not in excess of 100%.
The proceeds from a Title I home improvement loan may be used only to
finance property improvements which substantially protect or improve the basic
livability or utility of the property as disclosed in the loan application. The
Secretary of HUD has published a list of items and activities which cannot be
financed with proceeds from any Title I home improvement loans and from time to
time the Secretary of HUD may amend such list of items and activities. With
respect to any dealer Title I home improvement loan, before the lender may
disburse funds, the lender must have in its possession a completion certificate
on a HUD-approved form, signed by the borrower and the dealer. With respect to
any direct Title I home improvement loan, the lender is required to obtain,
promptly upon completion of the improvements but not later than 6 months after
disbursement of the loan proceeds with one 6 month extension if necessary, a
completion certificate, signed by the borrower. The lender is required to
conduct an on-site inspection on any Title I home improvement loan where the
original principal balance is $7,500 or more and on any direct Title I Loan
where the borrower fails to submit a completion certificate.
Manufactured home loans. Prior to August 15, 1994, the FHA regulations
capped the principal amount for a Title I manufactured home loan available to
purchase a new manufactured home at the sum of 125% of the wholesale base price
of the home plus any itemized options and applicable fees and charges allowed
under the Title I Program, up to a maximum of $40,500 (except in selected
high-cost areas defined by the Title I Program or other areas deemed necessary
by the Secretary of HUD). The principal amount for a loan to purchase an
existing manufactured home was capped at the lesser of 90% of the appraised
value of the home (as determined by a HUD-approved appraisal) plus 90% of any
applicable fees and charges allowed under the Title I Program, or 90% of the
purchase price of the home, up to a maximum of $40,500. The principal amount for
a loan to purchase a new manufactured home and a lot on which to place the home
was capped at the sum of 125% of the wholesale base price of the home plus any
itemized options and applicable fees and charges allowed under the Title I
Program, plus the lesser of the appraised value of the developed manufactured
home lot (as determined by a HUD-approved appraisal, including on-site water and
utility connections, sanitary facilities, site improvements and landscaping) or
the purchase price, up to a maximum of $54,000 (except in selected high-cost
areas defined by the Title I Program or other areas deemed necessary by the
Secretary of HUD). The principal amount for a loan to purchase an existing
manufactured home and a lot on which to place the home was capped at the lesser
of 95% of the total appraised value of the home, the lot, and any appurtenances
(as determined by a HUD-approved appraisal), plus 95% of any applicable charges,
or 95% of the purchase price of the home, the lot, and any appurtenances.
After August 14, 1994, FHA regulations cap the loan amount available for
the purchase of a new manufactured home or for the purchase of a new
manufactured home and a lot at 130% of the wholesale base price of the home plus
any itemized options and applicable fees and charges allowed under the Title I
Program. The loan amount for the purchase of an existing manufactured home is
capped at the lesser of 95% of the appraised value or purchase price of the
home. The maximum loan amounts for the purpose of financing the purchase of a
new or existing manufactured home and for purchasing a new or existing
manufactured home plus a suitably developed lot have been increased from $40,500
to $48,600 and $54,000 to $64,800, respectively.
Under the Title I Program, the term of a loan for a manufactured home or a
single-module manufactured home and lot must not be less than six months nor
more than 20 years and 32 days from the date of the loan. For a loan for a
multi-module manufactured home (new or existing) and lot, the maximum term must
not exceed 25 years and 32 days from the date of the loan.
Borrower eligibility for a Title I manufactured home loan (whether for a
manufactured home purchase loan, a manufactured home lot loan, or a combination
loan) requires that the borrower become the owner of the
S-21
<PAGE>
property which is to be financed with such loan. Where the loan involves a
manufactured home that is classified as realty, ownership of the home must be in
fee simple. Where the loan involves a manufactured home lot, ownership of the
lot must be in fee simple unless the lot consists of a share in a cooperative
association that owns and operates a manufactured home park. Where the proceeds
are for a manufactured home purchase loan or combination loan, the home must be
the borrower's principal residence. Where the proceeds are for a lot loan, a
manufactured home must be placed on the lot and occupied as the borrower's
principal residence within six months of the loan.
The proceeds of a Title I manufactured home loan may be used for the
purchase or refinancing of a manufactured home, a lot on which to place a
manufactured home already owned by the borrower, or a manufactured home and a
lot for the home. In addition, the proceeds of a manufactured home purchase loan
and combination loan may be used for the purchase of a garage, carport, patio
(or a permanent foundation in the case of a combination loan) or other
comparable appurtenance to the manufactured home.
In order to be eligible for financing under the Title I Program, the
manufactured home, its warranty and the site on which the home is placed must
all meet the specific requirements outlined under the Title I Program. The
manufactured home must be certified by the manufacturer that the home has been
constructed in compliance with the National Manufactured Housing Construction
and Safety Act of 1974. For new homes, the manufacturer must furnish the
borrower with a written warranty that obligates the manufacturer to take
appropriate action to correct any defects in material or workmanship. The lender
must investigate whether the home manufacturer is complying with its warranty
obligations, and when consumers have complaints, the lender must ascertain
whether the complaints have been resolved. To assure the suitability of the home
site, when the manufactured home is to be placed on a leased site in a
manufactured home park or on an individual manufactured home lot, the lender
must obtain directly or through the borrower a certification from the State or
local authority that the site complies with the minimum standards relating to
site location (zoned for manufactured homes), vehicular access, water supply,
sewerage disposal, utility connections, storm drainage, site development, and
landscaping.
In addition to certain costs which may not be financed with the proceeds of
the manufactured home loan, in the case of manufactured home purchase loans,
manufactured home lot loans, and combination loans, the borrower is required to
make a minimum cash downpayment of 5 percent of the home and/or lot. However,
prior to August 15, 1994, the borrower was required to make a minimum cash
downpayment of at least five percent of the first $5,000 and 10 percent of the
balance of the purchase price of the home, for the purchase of a new home or for
the purchase of a new home and lot. In the case of a manufactured home purchase
loan for an existing home or a manufactured home lot loan, the borrower was
required to make a minimum cash downpayment of at least 10 percent of the
purchase price of the home or lot. All manufactured home loans must be secured
by a recorded lien on the home (or lot or home and lot), its furnishings
equipment, accessories, and appurtenances. The lien must be a first lien,
superior to any other lien on that property, evidenced by a properly recorded
financing statement, security instrument, or another acceptable instrument, such
as a certificate of title issued by the State.
FHA INSURANCE COVERAGE
Under the Title I Program the FHA establishes an insurance coverage reserve
account for each lender which has been granted a Title I insurance contract. The
amount of insurance coverage in this account is a maximum of 10% of the amount
disbursed, advanced or expended by the lender in originating or purchasing
eligible loans registered with the FHA for Title I insurance, with certain
adjustments. The balance in the insurance coverage reserve account is the
maximum amount of insurance claims the FHA is required to pay to the Title I
lender. Loans to be insured under the Title I Program will be registered for
insurance by the FHA and the insurance coverage attributable to such loans will
be included in the insurance coverage reserve account for the originating or
purchasing lender following the receipt and acknowledgment by the FHA of a loan
report on the prescribed form pursuant to the Title I regulations. For each
eligible loan reported and acknowledged for insurance, the FHA charges a fee
(the 'Insurance Premium'). For loans having a maturity of 25 months or less, the
FHA bills the lender for the entire Insurance Premium in an amount equal to the
product of 0.50% of the original loan amount and the loan term. For home
improvement loans with a maturity greater than 25 months, each year that a loan
is outstanding the FHA bills the lender for an Insurance Premium in an amount
equal to 0.50% of the original loan amount. The annual Insurance Premium for
manufactured home loans originated prior to October 9, 1989 is equal to an
amount which is the product of 0.54% of the original loan amount. The annual
Insurance Premium for manufactured home loans originated after October 8, 1989
depends on maturity
S-22
<PAGE>
and is broken down as follows: (a) for loans with a maturity in excess of 25
months but not more than 144 months, the annual Insurance Premium is 1.00% of
the original loan amount for the first three years of the loan term, 0.75% of
the original loan amount for the next two years, and 0.50% of the original loan
amount for all succeeding years until the loan is paid; (b) for loans with a
maturity in excess of 144 months but not more than 192 months, annual Insurance
Premium is 1.00% of the loan amount for the first four years of the original
loan term, 0.75% of the original loan amount for the next three years, and 0.50%
of the loan amount for all succeeding years until the loan is paid; and (c) for
loans with a maturity in excess of 192 months, the annual Insurance Premium is
1.00% of the original loan amount for the first five years of the loan term,
0.75% of the loan amount for the next four years, and 0.50% of the loan amount
for all succeeding years until the loan is paid. If a loan is prepaid during the
year, the FHA will not refund or abate the Insurance Premium paid for such year.
The balance of the lender's FHA insurance coverage therein may be earmarked
with respect to each or any eligible loans insured thereunder, if a
determination is made by the Secretary of HUD that it is in its interest to do
so. Originations and acquisitions of new eligible loans will continue to
increase a lender's insurance coverage reserve account balance by the lesser of
(a) the amount of the FHA Insurance available for transfer at the time of
transfer to another qualified lender and (b) 10% of the amount disbursed,
advanced or expended in originating or acquiring such eligible loans registered
with the FHA for insurance under the Title I Program. The Secretary of HUD may
transfer insurance coverage between insurance coverage reserve accounts with
earmarking with respect to a particular insured loan or group of insured loans
when a determination is made that it is in the Secretary's interest to do so. As
described under the caption 'THE TITLE I LOAN PROGRAM--The Contract of
Insurance,' the insurance coverage reserve funds will not be earmarked by the
Secretary of HUD solely for the Trust.
The lender may transfer (except as collateral in a bona fide loan
transaction) insured loans and loans reported for insurance only to another
qualified lender under a valid Title I contract of insurance. Unless an insured
loan is transferred with recourse or with a guarantee or repurchase agreement,
the FHA, upon receipt of written notification of the transfer of such loan in
accordance with the Title I regulations, will transfer from the transferor's
insurance coverage reserve account to the transferee's insurance coverage
reserve account an amount, if available, equal to 10% of the actual purchase
price or the net unpaid principal balance of such loan (whichever is less).
However, under the Title I Program not more than $5,000 in insurance coverage
shall be transferred to or from a lender's insurance coverage reserve account
during any October 1 to September 30 fiscal year without the prior approval of
the Secretary of HUD.
CLAIMS PROCEDURES UNDER TITLE I
Under the Title I Program the lender may accelerate an insured loan
following a default on such loan only after the lender or its agent has
contacted the borrower in a face-to-face meeting or by telephone to discuss the
reasons for the default and to seek its cure. If the borrower does not cure the
default or agree to a modification agreement or repayment plan, the lender will
notify the borrower in writing that, unless within 30 days the default is cured
or the borrower enters into a modification agreement or repayment plan, the loan
will be accelerated and that, if the default persists, the lender will report
the default to an appropriate credit agency. The lender may rescind the
acceleration of maturity after full payment is due and reinstate the loan only
if the borrower brings the loan current, executes a modification agreement or
agrees to an acceptable repayment plan.
Following acceleration of maturity upon a secured Title I home improvement
loan, the lender may either (a) proceed against the related Property under any
security instrument, or (b) make a claim under the lender's contract of
insurance. Generally lenders make a claim under their contract of insurance. If
the lender chooses to proceed against the Property under a security instrument
(or if it accepts a voluntary conveyance or surrender of the Property), the
lender can later file an insurance claim only with the prior approval of the
Secretary of HUD.
In proceeding against the loan secured by a manufactured home, the lender
must proceed against the loan security by foreclosure or repossession, as
appropriate, and acquire good, marketable title to the property securing the
loan and the lender must take all actions necessary under applicable law to
preserve its rights, if any, to obtain a deficiency judgment against the
borrower. Where the lender obtains title to property securing a manufactured
home loan by repossession or foreclosure, the property shall be sold for the
'best price obtainable' before making an insurance claim. The best price
obtainable shall be the greater of (a) the actual sales price of the property,
less the cost of repairs to make the property marketable, or (b) the appraised
value of the property before repairs. In the case of a combination loan, the
manufactured home and lot shall be sold in a single
S-23
<PAGE>
transaction and the manufactured home may not be removed from the lot without
prior approval of the Secretary of HUD.
When a lender files an insurance claim with the FHA under the Title I
Program, the FHA reviews the claim, the complete loan file certification of
compliance with applicable state and local laws in carrying out any foreclosure
or repossession, and where the borrower is in bankruptcy or deceased evidence
that the lender has properly filed proofs of claims. Generally, a claim for
reimbursement for loss on any eligible loan must be filed with the FHA no later
than 9 months after the date of default for home improvement loans and, with
respect to manufactured home loans, no earlier than three months after the date
of sale, but not later than 18 months after the date of default. Concurrently
with filing the insurance claim, the lender shall assign to the United States of
America the lender's entire interest in the loan note (or a judgment in lieu of
the note), in any security held and in any claim filed in any legal proceedings.
If, at the time the note is assigned to the U.S., the Secretary has reason to
believe that the note is not valid or enforceable against the borrower, the FHA
may deny the claim and reassign the note to the lender. If either such defect is
discovered after the FHA has paid a claim, the FHA may require the lender to
repurchase the paid claim and to accept a reassignment of the loan note. If the
lender subsequently obtains a valid and enforceable judgment against the
borrower, the lender may resubmit a new insurance claim with an assignment of
the judgment. Although regulations permit the FHA to contest any insurance claim
and make a demand for repurchase of the loan at any time up to two years from
the date the claim was certified for payment (and may do so thereafter in the
event of fraud or misrepresentation on the part of the lender), the FHA has
expressed an intention to take such action within one year from the date the
claim was certified for payment.
Under the Title I Program the amount of a FHA insurance claim payment, when
made, is equal to the Claimable Amount, up to the amount of insurance coverage
in the lender's insurance coverage reserve account established by HUD. The
'Claimable Amount' for home improvement loans is equal to 90% of the sum of: (a)
the unpaid loan obligation (net unpaid principal and the uncollected interest
earned to the date of default) with adjustments thereto if the lender has
proceeded against property securing such loan; (b) the interest on the unpaid
amount of the loan obligation from the date of default to the date of the
claim's initial submission for payment plus 15 calendar days (but not to exceed
9 months from the date of default), calculated at the rate of 7% per annum; (c)
the uncollected court costs; (d) the attorneys' fees not to exceed $500; and (e)
the expenses for recording the assignment of the security to the United States.
The 'Claimable Amount' for manufactured home loans is equal to 90% of the sum
of: (a) the unpaid loan obligation (net unpaid principal and the uncollected
interest earned to the date of default) with adjustments thereto including the
best price obtainable for the property; (b) the interest on the unpaid amount of
the loan obligation from the date of default to the date of the claim's initial
submission for payment plus 15 calendar days (but not to exceed 9 months from
the date of default), calculated at the rate of 7% per annum; (c) the costs paid
to repossess and preserve the manufactured home, plus actual costs (not to
exceed $1,000 per module) for removing and transporting the home to the dealer
or other off-site location; (d) the sales commission paid for the resale of the
repossessed or foreclosed manufactured home and/or lot (but not to exceed 10% of
the sales price to homes sold on-site or 7% if sold off-site); (e) local and
state tax liens, special assessments, and premiums received for hazard insurance
prorated to the date of disposition, plus any transfer taxes imposed upon any
deed instruments; (f) the uncollected court costs; (f) the attorney's fees not
to exceed $1,000; and (f) the expenses for recording the assignment of the
security to the United States.
THE CONTRACT OF INSURANCE
On the Closing Date, the Contract of Insurance Holder held, or will request
for transfer in the name of the Contract of Insurance Holder for the benefit of
the Trust, FHA Insurance coverage reserves in an amount that is equal to
$33,343,300, which is equal to the sum of (a) approximately 10% of the
outstanding Principal Balance of all Initial FHA Loans as of the Cut-Off Date
and (b) the amount of FHA Insurance coverage available as of the Cut-Off Date
from the current Related Series Trusts other than the Trust. Additional amounts
of FHA Insurance will be added as Subsequent Loans are purchased by the Trust.
With respect to those Initial FHA Loans for which FHA Insurance coverage
reserves have not been transferred to the Contract of Insurance Holder's FHA
Insurance coverage reserves account (the 'FHA Insurance Coverage Reserve
Account') by the Closing Date, each of the related Originators will be required
to take appropriate steps to cause the FHA to transfer the appropriate amounts
of FHA Insurance coverage reserves from the FHA Insurance coverage reserve
account of the Originator to that of the Contract of Insurance Holder. To
accomplish this transfer, on or after the date on which the Originators
S-24
<PAGE>
receive the FHA Title I Case Numbers for such Initial Loans, the Originators
will be required to submit a transfer of note report to the Secretary of HUD
regarding the conveyance of such Initial Loans to the Trustee. Similar
procedures and adjustments will be made with respect to the Subsequent Loans.
The 'FHA Insurance Amount' shall mean on any day of determination the initial
FHA Insurance Amount plus all amounts subsequently transferred by the Secretary
of HUD to the Contract of Insurance Holder's FHA Insurance coverage reserve
account (including FHA Insurance coverage amounts transferred to the Contract of
Insurance Holder in connection with Subsequent Loans) less the amount of FHA
Insurance proceeds previously received under the Contract of Insurance with
respect to the FHA Loans and any loans in Related Series Trusts (as described
below) since the related Transfer Date. The Claims Administrator shall not
submit any claim to the FHA if the amount of such claim would exceed the FHA
Insurance Amount applicable to the Contract of Insurance. All proceeds received
in respect of such claims under the Contract of Insurance shall be deposited
into the Collection Account.
The Contract of Insurance will be held by Coast Partners Acceptance
Corporation for the benefit of the Trust, Lehman FHA Title I Loan Trust 1995-3,
Lehman FHA Title I Loan Trust 1995-4 and any subsequent series of trusts to
which loans are sold directly or indirectly by Keystone and the related
certificates of which are insured by a financial guarantee insurance policy
issued by the Certificate Insurer (collectively, the 'Related Series Trusts').
The Secretary of HUD will not earmark the insurance reserves held for the
Contract of Insurance Holder for the benefit of any particular Related Series
Trust, however the Contract of Insurance Holder has agreed not to own or hold
other Title I Loans covered by the Contract of Insurance other than loans
included in Related Series Trusts. In the event the FHA Insurance is applied to
loans in a Related Series Trust other than the Trust, there may be insufficient
FHA Insurance to cover defaults on the FHA Loans.
THE MASTER SERVICER AND CLAIMS ADMINISTRATOR
NORWEST BANK MINNESOTA, N.A.
The information set forth below has been provided by Norwest Bank
Minnesota, N.A. ('Norwest') and neither the Depositor nor the Underwriter makes
any representations or warranties as to the accuracy or completeness of such
information.
Norwest is a national banking association, with executive offices located
at Six and Marquette, Minneapolis, Minnesota 55479 and its master servicing
offices are located at 11000 Broken Land Parkway, Columbia, Maryland 21044.
DELINQUENCY AND LOSSES
The Master Servicer is engaged in the business of servicing, on behalf of
third party investors, residential single family mortgages secured by properties
located in all 50 states and the District of Columbia. As of September 30, 1995,
the Master Servicer was master servicing more than 117,000 mortgage loans
representing an aggregate outstanding principal balance of approximately $18.8
billion. No specific delinquency or foreclosure data relating to the Master
Servicer's servicing portfolio is provided because the Master Servicer has no
prior servicing experience with Title I Loans.
CONTRACT OF INSURANCE HOLDER
Coast Partners Acceptance Corporation, a Delaware corporation, will be
named as Contract of Insurance Holder under the Agreement. Coast Partners
Acceptance Corporation is a special purpose corporation and is an affiliate of
Coast Partners Securities, Inc.
DESCRIPTION OF THE LOANS
GENERAL
The statistical information presented in this Prospectus Supplement with
respect to the Initial Loans describes the Initial Loans as of the Cut-Off Date.
Unless otherwise specified, percentages are stated by aggregate Principal
Balance of the Initial Loans as of the Cut-Off Date.
The Initial Loans to be transferred to the Trust on the Closing Date will
consist of closed-end fixed-rate home improvement loans and retail installment
sale contracts secured by first and junior mortgages, deeds of trust and
security deeds on residences (which are primarily condominiums, townhouses and
one- to four-family residences), including investment properties (the 'Mortgaged
Properties'). The Subsequent Loans to be
S-25
<PAGE>
conveyed to the Trust during the Funding Period will either be home improvement
loans and retail installment sale contracts (the 'Mortgage Loans') or may be
fixed-rate manufactured housing installment sale contracts and installment loan
agreements (the 'Manufactured Housing Contracts' and together with the Mortgage
Loans, the 'Loans'), secured by either security interests in manufactured homes
purchased with the proceeds of such Manufactured Housing Contracts (each a
'Manufactured Home') and/or liens on the real estate to which the related
Manufactured Homes are deemed permanently affixed (the 'Manufactured Home
Properties' and together with the Manufactured Homes and the Mortgaged
Properties, the 'Properties'). The Mortgaged Properties may be owner-occupied
(which includes second and vacation homes) and non-owner occupied investment
properties. None of the Initial Loans are Manufactured Housing Contracts. The
Mortgaged Properties with respect to the Initial Loans are located in 43 states.
Substantially all of the Initial Loans are and substantially all of the
Subsequent Loans will be partially insured under the Title I Program
(collectively, the 'FHA Loans'). See 'THE TITLE I LOAN PROGRAM AND THE CONTRACT
OF INSURANCE' herein. No more than $1,000,000 in principal amount (based on
aggregate Principal Balance as of the applicable Transfer Date for such Loans)
will be originated using criteria substantially similar to the Title I Program,
but will not be insured under the FHA Insurance.
The Pool Balance as of the Cut-Off Date is $135,966,958.88, which is equal
to the aggregate Principal Balances of the Initial Loans as of the Cut-Off Date.
With respect to the Initial Loans, the average Cut-Off Date Principal Balance is
expected to be $15,410.42, the minimum Cut-Off Date Principal Balance is
expected to be $293.14, the maximum Cut-Off Date Principal Balance is expected
to be $60,000, the minimum Loan Rate and the maximum Loan Rate on the Cut-Off
Date are expected to be 9.990% and 18.000% per annum, respectively, and the
weighted average Loan Rate on the Cut-Off Date is expected to be 13.828% per
annum. As of the Cut-Off Date, the weighted average remaining term to maturity
of the Initial Loans is expected to be 189 months and the remaining terms to
maturity of the Initial Loans will range from 10 months to 240 months. No
Initial Loan is expected to mature later than October 2015. As of the Cut-Off
Date no Initial Loan was more than one month past due.
Under the Agreement, all Manufactured Homes, if any, are required to comply
with the requirements of certain federal statutes which generally would require
the Manufactured Homes to have a minimum of 400 square feet of living space and
a minimum width of 102 inches and to be of a kind customarily used at a fixed
location. Such statutes would also require the Manufactured Homes to be
transportable in one or more sections, built on a permanent chassis and designed
to be used as dwellings, with or without permanent foundations, when connected
to the required utilities. The Manufactured Homes are also required to include
the plumbing, heating, air conditioning, and electrical systems therein. At the
time of origination, each Obligor under a Manufactured Housing Contract
represented that the related Manufactured Home would be the Obligor's primary
residence.
CONVEYANCE OF SUBSEQUENT LOANS
The Agreement permits the Trust to acquire approximately $73,229,131.70 in
aggregate principal balance of Subsequent Loans. Accordingly, the statistical
characteristics of the Trust will vary as of any Subsequent Cut-Off Date upon
the acquisition of Subsequent Loans.
The obligation of the Trust to purchase a Subsequent Loan on a Subsequent
Transfer Date is subject to the following requirements, among others (i) each
such Subsequent Loan must satisfy the representations and warranties specified
in the Agreement and in the agreement pursuant to which such Subsequent Loans
are transferred to the Trust (each a 'Subsequent Transfer Agreement'); (ii) the
Seller will not select such Subsequent Loans in a manner that it believes is
adverse to the interest of the Senior Certificateholders or the Certificate
Insurer, (iii) the Seller will deliver certain opinions of counsel with respect
to the validity of the conveyance of such Subsequent Loans; (iv) as of the date
a Subsequent Loan is conveyed to the Trust (the 'Subsequent Transfer Date' and
together with the Closing Date, each a 'Transfer Date'), such Subsequent Loan
(a) will not have a last scheduled payment date after October 2015 and (b) will
not have a Loan Rate less than 9.990%; (v) following the purchase of the last
Subsequent Loan, the Subsequent Loans in the aggregate will have a weighted
average maturity of no more than 200 months and a weighted average Loan Rate at
least equal to 13.55%, each weighted on the basis of the Cut-Off Date Principal
Balances of the Subsequent Loans; and (vi) the Certificate Insurer in its sole
and absolute discretion shall have consented to such conveyance.
S-26
<PAGE>
CERTAIN STATISTICAL CHARACTERISTICS OF THE INITIAL LOANS
ORIGINAL PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
NUMBER OF CUT-OFF DATE DATE
RANGE OF PRINCIPAL BALANCES LOANS PRINCIPAL BALANCE POOL BALANCE
- -------------------------------------------------------------------- --------- ----------------- ------------
<S> <C> <C> <C>
0.01 to 5,000.00.............................................. 519 $ 2,016,413.72 1.48%
5,000.01 to 10,000.00.............................................. 2,169 17,216,545.76 12.66
10,000.01 to 15,000.00.............................................. 2,252 29,361,628.36 21.59
15,000.01 to 20,000.00.............................................. 1,239 21,860,478.48 16.07
20,000.01 to 25,000.00.............................................. 2,628 64,677,166.68 47.56
25,000.01 to 30,000.00.............................................. 1 29,589.01 0.02
30,000.01 to 35,000.00.............................................. 2 67,660.77 0.05
35,000.01 to 40,000.00.............................................. 3 111,944.58 0.08
40,000.01 to 45,000.00.............................................. 1 42,152.53 0.03
45,000.01 to 50,000.00.............................................. 4 193,918.88 0.14
55,000.01 to 60,000.00.............................................. 7 419,460.11 0.31
--------- ----------------- ------------
Totals......................................................... 8,825 $ 135,996,958.88 100.00%
--------- ----------------- ------------
--------- ----------------- ------------
</TABLE>
LOAN RATES AS OF CUT-OFF DATE
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE
RANGE OF LOAN RATES LOANS PRINCIPAL BALANCE POOL BALANCE
- -------------------------------------------------------------------- --------- ----------------- ------------
<S> <C> <C> <C>
9.501% to 10.000%.................................................. 6 $ 124,530.82 0.09%
10.501% to 11.000%.................................................. 83 1,602,175.52 1.18
11.001% to 11.500%.................................................. 72 1,256,537.95 0.92
11.501% to 12.000%.................................................. 866 14,529,910.85 10.68
12.001% to 12.500%.................................................. 209 2,558,199.94 1.88
12.501% to 13.000%.................................................. 1,441 26,426,758.56 19.43
13.001% to 13.500%.................................................. 319 4,334,613.35 3.19
13.501% to 14.000%.................................................. 2,747 43,294,683.24 31.84
14.001% to 14.500%.................................................. 692 8,663,117.66 6.37
14.501% to 15.000%.................................................. 1,377 21,314,675.14 15.67
15.001% to 15.500%.................................................. 208 2,456,764.15 1.81
15.501% to 16.000%.................................................. 634 7,521,173.02 5.53
16.001% to 16.500%.................................................. 42 419,960.55 0.31
16.501% to 17.000%.................................................. 88 1,101,842.89 0.81
17.001% to 17.500%.................................................. 8 79,417.05 0.06
17.501% to 18.000%.................................................. 33 312,598.19 0.23
--------- ----------------- ------------
Totals......................................................... 8,825 $ 135,996,958.88 100.00%
--------- ----------------- ------------
--------- ----------------- ------------
</TABLE>
S-27
<PAGE>
NUMBER OF MONTHS SINCE ORIGINATION
<TABLE>
<CAPTION>
PERCENT OF
CUT-OFF
RANGE OF MONTHS NUMBER OF CUT-OFF DATE DATE POOL
SINCE ORIGINATION LOANS PRINCIPAL BALANCE BALANCE
- -------------------------------------------------------------------- --------- ----------------- ------------
<S> <C> <C> <C>
< 0........................................................... 1,372 $ 24,836,074.07 18.26%
-
1 to 6.......................................................... 6,876 103,240,148.75 75.91
7 to 12.......................................................... 138 1,744,837.67 1.28
13 to 18.......................................................... 18 301,081.40 0.22
19 to 24.......................................................... 19 278,938.54 0.21
25 to 30.......................................................... 42 625,532.01 0.46
31 to 36.......................................................... 92 1,380,580.45 1.02
37 to 42.......................................................... 66 879,734.80 0.65
43 to 48.......................................................... 54 717,602.43 0.53
49 to 54.......................................................... 55 751,184.82 0.55
55 to 60.......................................................... 28 403,881.14 0.30
61 to 66.......................................................... 38 531,108.44 0.39
67 to 72.......................................................... 8 107,588.31 0.08
73 to 78.......................................................... 10 131,157.17 0.10
79 to 84.......................................................... 1 5,300.92 0.00
85 to 90.......................................................... 5 47,087.21 0.03
97 to 102.......................................................... 2 13,397.17 0.01
103 to 108.......................................................... 1 1,723.58 0.00
--------- ----------------- ------------
Totals......................................................... 8,825 $ 135,996,958.88 100.00%
--------- ----------------- ------------
--------- ----------------- ------------
</TABLE>
MONTHS REMAINING TO SCHEDULED MATURITY
<TABLE>
<CAPTION>
PERCENT OF
RANGE OF CUT-OFF
REMAINING TERMS NUMBER OF CUT-OFF DATE DATE POOL
(IN MONTHS) LOANS PRINCIPAL BALANCE BALANCE
- -------------------------------------------------------------------- --------- ----------------- ------------
<S> <C> <C> <C>
1 to 12.......................................................... 1 $ 5,082.01 0.00%
13 to 24.......................................................... 18 56,208.83 0.04
25 to 36.......................................................... 57 235,091.60 0.17
37 to 48.......................................................... 53 218,168.70 0.16
49 to 60.......................................................... 354 2,083,978.89 1.53
61 to 72.......................................................... 89 584,512.84 0.43
73 to 84.......................................................... 351 2,317,824.05 1.70
85 to 96.......................................................... 137 1,160,760.41 0.85
97 to 108.......................................................... 39 359,884.13 0.26
109 to 120.......................................................... 1,402 14,003,868.84 10.30
121 to 132.......................................................... 94 1,283,098.06 0.94
133 to 144.......................................................... 249 3,065,551.88 2.25
145 to 156.......................................................... 101 1,383,082.54 1.02
157 to 168.......................................................... 26 347,530.09 0.26
169 to 180.......................................................... 3,460 54,662,902.94 40.19
181 to 192.......................................................... 1 14,261.90 0.01
205 to 216.......................................................... 24 538,949.85 0.40
217 to 228.......................................................... 7 143,418.09 0.11
229 to 240.......................................................... 2,362 53,532,783.23 39.36
--------- ----------------- ------------
Totals......................................................... 8,825 $ 135,996,958.88 100.00%
--------- ----------------- ------------
--------- ----------------- ------------
</TABLE>
S-28
<PAGE>
MORTGAGED PROPERTY GEOGRAPHICAL DISTRIBUTION BY STATE (1)
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF CUT-OFF DATE CUT-OFF DATE
STATE LOANS PRINCIPAL BALANCE POOL BALANCE
- ----- --------- ----------------- ------------
<S> <C> <C> <C>
Arizona.......................................................... 252 $ 4,452,920.79 3.27%
Arkansas......................................................... 405 4,156,241.28 3.06
California....................................................... 3,339 67,921,735.95 49.94
Colorado......................................................... 403 5,355,157.18 3.94
Connecticut...................................................... 13 211,917.63 0.16
Florida.......................................................... 383 5,061,105.18 3.72
Georgia.......................................................... 190 2,226,450.74 1.64
Hawaii........................................................... 7 115,677.15 0.09
Idaho............................................................ 12 117,065.43 0.09
Illinois......................................................... 322 3,640,919.45 2.68
Indiana.......................................................... 52 638,449.42 0.47
Iowa............................................................. 18 206,535.00 0.15
Kansas........................................................... 29 338,862.62 0.25
Kentucky......................................................... 17 162,744.81 0.12
Louisiana........................................................ 84 862,512.80 0.63
Maryland......................................................... 4 74,777.86 0.05
Massachusetts.................................................... 6 113,279.17 0.08
Michigan......................................................... 23 188,477.74 0.14
Mississippi...................................................... 212 2,508,957.97 1.84
Missouri......................................................... 72 790,478.51 0.58
Nebraska......................................................... 6 70,735.04 0.05
Nevada........................................................... 179 3,487,340.63 2.56
New Hampshire.................................................... 1 24,954.52 0.02
New Jersey....................................................... 89 1,369,221.80 1.01
New Mexico....................................................... 12 127,539.68 0.09
New York......................................................... 127 2,155,817.04 1.59
North Carolina................................................... 250 2,652,003.76 1.95
North Dakota..................................................... 1 13,694.48 0.01
Ohio............................................................. 154 1,811,739.49 1.33
Oklahoma......................................................... 108 1,061,008.19 0.78
Oregon........................................................... 156 2,088,209.08 1.54
Pennsylvania..................................................... 389 4,559,004.41 3.35
Rhode Island..................................................... 5 90,354.26 0.07
South Carolina................................................... 75 877,423.71 0.65
Tennessee........................................................ 130 1,330,929.86 0.98
Texas............................................................ 911 10,004,364.45 7.36
Utah............................................................. 10 212,660.57 0.16
Vermont.......................................................... 4 79,147.31 0.06
Virginia......................................................... 34 403,165.08 0.30
Washington....................................................... 317 4,190,887.85 3.08
West Virginia.................................................... 8 68,791.61 0.05
Wisconsin........................................................ 1 7,190.87 0.01
Wyoming.......................................................... 15 166,508.51 0.12
--------- ----------------- ------------
Totals:..................................................... 8,825 $ 135,996,958.88 100.00%
--------- ----------------- ------------
--------- ----------------- ------------
</TABLE>
- ------------------
(1) Determined by property address designated as such in the related Mortgaged
Property.
S-29
<PAGE>
INTEREST PAYMENTS ON THE LOANS
The Loans are actuarial loans which provide that interest is charged to the
obligors thereunder (the 'Obligors'), and payments are due from such Obligors,
as of a scheduled day of each month which is fixed at the time of origination.
Each payment made by the Obligor is, therefore, treated as containing a
predetermined amount of interest and principal. Scheduled monthly payments made
by the Obligors on the Loans either earlier or later than the scheduled due
dates thereof will not affect the amortization schedule or the relative
application of such payments to principal and interest.
PREPAYMENT AND YIELD CONSIDERATIONS
The rate of principal payments on the Class A Certificates, the aggregate
amount of distributions on the Class A Certificates and the yield to maturity of
the Class A Certificates will be related to the rate and timing of payments of
principal on the Loans. The rate of principal payments on the Loans will in turn
be affected by the amortization schedules of the Loans and by the rate of
principal prepayments (including for this purpose prepayments resulting from
refinancing, liquidations of the Loans due to defaults, casualties,
condemnations and repurchases by the Seller). Certain of the Loans are subject
to a prepayment penalty which may reduce the amount or the likelihood of
prepayments on such Loans.
Prepayments, liquidations and purchases of the Loans (including any
optional purchase by the Seller of a defaulted Loan and any optional repurchase
of the remaining Loans in connection with the termination of the Trust, in each
case as described herein) will result in distributions on the Class A
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of the Loans. Since the rate of payment of principal of the
Loans will depend on future events and a variety of factors, no assurance can be
given as to such rate or the rate of principal prepayments. The extent to which
the yield to maturity of a Class A Certificate may vary from the anticipated
yield will depend upon the degree to which such Class A Certificate is purchased
at a discount or premium, and the degree to which the timing of payments thereon
is sensitive to prepayments, liquidations and purchases of the Loans. An
additional factor affecting the yield to maturity of the Class A Certificates is
the overcollateralization amount. The overcollateralization will cause the
amortization of the Class A Certificates to accelerate because all principal
payments received on the Loans will be distributed to the Class A
Certificateholders.
The rate of prepayment on the Loans cannot be predicted. The prepayment
experience of the Trust with respect to the Loans may be affected by a wide
variety of factors, including economic conditions, prevailing interest rate
levels, the availability of alternative financing and homeowner mobility and
changes affecting the deductibility for Federal income tax purposes of interest
payments on home improvement loans and manufactured housing installment loan
agreements. Generally, however, because the Loans bear interest at fixed rates,
and the rate of prepayment on fixed rate loans is sensitive to prevailing
interest rates, if prevailing interest rates fall significantly below the
interest rates on the Loans, the Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above the interest rates
on the Loans. Conversely, if prevailing interest rates rise significantly above
the interest rates on the Loans, the rate of prepayments would be likely to
decrease. See 'CERTAIN LEGAL ASPECTS OF LOANS--'Due-on-Sale' Clauses in Mortgage
Loans' in the Prospectus.
In addition to the foregoing factors affecting the weighted average life of
the Class A Certificates, if the Required OC Amount is not maintained or is
required to increase, the use of Distributable Excess Spread to pay principal of
the Class A Certificates will result in acceleration of the Class or Classes of
Class A Certificates then entitled to receive distributions of principal
relative to the amortization of the Loans. This acceleration feature maintains
or increases the overcollateralization to an amount equal to or greater than
that level of overcollateralization existing on the Closing Date (i.e., the
excess of the sum of the Pool Balance and the amount on deposit in the
Pre-Funding Account over the Aggregate Class A Principal Balance). Once the
required level of overcollateralization is reached, the acceleration feature
will cease, unless it again becomes necessary to maintain or increase the
required level of overcollateralization. In addition, the weighted average life
of the Class A Certificates will be affected if the Certificate Insurer requires
that Excess Spread be distributed on the Class A Certificates upon the
occurrence and continuance of a Trigger Event. See 'DESCRIPTION OF THE
CERTIFICATES--Events of Master Servicing Termination; Trigger Events.'
S-30
<PAGE>
MANDATORY PREPAYMENT
The approximate original Pre-Funded Amount of $73,229,131.70 will be funded
from the proceeds of the sale of the Senior Certificates and may be used to
acquire Subsequent Loans. In the event that, on the last day of the Funding
Period, not all of the $73,229,131.70 funded from the proceeds of the sale of
the Class A Certificates has been used to acquire Subsequent Loans, then the
Class or Classes of Class A Certificates then entitled to receive distributions
of principal will receive a partial prepayment on the Distribution Date
immediately following the last day of the Funding Period in an amount equal to
the amount remaining in the Pre-Funding Account (taking into account the
purchase of Subsequent Loans on such date).
Although no assurances can be given, Keystone intends that the principal
amount of Subsequent Loans sold to the Trust will require the application of
substantially all the amount on deposit in the Pre-Funding Account.
PAYMENT DELAY FEATURE OF SENIOR CERTIFICATES
The effective yield to the Senior Certificateholders will be lower than the
yield otherwise produced by the Certificate Rates for the Senior Certificates
and the purchase price of such Certificates because principal and interest
distributions will not be payable to the Certificateholders until at least the
twenty-fifth day of the month following the month of accrual (without any
additional distribution of interest or earnings thereon in respect of such
delay).
PROJECTED PREPAYMENTS AND YIELDS FOR CLASS A CERTIFICATES
If purchased at other than par, the yield to maturity on a Class A
Certificate will be affected by the rate of the payment of principal of the
Loans. If the actual rate of payments on the Loans is slower than the rate
anticipated by an investor who purchases a Class A Certificate at a discount,
the actual yield to such investor will be lower than such investor's anticipated
yield. If the actual rate of payments on the Loans is faster than the rate
anticipated by an investor who purchases a Class A Certificate at a premium, the
actual yield to such investor will be lower than such investor's anticipated
yield.
In general, if prevailing interest rates fall significantly below the
interest rates on fixed-rate loans, such as the Loans, such loans are likely to
be subject to higher prepayment rates than if prevailing rates remain at or
above the interest rate on such mortgage loans. Conversely, if prevailing
interest rates rise appreciably above the interest rates on fixed-rate loans,
such as the Loans, such loans are likely to experience a lower prepayment rate
than if prevailing rates remain at or below the interest rates on such loans. No
assurance can be given as to the level of prepayments that the Loans will
experience. However, the monthly payment on loans similar to the Loans is often
smaller than the monthly payment on a purchase-money first mortgage loan.
Consequently, a decrease or increase in interest rates generally results in a
smaller reduction or increase in the prepayment rate on the smaller-balance
loans.
Class A Certificates. 'Weighted average life' refers to the average amount
of time that will elapse from the date of issuance of a security until each
dollar of principal of such security will be repaid to the investor. The
weighted average life of the Class A Certificates will be influenced by the rate
at which principal payments on the Loans are paid, which may be in the form of
scheduled amortization, accelerated amortization or prepayments (for this
purpose, the term 'prepayment' includes liquidations due to default).
Prepayments on loans are commonly measured relative to a prepayment standard or
model. The model used in this Prospectus Supplement (the 'Constant Prepayment
Rate' or 'CPR') represents an assumed annualized rate of prepayment relative to
the then outstanding principal balance on a pool of new mortgage loans.
The following tables have been prepared for the Loans, assuming:
(i) all distributions with respect to the Senior Certificates will be
made at the scheduled times as described below under 'DESCRIPTION OF THE
CERTIFICATES--Distributions';
(ii) the Loans will prepay at the indicated constant percentages of
CPR;
(iii) the Class A-1 Certificate Rate is 6.68%; the Class A-2
Certificate Rate is 6.63%; the Class A-3 Certificate Rate is 6.68%: the
Class A-4 Certificate Rate is 7.06%; the Class A-5 Certificate Rate is
7.32%; and the Class S Certificate Rate is 0.4925%;
S-31
<PAGE>
(iv) no Loan is ever delinquent;
(v) neither the Master Servicer nor Keystone will exercise their right
of early termination of the Trust as described below under 'Description of
the Certificates--Termination; Retirement of the Certificates';
(vi) there is no substitution or repurchase of a Loan;
(vii) the Loans consists of:
(a) Initial Loans to be acquired by the Trust on or prior to the
Closing Date and having the following characteristics as of October 31,
1995: a weighted average remaining term to stated maturity of 189
months, a weighted average Loan Rate on the related Loans of 13.828% and
a weighted average Loan Rate (net of Subservicing Fees) of 12.7530%;
(b) $73,229,131.70 in Subsequent Loans to be acquired by the Trust
by February 15, 1996 and having the following characteristics: a
weighted average remaining term to stated maturity of 189 months, a
weighted average Loan Rate on the related Loans of 13.828% and a
weighted average Loan Rate (net of Subservicing Fees) of 12.7530%;
(viii) the Class A-1, Class A-2, Class A-3, Class A-4 and Class A-5
Certificates are offered with Class A Principal Balances of $68,600,000,
$32,340,000, $42,140,000, $12,740,000 and $49,221,000, respectively; and
(ix) 50% of the Subsequent Loans purchased with funds from the
Pre-Funding Account are purchased and conveyed to the Trust in December
1995 and 50% of the Subsequent Loans are purchased and conveyed to the
Trust in January 1996.
With respect to each Class of the Class A Certificates, two scenarios have
been presented. The first scenario assumes that the full Pre-Funded Amount is
used to acquire Subsequent Loans. The second scenario assumes that no Subsequent
Loans are acquired with the Pre-Funded Amount, precipitating mandatory
prepayments of $73,229,131.70 to the Class A Certificateholders on February 25,
1996.
Based upon the foregoing assumptions, some or all of which are unlikely to
reflect actual experience, the following tables indicate the projected weighted
average life of each Class of the Class A Certificates at various CPR
assumptions, assuming the full Pre-Funded Amount is used to acquire Subsequent
Loans and assuming no Subsequent Loans are acquired with the Pre-Funded Amount.
As used in the tables, 14% indicates prepayments at an annual rate of 14%; 16%
indicates prepayments at an annual rate of 16% and so on.
There is no assurance that prepayments will occur, or, if they do occur,
that they will occur at any constant percentage of CPR. Neither the CPR nor any
other prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool or mortgage loans, including the Loans in the Trust. Variations in the
actual prepayment experience and the balance of the Loans that prepay may occur
even if the average prepayment experience of all such Loans equals any of the
specified percentages of the CPR.
S-32
<PAGE>
PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
(ASSUMING FULL DELIVERY OF ALL SUBSEQUENT LOANS)
<TABLE>
<CAPTION>
CPR CLASS A-1 CLASS A-2 CLASS A-3
- -------------------- -------------------------------- -------------------------------- --------------------------------
DISTRIBUTION DATE 0% 12% 14% 16% 18% 0% 12% 14% 16% 18% 0% 12% 14% 16% 18%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 25, 1996... 94 60 54 48 43 100 100 100 100 100 100 100 100 100 100
November 25, 1997... 88 23 13 3 0 100 100 100 100 86 100 100 100 100 100
November 25, 1998... 80 0 0 0 0 100 80 53 26 2 100 100 100 100 100
November 25, 1999... 71 0 0 0 0 100 19 0 0 0 100 100 91 69 48
November 25, 2000... 61 0 0 0 0 100 0 0 0 0 100 73 48 26 5
November 25, 2001... 50 0 0 0 0 100 0 0 0 0 100 37 12 0 0
November 25, 2002... 37 0 0 0 0 100 0 0 0 0 100 5 0 0 0
November 25, 2003... 22 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2004... 4 0 0 0 0 100 0 0 0 0 100 0 0 0 0
November 25, 2005... 0 0 0 0 0 66 0 0 0 0 100 0 0 0 0
November 25, 2006... 0 0 0 0 0 18 0 0 0 0 100 0 0 0 0
November 25, 2007... 0 0 0 0 0 0 0 0 0 0 71 0 0 0 0
November 25, 2008... 0 0 0 0 0 0 0 0 0 0 22 0 0 0 0
November 25, 2009... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2010... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2011... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life (1)........... 5.6 1.4 1.2 1.1 1.0 10.4 3.5 3.1 2.8 2.5 12.5 5.7 5.1 4.5 4.1
<CAPTION>
CPR CLASS A-4 CLASS A-5
- -------------------- -------------------------------- --------------------------------
DISTRIBUTION DATE 0% 12% 14% 16% 18% 0% 12% 14% 16% 18%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100 100 100 100 100 100 100 100 100 100
November 25, 1996... 100 100 100 100 100 100 100 100 100 100
November 25, 1997... 100 100 100 100 100 100 100 100 100 100
November 25, 1998... 100 100 100 100 100 100 100 100 100 100
November 25, 1999... 100 100 100 100 100 100 100 100 100 100
November 25, 2000... 100 100 100 100 100 100 100 100 100 100
November 25, 2001... 100 100 100 67 2 100 100 100 100 100
November 25, 2002... 100 100 37 0 0 100 100 100 92 76
November 25, 2003... 100 22 0 0 0 100 100 87 70 57
November 25, 2004... 100 0 0 0 0 100 84 67 53 41
November 25, 2005... 100 0 0 0 0 100 65 50 38 28
November 25, 2006... 100 0 0 0 0 100 49 36 26 18
November 25, 2007... 100 0 0 0 0 100 34 24 16 10
November 25, 2008... 100 0 0 0 0 100 21 13 7 3
November 25, 2009... 0 0 0 0 0 96 9 4 1 0
November 25, 2010... 0 0 0 0 0 41 0 0 0 0
November 25, 2011... 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life (1)........... 13.7 7.8 6.9 6.2 5.6 14.9 11.2 10.4 9.6 8.9
</TABLE>
- ------------------
(1) The weighted average life of each Class of the Class A Certificates is
determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum by the initial respective
Principal Balance for such Class of Class A Certificate.
S-33
<PAGE>
PERCENTAGE OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
(ASSUMING NO DELIVERY OF ANY SUBSEQUENT LOANS)
<TABLE>
<CAPTION>
CPR CLASS A-1 CLASS A-2 CLASS A-3
- -------------------- -------------------------------- -------------------------------- --------------------------------
DISTRIBUTION DATE 0% 12% 14% 16% 18% 0% 12% 14% 16% 18% 0% 12% 14% 16% 18%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
November 25, 1996... 0 0 0 0 0 78 28 20 12 3 100 100 100 100 100
November 25, 1997... 0 0 0 0 0 68 0 0 0 0 100 83 72 61 51
November 25, 1998... 0 0 0 0 0 58 0 0 0 0 100 48 35 22 9
November 25, 1999... 0 0 0 0 0 46 0 0 0 0 100 18 3 0 0
November 25, 2000... 0 0 0 0 0 32 0 0 0 0 100 0 0 0 0
November 25, 2001... 0 0 0 0 0 16 0 0 0 0 100 0 0 0 0
November 25, 2002... 0 0 0 0 0 0 0 0 0 0 98 0 0 0 0
November 25, 2003... 0 0 0 0 0 0 0 0 0 0 82 0 0 0 0
November 25, 2004... 0 0 0 0 0 0 0 0 0 0 63 0 0 0 0
November 25, 2005... 0 0 0 0 0 0 0 0 0 0 42 0 0 0 0
November 25, 2006... 0 0 0 0 0 0 0 0 0 0 18 0 0 0 0
November 25, 2007... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2008... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2009... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2010... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
November 25, 2011... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life (1)........... 0.3 0.3 0.3 0.3 0.3 3.5 0.7 0.7 0.6 0.5 9.6 3.1 2.7 2.4 2.1
<CAPTION>
CPR CLASS A-4 CLASS A-5
- -------------------- -------------------------------- --------------------------------
DISTRIBUTION DATE 0% 12% 14% 16% 18% 0% 12% 14% 16% 18%
- -------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
Percentage......... 100 100 100 100 100 100 100 100 100 100
November 25, 1996... 100 100 100 100 100 100 100 100 100 100
November 25, 1997... 100 100 100 100 100 100 100 100 100 100
November 25, 1998... 100 100 100 100 100 100 100 100 100 100
November 25, 1999... 100 100 100 62 18 100 100 100 100 100
November 25, 2000... 100 72 19 0 0 100 100 100 92 81
November 25, 2001... 100 0 0 0 0 100 99 85 72 62
November 25, 2002... 100 0 0 0 0 100 81 67 56 46
November 25, 2003... 100 0 0 0 0 100 65 53 42 33
November 25, 2004... 100 0 0 0 0 100 51 40 31 23
November 25, 2005... 100 0 0 0 0 100 39 29 21 15
November 25, 2006... 100 0 0 0 0 100 28 20 13 8
November 25, 2007... 67 0 0 0 0 100 19 12 7 3
November 25, 2008... 0 0 0 0 0 90 10 5 2 0
November 25, 2009... 0 0 0 0 0 58 3 0 0 0
November 25, 2010... 0 0 0 0 0 22 0 0 0 0
November 25, 2011... 0 0 0 0 0 0 0 0 0 0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted Average
Life (1)........... 12.2 5.3 4.7 4.2 3.8 14.3 9.5 8.7 7.9 7.3
</TABLE>
- ------------------
(1) The weighted average life of each Class of the Class A Certificates is
determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Distribution Date,
(ii) adding the results and (iii) dividing the sum by the initial respective
Principal Balance for such Class of Class A Certificate.
PROJECTED PREPAYMENT AND YIELDS FOR THE CLASS S CERTIFICATES
Because amounts distributable to the holders of the Class S Certificates
consist entirely of interest, the yield to maturity of the Class S Certificates
will be extremely sensitive to the repurchase, prepayment and default experience
of the Loans, and prospective investors should fully consider the associated
risks, including the risk that such investors may not fully recover their
initial investment. In particular, investors in the Class S Certificates should
be aware that the Master Servicer, with the consent of the Certificate Insurer,
may cause a termination of the Trust when the aggregate outstanding Principal
Balance of the Loans is less than 10% of the sum of (a) the initial Pool Balance
and (b) the original Pre-Funded Amount.
The yield to investors in the Class S Certificates will be highly sensitive
to the timing of defaults, the timing of receipt of prepayments, the overall
rate of defaults and the overall rate of principal prepayment on the Loans,
which overall rate may fluctuate significantly from time to time. An investor in
the Class S Certificates should fully consider the associated risks, including
the risk that a rapid rate of defaults and principal payments (including
prepayments) could result in the failure of such investor to fully recover its
initial investment.
The yields set forth in the preceding tables were calculated by determining
the monthly discount rates which, when applied to the assumed stream of cash
flow to be paid on the Class S Certificates individually or in the aggregate,
would cause the discounted present value of such assumed cash flows to equal the
assumed purchase price of such Class S Certificates individually or in the
aggregate and by converting such monthly rates to corporate bond equivalent
rates. Such calculations do not take into account variations that may occur in
the interest rates at which investors may be able to reinvest funds received by
them as distributions on the Class S Certificates.
S-34
<PAGE>
PRE-TAX YIELD TO MATURITY(1)--SENSITIVITY OF CLASS S CERTIFICATES TO PREPAYMENTS
ASSUMING CLASS S CERTIFICATE RATE OF 0.4925%
(ASSUMING FULL DELIVERY OF ALL SUBSEQUENT LOANS)
<TABLE>
<CAPTION>
CPR(2)
----------------------------------------------------------------------------------------------------
0% 14% 16% 18% 24% 26% 30%
------- -------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
NO OPTIONAL TERMINATION
At a Price of
1.00%(3).............. 79.311 60.912 58.157 55.366 46.762 43.809 37.759
At a Price of
1.25%(3).............. 61.741 44.203 41.577 38.917 30.705 27.880 22.074
At a Price of
1.50%(3).............. 50.224 33.260 30.719 28.144 20.175 17.424 11.748
At a Price of
1.75%(3).............. 42.052 25.502 23.021 20.504 12.691 9.981 4.371
At a Price of
2.00%(3).............. 35.920 19.684 17.247 14.773 7.061 4.373 -1.209
At a Price of
2.25%(3).............. 31.124 15.135 12.732 10.289 2.643 -0.034 -5.612
At a Price of
2.50%(3).............. 27.250 11.463 9.086 6.667 -0.937 -3.612 -9.199
OPTIONAL TERMINATION
At a Price of
1.00%(3).............. 79.311 60.896 58.123 55.304 46.456 43.370 36.850
At a Price of
1.25%(3).............. 61.741 44.151 41.480 38.753 30.066 27.015 20.476
At a Price of
1.50%(3).............. 50.223 33.150 30.525 27.832 19.137 16.070 9.428
At a Price of
1.75%(3).............. 42.050 25.313 22.702 20.014 11.228 8.124 1.350
At a Price of
2.00%(3).............. 35.918 19.403 16.789 14.087 5.173 2.024 -4.890
At a Price of
2.25%(3).............. 31.120 14.756 12.127 9.402 0.344 -2.853 -9.903
At a Price of
2.50%(3).............. 27.245 10.982 8.331 5.579 -3.629 -6.873 -14.052
</TABLE>
- ------------------
(1) Represents a corporate bond equivalent yield.
(2) Based on a percentage of CPR.
(3) As a percentage of the Class S Notional Amount on the Closing Date.
The table above has been prepared based on the assumptions described on
pages S-31 and S-32 (including the assumptions regarding the characteristics and
performance of the Loans, which differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
On the basis of approximately 49% constant percentage of CPR, a purchase
price of 1.00%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
49% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 41.3% constant percentage of CPR, a purchase
price of 1.25%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
41.3% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 35.4% constant percentage of CPR, a purchase
price of 1.50%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
35.4%
S-35
<PAGE>
constant percentage of CPR, based on such assumptions, an investor in the Class
S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 30.8% constant percentage of CPR, a purchase
price of 1.75%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
30.8% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 27.2% constant percentage of CPR, a purchase
price of 2.00%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
27.2% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the intitial purchase price
thereof.
On the basis of approximately 24.3% constant percentage of CPR, a purchase
price of 2.25%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
24.3% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the initial purchase price thereof.
On the basis of approximately 21.8% constant percentage of CPR, a purchase
price of 2.50%, optional termination of the Trust and the other assumptions
described above, the pre-tax yield to maturity of the Class S Certificates would
be approximately 0%. If the actual prepayment rate were to exceed approximately
21.8% constant percentage of CPR, based on such assumptions, an investor in the
Class S Certificates would not fully recover the initial purchase price thereof.
It is highly unlikely that the Loans will prepay at a rate consistent with
the constant percentage of CPR until maturity or that all the Loans will prepay
at the same rate. In fact, the Loans are likely to prepay at different rates
over time.
The Loans will not necessarily have the characteristics assumed above, and
there can be no assurance that (i) the Loans will prepay at any of the rates
shown in the table or at any other particular rate or will prepay
proportionately, (ii) the pre-tax yield on the Class S Certificates will
correspond to any of the pre-tax yields shown above or (iii) the purchase price
of any of the Class S Certificates will be equal to any of the purchase prices
assumed.
S-36
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Certificates were issued pursuant to the Agreement. The form of the
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus Supplement and the Prospectus is a part. The following summaries
describe certain provisions of the Agreement. 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.
GENERAL
The Class A Certificates will be issued in minimum denominations of $1,000
and multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. Each of the Class S Certificates will be issued in fully
registered, definitive form in percentage interests of not less than 10%. The
property of the Trust consists of, to the extent provided in the Agreement: (i)
the Initial Loans and any Subsequent Loans conveyed to the Trust, substantially
all of which are partially insured by the Federal Housing Administration (the
'FHA') of the United States Department of Housing and Urban Development under
Title I of the National Housing Act of 1934 (the 'Title I Program'); (ii)
payments on the Loans received after the related Cut-Off Date; (iii) Properties
relating to the Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account, the Distribution Account, the
Pre-Funding Account and the Capitalized Interest Account; and (v) an assignment
of the Depositor's rights under the Purchase Agreement. In addition, the
Depositor has caused the Certificate Insurer to issue an irrevocable and
unconditional financial guaranty insurance policy (the 'Policy') for the benefit
of the Senior Certificateholders pursuant to which it will guarantee payments to
Senior Certificateholders as described herein. Definitive Certificates (as
defined below), if issued, will be transferable and exchangeable at the
corporate trust office of the Trustee, which will initially act as Certificate
Registrar. See '--Book-Entry Certificates' below. No service charge will be made
for any registration of exchange or transfer of Certificates, but the Trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge.
The aggregate undivided interest in the Trust represented by the Class A
Certificates as of the Closing Date will equal $205,041,000 of principal (the
'Original Aggregate Class A Principal Balance'), which represented approximately
98% of the sum of the aggregate Cut-Off Date Principal Balance of the Initial
Loans and $73,229,131.70 on deposit in the Pre-Funding Account. The principal
amount of an outstanding Class of Class A Certificates (each, a 'Class A
Principal Balance') on any Distribution Date is equal to the Class A Principal
Balance of such Class minus the aggregate of amounts actually distributed as
principal to the Class A Certificateholders of such Class. See '--Distributions'
below. Each Class A Certificate represents the right to receive payments of
interest at the applicable Certificate Rate for each such Class and payments of
principal as described below. On any date, the 'Aggregate Class A Principal
Balance' is the aggregate of the Class A Principal Balances on such date.
The Class S Certificates will have no principal balance and will receive
distributions of interest at a per annum Certificate Rate of 0.4925% on the
Class S Notional Amount with respect to any Distribution Date. With respect to
any Distribution Date, the 'Class S Notional Amount' is the Pool Balance as of
the close of business on the last day of the second calendar month before such
Distribution Date. The Class R Certificates have no class principal balance and
are not entitled to distributions of interest.
The 'Percentage Interest' of a Class A Certificate as of any date of
determination will be equal to the percentage obtained by dividing the
denomination of such Certificate by the Class A Principal Balance for the
related Class of Class A Certificates as of the Cut-Off Date. The 'Percentage
Interest' of the Class S Certificates as of any date of determination will be
equal to the percentage stated on the face of such Certificate.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a 'Certificateholder.'
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the 'Book-Entry
Certificates'). Persons acquiring beneficial ownership interests in the Class A
Certificates ('Certificate Owners') will hold their Class A Certificates through
the Depository Trust Company ('DTC') in the United States, or CEDEL or Euroclear
(in Europe) if they are participants of such systems, or indirectly through
organizations which are participants in
S-37
<PAGE>
such systems. The Book-Entry Certificates will be issued in one or more
certificates which equal the aggregate principal balance of the Class A
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. CEDEL and Euroclear will hold omnibus positions on behalf of
their participants through customers' securities accounts in CEDEL's and
Euroclear's names on the books of their respective depositaries which in turn
will hold such positions in customers' securities accounts in the depositaries'
names on the books of DTC. Citibank will act as depositary for CEDEL and Morgan
will act as depositary for Euroclear (in such capacities, individually the
'Relevant Depositary' and collectively the 'European Depositaries'). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations of $1,000. Except as described below, no person acquiring a
Book-Entry Certificate (each, a 'beneficial owner') will be entitled to receive
a physical certificate representing such Certificate (a 'Definitive
Certificate'). Unless and until Definitive Certificates are issued, it is
anticipated that the only 'Certificateholder' of the Class A Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a 'Financial Intermediary') that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate 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 beneficial owner's Financial Intermediary is not a DTC participant and on
the records of CEDEL or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the 'Rules'), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Holders will not receive or be entitled to receive certificates
representing their respective interests in the Class A Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Holders who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Class A Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Holders.
Because of time zone differences, credits of securities received in CEDEL
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
CEDEL Participants on such business day. Cash received in CEDEL or Euroclear as
a result of sales of securities by or through a CEDEL Participant (as defined
below) or Euroclear Participant (as defined below) 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. For information with respect to tax documentation procedures
relating to the Certificates, see 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--Foreign Investors' and '--Backup Withholding' herein and 'GLOBAL
CLEARANCE, SETTLEMENT AND TAX
S-38
<PAGE>
DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax Documentation
Requirements' in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between CEDEL Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly
through DTC, on the one hand, and directly or indirectly through CEDEL
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. CEDEL Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel Bank, societe anonyme, 67 Bd Grande-Duchesse Charlotte, L-1331
Luxembourg ('Cedel'), was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than five
percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institut Monetaire Luxembourgeois, 'IML', the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its customers ('CEDEL Participants') and
facilitates the clearance and settlement of securities transactions by
electronic book-entry transfers between their accounts. Cedel provides various
services, including safekeeping, administration, clearance and settlement of
internationally traded securities and securities lending and borrowing. Cedel
also deals with domestic securities markets in several countries through
established depository and custodial relationships. Cedel has established an
electronic bridge with Morgan Guaranty Trust as the Euroclear Operator in
Brussels to facilitate settlement of trades between systems. Cedel currently
accepts over 70,000 securities issues on its books.
Cedel's customers are world-wide financial institutions including
underwriters, securities brokers and dealers, banks, trust companies and
clearing corporations. Cedel's U.S. customers are limited to securities brokers
and dealers and banks. Currently, Cedel has approximately 3,000 customers
located in over 60 countries, including all major European countries, Canada,
and the United States. Indirect access to Cedel is available to other
institutions which clear through or maintain a custodial relationship with an
account holder of Cedel.
Euroclear was created in 1968 to hold securities for its participants
('Euroclear Participants') and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 29 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the 'Euroclear Operator'), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
'Cooperative'). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear
S-39
<PAGE>
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the 'Terms and Conditions'). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through CEDEL or Euroclear will be credited to the cash accounts of CEDEL
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--Foreign Investors' and '--Backup Withholding' herein. Because DTC
can only act on behalf of Financial Intermediaries, the ability of a beneficial
owner to pledge Book-Entry Certificates to persons or entities that do not
participate in the Depository system, or otherwise take actions in respect of
such Book-Entry Certificates, may be limited due to the lack of physical
certificates for such Book-Entry Certificates. In addition, issuance of the
Book-Entry Certificates in book-entry form may reduce the liquidity of such
Certificates in the secondary market since certain potential investors may be
unwilling to purchase Certificates for which they cannot obtain physical
certificates.
Monthly and annual reports on the Trust will be provided to Cede, as
nominee of DTC, and may be made available by Cede 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 Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. CEDEL or the
Euroclear Operator, as the case may be, will take any other action permitted to
be taken by a Certificateholder under the Agreement on behalf of a CEDEL
Participant or Euroclear Participant only in accordance with its relevant rules
and procedures and subject to the ability of the Relevant Depositary to effect
such actions on its behalf through DTC. DTC may take actions, at the direction
of the related Participants, with respect to some Class A Certificates which
conflict with actions taken with respect to other Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-
S-40
<PAGE>
Entry Certificates and the Depositor or the Trustee is unable to locate a
qualified successor, (b) the Depositor, at its sole option, with the consent of
the Trustee, elects to terminate a book-entry system through DTC or (c) after
the occurrence of an Event of Master Servicing Termination (as defined herein),
beneficial owners having Percentage Interests aggregating not less than 51% of
the Book-Entry Certificates advise the Trustee and DTC through the Financial
Intermediaries and the DTC participants in writing that the continuation of a
book-entry system through DTC (or a successor thereto) is no longer in the best
interests of beneficial owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, CEDEL and Euroclear have agreed to the foregoing procedures
in order to facilitate transfers of Class A Certificates among participants of
DTC, CEDEL and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
Neither the Seller, the Master Servicer nor the Trustee will have any
responsibility for any aspect of the records relating to or payments made on
account of beneficial ownership interests of the Book-Entry Certificates held by
Cede & Co., as nominee for DTC, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests.
ASSIGNMENT OF LOANS
At the time of issuance of the Certificates the Depositor, with respect to
the Initial Loans, and on each Subsequent Transfer Date (as defined herein), the
Seller, with respect to the Subsequent Loans, will transfer to the Trust all of
its right, title and interest in and to each Loan, the related note or contract,
any mortgages relating to the Loans or security interests relating to any
Manufactured Housing Contracts and other related documents (collectively, the
'Related Documents'), including all payments received on or with respect to each
such Loan on or after the Cut-Off Date or the Subsequent Cut-Off Date, as the
case may be. The Trustee, concurrently with the transfer of the Initial Loans,
will deliver the Certificates to the Depositor. Each Loan transferred to the
Trust will be identified on a schedule (the 'Loan Schedule') delivered to the
Trustee pursuant to the Agreement. Such schedule will include information as to
the related Cut-Off Date, Principal Balance of each Loan, as well as information
with respect to the Loan Rate.
The Agreement requires that, within the time period specified therein, the
Depositor deliver or cause to be delivered to the Trustee (or a custodian, as
the Trustee's agent for such purpose) the mortgages relating to the Loans with
evidence of a recording indicated thereon, the notes relating to the Mortgage
Loans endorsed to the Trustee, any Manufactured Housing Contracts and certain
other Related Documents. In lieu of delivery of original mortgages, the
Depositor may deliver or cause to be delivered true and correct copies thereof
which have been certified as to authenticity by the appropriate county recording
office where such mortgage is recorded. The Agreement provides, however, that
the Seller, for the benefit of and as agent for the Certificateholders, will
retain possession of certain portions of the Related Documents, including,
without limitation, the application and credit underwriting file with respect to
each Loan (the 'Credit File'). The assignments to the Trustee (or any co-trustee
appointed under the Agreement) of any mortgage or deed of trust securing a Loan
will be recorded in the appropriate public office for real property records
within the time period specified in the Agreement, except where, in the opinion
of counsel, such recording is not required to protect the Trustee's interest in
the related Loan against the claim of any subsequent transferee or any successor
to a creditor of the Depositor or the Seller. See 'DESCRIPTION OF THE
CERTIFICATES--The Trustee' herein and 'CERTAIN LEGAL ASPECTS OF THE
LOANS--Contracts Secured by Mortgages' in the Prospectus.
If the FHA has not assigned a case number under the Contract of Insurance
to a FHA Loan, to indicate that such FHA Loan is eligible for Title I Insurance
coverage under the Contract of Insurance, on or before the 120th day after the
Closing Date or the Subsequent Transfer Date with respect to Subsequent Loans,
the Seller shall be obligated, on the last day of the calendar month in which
such 120th day occurs, to repurchase such FHA Loan. If the FHA reserve amount
with respect to a FHA Loan has not been transferred to the FHA Insurance
Coverage Reserve Account on or before the 150th day after the Closing Date or
the Subsequent Transfer Date, as the case
S-41
<PAGE>
may be, the Seller shall be obligated, on the last day of the calendar month in
which such 150th day occurs, to repurchase such FHA Loan.
Within 45 Business Days of the Closing Date, or the Subsequent Transfer
Date with respect to Subsequent Loans, the Trustee will review the Related
Documents including the Credit Files maintained by Keystone. If any Related
Document or Credit File is found to be defective in any material respect and
such defect is not cured within 90 days following the receipt of notice thereof,
the Seller will be obligated to either (i) substitute for such Loan an Eligible
Substitute Loan (provided, however, that such substitution is permitted only
within two years of the Closing Date) or (ii) purchase such Loan at a price (the
'Purchase Price') equal to the outstanding Principal Balance of such Loan as of
the date of purchase, plus unpaid accrued interest at the Loan Rate to the date
of purchase; provided, however, that no such substitution or repurchase may be
made unless an opinion of counsel is provided to the effect that such
substitution or repurchase will not disqualify the Trust as a REMIC or result in
a prohibited transaction tax under the Code. In certain circumstances, the
Certificate Insurer may elect to extend by up to 150 days the cure periods
described in the preceding sentence. The Purchase Price will be deposited in the
Collection Account on or prior to the next succeeding Determination Date after
such obligation arises. The obligation of the Seller to repurchase or substitute
for a Defective Loan is the sole remedy regarding any defects in the Loans and
Related Documents available to the Trustee or the Certificateholders against the
Seller.
An 'Eligible Substitute Loan' is a mortgage loan or manufactured housing
installment sales contract or installment loan agreement substituted by the
Seller for a Defective Loan which must, on the date of such substitution, (i)
have an outstanding Principal Balance (or in the case of a substitution of more
than one Loan for a Defective Loan, an aggregate Principal Balance), not in
excess of, and not more than 1% less than, the Principal Balance of the
Defective Loan; (ii) have a Loan Rate at least equal to the Loan Rate of the
Defective Loan; (iii) have a remaining term to maturity not later than the
remaining term to maturity of the Defective Loan; (iv) comply with each
representation and warranty as to the Loans set forth in the Agreement (deemed
to be made as of the date of substitution); and (v) satisfy certain other
conditions specified in the Agreement. Additionally, if more than one Eligible
Substitute Loan is being substituted for one or more Defective Loans on any day,
in lieu of the requirement in clause (ii) above, the weighted average Loan Rate
of such Eligible Substitute Loans must equal or exceed the weighted average Loan
Rate of the Loans immediately prior to giving effect to the substitution, in
each case weighted on the basis of the outstanding principal balance of such
loans as of such day. In no event will the aggregate principal balance of
Eligible Substitute Loans exceed 5% of the Pool Balance as of the Closing Date.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Loan (e.g., Cut-Off Date Principal Balance and the
Loan Rate). In addition, on each Transfer Date, the Seller will represent and
warrant, among other things, that the Seller has transferred all of its right,
title and interest in each Loan and the Related Documents free and clear of
liens and that each Loan complied, at the time of origination, in all material
respects with applicable state and federal laws, including, without limitation,
the requirements of Title I with respect to the FHA Loans. Upon discovery of a
breach of any representation and warranty which materially and adversely affects
the interests of the Certificateholders or the Certificate Insurer in the
related Loan and Related Documents, the Seller will have a period of 90 days
after the related Transfer Date to cure such breach. If the breach cannot be
cured within the 90-day period, the Seller will be obligated to (i) substitute
for such Defective Loan an Eligible Substitute Loan or (ii) purchase such
Defective Loan from the Trust. The same procedure and limitations that are set
forth above for the substitution or purchase of Defective Loans as a result of
deficient documentation relating thereto will apply to the substitution or
purchase of a Defective Loan as a result of a breach of a representation or
warranty in the Agreement that materially and adversely affects the interests of
the Certificateholders or the Certificate Insurer.
Loans required to be repurchased or substituted by the Seller as described
in the preceding paragraphs are referred to as 'Defective Loans.'
PAYMENTS ON LOANS; COLLECTION ACCOUNTS AND DISTRIBUTION ACCOUNT
The Trustee will establish and shall maintain on behalf of the Trust one or
more accounts (the 'Collection Account') for the benefit of the
Certificateholders. The Collection Account will be an Eligible Account (as
defined herein). Upon receipt by each Subservicer of amounts in respect of the
Loans, the Master Servicer will cause each Subservicer to deposit such amounts
in the Collection Account as described below under '--Deposits
S-42
<PAGE>
to the Collection Account and the Distribution Account.' Amounts so deposited
may be invested in Eligible Investments maturing no later than one Business Day
prior to the date on which the amount on deposit therein is required to be
deposited in the Distribution Account or on such Distribution Date if approved
by the Rating Agencies and the Certificate Insurer.
The Trustee will establish an account (the 'Distribution Account') into
which will be deposited all amounts for distribution to Certificateholders on a
Distribution Date. The Distribution Account will be an Eligible Account. Amounts
on deposit therein may be invested in Eligible Investments maturing on or before
the Business Day prior to the related Distribution Date.
An 'Eligible Account' is (i) an account that is a segregated trust account
that is maintained with the corporate trust department of a depository
institution acceptable to the Certificate Insurer (so long as an Insurer Default
shall not have occurred and be continuing), or (ii) a segregated direct deposit
account maintained with a depository institution or trust company organized
under the laws of the United States of America, or any of the States thereof, or
the District of Columbia, having a certificate of deposit, short term deposit or
commercial paper rating of at least A-1+ by Standard & Poor's and P-1 by Moody's
and (so long as an Insurer Default shall not have occurred and be continuing)
acceptable to the Certificate Insurer.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
INTEREST ADVANCES
The Master Servicer is required to remit to the Trustee no later than the
close of business on the Determination Date for each Distribution Date for
deposit in the Distribution Account an amount equal to the scheduled installment
of interest on each Loan (net of the Subservicing Fee) (other than a Defaulted
Loan) due on a date during the related Due Period (the 'Due Date') less the
amount of scheduled installment of interest on each Loan (net of the
Subservicing Fee) due during such Due Period and received by a Subservicer and
deposited into the Distribution Account during the related Due Period (an
'Interest Advance'). Interest Advances will be made by the Master Servicer from
its own funds, from funds held in the Collection Accounts for future
distributions to Certificateholders or from any combination of the foregoing.
Notwithstanding the foregoing, the Master Servicer is not required to make
any Interest Advances if in the good faith judgment of the Master Servicer, the
Master Servicer determines that such advance will not ultimately be recoverable
from collections received from the Obligor in respect of the related Loan or
other recoveries in respect of such Loan.
If Interest Advances are made by the Master Servicer from funds held in the
Collection Account for future distribution to Certificateholders, the Master
Servicer will replace such funds on or before any future Distribution Date to
the extent that funds in the applicable Collection Account with respect to such
Distribution Date would be less than the amount required to be available for
distribution on such Distribution Date as a result of such Interest Advances.
The Master Servicer will be entitled to be reimbursed for previously
unreimbursed Interest Advances made from its own funds with respect to a Loan on
Distribution Dates subsequent to the Distribution Date in respect of which such
Interest Advance was made from payments with respect to such Loan. If a Loan
shall become a Defaulted Loan and the Master Servicer shall not have been fully
reimbursed for any Interest Advances with respect to such Loan, the Master
Servicer shall be entitled to be reimbursed for the outstanding amount of such
Interest Advances from unrelated Loans. No interest shall be due to the Master
Servicer in respect of any Interest Advance for any period prior to the
reimbursement thereof.
DISTRIBUTION DATES
On each Distribution Date, the Senior Certificateholders will be entitled
to receive in the aggregate, from amounts then on deposit in the Distribution
Account, to the extent of funds available therefor in accordance with the
priority and in the amounts described below under 'Distributions' on such
Distribution Date the sum of (a) the Class Interest Distribution for each Class
of Senior Certificates and (b) the Class A Principal Distribution. Distributions
will be made (i) in immediately available funds to holders of Senior
Certificates holding, with respect to the Class A Certificates, the aggregate
principal balance of which is at least $500,000 or with respect to
S-43
<PAGE>
the Class S Certificates, an aggregate Percentage Interest of which is 30%, by
wire transfer or otherwise, to the account of such Certificateholder at a
domestic bank or other entity having appropriate facilities therefor, if such
Certificateholder has so notified the Trustee, or (ii) by check mailed to the
address of the person entitled thereto as it appears on the register (the
'Certificate Register') maintained by the Trustee as registrar (the 'Certificate
Registrar').
DEPOSITS TO THE COLLECTION ACCOUNTS AND THE DISTRIBUTION ACCOUNT
Each Subservicer shall deposit into the related Collection Account all
payments of principal and interest (net of the Subservicing Fee) on the Loans
received by it within two Business Days of receipt. The Subservicer shall also
deposit into the related Collection Account all payments of premiums with
respect to FHA Insurance received from Obligors; provided however, if the Master
Servicer assumes the obligations of a Subservicer, the Master Servicer may hold
such payments for up to 30 days and retain investment earnings thereon as long
as certain conditions specified in the Agreement are satisfied.
The following amounts shall be deposited into the Distribution Account: (i)
from the Collection Account (a) payments of principal and interest on the Loans,
(b) FHA Insurance premiums received by the Subservicers during the related Due
Period and (c) any reinvestment earnings in the Collection Account; (ii) net
liquidation proceeds from the sale of Foreclosed Property; (iii) the Purchase
Price for repurchased Loans; (iv) Insurance Proceeds received by the Master
Servicer; (v) payments of FHA Insurance; (vi) payments from the Master Servicer
or Keystone in connection with the termination of the Trust as provided in the
Agreement; (vii) transfers from the Pre-Funding Account of funds not used to
purchase Subsequent Loans during the Funding Period; (viii) transfers from the
Capitalized Interest Account during the Funding Period of funds for the payment
of interest on the Class A Certificates; and (ix) any amounts paid under the
Policy.
DISTRIBUTIONS
On each Distribution Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Distribution
Account in respect of the related Due Period and payable on such Distribution
Date, to the extent of funds available therefor, in the following order of
priority:
(i) for deposit in the FHA Premium Account, the FHA Premium Account
Deposit for such Distribution Date;
(ii) to the Master Servicer, the Master Servicing Fee for such
Distribution Date;
(iii) to the Master Servicer, any amount in respect of reimbursement
of Interest Advances or Foreclosure Advances to which the Master Servicer
is entitled with respect to such Distribution Date;
(iv) to the Trustee, the Trustee Fee for such Distribution Date;
(v) certain taxes of the Trust, if any, and certain expenses to the
Persons entitled thereto on such Distribution Date;
(vi) to the holders of the Class S Certificates, an amount equal to
the related Class Interest Distribution for such Distribution Date;
(vii) to each Class of Class A Certificateholders, an amount equal to
the related Class Interest Distribution for such Distribution Date;
(viii) sequentially, to the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificateholders, in that order, until the respective Class
A Principal Balance of each such Class is reduced to zero, the Class A
Principal Distribution (other than the portion constituting the
Distributable Excess Spread) for such Distribution Date; provided, however,
after the occurrence and continuance of an Insurer Default, such portion of
the Class A Principal Distribution will be distributed pro rata to the
Class A Certificateholders based on the respective Class A Principal
Balances;
(ix) to the Certificate Insurer, amounts owing to the Certificate
Insurer under the Insurance Agreement for premiums payable pursuant thereto
and for reimbursement for prior draws made on the Policy with respect to
which no other Person is obligated to pay such amounts;
S-44
<PAGE>
(x) sequentially, to the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificateholders, in that order, until the respective Class
A Principal Balance of each such Class is reduced to zero, Distributable
Excess Spread, if any, for such Distribution Date; provided, however, after
the occurrence and continuance of an Insurer Default, such portion of the
Distributable Excess Spread will be distributed pro rata to the Class A
Certificateholders based on the respective Class A Principal Balances;
(xi) sequentially, to the Class A-1, Class A-2, Class A-3, Class A-4
and Class A-5 Certificateholders, in that order, until the respective Class
A Principal Balance of each such Class is reduced to zero, the Class A
Guaranteed Principal Distribution Amount, if any, for such Distribution
Date;
(xii) to any successor Master Servicer, such fees and expenses
reimbursable to the Master Servicer pursuant to the Agreement, if any, for
such Distribution Date in addition to the Master Servicer Fee paid pursuant
to (ii) above;
(xiii) payments in respect of other fees to the Persons entitled
thereto pursuant to the Agreement;
(xiv) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement; and
(xv) the balance of the monies on deposit in the Distribution Account,
to the Class R Certificateholders or after the occurrence and continuance
of a Trigger Event and at the direction of the Certificate Insurer, to the
Class A Certificateholders, as principal, pro rata based on the respective
Class A Principal Balances.
The 'Trustee Fee' as of each Distribution Date will be one-twelfth of the
product of .02% and the sum of (a) the Pool Balance and (b) the amount on
deposit in the Pre-Funding Account, each as of the close of business on the last
day of the second calendar month before such Distribution Date.
See 'Collection and Other Servicing Procedures on Loans' below for a
discussion of Foreclosure Advances.
INTEREST
'Senior Interest Distribution' means, with respect to any Distribution
Date, to the extent of funds available therefor in accordance with the
priorities as described above under 'Distribution' the sum of the Class Interest
Distributions for each Class of Senior Certificates. For each Distribution Date
and each Class of Senior Certificates, the 'Class Interest Distribution' is the
sum of (a) one month's interest at the related Certificate Rate on the related
Class A Principal Balance or Class S Notional Amount, as applicable, at the end
of the preceding calendar month (the 'Class Monthly Interest Distributable
Amount') and (b) any Class Interest Carryover Shortfall for such Class of Senior
Certificates for such Distribution Date. As to any Distribution Date and Class
of Senior Certificates, Class Interest Carryover Shortfall is the sum of (a) the
excess of the related Class Monthly Interest Distributable Amount for the
preceding Distribution Date and any outstanding Class Interest Carryover
Shortfall with respect to such Class on such preceding Distribution Date, over
the amount in respect of interest that is actually distributed to such Class of
Senior Certificateholders on such preceding Distribution Date plus (b) interest
on such excess, to the extent permitted by law, at the related Certificate Rate
from such preceding Distribution Date through the current Distribution Date.
Distributions of the related Class Interest Distribution to the Class S
Certificates will be made prior to the distribution of the Class Interest
Distribution to the Class A Certificates. In the event that on any Distribution
Date there are not sufficient funds available in accordance with the priorities
described above under 'Distributions' to distribute the full amount of the Class
Interest Distribution to each Class of Class A Certificates, interest will be
distributed on each Class of Class A Certificates pro rata based on the amount
each such Class would otherwise have been entitled to receive on such
Distribution Date in the absence of such shortfall.
PRINCIPAL
'Class A Principal Distribution' means, with respect to any Distribution
Date, the sum of the Class A Monthly Principal Distributable Amount for such
Distribution Date and any outstanding Class A Principal Carryover Shortfall as
of the close of business on the preceding Distribution Date.
S-45
<PAGE>
'Class A Monthly Principal Distributable Amount' means, with respect to any
Distribution Date, the amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding Due Period (as defined
below): (i) that portion of all payments on Loans allocable to principal,
including all full and partial principal prepayments, (ii) the Principal Balance
as of the related Monthly Cut-Off Date of all Loans that became Defaulted Loans
for the first time during such Due Period, (iii) the portion of the Purchase
Price allocable to principal of all Loans that became Purchased Loans as of the
last day of the calendar month preceding such Distribution Date (the 'Monthly
Cut-Off Date'), and, at the discretion of the Certificate Insurer, the Principal
Balance as of the Monthly Cut-Off Date of all Loans that were required to be
purchased or repurchased as of the related Monthly Cut-Off Date but were not so
purchased, (iv) the aggregate amount of Cram Down Losses (as defined below) that
shall have occurred during such Due Period, (v) the amount of Distributable
Excess Spread, if any, in respect of such Distribution Date; and (vi) funds
remaining in the Pre-Funding Account at the end of the Funding Period.
So long as an Insurer Default, has not occurred and is continuing,
distributions of the Class A Principal Distribution will be applied,
sequentially, to the distribution of principal to the Class A-1, Class A-2,
Class A-3, Class A-4 and Class A-5 Certificates, in that order, such that no
Class of Class A Certificates having a higher numerical designation is entitled
to distributions of principal until the Class A Principal Balance of each such
Class of Certificates having a lower numerical designation has been reduced to
zero.
As to any Distribution Date and Class of Class A Certificates, Class A
Principal Carryover Shortfall is the excess of the sum of the related Class A
Monthly Principal Distributable Amount for the preceding Distribution Date and
any outstanding Class A Principal Carryover Shortfall on such preceding
Distribution Date, over the amount in respect of principal that is actually
distributed to the Class A Certificateholders on such preceding Distribution
Date.
'Due Period' means, with respect to any Determination Date or Distribution
Date, the calendar month immediately preceding such Determination Date or
Distribution Date, as the case may be.
A 'Defaulted Loan' is a Loan with respect to which: (i) a claim has been
submitted pursuant to the Contract of Insurance, (ii) foreclosure proceedings
have been commenced, (iii) any portion of a Monthly Payment is more than 150
days past due (without giving effect to any grace period) or (iv) the Master
Servicer has determined in good faith in accordance with customary mortgage loan
servicing practices that all amounts which it expects to receive with respect to
the Loan have been received.
'Excess Spread' means, with respect to any Distribution Date, the positive
excess, if any, of (x) the sum of the amounts deposited into the Distribution
Account as described in clauses (i) through (viii) under 'Deposits to the
Collection Accounts and the Distribution Account' above with respect to such
Distribution Date over (y) the amount required to be distributed pursuant to
priorities (i) through (ix) above under 'Distributions' on such Distribution
Date.
An 'Insurer Default' will occur in the event the Certificate Insurer fails
to make a payment required under the Policy.
'Distributable Excess Spread' means, with respect to any Distribution Date,
the portion of (not greater than 100%) Excess Spread, if any, required to be
distributed on such Distribution Date to satisfy the Required OC Amount for such
Distribution Date. The overcollateralization (i.e., the excess of the sum of the
Pool Balance and the amount on deposit in the Pre-Funding Account over the
Aggregate Class A Principal Balance) in effect on the Closing Date equals the
Required OC Amount and absent losses on the Loans or an increase in the Required
OC Amount, no Distributable Excess Spread will be distributed to the Class A
Certificateholders on any Distribution Date.
A 'Cram Down Loss' shall be deemed to have occurred with respect to a Loan,
if a court of appropriate jurisdiction in an insolvency proceeding shall have
issued an order reducing the Principal Balance of such Loan or otherwise
modifying or restructuring the scheduled payments to be made on such Loan. The
Cram Down Loss shall be an amount equal to the excess of the Principal Balance
of such Loan immediately prior to such order over the Principal Balance of such
Loan as so reduced or the net present value (using as the discount rate the
higher of the Loan Rate or the rate of interest, if any, specified by the court
in such order) of the scheduled payments as so modified or restructured.
S-46
<PAGE>
The last scheduled Distribution Date for each Class of Senior Certificates
is as follows: Class A-1 Certificates, February 25, 2005; Class A-2
Certificates, May 25, 2007; Class A-3 Certificates, June 25, 2009; Class A-4
Certificates, February 25, 2010; Class A-5 Certificates, November 25, 2016 and
Class S Certificates, November 25, 2016. It is expected that the actual last
Distribution Date for each Class of Class A Certificates will occur
significantly earlier than such scheduled Distribution Dates. See 'PREPAYMENT
AND YIELD CONSIDERATIONS.'
Such last scheduled Distribution Dates are based on a 0% CPR with no Excess
Spread used to make accelerated payments of principal to the holders of the
Class A Certificates; provided that the last scheduled Distribution Dates for
the Class A-5 Certificates have been calculated assuming that a Loan (including
any Subsequent Loans) having the latest maturity allowed by the Agreement
amortizes according to its terms, plus thirteen months.
THE POLICY
On or before the Closing Date, the Policy will be issued by the Certificate
Insurer pursuant to the provisions of the amended and restated Insurance and
Reimbursement Agreement, (the 'Insurance Agreement') dated as of July 1, 1995 as
supplemented, among the Seller, the Master Servicer, Lomas Mortgage USA, Inc.,
as master servicer for Related Series Trusts other than the Trust, the Trustee,
the Depositor and the Certificate Insurer amending and restating the Insurance
and Reimbursement Agreement dated as of April 1, 1995 including without
limitation all schedules, exhibits and attachments thereto.
The Policy will unconditionally and irrevocably guarantee principal
payments on the Class A Certificates plus accrued and unpaid interest due on the
Senior Certificates. On each Distribution Date, a draw will be made on the
Policy equal to the sum of (a) the amount by which the sum of interest accrued
at (i) the applicable Certificate Rate on the Class S Notional Amount for the
Class S Certificates and (ii) the applicable Certificate Rate on the outstanding
Class Principal Balance for each Class of Class A Certificates exceeds the
amount on deposit in the Distribution Account available to be distributed
therefor on such Distribution Date and (b) the amount (the 'Class A Guaranteed
Principal Distribution Amount'), if any, by which the Aggregate Class A
Principal Balance exceeds the sum of the Pool Balance at the end of the related
Monthly Cut-Off Date and the amount, if any, on deposit in the Pre-Funding
Account on such date (after giving effect to all amounts distributable and
allocable to principal on the Class A Certificates on such Distribution Date).
In addition, the Policy will guarantee the payment in full of the Aggregate
Class A Principal Balance on the Distribution Date in November 2016 (after
giving effect to all other amounts distributable and allocable to principal on
the Class A Certificates on such Distribution Date).
In the absence of payments under the Policy, Certificateholders will
directly bear the credit and other risks associated with their undivided
interest in the Trust.
OVERCOLLATERALIZATION PROVISIONS
On each Distribution Date, the Distributable Excess Spread (as defined
above) if any, will be applied on such Distribution Date as an accelerated
payment of principal on the Class A Certificates to the extent required to
satisfy the Required OC Amount. This has the effect of accelerating the
amortization of the Class A Certificates relative to the amortization of the
Loans.
The 'Required OC Amount' will equal with respect to any Distribution Date,
absent certain delinquency and default experience on the Loans, $4,184,521.81.
On the Closing Date, the excess of the sum of the Pool Balance and the original
Pre-Funding Amount over the Aggregate Class A Principal Balance equals the
Required OC Amount in effect on the Closing Date and absent losses on the Loans
or an increase in the Required OC Amount, no Distributable Excess Spread will be
distributed to Class A Certificateholders on any Distribution Date. An increase
in the Required OC Amount will result if the delinquency or default experience
on the Loans exceeds certain levels set forth in the Agreement. In that event,
amortization of the Class A Certificates would be accelerated until the level of
overcollateralization reaches its required level. The Required OC Amount may be
decreased, in the sole discretion of the Certificate Insurer with the consent of
the Rating Agencies, as low as zero, which would have the effect of reducing the
amortization of the Class A Certificates below what it otherwise would have
been.
S-47
<PAGE>
CERTIFICATE RATE
The 'Certificate Rate' for each Class of Senior Certificates is as set
forth on the cover page hereof. Notwithstanding the foregoing, in no event will
the Certificate Rate in respect of any Class of Class A Certificates on any
Distribution Date exceed a per annum effective rate equal to the quotient of (a)
the excess of (i) interest due on the Loans during the preceding Due Period net
of the portion thereof allocable to Master Servicing Fees and Subservicing Fees
over (ii) the sum of (x) the amounts described in subparagraphs (i), (iv)-(vi)
under 'Description of the Certificates--Distributions' below and (y) the premium
for the Policy, in each case required to be paid or distributed by the Trust on
such Distribution Date and (b) the Aggregate Class A Principal Balance on such
Distribution Date (prior to giving effect to distributions made on such date).
Interest on each Class of Senior Certificates in respect of any Distribution
Date will accrue from the first day of the month preceding such Distribution
Date through the last day of the month preceding such Distribution Date (each
such period, an 'Interest Period') on the basis of a 360-day year consisting of
twelve 30-day months.
PRE-FUNDING ACCOUNT
On the Closing Date, an aggregate cash amount (the 'Pre-Funded Amount'), of
approximately $73,229,131.70 will be deposited in an account which is in the
name of, and maintained by, the Trustee on behalf of the Trust (the 'Pre-Funding
Account') and will be funded from the sale of the Senior Certificates. The
amount to be deposited in the Pre-Funding Account is intended to be used to
acquire Subsequent Loans. The Funding Period is the period from the Closing Date
until the earlier of (i) the date on which the amount on deposit in the
Pre-Funding Account is less than $100,000 and (ii) February 15, 1996. The
Pre-Funded Amount will be reduced during the Funding Period by the amount
thereof used to purchase Subsequent Loans in accordance with the Agreement.
Subsequent Loans purchased by and added to the Trust on any date (each, a
'Subsequent Transfer Date' and together with the Closing Date, each a 'Transfer
Date') must satisfy the criteria set forth in the Agreement. The approximate
aggregate principal amount of Subsequent Loans which may be acquired by the
Trust is $73,229,131.70. Any Pre-Funded Amount remaining at the end of the
Funding Period will be distributed as part of the Class A Monthly Principal
Distributable Amount to the Class or Classes of Class A Certificates entitled to
receive principal distributions on the Distribution Date following the last day
of the Funding Period, thus resulting in a partial principal prepayment to such
Class. It is expected that substantially all of the Subsequent Loans will be
sold to the Trust by February 15, 1996. Interest and other investment earnings
on amounts on deposit in the Pre-Funding Account will be deposited in the
Distribution Account. The Pre-Funding Account will not be an asset of the REMIC
(as defined herein).
Although no assurance can be given, it is intended that the principal
amount of Subsequent Loans sold to the Trust will require application of
substantially all of the original Pre-Funded Amount and it is not intended that
there will be any material amount of principal prepaid to the holders of the
Class A Certificates from the Pre-Funding Account.
CAPITALIZED INTEREST ACCOUNT
On the Closing Date, cash will be deposited in a trust account (the
'Capitalized Interest Account') in the name of, and maintained by, the Trustee
on behalf of the Trust. The amount on deposit in the Capitalized Interest
Account, including reinvestment income thereon, will be used by the Trustee to
fund the excess, if any, on each of the first three Distribution Dates of (i)
the sum of the amount of interest accruing at the weighted average Certificate
Rate on all Class A Certificates on the amount by which the Aggregate Class A
Principal Balance as of the last day of the preceeding month exceeds the Pool
Balance as of such day plus the Trustee and Certificate Insurer fees accruing on
such excess balance over (ii) the amount of investment earnings on amounts in
the Pre-Funding Account deposited to the Distribution Account since the previous
Distribution Date. Any amounts remaining in the Capitalized Interest Account not
needed for such purpose will be paid to the Seller on the Distribution Date
following the end of the Funding Period. The Capitalized Interest Account will
not be an asset of the REMIC.
S-48
<PAGE>
FHA INSURANCE PREMIUM ACCOUNT
A separate account (the 'FHA Premium Account') will be established by the
Trustee into which an initial deposit of $112,236 (the 'Initial FHA Premium
Account Deposit') will be made on the Closing Date. No later than the Business
Day following each Determination Date, the Trustee will deposit into the FHA
Premium Account FHA insurance premiums received from Obligors on Invoiced Loans
(as defined below). The Trustee will also deposit into the FHA Premium Account,
to the extent of funds available therefor in the Distribution Account, an amount
equal to the greater of (i) .75% of the aggregate principal balance of each
outstanding Loan, other than Invoiced Loans, divided by 12 and (ii) the positive
excess, if any, of (A) the amount of premium and other charges due under the
Contract of Insurance for the next succeeding Due Period over (B) the balance in
the FHA Premium Account as of the related Determination Date (the 'FHA Premium
Account Deposit'). 'Invoiced Loans' are Loans with respect to which the related
obligor is required to pay the premium on FHA Insurance as a separate amount
with respect to such Loan.
REPORTS TO CERTIFICATEHOLDERS
Concurrently or before the third Business Day following each distribution
to the Certificateholders, the Trustee will forward to each Certificateholder a
statement setting forth as to each Class of Certificates among other items:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on the Distribution Date set forth above;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class Interest
Carryover Shortfall for each Class, and the amount of any Class Interest
Carryover Shortfall remaining;
(iii) with respect to each Class of Class A Certificates, the amount
of distribution set forth in paragraph (i) above in respect of principal;
and the amount thereof in respect of the Class A Principal Carryover
Shortfall, and any remaining Class A Principal Carryover Shortfall;
(iv) the amount of Distributable Excess Spread paid as principal to
each Class of Class A Certificateholders;
(v) Class A Guaranteed Principal Distribution Amount (if applicable);
(vi) the amount paid to each Class of Certificateholders under the
Policy for such Distribution Date in respect of the Class Interest
Distribution of each Class of Certificates and the portion of the Class A
Guaranteed Principal Distribution Amount paid to each Class of Class A
Certificates;
(vii) the Master Servicer Fee and the aggregate Subservicing Fees;
(viii) the aggregate Principal Balance of the Loans as of the close of
business on the last day of the preceding Due Period;
(ix) the aggregate Class A Principal Balance of each Class after
giving effect to payments allocated to principal in paragraph (iii) above;
(x) the Required OC Amount and the amount of overcollateralization as
of the close of business on the Distribution Date, after giving effect to
distributions of principal on such Distribution Date;
(xi) the Class S Notional Amount for such Distribution Date;
(xii) the aggregate amount of FHA Claims for the related Due Period;
(xiii) the Principal Balance of each Defaulted Loan and the aggregate
amount of Defaulted Loans for the related Due Period; and
(xiv) the number and aggregate Principal Balance of Loans that have
been repurchased by Keystone for the related Due Period.
S-49
<PAGE>
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
COLLECTION AND OTHER SERVICING PROCEDURES ON LOANS
The Master Servicer has agreed to manage, service, administer and make
collections on the Loans, and perform the other actions required by the Master
Servicer under the Agreement. In performing such obligations, the Master
Servicer is required to act in good faith in a commercially reasonable manner
and with respect to the FHA Loans, in accordance with all requirements of the
FHA applicable to the servicing of the Title I Loans, and to service and
administer such Loans in accordance with the Title I Program, the terms of the
Agreement and the respective Loans. The Master Servicer has full power and
authority, acting alone and/or through Subservicers subject only to the specific
requirements and prohibitions of the Title I Program (with respect to the FHA
Loans), the Agreement and the respective Loans, to do any and all things in
connection with such servicing and administration which are consistent with the
manner in which it services similar types of loans owned by the Master Servicer
or any of its affiliates or serviced by the Master Servicer for others and which
are consistent with the ordinary practices of prudent mortgage lending
institutions.
If any payment due under any Loan is not paid when the same becomes due and
payable, or if the related Obligor fails to perform any other covenant or
obligation under the Loan and such failure continues beyond any applicable grace
period, the Master Servicer must take such action (consistent with Title I, if
applicable including efforts to cure the default of such Loan) as it shall deem
to be in the best interest of the Trust. With respect to the FHA Loans, if the
maturity of the related note or obligation has been accelerated pursuant to the
requirements under Title I following the Master Servicer's efforts to cure the
default of such FHA Loan (and such Loan is not required to be purchased pursuant
to the Agreement) and (i) if the FHA Insurance Amount has not been depleted at
that time (an 'FHA Insurance Coverage Insufficiency'), the Master Servicer must
initiate, on behalf of the Trust, a claim under the Contract of Insurance for
reimbursement for loss on such Loan pursuant to Title I or, (ii) if a FHA
Insurance Coverage Insufficiency exists at the time, the Master Servicer shall
determine within 90 days whether or not to proceed against the property securing
the Loan pursuant to the provisions of the Agreement, and if thereafter a FHA
Insurance Coverage Insufficiency does not exist, may submit a claim under the
Contract of Insurance with respect to such Loan if it has obtained the prior
approval of the Secretary of HUD.
In the event that in accordance with clause (ii) above the Master Servicer
determines not to proceed against the Property, on or before the Determination
Date following such determination the Master Servicer shall determine if in good
faith in accordance with customary mortgage loan servicing practices all amounts
which it expects to receive with respect to such Loan have been received. If the
Master Servicer makes such a determination, it shall include such information in
its records.
If the FHA rejects or refuses to pay any claim made under the Contract of
Insurance (including a rejection of a previously paid claim and a demand by the
FHA of a previously paid claim amount for such Loan) for a Loan (other than a
refusal or rejection for clerical error in computing the claim amount or due to
an exhaustion of the FHA Insurance Amount), upon receipt of the FHA's rejection
notice and determination by the Master Servicer that the rejection was not due
to clerical error, then (i) the Master Servicer must promptly notify the Trustee
(if the Trustee shall not initially have received such notice) and the
Certificate Insurer of such fact, and (ii) if the FHA indicates rejection for
other than a failure to service such FHA Loan in accordance with Title I, the
Seller shall be liable on or before the last day of the calendar month next
following the date of such notice from the Master Servicer to repurchase such
Loan for the Purchase Price thereof. In connection with its rejection or refusal
to pay a claim, if the FHA shall have indicated in writing, or if the FHA does
not indicate in writing the reason for its rejection or refusal and it is
otherwise evident that such rejection or refusal is due to a failure to service
such Loan in accordance with Title I, the Master Servicer shall notify the
Seller and the Certificate Insurer of such determination, and the Master
Servicer shall on or before the later to occur of (i) the last day of the
calendar month next succeeding the date of such rejection and (ii) ten Business
Days from the date on which such rejection notice is received by the Master
Servicer from the FHA, either directly or from the Seller or the Trustee,
repurchase such Loan for the Purchase Price.
S-50
<PAGE>
The Trustee must deposit in the Distribution Account on the day of receipt
all amounts received from the FHA (to the extent payments are not sent by the
FHA directly to the Master Servicer) or any other Person with respect to the FHA
Loans or any other assets of the Trust.
If prior to the liquidation of the last asset of the Trust pursuant to the
Agreement, the FHA rejects an insurance claim, in whole or part, under the
Contract of Insurance after previously paying such insurance claim and the FHA
demands that the Contract of Insurance Holder repurchase such Loan from the FHA,
the Master Servicer must pursue such appeals with the FHA as are reasonable. If
the FHA continues to demand that the Contract of Insurance Holder repurchase
such Loan from the FHA after the Master Servicer exhausts such administrative
appeals as are reasonable, then notwithstanding that the Seller, the Master
Servicer or any other person is required to repurchase such Loan, the Master
Servicer must notify the Contract of Insurance Holder of such fact and the
Contract of Insurance Holder shall cause the Trust to repurchase such Loan from
funds available in the Distribution Account.
The Seller will reimburse the Contract of Insurance Holder for any amounts
paid by the Contract of Insurance Holder to the FHA in order to repurchase FHA
Loans for which the FHA has rejected an insurance claim for any reason other
than a failure to comply with FHA servicing requirements. The Master Servicer
will reimburse the Contract of Insurance Holder for any amounts paid by the
Contract of Insurance Holder to FHA in order to repurchase Loans for which the
FHA has rejected an insurance claim as a result of a failure to service such
Loan in accordance with Title I.
In addition, with respect to any Loan, the Master Servicer is required to
advance funds for the payment of certain expenses in connection with the
foreclosure of a Property (the 'Foreclosure Property') relating to insurance,
taxes, property protection, maintenance, third party expenses and similar
expenses ('Foreclosure Advances'). The Master Servicer must advance the
Foreclosure Advances but only if it has approved the foreclosure in writing and
the Master Servicer would make such an advance if it or an affiliate held the
affected Loan or Foreclosed Property for its own account and, in the Master
Servicer's good faith judgment, such amounts will be recoverable from the
related Loan. In making such assessment with respect to the institution of
foreclosure proceedings, the Master Servicer shall not advance funds with
respect to a Loan unless the appraised value of the related Property exceeds the
sum of (i) with respect to any Loan, the amounts necessary to satisfy any liens
prior to the Mortgage and (ii) the reasonably anticipated costs of foreclosure
or similar proceedings.
The Master Servicer may modify any provision of any Loan if, in the Master
Servicer's good faith judgment, such modification (i) would minimize the loss
that might otherwise be experienced with respect to such Loan and complies with
the requirements of Title I or (ii) is required by Title I and, in either case,
only in the event of a payment default with respect to such Loan or in the event
that a payment default with respect to such Loan is reasonably foreseeable by
the Master Servicer. The Master Servicer will agree to subordinate the position
of the security interest in the Property which secures any FHA Loan upon the
Master Servicer's receipt of written approval of HUD to such subordination and
provided such subordination (i) would permit the borrower to refinance a senior
lien to take advantage of a lower interest rate or (ii) would permit the
borrower to extend the term of the senior lien.
HAZARD INSURANCE
FHA regulations require borrowers to maintain flood insurance with respect
to the Property securing a FHA Loan where the Property securing the FHA Loan is
located in an area that has been identified by the Federal Emergency Management
Agency (FEMA) as having special flood hazards in accordance with FHA
regulations. The amount of such insurance shall be at least equal to the
outstanding Principal Balance of the FHA Loan and the insurance must be
maintained by the borrower for the full term of the FHA Loan or until the
Property is either repossessed or foreclosed by the Master Servicer.
With respect to any Manufactured Housing Contract, the Master Servicer will
cause to be maintained hazard insurance with respect to each related Property in
an amount which is at least equal to the outstanding Principal Balance on the
Manufactured Housing Contract, except that the amount of insurance coverage
shall not be less than the actual cash value of the Manufactured Home where
State law precludes a higher amount.
S-51
<PAGE>
REALIZATION UPON DEFAULTED LOANS
The Master Servicer shall 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 Property, by
operation of law or otherwise only in the event that in the Master Servicer's
reasonable judgment such action is likely to result in a positive economic
benefit to the Trust by creating net liquidation proceeds (after reimbursement
of all amounts owed with respect to such Loan to the Master Servicer or related
Subservicer) and provided that prior to taking title to any Property, the Master
Servicer has requested that the Trustee obtain, and the Trustee shall have
obtained, a review to be performed on the Property by a company having
appropriate experience and otherwise reasonably acceptable to the Trustee and
the Certificate Insurer, the scope of which is limited to the review of public
records and documents for information regarding whether such Property has on it,
under it or is near, hazardous or toxic material or waste. If such review
reveals that the Property has on it, under it or is near hazardous or toxic
material or waste or reveals any other environmental problem, the Trustee shall
provide a copy of the related report to the Master Servicer and the Certificate
Insurer and title shall be taken to such Property only after obtaining the
written consent of the Master Servicer and the Certificate Insurer.
The Master Servicer, on behalf of the Trustee, may, at any time, 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 Property, by operation of law or otherwise. In such event the
Master Servicer shall comply with the requirements under Title I, if applicable,
the REMIC regulations and the Agreement, shall follow such practices and
procedures in a manner which is consistent with the Master Servicer's procedure
for foreclosure and operation of the foreclosed property with respect to Title I
Loans or other loans, as applicable, held in the Master Servicer's portfolio for
its own account or, if there are no such loans, such loans serviced by the
Master Servicer for others, giving due consideration to accepted servicing
practices of prudent lending institutions, and shall sell or liquidate the Loan
or Property.
The Master Servicer will also be required to advance certain amounts in
respect of foreclosure expenses that the Master Servicer determines in its good
faith judgment are recoverable from liquidation proceeds.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Loans a portion of such interest payments as
a monthly Master Servicing Fee in the amount equal to 0.12% per annum ('Master
Servicing Fee Rate') on the Principal Balance of each Loan as of the first day
of each such Due Period as to which such payment was made. Each Subservicer will
receive from payments in respect of interest on the Loans a monthly subservicing
fee (the 'Subservicing Fee') in an amount ranging from 1.00% to 1.125% per annum
(the 'Subservicing Fee Rate'). All assumption fees, late payment charges,
prepayment penalties and other fees and charges, to the extent collected from
borrowers, will be retained by the Subservicers as additional servicing
compensation.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery to the Trustee, the Certificate Insurer
and the Rating Agencies of an annual statement signed by an officer of the
Master Servicer to the effect that the Master Servicer has fulfilled its
obligations under the Agreement throughout the preceding year, except as
specified in such statement.
Each year (within 120 days following the end of the Master Servicer's
fiscal year), beginning in 1996, the Master Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants (who
may also render other services to the Master Servicer or the Depositor) to the
Trustee and the Certificate Insurer to the effect that such firm has examined
certain documents and the records relating to servicing of the Loans as
specified in the Agreement and such firm's conclusion that the Master Servicer
is in compliance with respect thereto.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder except (i) with the consent of the Certificate
Insurer and the Rating Agencies or (ii) upon determination that by reason of a
change in legal requirements the performance of its duties under the Agreement
would cause it to be in violation
S-52
<PAGE>
of such legal requirements in a manner which would result in a material adverse
effect on the Master Servicer, and the Certificate Insurer (so long as an
Insurer Default shall not have occurred and be continuing) does not elect to
waive the obligations of the Master Servicer to perform the duties which render
it legally unable to act or to delegate those duties. Any such determination
permitting the resignation of the Master Servicer by reason of a change in such
legal requirements shall be evidenced by an opinion of counsel to such effect
delivered and acceptable to the Trustee and the Certificate Insurer (unless an
Insurer Default shall have occurred and be continuing). No resignation of the
Master Servicer shall become effective until the Trustee or a successor servicer
acceptable to the Certificate Insurer shall have assumed the Master Servicer's
servicing 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 (i) shall be an Eligible Servicer (as defined in the
Agreement), (ii) shall be capable of fulfilling the duties of the Master
Servicer contained in the Agreement and (iii) shall have a long-term debt rating
which is at least investment grade from each of the Rating Agencies. Any company
into which the Master Servicer may be merged or consolidated, shall execute an
agreement of assumption to perform every obligation of the Master Servicer under
the Agreement and, shall be the successor to the Master Servicer under the
Agreement.
The Master Servicer has entered into subservicing agreements (the
'Subservicing Agreements') with certain lenders (each, a 'Subservicer'). No such
subservicing agreement will relieve the Master Servicer of any of its duties and
obligations to the Trustee on behalf of Certificateholders with respect to the
servicing and administration of the Loans. The Master Servicer will be obligated
with respect thereto to the same extent and under the same terms and conditions
as if it alone were performing all duties and obligations in connection with the
servicing and administration of such Loans.
The Master Servicer will be required to verify that each Subservicer is
collecting and appropriately accounting for Obligor payments of premium on FHA
Insurance on Invoiced Loans, otherwise to monitor the performance by
Subservicers under the related Subservicing Agreement and will be liable for the
deposit by the respective Subservicers of payments on the Loans into the related
Collection Account to the same extent as if such amounts were received or
collected directly by the Master Servicer.
The Certificate Insurer and the Master Servicer have various rights to
terminate any Subservicing Agreement upon the occurrence of a Subservicer
Termination Event, as defined in the related Subservicing Agreement. The Master
Servicer is required to perform the obligations of any Subservicer that fails to
perform its duties and obligations under its Subservicing Agreement.
The Subservicing Fee to be paid to the related Subservicer will be withheld
by such Subservicer from deposits required to be made by such Subservicer into
the related Collection Account.
The Agreement provides that neither the Master Servicer nor any of its
directors, officers, employees or agents shall be under any liability to the
Trust or to the Certificateholders 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, unless liability would otherwise be imposed by reason of willful
misfeasance, bad faith or negligence in performing or failing to perform duties.
EVENTS OF MASTER SERVICING TERMINATION; TRIGGER EVENTS
'Events of Master Servicing Termination' will consist of, among other
things: (i) (A) any failure by the Master Servicer to make any required Interest
Advance or (B) any other failure of the Master Servicer to deposit or cause the
related Subservicer to deposit in the Collection Account any amount required to
be made under the Agreement, which failure continues unremedied for two Business
Days or (C) any failure by the Master Servicer to pay when due any amount
payable by it under the Agreement and such failure results in a drawing under
the Policy or (D) any failure by the Master Servicer to pay when due any amount
payable by it under the Insurance Agreement, which failure continues unremedied
for two Business Days; (ii) any failure by the Master Servicer duly to observe
or perform in any material respect any other of its covenants or agreements in
the Agreement; (iii) the failure to maintain a long-term debt rating of BBB and
Baa2 by Standard & Poor's and Moody's respectively; (iv) the loss and deliquency
experience with respect to the Loans exceeds certain levels as specified
S-53
<PAGE>
in the Agreement; or (v) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings relating to the
Master Servicer and certain actions by the Master Servicer indicating
insolvency, reorganization or inability to pay its obligations (an 'Insolvency
Event') or the Master Servicer shall dissolve or liquidate, in whole or part, in
any material respect.
If an Event of Master Servicing Termination shall occur and be continuing,
the Certificate Insurer (or, if an Insurer Default shall have occurred and be
continuing, the Trustee at the direction of the Certificateholders), by notice
given in writing to the Master Servicer (and to the Trustee if given by the
Certificate Insurer or the Certificateholders) may terminate all of the rights
and obligations of the Master Servicer under the Agreement. On or after the
receipt by the Master Servicer of such written notice, and the appointment of
and acceptance by a successor Master Servicer, all authority, power, obligations
and responsibilities of the Master Servicer under the Agreement shall become
obligations and responsibilities of the successor Master Servicer. After the
Master Servicer receives a notice of termination or upon the resignation of the
Master Servicer, the Trustee shall be the successor in all respects to the
Master Servicer in its capacity as master servicer under the Agreement.
Any successor Master Servicer shall be entitled to such compensation
(whether payable out of the Distribution Amount or otherwise) as the Master
Servicer would have been entitled to under the Agreement if the Master Servicer
had not resigned or been terminated hereunder. The Certificate Insurer and a
successor Master Servicer may agree on additional compensation to be paid to
such successor Master Servicer. In addition, any successor Master Servicer shall
be entitled to reasonable transition expenses incurred in acting as successor
Master Servicer.
'Trigger Events' will consist of, among other things: (i) any failure by
the Seller to pay when due any amount payable by it under the Agreement or
Insurance Agreement and such failure results in a drawing under the Policy; (ii)
any representation, warranty or statement of the Seller made in the Insurance
Agreement or the Agreement shall prove to be incorrect in any material respect
as of the time when made, and such circumstances or conditions in respect of
which such representation, warranty or statement was incorrect have not been
cured within the applicable cure period specified in the Insurance Agreement or
Agreement, as the case may be; (iii) certain Insolvency Events relating to the
Seller or the Seller shall dissolve or liquidate, in whole or part, in any
material respect; (iv) the Insurance Agreement, the Agreement or the Purchase
Agreement shall cease to be in full force and effect or (v) the loss and
delinquency experience with respect to the Loans exceeds certain levels as
specified in the Agreement. Upon the occurrence and continuance of any Trigger
Event, the Certificate Insurer may require that all Excess Spread (net of
certain fees and expenses) on each succeeding Distribution Date be distributed
as principal of the Class A Certificates, pro rata, based on respective Class A
Principal Balances.
AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee as specified in this paragraph and with
the consent of the Certificate Insurer, provided that any amendment be
accompanied by an opinion of counsel to the Trustee to the effect that such
amendment complies with the provisions of the Agreement. If the purpose of the
amendment (as detailed therein) is to correct any mistake, eliminate any
inconsistency, cure any ambiguity or deal with any matter not covered (i.e. to
give effect to the intent of the parties, and if applicable, the expectations of
the Certificateholders), it shall not be necessary to obtain the consent of any
Certificateholder, but the Trustee shall be furnished with a letter from the
Rating Agencies that the amendment will not result in the downgrading or
withdrawal of the rating then assigned to the Senior Certificates. If the
purpose of the amendment is to prevent the imposition of any federal or state
taxes at any time that any Certificates are outstanding (i.e. technical in
nature), it shall not be necessary to obtain the consent of any
Certificateholder, but the Trustee shall be furnished with an opinion of counsel
that such amendment is necessary or helpful to prevent the imposition of such
taxes and is not materially adverse to any Certificateholder. If the purpose of
the amendment is to add or eliminate or change any provision of the Agreement
other than as contemplated in the prior two sentences, the amendment shall
require the consent of the Holders of Certificates evidencing at least 51% of
the Percentage Interest of each Class affected thereby, provided that no such
amendment will (i) reduce in any manner the amount of, or delay the timing of,
payments on or payments received which are required to be made on any
Certificate without the consent of the related Certificateholder or (ii) reduce
the aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Senior Certificates then outstanding. It shall not
be necessary for the consent of the
S-54
<PAGE>
Certificateholders to approve the particular form of any proposed amendment, but
it shall be sufficient if such consent approves the substance thereof.
TERMINATION; RETIREMENT OF THE CERTIFICATES
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless the
Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Class A Principal Balance has been reduced to
zero, (ii) the final payment or other liquidation of the last Loan in the Trust,
(iii) the optional purchase by the Master Servicer or Keystone of the Loans, as
described below and (iv) the Distribution Date in November 2016, on which date
the Policy will be available to pay the outstanding Aggregate Class A Principal
Balance.
At their option, the Master Servicer and Keystone, each with the consent of
the Certificate Insurer, may each purchase from the Trust all (but not fewer
than all) remaining Loans and other property acquired by foreclosure, deed in
lieu of foreclosure, or otherwise then constituting property of the Trust, and
thereby effect early retirement of the Certificates, on any Distribution Date
when the aggregate outstanding Principal Balance of the Loans is less than 10%,
in the case of a purchase by the Master Servicer, or 5%, in the case of a
purchase by Keystone, of the sum of (a) the initial Pool Balance and (b) the
original Pre-Funded Amount. The purchase price will be equal to the sum of the
outstanding Pool Balance (subject to reductions as provided in the Agreement if
the purchase price is based in part on the appraised value of any REO Property
included in the Trust and such appraised value is less than the Principal
Balance of the related Loan) and accrued and unpaid interest thereon at the
weighted average of the Loan Rates through the day preceding the final
Distribution Date together with all amounts due and owing to the Certificate
Insurer.
The termination of the Trust will be effected in a manner consistent with
applicable federal income tax regulations and the Status of the Trust as a
REMIC.
OPTIONAL PURCHASE OF DEFAULTED LOANS
Keystone has the option to purchase from the Trust Fund any Loan which is
120 days or more delinquent at the Purchase Price; provided, that the aggregate
of the initial Principal Balances of Loans purchased by the Seller at its option
may not exceed 5% of the sum of (a) the initial Pool Balance and (b) the
original Pre-Funded Amount on the Closing Date. Notwithstanding the foregoing,
the Seller will select Loans for repurchase in the order of the number of days
such Loans are past due, with the Loan which is the most number of days past due
being selected first.
THE TRUSTEE
First Bank National Association, a national banking association, has been
named Trustee pursuant to the Agreement. Pursuant to the Agreement, the
Depositor and the Trustee will appoint Coast Partners Acceptance Corporation, as
a co-trustee generally for the limited purposes of facilitating claims under the
Contract of Insurance and for holding record ownership of each mortgage or deed
of trust with respect to which an assignment thereof is required to be recorded
pursuant to the Agreement.
The commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. The Depositor may also remove the Trustee if the Trustee ceases to be
eligible to continue as such under the Agreement or if the Trustee becomes
insolvent. Upon becoming aware of such circumstances, the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate
Insurer. Any resignation or removal of the Trustee and appointment of a
successor Trustee will not become effective until acceptance of the appointment
by the successor Trustee.
S-55
<PAGE>
DESCRIPTION OF THE PURCHASE AGREEMENT
The Loans to be transferred to the Trust by the Depositor will be purchased
by the Depositor from The First National Bank of Keystone (the 'Seller')
pursuant to a purchase agreement to be entered into between the Depositor, as
purchaser of the Loans, and the Seller, as seller of the Loans (the 'Purchase
Agreement'). Under the Purchase Agreement, the Seller will agree to transfer the
Initial Loans to the Depositor and the Subsequent Loans to the Trust. Pursuant
to the Agreement, the Initial Loans will be immediately transferred by the
Depositor to the Trust, and the Depositor has assigned its rights in, to and
under the Purchase Agreement, to the Trust. The following summary describes
certain terms of the form of the Purchase Agreement and is qualified in its
entirety by reference to the form of Purchase Agreement.
TRANSFER OF LOANS
Pursuant to the Purchase Agreement, the Seller will transfer and assign to
the Depositor all of its right, title and interest in and to the Loans and the
Related Documents. The purchase price of the Loans will be a specified
percentage of the face amount thereof as of the time of transfer and will be
paid by the Depositor in cash.
REPRESENTATIONS AND WARRANTIES
The Seller will represent and warrant to the Depositor that, among other
things, as of the Closing Date, it was duly organized and in good standing and
that it has the authority to consummate the transactions contemplated by the
Purchase Agreement.
The Seller will also represent and warrant to the Depositor, that, among
other things, (a) the information with respect to each Loan set forth in the
schedule attached to the Purchase Agreement is true and correct in all material
respects, (b) immediately prior to the sale of the Loans to the Depositor, the
Seller was the sole owner and holder of the Loans free and clear of any and all
liens and security interests and (c) each Loan complied, at the time of
origination, in all material respects with applicable state and federal laws,
including, without limitations, the requirements of Title I with respect to the
FHA Loans. The Seller will make similar representations and warranties in the
Agreement. The Seller also will represent and warrant to the Depositor, that,
among other things, as of the Closing Date, the Purchase Agreement constitutes a
legal, valid and binding obligation of the Seller. The Seller will covenant to
sell Subsequent Loans to the Trust in accordance with the terms of the
Agreement. In the event of a breach of any such representations and warranties
of the Seller in the Purchase Agreement and the Agreement which has a material
adverse effect on the interests of the Certificateholders or the Certificate
Insurer, the Seller will repurchase or substitute for the Loans as described
herein under 'DESCRIPTION OF THE CERTIFICATES--Assignment of Loans.' In
addition, the Seller will repurchase Loans from, or substitute Loans from the
Depositor if the Depositor is required to repurchase or substitute Loans
pursuant to the terms of the Agreement.
The Seller will also agree to indemnify the Depositor and the Trust from
and against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
ASSIGNMENT TO THE TRUST
The Seller expressly acknowledges and consents to the Depositor's transfer
of its rights relating to the Loans under the Agreement and its rights under the
Purchase Agreement, to the Trust. The Seller also agrees to perform its
obligations under the Purchase Agreement for the benefit of the Trust.
TERMINATION
The Purchase Agreement will terminate upon the termination of the Trust.
THE CERTIFICATE INSURER
CapMAC is a New York-domiciled monoline stock insurance company which
engages only in the business of financial guarantee and surety insurance. CapMAC
is licensed in 50 states in addition to the District of Columbia, the
Commonwealth of Puerto Rico and the territory of Guam. CapMAC insures structured
asset-
S-56
<PAGE>
backed, corporate, municipal and other financial obligations in the U.S. and
international capital markets. CapMAC also provides financial guarantee
reinsurance for structured asset-backed, corporate, municipal and other
financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated 'Aaa' by Moody's Investors Service,
Inc., 'AAA' by Standard & Poor's Corporation, 'AAA' by Duff & Phelps Credit
Rating Co. and 'AAA' by Nippon Investors Service Inc. Such ratings reflect only
the views of the respective rating agencies, are not recommendations to buy,
sell or hold securities and are subject to revision or withdrawal at any time by
such rating agencies.
CapMAC is wholly owned by CapMAC Holdings Inc. ('Holdings'), a company that
is owned by a group of institutional and other investors, including CapMAC's
management and employees. Neither Holdings nor any of its stockholders is
obligated to pay any claims under any surety bond issued by CapMAC or any debts
of CapMAC or to make additional capital contributions.
CapMAC is regulated by the Superintendent of Insurance of the State of New
York. In addition, CapMAC is subject to regulation by the insurance laws and
regulations of the other jurisdictions in which it is licensed. Such insurance
laws regulate, among other things, the amount of net exposure per risk that
CapMAC may retain, capital transfers, dividends, investment of assets, changes
in control, transactions with affiliates and consolidations and acquisitions.
CapMAC is subject to periodic regulatory examinations by the same regulatory
authorities.
CapMAC's obligations under the Policy may be reinsured. Such reinsurance
does not relieve CapMAC of any of its obligations under the Policy.
THE POLICY IS NOT COVERED BY THE PROPERTY/CASUALTY INSURANCE SECURITY FUND
SPECIFIED IN ARTICLE 76 OF THE NEW YORK INSURANCE LAW.
As of December 31, 1994 and 1993, CapMAC had qualified statutory capital
(which consists of policyholders' surplus and contingency reserve) of
approximately $170 million and $168 million, respectively, and had not incurred
any debt obligations. Article 69 of the New York State Insurance Law requires
CapMAC to establish and maintain the contingency reserve, which is available to
cover claims under surety bonds issued by CapMAC.
The financial statements of CapMAC prepared in accordance with generally
accepted accounting principles for (i) the years ended December 31, 1994 and
1993 and the six months ended December 31, 1992 and (ii) the six months ended
June 30, 1995 and 1994 are attached as exhibits to this document as Annex II.
Copies of CapMAC's financial statements prepared in accordance with statutory
accounting standards, which differ from generally accepted accounting
principles, and filed with the Insurance Department of the State of New York are
available upon request. CapMAC is located at 885 Third Avenue, New York, New
York 10022, and its telephone number is (212) 755-1155.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Initial Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
An election will be made to treat the Trust (excluding the Pre-Funding
Account and the Capitalized Interest Account) as a 'real estate mortgage
investment conduit' ('REMIC') for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the 'Code'). The Senior Certificates will be
designated as 'regular interests' in the REMIC and the Class R Certificates will
be designated as the sole Class of residual interests in the REMIC. See 'CERTAIN
FEDERAL INCOME TAX CONSEQUENCES--Taxation of the REMIC and its Holders' in the
Prospectus.
The Senior Certificates generally will be treated as debt instruments
issued by the REMIC for Federal income tax purposes. Income on the Senior
Certificates must be reported under an accrual method of accounting.
S-57
<PAGE>
The Class A Certificates may be, and the Class S Certificates will be,
issued with original issue discount ('OID') for federal income tax purposes. In
such event, holders of such Certificates will be required to include OID in
income as it accrues under a constant yield method and based on a prepayment
assumption (described below), in advance of the receipt of cash attributable to
such income.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The Prepayment Assumption model used in this
Prospectus is based on CPR. CPR does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Loans, and there is no assurance that the Loans will prepay at the
specified CPR. The Depositor does not make any representation about the
appropriateness of the CPR model.
The yield used to calculate accruals of OID with respect to the Senior
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Loans will prepay in accordance
with 14% of CPR. No representation is made as to the actual rate at which the
Loans will prepay.
The Senior Certificates will be treated as regular interests in a REMIC
under section 860G of the Internal Revenue Code of 1986, as amended (the
'Code'). Accordingly, the Senior Certificates will be treated as (i) qualifying
real property loans within the meaning of section 593(d)(1) of the Code, (ii)
assets described in section 7701(a)(19)(C) of the Code, and (iii) 'real estate
assets' within the meaning of section 856(c)(5) of the Code, in each case to the
extent described in the Prospectus. Interest on the Senior Certificates will be
treated as interest on obligations secured by mortgages on real property within
the meaning of section 856(c)(B) of the Code to the same extent that the Senior
Certificates are treated as real estate assets. See 'Certain Federal Income Tax
Consequences' in the Prospectus.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Senior Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other 'reportable
payments' (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Senior Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Senior Certificates (and the amount of interest withheld
for Federal income taxes, if any) for each calendar year, except as to exempt
holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only 'Class A Certificateholder' of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
owned from Participants and Indirect Participants rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct Federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's Federal income tax
liability.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ('Foreign Investors').
The term 'Foreign Investor' means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States or any state or political
subdivision thereof or (iii) an estate or trust the income of which is
includible in gross income for United States federal income tax purposes,
regardless of its source.
S-58
<PAGE>
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain 'portfolio debt investments' issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Senior
Certificates will be issued in registered form; therefore, if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Senior Certificates.
For the Senior Certificates to constitute portfolio debt investments exempt
from the United States withholding tax, the withholding agent must receive from
the Certificate Owner an executed IRS Form W-8 signed under penalty of perjury
by the Certificate Owner stating that the Certificate Owner is a Foreign
Investor and providing such Certificate Owner's name and address. The statement
must be received by the withholding agent in the calendar year in which the
interest payment is made, or in either of the two preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Senior Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificate Owner in the United States, (ii) in the case of a Certificate Owner
that is an individual, such Certificate Owner is not present in the United
States for 183 days or more during the taxable year in which such sale, exchange
or redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in the immediately preceding paragraph are
satisfied.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Senior Certificates under the tax laws
of any state. Investors considering an investment in the Certificates should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Senior Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Senior Certificates should consult with its counsel with respect to the
potential consequences under the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), and the Code, of the Plan's acquisition and
ownership of such Certificates. See 'ERISA Consideration' in the Prospectus.
In Prohibited Transaction Exemption 83-1 (the 'Exemption'), the Department
of Labor ('DOL') exempted from ERISA's prohibited transaction rules certain
transactions relating to the operation of residential mortgage pool investment
trusts and the purchase, sale and holding of 'mortgage pool pass-through
certificates' in the initial issuance of such certificates. The Exemption
permits, subject to certain conditions, transactions that might otherwise be
prohibited between Plans and Parties in Interest with respect to those Plans
related to the origination, maintenance and termination of mortgage pools
consisting of mortgage loans secured by first or second mortgages or deeds of
trust on single-family residential property, and the acquisition and holding of
certain mortgage pool pass-through certificates representing an interest in such
mortgage pools by Plans. If the general conditions of the Exemption are
satisfied, investments by a Plan in certificates that represent interests in a
mortgage pool consisting of mortgage loans representing loans for single family
homes ('Single Family Certificates') will be exempt from the prohibitions of
ERISA Sections 406(a) and 407 (relating generally to transactions with Parties
in Interest who are not fiduciaries) if the Plan purchases the Single Family
Certificates at no more than fair market value and will be exempt from the
prohibitions of ERISA Sections 406(b)(1) and (2) (relating generally to
transactions with fiduciaries) if, in addition, the purchase is approved by an
independent fiduciary, no sales commission is paid to the pool sponsor, the Plan
does not purchase more than twenty-five percent (25%) of all Single Family
Certificates and at least fifty percent (50%) of all Single Family Certificates
are purchased by persons independent of the pool sponsor or pool trustee.
S-59
<PAGE>
Any Plan fiduciary considering whether to purchase any Class A Certificates
on behalf of a Plan should consult with its counsel regarding the applicability
of the fiduciary responsibility and prohibited transaction provisions of ERISA
and the Code to such investment. Among other things, before purchasing any Class
A Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or an employee benefit plan subject to the prohibited
transaction provisions of the Code should make its own determination as to the
availability of the exemptive relief provided in the Exemption, and also
consider the availability of any other prohibited transaction exemptions.
Because the Underwriters believe the Class S Certificates do not currently
meet the requirements of the Exemption or any other issued exemption under
ERISA, the purchase and holding of the Class S Certificates by a Plan or by
individual retirement accounts or other plans subject to Section 4975 of the
Code may result in prohibited transactions or the imposition of excise taxes or
civil penalties. Consequently, transfer of the Class S Certificates will not be
registered by the Trustee unless the Trustee receives: (i) a representation from
the transferee of such Certificate, acceptable to and in form and substance
satisfactory to the Trustee, to the effect that such transferee is not an
employee benefit plan subject to Section 406 of ERISA or a plan or arrangement
subject to Section 4975 of the Code, nor a person acting on behalf of any such
plan or arrangement nor using the assets of any such plan or arrangement to
effect such transfer; (ii) if the purchaser is an insurance company, a
representation that the purchaser is an insurance company which is purchasing
such Certificates with funds contained in an 'insurance company general account'
(as such term is defined in Section V(e) of Prohibited Transaction Class
Exemption 95-60 ('PTCE 95-60')) and that the purchase and holding of such
Certificates are covered under PTCE 95-60; or (iii) an opinion of counsel
satisfactory to the Trustee that the purchase or holding of such Certificate by
a Plan, any person acting on behalf of a Plan or using such Plan's assets, will
not result in the assets of the Trust Fund being deemed to be 'plan assets' and
subject to the prohibited transaction requirements of ERISA and the Code and
will not subject the Trustee to any obligation in addition to those undertaken
in the Agreement. In the event that such representation is violated, or any
attempt to transfer to a Plan or person acting on behalf of a Plan or using such
Plan's assets is attempted without such opinion of counsel, such attempted
transfer or acquisition shall be void and of no effect.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Senior Certificates will be
rated in the highest rating category of the Rating Agencies, the Senior
Certificates will not constitute 'mortgage related securities' for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ('SMMEA'), because not all
of the mortgages securing the Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Senior Certificates, which because they evidence interests in a pool that
includes junior mortgage loans are not 'mortgage related securities' under
SMMEA. See 'LEGAL INVESTMENT' in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated November 13, 1995 (the 'Underwriting Agreement'), among the
Depositor and the underwriters named below (the 'Underwriters'), the Depositor
has agreed to sell to the Underwriters and the Underwriters have agreed to
purchase from the Depositor all of the Class A Certificates as set forth
opposite their names below:
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
- ------------------------------------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Lehman Brothers Inc. ..................... $ 61,740,000 $ 29,106,000 $ 37,926,000 $ 11,466,000 $ 44,298,900
Coast Partners Securities, Inc. .......... 6,860,000 3,234,000 4,214,000 1,274,000 4,922,100
------------ ------------ ------------ ------------ ------------
Total........................... $ 68,600,000 $ 32,340,000 $ 42,140,000 $ 12,740,000 $ 49,221,000
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
</TABLE>
Pursuant to the Underwriting Agreement, the Depositor has agreed to sell to
Lehman Brothers Inc., and Lehman Brothers Inc. has agreed to purchase from the
Depositor, all of the Class S Certificates.
Distribution of the Senior Certificates will be made by the Underwriters
from time to time in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor from
S-60
<PAGE>
the sale of the Senior Certificates will be $204,227,591, before deducting
expenses payable by the Depositor expected to be $300,000. In connection with
the purchase and sale of the Senior Certificates, the Underwriters may be deemed
to have received compensation from the Depositor in the form of underwriting
discounts.
The Depositor has been advised by the Underwriters that they or an
affiliate thereof presently intends to make a market in the Senior Certificates
offered hereby; however, it is not obligated to do so, any market-making may be
discontinued at any time, and there can be no assurance that an active public
market for the Senior Certificates will develop.
The Depositor is an affiliate of Lehman Brothers Inc.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Act.
LEGAL MATTERS
Certain legal matters with respect to the Senior Certificates will be
passed upon for the Depositor by Brown & Wood, New York, New York and for the
Underwriters by Brown & Wood, New York, New York.
EXPERTS
The financial statements of Capital Markets Assurance Corporation as of
December 31, 1994 and 1993 and for the years ended December 31, 1994 and 1993,
and the six-month period ended December 31, 1992, have been included herein in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The report of KPMG Peat Marwick LLP covering the financial statements noted
above refers to Capital Markets Assurance Corporation's adoption at December 31,
1993 of Financial Accounting Standard Board's Statement of Financial Accounting
Standards No. 115, 'Accounting for Certain Investments in Debt and Equity
Securities.'
RATINGS
It is a condition to the issuance of the Senior Certificates that the Class
A Certificates receive ratings of 'AAA' by Standard & Poor's Rating Services, a
division of the McGraw Hill Company ('Standard & Poor's') and 'Aaa' by Moody's
Investors Service ('Moody's' and together with Standard & Poor's, each a 'Rating
Agency') and that the Class S Certificates receive ratings of 'AAAr' by S&P and
'Aaa' by Moody's.
A securities rating addresses the likelihood of the receipt by Senior
Certificateholders of distributions on the Loans. The rating takes into
consideration the characteristics of the Loans and the structural, legal and tax
aspects associated with the Senior Certificates. The ratings on the Senior
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Loans or the possibility that Senior
Certificateholders might realize a lower than anticipated yield due to
prepayments.
The ratings assigned to the Senior Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the claims-paying ability of the Certificate Insurer below the
ratings initially assigned to the Senior Certificates may result in a reduction
of one or more of the ratings assigned to the Senior Certificates.
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.
S-61
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
1934 Act................................................................................ S-2
Aggregate Class A Principal Balance..................................................... S-4
Agreement............................................................................... S-1, S-3
beneficial owner........................................................................ S-38
Book-Entry Certificates................................................................. S-37
Capitalized Interest Account............................................................ S-12, S-48
CapMAC.................................................................................. S-11
Cede.................................................................................... S-5
CEDEL................................................................................... S-5, S-39
CEDEL Participants...................................................................... S-39
Certificate Owners...................................................................... S-5, S-37
Certificate Rate........................................................................ S-4, S-6, S-47
Certificate Register.................................................................... S-44
Certificate Registrar................................................................... S-44
Certificateholder....................................................................... S-38
Certificate Insurer..................................................................... S-2, S-11
Certificates............................................................................ S-1, S-3
Citibank................................................................................ S-5
Claimable Amount........................................................................ S-24
Claims Administrator.................................................................... S-3
Class Interest Carryover Shortfall...................................................... S-7
Class Interest Distribution............................................................. S-7, S-44
Class Monthly Interest Distributable Amount............................................. S-7, S-44
Class A Certificateholder............................................................... S-58
Class A Certificates.................................................................... S-1, S-4
Class A Guaranteed Principal Distribution Amount........................................ S-11, S-47
Class A Monthly Principal Distributable Amount.......................................... S-7, S-46
Class A Principal Balance............................................................... S-4, S-37
Class A Principal Distribution.......................................................... S-7, S-45
Class R Certificates.................................................................... S-1, S-4
Class S Certificates.................................................................... S-1, S-4
Class S Notional Amount................................................................. S-4, S-37
Closing Date............................................................................ S-4
Code.................................................................................... S-57
Collection Account...................................................................... S-42
Contract of Insurance................................................................... S-9
Contract of Insurance Holder............................................................ S-3
Cooperative............................................................................. S-39
CPR..................................................................................... S-31, S-58
Cram Down Loss.......................................................................... S-46
Credit File............................................................................. S-41
Cut-Off Date............................................................................ S-3
Cut-Off Date Principal Balance.......................................................... S-3
Defaulted Loan.......................................................................... S-45
Defective Loans......................................................................... S-42
Definitive Certificate.................................................................. S-38
Depositor............................................................................... S-1, S-3, S-6
Determination Date...................................................................... S-12
Distributable Excess Spread............................................................. S-8, S-46
Distribution Account.................................................................... S-43
Distribution Date....................................................................... S-2, S-6
DOL..................................................................................... S-59
DTC..................................................................................... S-5, S-37, A-I-1
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Due Date................................................................................ S-43
Due Period.............................................................................. S-8, S-46
Eligible Account........................................................................ S-43
Eligible Substitute Loan................................................................ S-42
ERISA................................................................................... S-13, S-59
Euroclear............................................................................... S-5
Euroclear Operator...................................................................... S-39
Euroclear Participants.................................................................. S-39
European Depositaries................................................................... S-38
Events of Master Servicing Termination.................................................. S-53
Excess Spread........................................................................... S-8, S-46
Exemption............................................................................... S-59
FHA..................................................................................... S-1, S-37
FHA Claims.............................................................................. S-10
FHA Insurance........................................................................... S-8
FHA Insurance Amount.................................................................... S-25
FHA Insurance Coverage Insufficiency.................................................... S-50
FHA Insurance Coverage Reserve Account.................................................. S-9, S-24
FHA Loans............................................................................... S-4, S-26
FHA Premium Account..................................................................... S-10, S-49
FHA Premium Account Deposit............................................................. S-10, S-49
Financial Intermediary.................................................................. S-38
Foreclosure Advances.................................................................... S-51
Foreclosure Property.................................................................... S-51
Foreign Investors....................................................................... S-58
Global Securities....................................................................... A-I-1
Holdings................................................................................ S-57
Initial FHA Loans....................................................................... S-8
Initial FHA Premium Account Deposit..................................................... S-10, S-49
Initial Loans........................................................................... S-1, S-3
Insolvency Event........................................................................ S-53
Insurance Agreement..................................................................... S-10, S-47
Insurance Premium....................................................................... S-22
Insurer Default......................................................................... S-46
Interest Advance........................................................................ S-13, S-43
Interest Period......................................................................... S-6, S-48
Invoiced Loans.......................................................................... S-10, S-49
Keystone................................................................................ S-1, S-3
Loans................................................................................... S-1, S-3, S-26
Loan Rate............................................................................... S-4
Loan Schedule........................................................................... S-41
Lock-up................................................................................. A-I-1
Manufactured Home....................................................................... S-5, S-26
Manufactured Home Properties............................................................ S-5, S-26
Manufactured Housing Contracts.......................................................... S-5, S-26
Master Servicer......................................................................... S-3, S-6
Master Servicing Fee.................................................................... S-12
Master Servicing Fee Rate............................................................... S-12, S-52
Monthly Cut-Off Date.................................................................... S-7, S-46
Moody's................................................................................. S-14, S-61
Morgan.................................................................................. S-5
Mortgage Loans.......................................................................... S-5, S-26
Mortgaged Properties.................................................................... S-4, S-25
Norwest................................................................................. S-25
Obligors................................................................................ S-30
</TABLE>
S-63
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
OID..................................................................................... S-58
Original Aggregate Class A Principal Balance............................................ S-4, S-37
Originators............................................................................. S-6
Plan.................................................................................... S-13
Policy.................................................................................. S-1, S-3, S-10, S-37
Pool Balance............................................................................ S-3
Pre-Funded Amount....................................................................... S-11, S-48
Pre-Funding Account..................................................................... S-1, S-4, S-11, S-48
Principal Balance....................................................................... S-3
Properties.............................................................................. S-4, S-26
PTCE 95-60.............................................................................. S-60
Purchase Agreement...................................................................... S-56
Purchase Price.......................................................................... S-13, S-42
Rating Agency........................................................................... S-14, S-61
Record Date............................................................................. S-6
regular interests....................................................................... S-12, S-57
Related Documents....................................................................... S-41
Related Series Trusts................................................................... S-9, S-25
Relevant Depositary..................................................................... S-37
REMIC................................................................................... S-2, S-13, S-57
Required OC Amount...................................................................... S-47
Residual Certificates................................................................... S-13
Rules................................................................................... S-38
Seller.................................................................................. S-3, S-56
Senior Certificateholders............................................................... S-6
Senior Certificates..................................................................... S-1, S-3
Senior Interest Distribution............................................................ S-45
Single Family Certificates.............................................................. S-59
SMMEA................................................................................... S-14, S-60
Standard & Poor's....................................................................... S-14, S-61
Subsequent Loans........................................................................ S-1, S-3
Subsequent Transfer Agreement........................................................... S-26
Subsequent Transfer Date................................................................ S-11, S-26, S-48
Subservicer............................................................................. S-12, S-53
Subservicing Agreements................................................................. S-53
Subservicing Fee........................................................................ S-12, S-52
Subservicing Fee Rate................................................................... S-12, S-52
Terms and Conditions.................................................................... S-40
Title I Loans........................................................................... S-20
Title I Program......................................................................... S-37
Transfer Date........................................................................... S-11, S-26, S-47
Trigger Events.......................................................................... S-54
Trust................................................................................... S-1, S-3
Trustee................................................................................. S-3, S-12
Trustee Fee............................................................................. S-45
UCC..................................................................................... S-17
Underwriters............................................................................ S-60
Underwriting Agreement.................................................................. S-60
U.S. Person............................................................................. A-I-3
Weighted average life................................................................... S-31
</TABLE>
S-64
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered FHA Title I
Loan Asset Backed Certificates, Series 1995-6 (the 'Global Securities') will be
available only in book-entry form. Investors in the Global Securities may hold
such Global Securities through any of The Depository Trust Company ('DTC'),
CEDEL or Euroclear. The Global Securities will be tradeable as home market
instruments in both the European and U.S. domestic markets. Initial settlement
and all secondary trades will settle in same-day funds.
Secondary market trading between investors holding Global Securities
through CEDEL and Euroclear will be conducted in the ordinary way in accordance
with their normal rules and operating procedures and in accordance with
conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Improvement Loan Asset-Backed
Certificates issues.
Secondary cross-market trading between CEDEL or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of CEDEL and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, CEDEL and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Improvement Loan Asset-Backed
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through CEDEL or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no 'lock-up' or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Improvement Loan Asset-Backed Certificates issues in same-day funds.
Trading between CEDEL and/or Euroclear Participants. Secondary market
trading between CEDEL Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and CEDEL or Euroclear purchaser. When Global
Securities are to be transferred from the account of a DTC Participant to the
account of a CEDEL Participant or a Euroclear Participant, the purchaser will
send instructions to CEDEL or Euroclear through a CEDEL Participant or
A-I-1
<PAGE>
Euroclear Participant at least one business day prior to settlement. CEDEL or
Euroclear will instruct the respective Depositary, as the case may be, to
receive the Global Securities against payment. Payment will include interest
accrued on the Global Securities from and including the last coupon payment date
to and excluding the settlement date, on the basis of the actual number of days
in such accrual period and a year assumed to consist of 360 days. For
transactions settling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be system and by the clearing system, in accordance with
its usual procedures, to the CEDEL Participant's or Euroclear Participant's
account. The securities credit will appear the next day (European time) and the
cash debt will be back-valued to, and the interest on the Global Securities will
accrue from, the value date (which would be the preceding day when settlement
occurred in New York). If settlement is not completed on the intended value date
(i.e., the trade fails), the CEDEL or Euroclear cash debt will be valued instead
as of the actual settlement date.
CEDEL Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within CEDEL or Euroclear. Under this approach,
they may take on credit exposure to CEDEL or Euroclear until the Global
Securities are credited to their accounts one day later.
As an alternative, if CEDEL or Euroclear has extended a line of credit to
them, CEDEL Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon the finance settlement. Under
this procedure, CEDEL Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although this result will depend on each CEDEL Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for sending Global Securities to
the respective European Depositary for the benefit of CEDEL Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between CEDEL or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, CEDEL Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to CEDEL or Euroclear through a CEDEL Participant or Euroclear Participant at
least one business day prior to settlement. In these cases CEDEL or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions settling on the 31st of the month, payment will include
interest accrued to and excluding the first day of the following month. The
payment will then be reflected in the account of the CEDEL Participant or
Euroclear Participant the following day, and receipt of the cash proceeds in the
CEDEL Participant's or Euroclear Participant's account would be back-valued to
the value date (which would be the preceding day, when settlement occurred in
New York). Should the CEDEL Participant or Euroclear Participant have a line of
credit with its respective clearing system and elect to be in debt in
anticipation of receipt of the sale proceeds in its account, the back-valuation
will extinguish any overdraft incurred over that one-day period. If settlement
is not completed on the intended value date (i.e., the trade fails), receipt of
the cash proceeds in the CEDEL Participant's or Euroclear Participant's account
would instead be valued as of the actual settlement date.
Finally, day traders that use CEDEL or Euroclear and that purchase Global
Securities from DTC Participants for delivery to CEDEL Participants or Euroclear
Participants should note that these trades would
A-I-2
<PAGE>
automatically fail on the sale side unless affirmative action were taken. At
least three techniques should be readily available to eliminate this potential
problem:
(a) borrowing through CEDEL or Euroclear for one day (until the
purchase side of the day trade is reflected in their CEDEL or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their CEDEL or Euroclear
account in order to settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade
so that the value date for the purchase from the DTC Participant is at
least one day prior to the value date for the sale to the CEDEL Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through CEDEL or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons, unless (i) each clearing system, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or business
in the chain of intermediaries between such beneficial owner and the U.S. entity
required to withhold tax complies with applicable certification requirements and
(ii) such beneficial owner takes one of the following steps to obtain an
exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8). Beneficial owners of Global
Securities that are non-U.S. Persons can obtain a complete exemption from the
withholding tax by filing a signed Form W-8 (Certificate of Foreign Status). If
the information shown on Form W-8 changes, a new Form W-8 must be filed within
30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
4224). A non-U.S. Person, including a non-U.S. corporation or bank with a U.S.
branch, for which the interest income is effectively connected with its conduct
of a trade or business in the United States, can obtain an exemption from the
withholding tax by filing Form 4224 (Exemption from Withholding of Tax on Income
Effectively Connected with the Conduct of a Trade or Business in the United
States).
Exemption or reduced rate for non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons that are Certificate Owners residing in a country
that has a tax treaty with the United States can obtain an exemption or reduced
tax rate (depending on the treaty terms) by filing Form 1001 (Ownership,
Exemption or Reduced Rate Certificate). If the treaty provides only for a
reduced rate, withholding tax will be imposed at that rate unless the filer
alternatively files Form W-8. Form 1001 may be filed by the Certificate Owners
or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form 1001 or a Form 4224 filer, his agent,
files by submitting the appropriate form to the person through whom it holds
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term 'U.S. Person' means (i) a citizen or resident of the United
States, (ii) a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof or (iii) an estate or trust
the income of which is includible in gross income for United States tax
purposes, regardless of its source. This summary does not deal with all aspects
of U.S. Federal income tax withholding that may be relevant to foreign holders
of the Global Securities. Investors are advised to consult their own tax
advisors for specific tax advice concerning their holding and disposing of the
Global Securities.
A-I-3
<PAGE>
[This page intentionally left blank]
<PAGE>
ANNEX II
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1993
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
A-II-1
<PAGE>
[LETTERHEAD OF KPMG PEAT MARWICH LLP]
Independent Auditors' Report
The Board of Directors
Capital Markets Assurance Corporation:
We have audited the accompanying balance sheets of Capital Markets Assurance
Corporation as of December 31, 1994 and 1993 and the related statements of
income, stockholder's equity and cash flows for the years ended December 31,
1994 and 1993 and the six-month period ended December 31, 1992. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Capital Markets Assurance
Corporation as of December 31, 1994 and 1993 and the results of its operations
and its cash flows for the years ended December 31, 1994 and 1993 and for the
six-month period ended December 31, 1992, in conformity with generally accepted
accounting principles.
As discussed in note 2, the Company changed its method of accounting for
investments to adopt the provisions of the Financial Accounting Standards
Board's Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," at December 31, 1993.
/s/ KPMG Peat Marwick LLP
January 13, 1995
A-II-2
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
ASSETS
December 31 December 31
1994 1993
- --------------------------------------------------------------------------------
Investments:
Bonds at fair value (amortized cost $178,882
at December 31, 1994 and $142,885 at
December 31, 1993) $172,016 148,258
Short-term investments (at amortized cost which
approximates fair value) 2,083 5,797
Mutual funds at fair value (cost $16,434 at
December 31, 1994 and $30,818 at December 31, 1993) 14,969 30,899
- --------------------------------------------------------------------------------
Total investments 189,068 184,954
- --------------------------------------------------------------------------------
Cash 85 253
Accrued investment income 2,746 1,898
Deferred acquisition costs 24,860 15,249
Premiums receivable 3,379 1,276
Prepaid reinsurance 5,551 199
Other assets 3,754 2,811
- --------------------------------------------------------------------------------
Total assets $229,443 206,640
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Unearned premiums $25,905 10,062
Reserve for losses and loss adjustment expenses 5,191 3,762
Ceded reinsurance 1,497 638
Accounts payable and other accrued expenses 10,372 6,646
Deferred income taxes 3,599 5,442
- --------------------------------------------------------------------------------
Total liabilities 46,564 26,550
- --------------------------------------------------------------------------------
Stockholder's Equity:
Common stock 15,000 15,000
Additional paid-in capital 146,808 146,808
Unrealized (depreciation) appreciation
on investments, net of tax (5,499) 3,600
Retained earnings 26,570 14,682
- --------------------------------------------------------------------------------
Total stockholder's equity 182,879 180,090
- --------------------------------------------------------------------------------
Total liabilities and stockholder's equity $ 229,443 206,640
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
A-II-3
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Dollars in thousands)
Year Ended Year Ended Six Months Ended
December 31, 1994 December 31, 1993 December 31, 1992
- --------------------------------------------------------------------------------
Revenues:
Direct premiums written $ 43,598 24,491 7,237
Assumed premiums written 1,064 403 1,352
Ceded premiums written (11,069) (3,586) (1,628)
- --------------------------------------------------------------------------------
Net Premiums written 33,593 21,308 6,961
Increase in unearned premiums (10,490) (3,825) (708)
- --------------------------------------------------------------------------------
Net premiums earned 23,103 17,483 6,253
Net investment income 10,072 10,010 4,748
Net realized capital gains 92 1,544 182
Other income 120 354 563
- --------------------------------------------------------------------------------
Total revenues 33,387 29,391 11,746
- --------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 1,429 902 422
Underwriting and operating expenses 11,833 11,470 5,969
Policy acquisition costs 4,529 2,663 143
- --------------------------------------------------------------------------------
Total expenses 17,791 15,035 6,534
- --------------------------------------------------------------------------------
Income before income taxes 15,596 14,356 5,212
- --------------------------------------------------------------------------------
Income Taxes:
Current federal income tax 865 1,002 -
Deferred federal income tax 2,843 2,724 1,160
- --------------------------------------------------------------------------------
Total income taxes 3,708 3,726 1,160
- --------------------------------------------------------------------------------
NET INCOME $11, 888 10,630 4,052
- --------------------------------------------------------------------------------
See accompanying notes to financial statements.
A-II-4
<PAGE>
Capital Markets Assurance Corporation
Statements of Stockholder's Equity
(Dollars in thousands)
Year ended Year Ended Six months Ended
December 31, 1994 December 31, 1993 December 31, 1992
- --------------------------------------------------------------------------------
Common stock:
Balance at beginning
of period $ 15,000 15,000 2,526
Transfer from paid-in
capital - - 12,474
- --------------------------------------------------------------------------------
Balance at end of period 15,000 15,000 15,000
- --------------------------------------------------------------------------------
Additional paid-in capital:
Balance at beginning of
period 146,808 146,808 159,282
Reduction due to transfer
to common stock - - (12,474)
- --------------------------------------------------------------------------------
Balance at end of period 146,808 146,808 146,808
- --------------------------------------------------------------------------------
Unrealized (deprecation)
appreciation on investments,
net of tax:
Balance at beginning of period 3,600 - -
Unrealized (depreciation)
appreciation on investments (9,099) 3,600 -
- --------------------------------------------------------------------------------
Balance at end of year (5,499) 3,600 -
- --------------------------------------------------------------------------------
Retained earnings:
Balance at beginning of
period 14,682 4,052 -
Net income 11,888 10,630 4,052
- --------------------------------------------------------------------------------
Balance at end of period 26,570 14,682 4,052
- --------------------------------------------------------------------------------
Total stockholder's equity $ 182,879 180,090 165,860
================================================================================
See accompanying notes to financial statements.
A-II-5
<PAGE>
Capital Markets Assurance Corporation
Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended Year Ended Six Months Ended
December 31, 1994 December 31. 1993 December 31, 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,888 10,630 4,052
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Reserve for losses and loss adjustment
expenses 1,429 902 422
Unearned premiums 15,843 4,024 708
Deferred acquisition costs (9,611) (9,815) (5,434)
Depreciation 220 641 392
Amortization of bond premium and
discount 541 683 413
Premiums receivable (2,103) (432) (154)
Accrued investment income (848) (110) 266
Income taxes payable 2,611 2,872 1,079
Net realized capital gains (92) (1,544) (182)
Accounts payable and other accrued expenses 3,726 1,079 (1,925)
Other, net (5,424) (322) (832)
- ------------------------------------------------------------------------------------------------------------------------------------
Total adjustments 6,292 (2,022) (5,287)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating
activities 18,180 8,608 (1,235)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments (77,980) (139,061) (75,613)
Proceeds from sale of investments 39,967 24,395 21,241
Proceeds from maturities of investments 19,665 106,042 55,709
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash (used) provided by investing
activities (18,348) (8,624) 1,337
- ------------------------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (168) (16) 102
Cash balance at January 1, 1994 and 1993
and July 1, 1992 253 269 167
- ------------------------------------------------------------------------------------------------------------------------------------
Cash balance at December 31, 1994,
1993 and 1992 $ 85 253 269
- ------------------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow
information:
Income taxes paid $ 1,063 833 368
Tax and loss bonds purchased $ 34 47 -
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
A-II-6
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
December 31, 1994 and 1993
1) Background
Capital Markets Assurance Corporation (the "Company" or "CapMAC") is a New
York-domiciled monoline stock insurance company which engages only in the
business of financial guarantee and surety insurance. CapMAC is licensed in
50 states in addition to the District of Columbia, the Commonwealth of
Puerto Rico and the territory of Guam. CapMAC insures structured
asset-backed, corporate, municipal and other financial obligations in the
U.S. and international capital markets. CapMAC also provides financial
guarantee reinsurance for structured asset-backed, corporate, municipal
and other financial obligations written by other major insurance companies.
CapMAC's claims-paying ability is rated "Aaa" by Moody's Investors
Service, Inc. ("Moody's"), "AAA" by Standard & Poor's Corporation
("Standard & Poor's"), "AAA" by Duff & Phelps Credit Rating Co. ("Duff
& Phelps") and "AAA" by Nippon Investors Service, Inc., a Japanese
rating agency. Such ratings reflect only the views of the
respective rating agencies, are not recommendations to buy, sell or
hold securities and are subject to revision or withdrawal at any
time by such rating agencies.
CapMAC commenced operations on December 24, 1987 as a direct,
wholly-owned subsidiary of CapMAC Holdings Inc. ("Original
Holdings"), which in turn was a wholly-owned subsidiary of Citibank
(New York State) ("Citibank"), a wholly-owned subsidiary of
Citicorp. On June 25, 1992, Citibank sold Original Holdings to
CapMAC Acquisition Corp. (the "Sale") a newly formed corporation
owned by a group of institutional investors and led by Original
Holdings' management and employees and Saratoga Partners II, L.P.
The aggregate purchase price of Original Holdings was based on the
total Consolidated Stockholders' Equity as of June 25, 1992 as
defined by the Purchase Agreement. On June 26, 1992, Original
Holdings was merged into CapMAC Acquisition Corp. CapMAC
Acquisition Corp. changed its name to CapMAC Holdings Inc.
("Holdings") As a result, CapMAC is wholly owned by the new CapMAC
Holdings Inc.
In connection with the Sale, CapMAC made a special distribution
(the "Distribution") to Holdings in an aggregate amount that caused
the total of CapMAC's statutory capital and surplus to decline to
approximately $150 million. Holdings applied substantially all of
the proceeds of the Distribution to repay the debt owed to Citicorp
that was incurred in connection with the initial capitalization of
CapMAC. The Sale, including the Distribution, was approved by the
New York State Insurance Department, and the Company's triple-A
claims-paying ability rating was reaffirmed by Moody's, Standard &
Poor's, and Duff & Phelps.
2) Significant Accounting Policies
Significant accounting policies used in the preparation of the
accompanying financial statements are as follows:
a) Basis of Presentation
The accompanying financial statements are prepared on the basis
of generally accepted accounting principles ("GAAP"). Such accounting
principles differ from statutory reporting practices used by
insurance companies in reporting to state regulatory authorities.
A-II-7
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The acquisition of Original Holdings was recorded using the "Purchase
Method" of accounting. The Purchase Method of accounting requires the
assets and liabilities to be recorded at fair value. The adjustments
to the carrying value of such assets and liabilities were "pushed down"
and reflected in CapMAC's July 1, 1992 balance sheet. As a result, the
investment portfolio was marked to market. In addition, the excess of
fair value of the assets and liabilities over the purchase price was
offset against Original Holdings' intangible assets and deferred
acquisition costs.
b) Investments
At December 31, 1993, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No.115, "Accounting for
Certain Investments in Debt and Equity Securities." Under SFAS No. 115,
the Company can classify its debt and marketable equity securities in
one of three categories: trading, available-for-sale, or
held-to-maturity. Trading securities are bought and held principally
for the purpose of selling them in the near term. Held-to-maturity
securities are those securities in which the Company has the ability
and intent to hold the securities until maturity. All other securities
not included in trading or held-to-maturity are classified as
available-for-sale. As of December 31, 1994 and 1993 all of the
Company's securities have been classified as available-for-sale. Prior
to December 31, 1993, bonds and short-term investments were stated at
amortized cost. Short-term investments are those investments having a
maturity of less than one year at purchase date.
Available-for-sale securities are recorded at fair value. Fair value is
based upon quoted market prices. Unrealized holding gains and losses,
net of the related tax effect, on available-for-sale securities are
excluded from earnings and are reported as a separate component of
stockholder's equity until realized. Transfers of securities between
categories are recorded at fair value at the date of transfer.
A decline in the fair value of any available-for-sale security below
cost that is deemed other than temporary is charged to earnings
resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the
related security as an adjustment to yield using the effective interest
method. Dividend and interest income are recognized when earned.
Realized gains and losses for securities classified as
available-for-sale are included in earnings and are derived using the
FIFO (first-in, first-out) method for determining the cost of
securities sold.
c) Revenue Recognition
Premiums which are payable monthly are reflected in income when due,
net of amounts payable to reinsurers. Premiums which are payable
quarterly, semi-annually or annually are reflected in income, net of
amounts payable to reinsurers, on an equal monthly basis over the
corresponding policy term. Premiums for structured asset transactions
that are collected as a single premium at the inception of the policy
and have a term longer than one year are earned net of amounts payable
to reinsurers, on a basis proportionate to the scheduled periodic
maturity of principal and payment of interest ("debt service") to the
original total debt service insured. All
A-II-8
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
other premiums which are collected as a single premium at the inception
of the policy and have a term longer than one year are earned, net of
amounts payable to reinsurers, by allocating premium to each bond
maturity based on the principal amount and earning it straight-line
over the term of each bond maturity. For the year ended December 31,
1994, 96% of net premiums earned was attributable to premiums payable
in installments and 4% was attributable to premiums collected on an
upfront basis.
d) Deferred Acquisition Costs
Certain costs incurred, which vary with and are primarily related to
the production of new business, are deferred. These costs include
direct and indirect expenses related to underwriting, marketing and
policy issuance, rating agency fees and premium taxes. The deferred
acquisition costs are amortized over the period in proportion to
the related premium earnings.
e) Reserve for Losses and Loss Adjustment Expenses
The reserve for losses and loss adjustment expenses consists of a
supplemental loss reserve for expected levels of defaults resulting
from credit failures on currently insured issues. This supplemental
loss reserve is based on estimates of the portion of earned premiums
required to cover those claims. The supplemental loss reserve amounted
to $5,191,000 at December 31, 1994 and $3,762,000 at December 31, 1993.
A case basis loss reserve is established for insured obligations when,
in the judgement of management, a default in the timely payment of
debt service is imminent. For defaults considered temporary, a case
basis loss reserve is established in an amount equal to the present
value of the anticipated defaulted debt service payments over the
expected period of default. If the default is judged not to be
temporary, the present value of all remaining defaulted debt service
payments is recorded as a case basis loss reserve. Anticipated salvage
recoveries are considered in establishing case basis loss reserves
when such amounts are reasonably estimable. The Company has
experienced no defaults on its book of business since inception.
Management believes that no such defaults existed at December 31,
1994 and 1993.
f) Depreciation
Leasehold improvements, furniture and fixtures are being depreciated
over the lease term or useful life, whichever is shorter, using the
straight-line method.
g) Income Taxes
In February 1992, the Financial Accounting Standards Board
("FASB") issued SFAS No. 109, "Accounting for Income Taxes." SFAS
No. 109 required a change from the deferred method of accounting
for income taxes of Accounting Principles Board Opinion No. 11
("APB 11") to the asset and liability method of accounting for
income taxes. Under the asset and liability method of SFAS No. 109,
deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases.
A-II-9
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. Under SFAS No. 109, the effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Effective July 1, 1992, the Company adopted SFAS No. 109. There was no
cumulative effect as a result of making this change in the method of
accounting for income taxes.
h) Recent Accounting Pronouncement
In October 1994, the FASB issued SFAS No. 119, "Disclosure About
Derivative Financial Instruments and Fair Value of Financial
Instruments." SFAS No 119 amends SFAS Nos. 105 and 107 and provides
specific disclosure requirements for derivative instruments. SFAS No.
119 is effective for financial statements issued for fiscal years
ending after December 15, 1994. Due to the immaterial balance of
derivatives held in the Company's investment portfolio, this statement
had no effect on the notes to the financial statements.
i) Reclassifications
Certain prior year balances have been reclassified to
conform to the current year presentation.
3) Pro Forma Results of Operations
Presented below is unaudited pro forma information
relating to the results of operations for the year ended December
31, 1992. The pro forma information was prepared assuming the Sale
had occurred on January 1, 1992.
<TABLE>
<CAPTION>
Pro Forma Information
for the Year Ended
December 31, 1992
$ in thousands (Unaudited)
--------------------------------------------------------------------
<S> <C>
Revenues:
Net premiums earned $ 12,222
Net investment income 9,898
Net realized capital gains 182
Other income 965
--------------------------------------------------------------------
Total revenues 23,267
--------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses 882
Underwriting and operating expenses 11,382
Policy acquisition costs 368
--------------------------------------------------------------------
Total expenses 12,632
--------------------------------------------------------------------
Income before income taxes 10,635
Income taxes 2,397
--------------------------------------------------------------------
Net Income $ 8,238
====================================================================
</TABLE>
A-II-10
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The pro forma information reflects adjustments relating to (a) lower
investment income due to the reduction in the investment portfolio as a
result of the Distribution made in connection with the Sale; (b) higher
benefits expense due to the establishment of the Employee Stock Ownership
Plan ("ESOP"); and (c) lower policy acquisition costs due to the assumed
write-off of the deferred acquisition costs at January 1, 1992.
The pro forma information does not purport to represent what the results
of operations would actually have been if the Sale had occurred on January
1, 1992 or to be indicative of the future results of operations of the
Company.
4) Insured Portfolio
At December 31, 1994, 1993 and 1992, the principal amount of financial
obligations insured by the Company was $11.6 billion, $6.7 billion and $4.2
billion, respectively, and net of reinsurance (net principal outstanding),
was $9.4 billion, $5.6 billion and $3.7 billion, respectively, with a
remaining weighted average life of 5.0 years, 4.8 years and 6.7 years,
respectively. The Company's insured portfolio was broadly diversified by
geographic distribution and type of insured obligations, with no single
insured obligation in excess of statutory single risk limits, which are a
function of the Company's statutory qualified capital (the sum of statutory
capital and surplus and mandatory contingency reserve). At December 31,
1994, 1993 and 1992, the statutory qualified capital was approximately $170
million, $168 million and $164 million, respectively.
<TABLE>
<CAPTION>
Net Principal Outstanding
Type of Obligations Insured
($ in millions) December 31, 1994 December 31, 1993 December 31, 1992
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Consumer receivables $4,740 2,950 1,983
Trade and other corporate
obligations 4,039 2,275 1,437
Municipal/government
obligations 618 381 231
----------------------------------------------------------------------------------------------
Total $9,397 5,606 3,651
==============================================================================================
</TABLE>
At December 31, 1994, approximately 88% of the Company's insured portfolio
was comprised of structured asset-backed transactions. Under these
structures, a pool of assets covering at least 100% of the principal amount
guaranteed under its insurance contract is sold or pledged to a special
purpose bankruptcy remote entity. The Company's primary risk from such
insurance contracts is the impairment of cash flows due to delinquency or
loss on the underlying assets. The Company, therefore, evaluates all the
factors affecting past and future asset performance by studying historical
data on losses, delinquencies and recoveries of the underlying assets. Each
transaction is reviewed to ensure that an appropriate legal structure is
used to protect against the bankruptcy risk of the originator of the
assets. Along with the legal structure, an additional level of first loss
protection is also created to protect against losses due to credit or
dilution. This first level of loss protection is usually available from
reserve funds, excess cash flows, or overcollateralization. The level of
first loss protection depends upon the historical losses and dilution of
the underlying assets, but is typically several times the normal historical
loss experience for the underlying type of assets.
A-II-11
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
5) Investments
At December 31, 1994 and 1993, all of the Company's investments were
classified as available-for-sale securities. The amortized cost,
gross unrealized gains, gross unrealized losses and estimated fair
value for available-for-sale securities by major security type at
December 31, 1994 and l993, were as follows ($ in thousands):
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $4,295 - 153 4,142
Mortgage-backed securities of
U.S. government corporations
and agencies 40,973 - 2,986 37,987
Obligations of states,
municipalities and political
subdivisions 128,856 364 3,994 125,226
Corporate and asset-backed
securities 6,841 15 112 6,744
Mutual funds 16,434 - 1,465 14,969
-----------------------------------------------------------------------------------------------
Total $197,399 379 8,710 189,068
===============================================================================================
</TABLE>
<TABLE>
<CAPTION>
1993
-----------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Securities Available-for-Sale Cost Gains Losses Value
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury obligations $4,337 163 - 4,500
Mortgage-backed securities of
U.S. government corporations
and agencies 52,549 634 16 53,167
Obligations of states,
municipalities and political
subdivisions 82,142 4,569 23 86,688
Corporate and asset-backed
securities 9,654 59 13 9,700
Mutual funds 30,818 443 362 30,899
-----------------------------------------------------------------------------------------------
Total $179,500 5,868 414 184,954
-----------------------------------------------------------------------------------------------
</TABLE>
A-II-12
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The Company's investment in the mutual fund in 1994 represents an
investment in an open-end management investment company which
invests primarily in investment-grade fixed-income securities
denominated in foreign and United States currencies. In 1993, the
Company's investment in mutual funds also included an investment in
an open-end management investment company which invested primarily
in United States fixed-income securities.
The amortized cost and estimated fair value of investments in debt
securities at December 31, 1994 by contractual maturity are shown
below ($ in thousands):
<TABLE>
<CAPTION>
1994
-----------------------------------------------------------------------------------------------
Amortized Estimated
Securities Available-for-Sale Cost Fair Value
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Less than one year to maturity $ 3,548 3,549
One to five years to maturity 38,612 38,441
Five to ten years to maturity 65,703 63,162
Greater than ten years to maturity 32,129 30,960
-----------------------------------------------------------------------------------------------
Sub-total 139,992 136,112
Mortgage-backed securities 40,973 37,987
-----------------------------------------------------------------------------------------------
Total $180,965 174,099
===============================================================================================
</TABLE>
Actual maturities may differ from contractual maturities because
borrowers may call or prepay obligations with or without call or
prepayment penalties.
The change in unrealized holdings appreciation (depreciation) on
available-for-sale securities that is included in the separate
component of stockholder's equity is shown below:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ended Year Ended
$ in thousands December 31, 1994 December 31, 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Balance at beginning year $ 3,600 -
Change in unrealized
(depreciation)/appreciation (13,786) 5,455
Income tax effect 4,687 (1,855)
-----------------------------------------------------------------------------------------------
Net change (9,099) 3,600
-----------------------------------------------------------------------------------------------
Ending balances $ (5,499) 3,600
===============================================================================================
</TABLE>
No single issuer, except for investments in U.S. Treasury and U.S.
government agency securities, exceeds 10% of stockholder's equity as
of December 31, 1994.
Proceeds from sale of investment securities were approximately $40
million in 1994, $24 million in 1993 and $21 million for the six
months ended December 31, 1992. Gross realized capital gains of
$714,000, $l,621,000 and $230,000 and gross realized capital losses
of $622,000, $77,000 and $48,000 were realized on those sales in
1994 and 1993 and for the six months ended December 31, 1992, respectively.
A-II-13
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Investments include bonds having a fair value of approximately
$3,873,000 and $4,855,000 (amortized cost of $4,011,000 and
$4,474,000) which were on deposit at December 31, 1994 and 1993,
respectively, with state regulators as required by law. Investment
income was comprised of interest and dividends, net of related
expenses, and is applicable to the following sources:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
$ in thousands December 31, 1994 December 31, 1993 December 31, 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Bonds $ 9,193 7,803 3,771
Short-term investments 484 572 474
Mutual funds 579 1,801 594
Investment expenses (184) (166) (91)
-----------------------------------------------------------------------------------------------
Total $ 10,072 10,010 4,748
===============================================================================================
</TABLE>
6) Deferred Acquisition Costs
The following table reflects acquisition costs deferred and
amortized in proportion to the related premium earnings:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
$ in thousands December 31, 1994 December 31, 1993 December 31, 1992
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of period $ 15,249 5,434 -
Additions 14,140 12,478 5,577
Amortization (policy
acquisition costs) (4,529) (2,663) (143)
-----------------------------------------------------------------------------------------------
Balance at end of period $ 24,860 15,249 5,434
===============================================================================================
</TABLE>
7) Related Party Transactions - Employee Benefits
On June 25, 1992, CapMAC entered into a Service Agreement with
CapMAC Management Services Corporation, which was then a newly
formed wholly-owned subsidiary of Holdings. In 1994, CapMAC
Management Services changed its name to CapMAC Financial Services,
Inc. ("CapMAC Services"). Under the Service Agreement, CapMAC
Services has agreed to provide various services, including
underwriting, reinsurance, data processing and other services to
CapMAC in connection with the operation of CapMAC's insurance
business. CapMAC pays CapMAC Services an arm's length fee for
providing such services, but not in excess of CapMAC Services' cost
for such services. CapMAC Services incurred on behalf of CapMAC
total expenses of $11,081,000 and $9,789,000 in 1994 and 1993,
respectively, and $4,218,000 for the six months ended December 31,
1992 for such services.
A-II-14
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
CapMAC Services maintains an incentive compensation plan for its
employees. The plan is an annual discretionary bonus award based
upon Holdings' and an individual's performance. CapMAC Services also
has a health and welfare plan to cover substantially all of its
employees. CapMAC reimburses CapMAC Services for all out-of-pocket
expenses incurred by CapMAC Services in providing services to
CapMAC, including awards given under the incentive compensation plan
and benefits provided under the health and welfare plan. In 1994 and
1993 and for the six months ended December 31, 1992, the Company had
provided approximately $5,253,000, $3,528,000 and $2,081,000,
respectively, for the annual discretionary bonus plan. In connection
with the Sale, certain officers of CapMAC were granted 121,755
restricted stock units at $20 a share in respect of certain deferred
compensation. The units will be converted into shares of common
stock of Holdings upon the occurrence of certain events, including
an initial public offering of the stock of Holdings or change in
ownership of the Company, as defined by the Restricted Stock Plan
Agreement.
8) Employee Stock Ownership Plan
On June 25, 1992, Holdings adopted an ESOP to provide its employees
the opportunity to obtain beneficial interests in the stock of
Holdings through a trust (the AESOP Trust). The ESOP Trust
purchased 500,000 shares at $20 per share of Holdings' stock. The
ESOP Trust financed its purchase of common stock with a loan in the
amount of $10 million from Holdings.
CapMAC Services is required to make contributions to the ESOP Trust
which enables the ESOP Trust to service its loan. The ESOP expense
is calculated using the shares allocated method. Shares are released
for allocation to the participants and held in trust for the
employees based upon the ratio of the current year's principal and
interest payment to the sum of principal and interest payments
estimated over the life of the loan. As of December 31, 1994,
approximately 142,000 shares were allocated to the participants.
Compensation expense allocated to CapMAC related to the ESOP was
approximately $2,086,000, $1,652,000 and $1,186,000 for 1994 and
1993 and for the six months ended December 31, 1992, respectively.
9) Income Taxes
Pursuant to a tax sharing agreement with Holdings, the Company is
included in Holdings' consolidated U.S. Federal income tax return.
The Company's annual Federal income tax liability is determined by
computing its pro rata share of the consolidated group Federal
income tax liability.
As discussed in note 2, the Company adopted SFAS No. 109 as of July
1, 1992. There were no differences between deferred taxes previously
reported by the Company under APB 11 and those determined under SFAS
No. 109. Accordingly, the cumulative effect of the change in
accounting for income taxes was zero.
A-II-15
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
Federal income tax expense differed from the amount computed by applying the
U.S. Federal income tax rate of 34 percent as a result of the following:
<TABLE>
<CAPTION>
Year ended Year Ended Six Months Ended
December 31, 1994 December 31, 1993 December 31, 1992
$ in thousands Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Expected tax expense computed
at the statutory rate $ 5,303 34.0 4,881 34.0 1,772 34.0
Increase (decrease) in tax
resulting from:
Tax exempt interest (1,646) (10.6) (1,140) (7.9) (622) (11.9)
Other, net 51 0.4 (15) (0.1) 10 0.2
- ---------------------------------------------------------------------------------------------
Total Federal income
tax expense $3,708 23.8 3,726 26.0 1,160 22.3
=============================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred Federal income tax liability are as follows:
<TABLE>
<CAPTION>
$ in thousands December 31, 1994 December 31, 1993 December 31, 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Federal income tax
assets:
Unrealized capital losses $(2,833) - -
Deferred compensation (1,233) (1,133) (762)
Net operating loss - - (755)
Losses and loss adjustment
expenses (936) (1,279) (973)
Unearned premiums (762) (506) (392)
Other, net (228) (188) (88)
- ---------------------------------------------------------------------------------------------
Total gross deferred Federal
income tax assets (5,992) (3,106) (2,970)
- ---------------------------------------------------------------------------------------------
Deferred Federal income tax
liabilities:
Deferred acquisition costs 8,453 5,185 1,848
Unrealized capital gains - 1,855 -
Deferred capital gains 726 962 1,666
Other, net 412 546 320
- ---------------------------------------------------------------------------------------------
Total gross deferred Federal
income tax liabilities 9,591 8,548 3,834
- ---------------------------------------------------------------------------------------------
Net deferred Federal
income tax liability $3,599 5,442 864
=============================================================================================
</TABLE>
A-II-16
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
A valuation allowance is provided when it is more likely than not that some
portion of the deferred Federal income tax assets will not be realized.
Management believes that the deferred Federal income tax assets will be fully
realized in the future.
At December 31, 1992, the Company had a net operating loss carryforward for
Federal income tax purposes of approximately $2,200,000 which was used entirely
to offset taxable income in 1993.
10) Insurance Regulatory Restrictions
The Company is subject to insurance regulatory requirements of the State of
New York and other states in which it is licensed to conduct business.
Generally, New York insurance laws require that dividends be paid from
earned surplus and restrict the amount of dividends in any year that may be
paid without obtaining approval for such dividends from the Superintendent
of Insurance to the lower of (i) net investment income as defined or (ii)
10% of statutory surplus as of December 31 of the preceding year. No
dividends were paid during 1994 and 1993 and for the six months ended
December 31, 1992. In connection with the Sale, CapMAC had agreed with the
New York State Insurance Department to pay any dividends until June 25,
1994. Statutory surplus at December 31, 1994, 1993 and 1992 was
approximately $139,739,000, $146,439,000 and $148,006,000, respectively.
Statutory surplus differs from stockholder's equity determined under GAAP
principally due to the mandatory contingency reserve required for statutory
accounting purposes, differences in accounting for investments, and net
deferred acquisition costs provided under GAAP. Statutory net income was
$4,543,000 and $4,528,000 for the years ended December 31, 1994 and 1993,
respectively, and $222,000 for the six months ended December 31, 1992.
Statutory net income differs from net income determined under GAAP
principally due to deferred acquisition costs and deferred income taxes.
11) Commitments and Contingencies
On January 1, 1988, the Company assumed from Citibank, N.A. the obligations
of a sublease agreement for space occupied in New York that expires on June
29, 1996. On November 21, 1993, the sublease was terminated and a new lease
was negotiated which expires on November 20, 2008. CapMAC has a lease
agreement for its London office beginning October 1, 1992 and expiring
October 1, 2002. At December 31, 1994, future minimum payments under the
lease agreements are as follows:
$ in thousands Payment
- ----------------------------------------------------------------------------
1995 $ 2,192
1996 2,246
1997 2,250
1998 2,309
1999 and thereafter 29,908
- ----------------------------------------------------------------------------
Total $38,905
============================================================================
Rent expense, commercial rent taxes and electricity for 1994 and 1993 and the
six months ended December 31, 1992 amounted to $2,243,000, $2,065,000 and
$1,056,000, respectively.
A-II-17
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
CapMAC has available a $100,000,000 standby corporate liquidity facility (the
"Liquidity Facility") provided by a group of banks rated A1+ and P1 by
Standard & Poor's and Moody's, respectively. Under the Liquidity Facility,
CapMAC will be able to, subject to satisfying certain conditions, borrow funds
from time to time in order to enable it to fund any claim payments or payments
made in settlement or mitigation of claim payments under its insurance
contracts. For the years ended December 31, 1994 and 1993 and the six month
period ended December 31, 1992, no draws had been made under the Liquidity
Facility.
12) Reinsurance
In the ordinary course of business, CapMAC cedes exposure under various
treaty, pro rata and excess of loss reinsurance contracts primarily
designed to minimize losses from large risks and protect the capital and
surplus of CapMAC.
Although the reinsurance of risk does not relieve the ceding insurer of its
original liability to its policyholders, it is the industry practice of
insurers for financial statement purposes to treat reinsured risks as
though they were risks for which the ceding insurer was only contingently
liable. A contingent liability exists with respect to the aforementioned
reinsurance arrangements which may become a liability of CapMAC in the
event the reinsurers are unable to meet obligations assumed by them under
the reinsurance contracts. At December 31, 1994, 1993 and 1992, CapMAC had
no ceded loss reserves and had ceded unearned premiums of $5,551,000,
$199,000 and $4,000, respectively. As of December 31, 1993, the Company
adopted SFAS No. 113, "Accounting for Reinsurance of Short-Duration and
Long-Duration Contracts." The adoption of this SFAS had no impact on the
results of operations.
In 1994, CapMAC entered into a new Reinsurance agreement with Luxembourg
European Reinsurance LURECO S.A. ("LURECO"), a European-based reinsurer,
covering the period from April 1, 1994 through December 31, 1994. The
agreement reinsured and indemnified the Company for any loss incurred by
CapMAC during the agreement period up to the limits of the agreement. The
agreement is renewable annually at the Company's option, subject to
satisfying certain conditions.
The loss limits under the agreement for 1994 were $7 million, plus an
additional $4 million for losses in excess of 200% of CapMAC's net retained
earned premium for the agreement period. Gross ceded premiums for 1994 were
$2,075,000. No losses were ceded to the reinsurer in 1994, and the Company
has recorded return premiums in the amount of $2,000,000 as of December 31,
1994 which the Company is entitled to receive under the terms of the
contract.
In addition to its capital (including contingency reserves) and other
reinsurance available to pay claims under its insurance contracts, CapMAC
entered into a Stop Loss Reinsurance Agreement (the "Stop Loss Agreement")
on June 25, 1992 with Winterthur Swiss Insurance Company (the "Reinsurer"),
which is rated "AAA" by Standard & Poor's and "Aaa" by Moody's. The
Reinsurer will be required to pay any losses incurred by CapMAC during the
term of the Stop Loss Agreement on the insurance contracts covered under
the Stop Loss Agreement in excess of a specified amount of losses incurred
by CapMAC under such insurance contracts (such specified amount initially
being $100 million and increasing annually by an amount equal to 66-2/3%
of the increase in CapMAC's statutory capital and surplus) up to an
aggregate limit payable under the Stop Loss Agreement of $50 million.
A-II-18
<PAGE>
Capital Markets Assurance Corporation
Notes to Financial Statements
The Stop Loss Agreement's initial term was seven years and was extendable
for one-year periods, subject to early termination upon the occurrence of
certain events. At December 31, 1994, the expiration date of the Stop Loss
Agreement was extended from June 25, 2000 to June 25, 2001.
13) Disclosures About Fair Value of Financial Instruments
The following estimated fair values have been determined by the Company
using available market information and various valuation methodologies.
However, considerable judgment is necessary to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amount the Company could
realize in a current market exchange. The use of different market
assumptions and/or estimation methodologies may have a material effect on
the estimated fair value amounts.
Installment Revenue/Expense
The fair value of installment revenue is derived by calculating the present
value of the estimated future cash inflow to the Company of policies in
force having premiums net of amounts payable to reinsurers, ceding
commission and other income payable in future installments, at a discount
rate of 7% and 6% at December 31, 1994 and 1993, respectively. The amount
calculated is equivalent to the consideration that would be paid under
market conditions prevailing at the reporting dates to transfer the
Company's installment revenue-related financial guarantee business to a
third party under a reinsurance agreement. The fair value of installment
expense is an estimate of the ceding commission that would be paid to the
Company to compensate the Company for originating and servicing the
insurance contracts. In constructing estimated future cash inflows,
management makes assumptions regarding prepayments for amortizing
asset-backed securities which are consistent with relevant historical
experience. For revolving programs, assumptions are made regarding program
utilization. The actual amount of installment revenue and expense may
differ from the projections due to various factors such as renewal or early
termination of insurance contracts or different runoff patterns of
exposure.
December 31, 1994 December 31, 1993
Carrying Estimated Carrying Estimated
$ in thousands Amount Fair Value Amount Fair Value
- ----------------------------------------------------------------------------
Off-Balance-Sheet
Instruments:
Installment revenue $ - 77,705 - 54,165
Installment expense $ - 23,312 - 16,250
- ----------------------------------------------------------------------------
14) Capitalization
The Company's certificate of incorporation, as amended during 1992 to
conform to the financial guaranty law passed by the State of California,
authorizes the issuance of 15,000,000 shares of common stock, par value
$l.00 per share.
Authorized, issued and outstanding shares at December 31, 1994 and 1993
were 15,000,000 at $1.00 per share.
A-II-19
<PAGE>
CAPITAL MARKETS ASSURANCE CORPORATION
FINANCIAL STATEMENTS
MARCH 31, 1995
(Unaudited)
A-II-20
<PAGE>
Capital Markets Assurance Corporation
Balance Sheets
(Dollars in thousands)
March 31, 1995 December 31, 1994
-------------- -----------------
(Unaudited)
ASSETS
------
Investments:
Bonds at fair value (amortized cost
$181,186 at March 31, 1995 and
$178,882 at December 31, 1994)............ $179,545 172,016
Short-term investments (at amortized cost
which approximates fair value)............ 10,673 2,083
Mutual funds at fair value (cost $16,226
at March 31, 1995 and $16,434 at
December 31, 1994)........................ 15,202 14,969
-------- -------
Total investments........................ 205,420 189,068
-------- -------
Cash....................................... 614 85
Accrued investment income.................. 2,346 2,746
Deferred acquisition costs................. 27,522 24,860
Premiums receivable........................ 6,620 3,379
Prepaid reinsurance........................ 6,828 5,551
Other assets............................... 3,132 3,754
-------- -------
Total assets............................. $252,482 229,443
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
-----------------------------------
Liabilities:
Unearned premiums.......................... $ 33,980 25,905
Reserve for losses and loss adjustment
expenses.................................. 5,887 5,191
Ceded reinsurance.......................... 2,398 1,497
Accounts payable and other accrued
expenses.................................. 14,736 10,372
Deferred income taxes...................... 6,101 3,599
-------- -------
Total liabilities........................ 63,102 46,564
-------- -------
Stockholder's Equity:
Common stock.............................. 15,000 15,000
Additional paid-in capital................ 146,808 146,808
Unrealized depreciation on investments,
net of tax............................... (1,815) (5,499)
Retained earnings......................... 29,387 26,570
-------- -------
Total stockholder's equity.............. 189,380 182,879
-------- -------
Total liabilities and stockholder's
equity................................ $252,482 229,443
======== =======
See accompanying notes to financial statements.
A-II-21
<PAGE>
Capital Markets Assurance Corporation
Statements of Income
(Unaudited)
(Dollars In thousands)
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1996
------------------ ------------------
Revenues:
Direct premiums written................. $16,838 12,096
Assumed premiums written................ 154 4
Ceded premiums written.................. (3,093) (3,560)
------- ------
Net premiums written.................. 13,899 8,540
Increase in unearned premiums........... (6,798) (3,302)
------- ------
Net premiums earned................... 7,101 5,238
Net investment income................... 2,637 2,311
Net realized capital gains.............. 65 83
Other income............................ 12 16
------- ------
Total revenues........................ 9,815 7,648
------- ------
Expenses:
Losses and loss adjustment expenses..... 696 270
Underwriting and operating expenses..... 3,738 3,413
Policy acquisition costs................ 1,725 1,446
------- ------
Total expenses........................ 6,159 5,129
------- ------
Income before income taxes............ 3,656 2,519
------- ------
Income Taxes:
Current federal income tax.............. 320 316
Deferred federal income tax............. 519 239
------- ------
Total income taxes.................... 839 555
------- ------
NET INCOME............................ $ 2,817 1,964
======= ======
See accompanying notes to financial statements
A-II-22
<PAGE>
Capital Markets Assurance Corporation
Statement of Stockholder's Equity
(Unaudited)
(Dollars in thousands)
Three Months Ended
March 31, 1995
------------------
Common stock:
Balance at beginning of period........................... $ 15,000
--------
Balance at end of period............................... 15,000
--------
Additional paid-in capital:
Balance at beginning of period........................... 146,808
--------
Balance at end of period............................... 146,808
--------
Unrealized (depreciation) appreciation on
investments, net of tax:
Balance at beginning of period........................... (5,499)
Unrealized appreciation on investments................... 3,684
--------
Balance at end of period............................... (1,815)
--------
Retained earnings:
Balance at beginning of period........................... 26,570
Net income............................................... 2,817
--------
Balance at end of period............................... 29,387
--------
Total stockholder's equity............................. $189,380
========
See accompanying notes to financial statements
A-II-23
<PAGE>
Capital Markets Assurance Corporation
Statement of Cash flows
(Unaudited)
(Dollars in thousands)
Three Months Ended Three Months Ended
March 31, 1995 March 31, 1994
------------------ ------------------
Cash flows from operating activities:
Net income.............................. $ 2,817 1,964
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Reserve for losses and loss
adjustment expenses................. 696 270
Unearned premiums..................... 8,075 5,683
Deferred acquisition costs............ (2,662) (1,683)
Depreciation.......................... 43 64
Amortization of bond premium
and discount........................ 150 307
Premiums receivable................... (3,241) 197
Accrued investment income............. 400 19
Income taxes payable.................. 839 433
Net realized capital gains............ (65) (83)
Accounts payable and other
accrued expenses.................... 4,364 2,437
Other, net............................ (115) (623)
-------- ------
Total adjustments................... 8,484 7,021
-------- ------
Net cash provided by operating
activities.......................... 11,301 8,985
-------- ------
Cash flows from investing activities:
Purchases of investments................ (18,235) (56,856)
Proceeds from sale of investments....... 4,072 37,429
Proceeds from maturities of
investments........................... 3,391 10,849
-------- ------
Net cash used in investing
activities.......................... (10,772) (8,578)
-------- ------
Net increase in cash.................... 529 407
Cash balance at January 1, 1995
and 1994.............................. 85 253
-------- ------
Cash balance at March 31, 1995
and 1994............................ $ 614 660
======== ======
Supplemental disclosures of cash flow
information:
Income taxes paid....................... $ - 122
======== ======
See accompanying notes to financial statements.
A-II-24
<PAGE>
Capital Markets Assurance Corporation
Notes to Unaudited Financial Statements
March 31, 1995
1) Capital Markets Assurance Corporation ("CapMAC") is wholly owned by CapMAC
Holdings Inc., a company that is owned by a group of institutional and
other investors, including CapMAC's management and employees.
2) The March 31, 1995 financial statements of CapMAC are unaudited. In the
opinion of management, the interim financial statements reflect all
adjustments necessary for a fair presentation of financial position and
results of operations. Results for interim periods are not necessarily
indicative of results for the full year.
3) Certain prior period balances have been reclassified to conform to the
current period presentation.
A-II-25
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
'Notes') and the Asset-Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') which may be sold from time to time in one or
more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (the 'Seller') composed of (a) Primary Assets, which may include one
or more pools of (i) home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') which are either
unsecured or secured by mortgages primarily on one-to-four family residential
properties, unless otherwise specified in the related Prospectus Supplement, or
by purchase money security interests in the home improvements financed thereby
(the 'Home Improvements') and (ii) manufactured housing installment sales
contracts and installment loan agreements (the 'Manufactured Housing Contracts'
and together with the Home Improvement Contracts, the 'Contracts') secured by
either security interests in the Manufactured Homes (as defined herein) or by
mortgages on real estate on which the related Manufactured Homes are located
and/or (iii) Private Securities (as defined herein), (b) all monies due
thereunder net, if and as provided in the related Prospectus Supplement, of
certain amounts payable to the servicer of the Contracts, which servicer may
also be the Seller, specified in the related Prospectus Supplement (the
'Servicer'), and (c) certain funds, Enhancement (as defined herein) and other
assets as described herein and in the related Prospectus Supplement.
Each Series of Securities will be issued in one or more classes (each, a
'Class'). Interest on and principal of the Securities of a Series will be
payable on each Distribution Date specified in the related Prospectus
Supplement, at the times, at the rates, in the amounts and in the order of
priority set forth in the related Prospectus Supplement.
If a Series includes multiple Classes, such Classes may vary with respect to
the amount, percentage and timing of distributions of principal, interest or
both and one or more Classes may be subordinated to other Classes with respect
to distributions of principal, interest or both as described herein and in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Primary Assets and other assets comprising the Trust Fund may be
divided into one or more Asset Groups and each Class of the related Series will
evidence beneficial ownership of the corresponding Asset Group, as applicable.
The rate of reduction of the aggregate principal balance of each Class of a
Series may depend principally upon the rate of payment (including prepayments)
with respect to the Contracts or Underlying Contracts relating to the Private
Securities, as applicable. A rate of prepayment lower or higher than anticipated
will affect the yield on the Securities of a Series in the manner described
herein and in the related Prospectus Supplement. Under certain limited
circumstances described herein and in the related Prospectus Supplement, a
Series of Securities may be subject to termination or redemption under the
circumstances described herein and in the related Prospectus Supplement.
If specified in the related Prospectus Supplement, an election may be made
to treat certain assets comprising the Trust Fund for a Series as a 'real estate
mortgage investment conduit' (a 'REMIC') for federal income tax purposes. See
'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein.
FOR A DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE
CERTIFICATES, SEE PAGE 12.
NOTES OF A GIVEN SERIES REPRESENT OBLIGATIONS OF, AND CERTIFICATES OF A SERIES
EVIDENCE BENEFICIAL INTERESTS IN THE RELATED TRUST FUND ONLY AND ARE NOT
GUARANTEED BY ANY GOVERNMENTAL AGENCY OR BY THE DEPOSITOR, THE SELLER, THE
TRUSTEE, THE SERVICER OR BY ANY OF THEIR RESPECTIVE AFFILIATES OR,
UNLESS OTHERWISE SPECIFIED IN THE RELATED PROSPECTUS SUPPLEMENT, BY ANY
OTHER PERSON OR ENTITY. THE DEPOSITOR'S ONLY OBLIGATIONS WITH RESPECT
TO ANY SERIES OF SECURITIES WILL BE PURSUANT TO CERTAIN
REPRESENTATIONS AND WARRANTIES SET FORTH IN THE RELATED AGREEMENT
AS DESCRIBED HEREIN OR IN THE RELATED PROSPECTUS SUPPLEMENT. SEE
'RISK FACTORS' FOR CERTAIN FACTORS TO BE CONSIDERED IN
PURCHASING THE SECURITIES.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS OR THE PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities offered by this Prospectus and by the related Prospectus
Supplement are offered by Lehman Brothers and the other underwriters set forth
in the related Prospectus Supplement, if any, subject to prior sale, to
withdrawal, cancellation or modification of the offer without notice, to
delivery to and acceptance by Lehman Brothers and the other underwriters, if
any, and certain further conditions. Retain this Prospectus for future
reference. This Prospectus may not be used to consummate sales of the Securities
offered hereby unless accompanied by a Prospectus Supplement.
------------------------
LEHMAN BROTHERS
November 13, 1995
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Securities to be offered
hereunder will, among other things, set forth with respect to such Series of
Securities: (i) the aggregate principal amount, interest rate, and authorized
denominations of each Class of such Securities; (ii) certain information
concerning the Primary Assets, the Seller and any Servicer; (iii) the terms of
any Enhancement with respect to such Series; (iv) the terms of any insurance
related to the Primary Assets; (v) information concerning any other assets in
the related Trust Fund, including any Reserve Fund; (vi) the Final Scheduled
Distribution Date of each Class of such Securities; (vii) the method to be used
to calculate the amount of principal required to be applied to the Securities of
each Class of such Series on each Distribution Date, the timing of the
application of principal and the order of priority of the application of such
principal to the respective Classes and the allocation of principal to be so
applied; (viii) the Distribution Dates and any Assumed Reinvestment Rate (as
defined herein); (ix) additional information with respect to the plan of
distribution of such Securities; and (x) whether a REMIC election will be made
with respect to some or all of the Trust Fund for such Series. To the extent
that the terms of this Prospectus conflict or are otherwise inconsistent with
the terms of any Prospectus Supplement, the terms of such Prospectus Supplement
shall govern.
AVAILABLE INFORMATION
The Depositor is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission (the
'Commission'). Such reports and other information can be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at its Regional Offices located as
follows: Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and New York Regional Office, 75 Park Place, Room 1102, New
York, New York 10007. Copies of such material can also be obtained from the
Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO HOLDERS
Periodic and annual reports concerning the related Trust Fund for a Series
of Securities are required under the related Agreement to be forwarded to
Holders. Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. See 'THE AGREEMENTS--Reports to Holders' herein.
2
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the information with respect to each Series of Securities contained in the
Prospectus Supplement to be prepared and delivered in connection with the
offering of Securities of such Series. Capitalized terms used and not otherwise
defined herein or in the related Prospectus Supplement shall have the meanings
set forth in the 'GLOSSARY OF TERMS' herein.
<TABLE>
<S> <C>
SECURITIES OFFERED................... Asset-Backed Certificates (the
'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable
from time to time in Series pursuant to
a Pooling and Servicing Agreement or
Trust Agreement. Each Certificate of a
Series will evidence an interest in the
Trust Fund for such Series, or in an
Asset Group specified in the related
Prospectus Supplement. Notes are
issuable from time to time in Series
pursuant to an Indenture. Each Series of
Securities will consist of one or more
Classes, one or more of which may be
Classes of Compound Interest Securities,
Planned Amortization Class ('PAC')
Securities, Variable Interest
Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only
Securities, Participating Securities,
Senior Securities or Subordinate
Securities. Each Class may differ in,
among other things, the amounts
allocated to and the priority of
principal and interest payments, Final
Scheduled Distribution Dates,
Distribution Dates and interest rates.
The Securities of each Class will be
issued in fully registered form in the
denominations specified in the related
Prospectus Supplement. If so specified
in the related Prospectus Supplement,
the Securities or certain Classes of
such Securities offered thereby may be
available in book-entry form only.
DEPOSITOR............................ Lehman ABS Corporation (the 'Depositor')
was incorporated in the State of
Delaware on January 29, 1988, and is a
wholly-owned, special purpose subsidiary
of Lehman Commercial Paper Inc.
('LCPI'), which itself is a wholly-owned
subsidiary of Lehman Brothers Inc.
('Lehman Brothers'), which is a
wholly-owned subsidiary of Lehman
Brothers Holdings Inc. ('Holdings').
None of Lehman Brothers, LCPI, Holdings
nor any other affiliate of the
Depositor, the Servicer, the Trustee or
the Seller has guaranteed or is
otherwise obligated with respect to the
Securities of any Series. See 'THE
DEPOSITOR.'
INTEREST PAYMENTS.................... Interest payments on the Securities of
a Series entitled by their terms to
receive interest will be made on each
Distribution Date, to the extent set
forth in, and at the applicable rate
specified in (or determined in the
manner set forth in), the related
Prospectus Supplement. The interest rate
on Securities of a Series may be
variable or change with changes in the
rates of interest on the related
Contracts or Underlying Contracts
relating to the Private Securities, as
applicable and/or as prepayments occur
with respect to such Contracts or
Underlying Contracts, as applicable.
Interest Only Securities may be assigned
a 'Notional Amount' set forth in the
related Prospectus Supplement which is
used solely for convenience in
expressing the calculation of interest
and for certain other purposes and does
not represent the right to receive any
distributions allocable to principal.
Principal Only Securities may not be
entitled to receive any interest
payments or may be entitled to receive
only nominal interest payments. 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
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Supplement. See 'DESCRIPTION OF THE
SECURITIES--Payments of Interest.'
PRINCIPAL PAYMENTS................... All payments of principal of a Series of
Securities will be made in an aggregate
amount determined as set forth in the
related Prospectus Supplement and will
be paid at the times and will be
allocated among the Classes of such
Series in the order and amounts, and
will be applied either on a pro rata or
a random lot basis among all Securities
of any such Class, all as specified in
the related Prospectus Supplement.
FINAL SCHEDULED
DISTRIBUTION DATE
OF THE SECURITIES.................. The Final Scheduled Distribution Date
with respect to each Class of Notes is
the date no later than which principal
thereof will be fully paid and with
respect to each Class of Certificates is
the date after which no Certificates of
such Class are expected to remain
outstanding, in each case calculated on
the basis of the assumptions applicable
to such Series described in the related
Prospectus Supplement. The Final
Scheduled Distribution Date of a Class
may equal the maturity date of the
Primary Asset in the related Trust Fund
which has the latest stated maturity or
will be determined as described herein
and in the related Prospectus
Supplement.
The actual final Distribution Date of
the Securities of a Series will depend
primarily upon the rate of payment
(including prepayments, liquidations due
to default, the receipt of proceeds from
casualty insurance policies and
repurchases) of the Contracts or
Underlying Contracts relating to the
Private Securities, as applicable, in
the related Trust Fund. Unless otherwise
specified in the related Prospectus
Supplement, the actual final
Distribution Date of any Security is
likely to occur earlier and may occur
substantially earlier or may occur later
than its Final Scheduled Distribution
Date as a result of the application of
prepayments to the reduction of the
principal balances of the Securities and
as a result of defaults on the Primary
Assets. The rate of payments on the
Contracts or Underlying Contracts
relating to the Private Securities, as
applicable, in the Trust Fund for a
Series will depend on a variety of
factors, including certain
characteristics of such Contracts or
Underlying Contracts, as applicable, and
the prevailing level of interest rates
from time to time, as well as on a
variety of economic, demographic, tax,
legal, social and other factors. No
assurance can be given as to the actual
prepayment experience with respect to a
Series. See 'RISK FACTORS--Prepayment
and Yield Considerations' and
'DESCRIPTION OF THE SECURITIES--
Weighted Average Life of the Securities'
herein.
OPTIONAL TERMINATION................. One or more Classes of Securities of any
Series may be redeemed or repurchased in
whole or in part, at the Depositor's or
the Servicer's option, at such time and
under the circumstances specified in the
related Prospectus Supplement, at the
price set forth therein. If so specified
in the related Prospectus Supplement for
a Series of Securities, the Depositor,
the Servicer, or such other entity that
is specified in the related Prospectus
Supplement, may, at its option, cause an
early termination of the related Trust
Fund by repurchasing all of the Primary
Assets remaining in the Trust Fund on or
after a specified date, or on or after
such time as the aggregate principal
balance of the Securities of the Series
or the Primary Assets relating to
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
such Series, as specified in the related
Prospectus Supplement, is less than the
amount or percentage specified in the
related Prospectus Supplement. See
'DESCRIPTION OF THE SECURITIES--Optional
Redemption, Purchase or Termination.'
In addition, the Prospectus Supplement
may provide other circumstances under
which Holders of Securities of a Series
could be fully paid significantly
earlier than would otherwise be the case
if payments or distributions were solely
based on the activity of the related
Primary Assets.
THE TRUST FUND....................... The Trust Fund for a Series of
Securities will consist of one or more
of the assets described below, as
described in the related Prospectus
Supplement.
A. PRIMARY ASSETS............... The Primary Assets for a Series may
consist of any combination of the
following assets, to the extent and as
specified in the related Prospectus
Supplement. The Primary Assets will be
purchased from the Seller or may be
purchased by the Depositor in the open
market or in privately negotiated
transactions, including transactions
with entities affiliated with the
Depositor.
(1) CONTRACTS.............. Primary Assets for a Series will
consist, in whole or in part, of
Contracts. Some Contracts may be
delinquent or non-performing as
specified in the related Prospectus
Supplement. Contracts may be originated
by or acquired from an affiliate of the
Depositor and an affiliate of the
Depositor may be an obligor with respect
to any such Contracts. The Contracts
will be conventional contracts or
contracts incurred by the Federal
Housing Administration ('FHA') or
partially guaranteed by the Veterans
Administration ('VA'). To the extent
provided in the related Prospectus
Supplement, additional Contracts may be
periodically added to the Trust Fund, or
may be removed from time to time if
certain asset value tests are met, as
described in the related Prospectus
Supplement.
The 'Contracts' for a Series will
consist of (i) home improvement
installment sales contracts and
installment loan agreements (the 'Home
Improvement Contracts') and (ii)
manufactured housing installment sales
contracts and installment loan
agreements (the 'Manufactured Housing
Contracts' and together with the Home
Improvement Contracts, the 'Contracts').
Contracts may, as specified in the
related Prospectus Supplement, have
various payment characteristics,
including balloon or other irregular
payment features, and may accrue
interest at a fixed rate or an
adjustable rate.
As specified in the related Prospectus
Supplement, the Contracts may be secured
by mortgages or deeds of trust or other
similar security instruments creating a
lien on a residential property (each, a
'Mortgaged Property'), which may be
subordinated to one or more senior liens
on the Mortgaged Property, as described
in the related Prospectus Supplement. As
specified in the related Prospectus
Supplement, Contracts may be unsecured
or secured by purchase money security
interests in the Home Improvements
financed thereby and the Manufactured
Housing Contracts may be secured by
security interests in Manufactured
Homes. The Mortgaged Properties, the
Home Improvements and the Manufactured
Homes are collectively referred to
herein as the 'Properties.' </TABLE>
5
<PAGE>
<TABLE>
<S> <C>
The related Prospectus Supplement will
describe certain characteristics of the
Contracts for a Series, including,
without limitation, and to the extent
relevant: (a) the aggregate unpaid
principal balance of the Contracts (or
the aggregate unpaid principal balance
included in the Trust Fund for the
related Series) and the average
outstanding principal balance of the
Contracts; (b) the weighted average Loan
Rate on the Contracts as of the Cut-off
Date; (c) the Combined Loan-to-Value
Ratios or Loan-to-Value Ratios, as
applicable, of the Contracts, computed
in the manner described in the related
Prospectus Supplement; (d) the
percentage (by principal balance as of
the Cut-off Date) of Contracts that
accrue interest at adjustable or fixed
interest rates; (e) any enhancement
relating to the Contracts; (f) the
percentage (by principal balance as of
the Cut-off Date) of Contracts that are
secured by Mortgaged Properties, Home
Improvements, Manufactured Homes, the
real estate on which the Manufactured
Homes are located or are unsecured; (g)
the geographic distribution of the
Properties securing the Contracts; (h)
the use and type of each Property
securing the Contracts; (i) the lien
priority of the Contracts and (j) the
delinquency status and year of
origination of the Contracts.
(2) PRIVATE SECURITIES..... Primary Assets for a Series may consist,
in whole or in part, of Private
Securities which include (a)
pass-through certificates representing
beneficial interests in loans of the
type that would otherwise be eligible to
be Contracts (the 'Underlying
Contracts') or (b) collateralized
obligations secured by Underlying
Contracts. Such pass-through
certificates or collateralized
obligations will have previously been
(a) offered and distributed to the
public pursuant to an effective
registration statement or (b) purchased
in a transaction not involving any
public offering from a person who is not
an affiliate of the issuer of such
securities at the time of sale (nor an
affiliate thereof at any time during the
three preceding months); provided a
period of three years has elapsed since
the later of the date the securities
were acquired from the issuer or an
affiliate thereof. Although individual
Underlying Contracts may be insured or
guaranteed by the United States or an
agency or instrumentality thereof, they
need not be, and the Private Securities
themselves will not be so insured or
guaranteed. See 'THE TRUST
FUNDS--Private Securities.' Unless
otherwise specified in the Prospectus
Supplement relating to a Series of
Securities, payments on the Private
Securities will be distributed directly
to the Trustee as registered owner of
such Private Securities.
The related Prospectus Supplement for a
Series will specify (such disclosure may
be on an approximate basis, as described
above and will be as of the date
specified in the related Prospectus
Supplement) to the extent relevant and
to the extent such information is
reasonably available to the Depositor
and the Depositor reasonably believes
such information to be reliable: (i) the
aggregate approximate principal amount
and type of any Private Securities to be
included in the Trust Fund for such
Series; (ii) certain characteristics of
the Underlying Contracts including (A)
the payment features of such Underlying
Contracts (i.e., whether they are fixed
rate or adjustable rate and whether they
provide for fixed level payments,
negative amortization or other payment
features), (B) the approximate aggregate
principal amount of such Underlying
Contracts which are insured or
guaranteed by a governmental entity, (C)
the servicing fee or range of servicing
fees with respect to such Underlying
Contracts, (D) the minimum and maximum
stated maturities of such Underlying
Contracts at
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
origination, (E) the lien priority and
the credit utilization rates, if any, of
such Underlying Contracts, and (F) the
delinquency status and year of
origination of such Underlying
Contracts; (iii) the maximum original
term-to-stated maturity of the Private
Securities; (iv) the weighted average
term-to-stated maturity of the Private
Securities; (v) the pass-through or
certificate rate or ranges thereof for
the Private Securities; (vi) the sponsor
or depositor of the Private Securities
(the 'PS Sponsor'), the servicer of the
Private Securities (the 'PS Servicer')
and the trustee of the Private
Securities (the 'PS Trustee'); (vii)
certain characteristics of enhancement,
if any, such as reserve funds, insurance
policies, letters of credit or
guarantees, relating to the Contracts
underlying the Private Securities, or to
such Private Securities themselves;
(viii) the terms on which the Underlying
Contracts may, or are required to, be
repurchased prior to stated maturity;
and (ix) the terms on which substitute
Underlying Contracts may be delivered to
replace those initially deposited with
the PS Trustee. See 'THE TRUST
FUNDS--Additional Information' herein.
B. COLLECTION AND
DISTRIBUTION
ACCOUNTS................... Unless otherwise provided in the related
Prospectus Supplement, all payments on
or with respect to the Primary Assets
for a Series will be remitted directly
to an account (the 'Collection Account')
to be established for such Series with
the Trustee or the Servicer, in the name
of the Trustee. Unless otherwise
provided in the related Prospectus
Supplement, the Trustee shall be
required to apply a portion of the
amount in the Collection Account,
together with reinvestment earnings from
eligible investments specified in the
related Prospectus Supplement, to the
payment of certain amounts payable to
the Servicer under the related Agreement
and any other person specified in the
Prospectus Supplement, and to deposit a
portion of the amount in the Collection
Account into a separate account (the
'Distribution Account') to be
established for such Series, each in the
manner and at the times established in
the related Prospectus Supplement. All
amounts deposited in such Distribution
Account will be available, unless
otherwise specified in the related
Prospectus Supplement, for (i)
application to the payment of principal
of and interest on such Series of
Securities on the next Distribution
Date, (ii) the making of adequate
provision for future payments on certain
Classes of Securities and (iii) any
other purpose specified in the related
Prospectus Supplement. After applying
the funds in the Collection Account as
described above, any funds remaining in
the Collection Account may be paid over
to the Servicer, the Depositor, any
provider of Enhancement with respect to
such Series (an 'Enhancer') or any other
person entitled thereto in the manner
and at the times established in the
related Prospectus Supplement.
ENHANCEMENT.......................... If stated in the Prospectus Supplement
relating to a Series, the Depositor will
obtain an irrevocable letter of credit,
surety bond, certificate insurance
policy, insurance policy or other form
of credit support (collectively,
'Enhancement') in favor of the Trustee
on behalf of the Holders of such Series
and any other person specified in such
Prospectus Supplement from an
institution acceptable to the rating
agency or agencies identified in the
related Prospectus Supplement as rating
such Series of Securities (collectively,
the 'Rating Agency') for the purposes
specified in such Prospectus Supplement.
The
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Enhancement will support the payments
on the Securities and may be used for
other purposes, to the extent and under
the conditions specified in such
Prospectus Supplement. See
'ENHANCEMENT.'
Enhancement for a Series may include one
or more of the following types of
Enhancement, or such other type of
Enhancement specified in the related
Prospectus Supplement.
A. SUBORDINATE
SECURITIES................. If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of one or more Classes of
Subordinate Securities. The rights of
Holders of such Subordinate Securities
to receive distributions on any
Distribution Date will be subordinate in
right and priority to the rights of
holders of Senior Securities of the
Series, but only to the extent described
in the related Prospectus Supplement.
B. INSURANCE.................... If stated in the related Prospectus
Supplement, Enhancement for a Series may
consist of special hazard insurance
policies, bankruptcy bonds and other
types of insurance supporting payments
on the Securities.
C. RESERVE FUNDS................ If stated in the Prospectus Supplement,
the Depositor may deposit cash, a letter
or letters of credit, short-term
investments, or other instruments
acceptable to the Rating Agency in one
or more reserve funds to be established
in the name of the Trustee (each, a
'Reserve Fund'), which will be used, as
specified in such Prospectus Supplement,
by the Trustee to make required payments
of principal of or interest on the
Securities of such Series, to make
adequate provision for future payments
on such Securities or for any other
purpose specified in the Agreement, with
respect to such Series, to the extent
that funds are not otherwise available.
In the alternative or in addition to
such deposit, a Reserve Fund for a
Series may be funded through application
of all or a portion of the excess cash
flow from the Primary Assets for such
Series, to the extent described in the
related Prospectus Supplement.
D. MINIMUM PRINCIPAL
PAYMENT AGREEMENT.......... If stated in the Prospectus Supplement
relating to a Series of Securities, the
Depositor will enter into a minimum
principal payment agreement (the
'Minimum Principal Payment Agreement')
with an entity meeting the criteria of
the Rating Agency, pursuant to which
such entity will provide funds in the
event that aggregate principal payments
on the Primary Assets for such Series
are not sufficient to make certain
payments, as provided in the related
Prospectus Supplement. See
'ENHANCEMENT--Minimum Principal Payment
Agreement.'
E. DEPOSIT
AGREEMENT.................. If stated in the Prospectus Supplement,
the Depositor and the Trustee will enter
into a guaranteed investment contract or
an investment agreement (the 'Deposit
Agreement') pursuant to which all or a
portion of amounts held in the
Collection Account, the Distribution
Account or in any Reserve Fund will be
invested with the entity specified in
such Prospectus Supplement. The Trustee
will be entitled to withdraw amounts so
invested, plus interest at a rate equal
to the Assumed Reinvestment Rate, in the
manner specified in the Prospectus
Supplement. See 'ENHANCEMENT--Deposit
Agreement.'
SERVICING............................ The Servicer will be responsible for
servicing, managing and making
collections on the Contracts for a
Series. In addition, the Servicer, if so
specified in the related Prospectus
Supplement, will act as custodian and
will be responsible for maintaining
custody of the Contracts and </TABLE>
8
<PAGE>
<TABLE>
<S> <C>
related documentation on behalf of the
Trustee. Advances with respect to
delinquent payments of principal or
interest on a Contract will be made by
the Servicer only to the extent
described in the related Prospectus
Supplement. Such advances will be
intended to provide liquidity only and,
unless otherwise specified in the
related Prospectus Supplement,
reimbursable to the Servicer from
scheduled payments of principal and
interest, late collections, or from the
proceeds of liquidation of the related
Contracts or from other recoveries
relating to such Contracts (including
any insurance proceeds or payments from
other credit support). In performing
these functions, the Servicer will
exercise the same degree of skill and
care that it customarily exercises with
respect to similar receivables or
Contracts owned or serviced by it. Under
certain limited circumstances, the
Servicer may resign or be removed, in
which event either the Trustee or a
third-party servicer will be appointed
as successor servicer. The Servicer will
receive a periodic fee as servicing
compensation (the 'Servicing Fee') and
may, as specified herein and in the
related Prospectus Supplement, receive
certain additional compensation. See
'SERVICING OF CONTRACTS--Servicing
Compensation and Payment of Expenses'
herein.
FEDERAL INCOME
TAX CONSIDERATIONS
A. DEBT SECURITIES AND
REMIC RESIDUAL
SECURITIES................. If (i) an election is made to treat all
or a portion of a Trust Fund for a
Series as a 'real estate mortgage
investment conduit' (a 'REMIC') or (ii)
so provided in the related Prospectus
Supplement, a Series of Securities will
include one or more Classes of taxable
debt obligations under the Internal
Revenue Code of 1986, as amended (the
'Code'). Stated interest with respect to
such Classes of Securities will be
reported by a Holder in accordance with
the Holder's method of accounting except
that, in the case of Securities
constituting 'regular interests' in a
REMIC ('Regular Interests'), such
interest will be required to be reported
on the accrual method regardless of a
Holder's usual method of accounting.
Securities that are Compound Interest
Securities, Zero Coupon Securities or
Interest Only Securities will, and
certain other Classes of Securities may,
be issued with original issue discount
that is not de minimis. In such cases,
the Holder will be required to include
original issue discount in gross income
as it accrues, which may be prior to the
receipt of cash attributable to such
income. If a Security is issued at a
premium, the holder may be entitled to
make an election to amortize such
premium on a constant yield method.
In the case of a REMIC election, a
Class of Securities may be treated as
REMIC 'residual interests' ('Residual
Interests'). A holder of a Residual
Interest will be required to include in
its income its pro rata share of the
taxable income of the REMIC. In certain
circumstances, the holder of a Residual
Interest may have REMIC taxable income
or tax liability attributable to REMIC
taxable income for a particular period
in excess of cash distributions for such
period or have an after-tax return that
is less than the after-tax return on
comparable debt instruments. In
addition, a portion (or, in some cases,
all) of the income from a Residual
Interest (i) except in certain
circumstances with respect to a Holder
classified as a thrift institution under
the Code, may not be subject to offset
by losses from other activities, (ii)
for a
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
Holder that is subject to tax under the
Code on unrelated business taxable
income, may be treated as unrelated
business taxable income and (iii) for a
foreign holder, may not qualify for
exemption from or reduction of
withholding. In addition, (i) Residual
Interests are subject to transfer
restrictions and (ii) certain transfers
of Residual Interests will not be
recognized for federal income tax
purposes. Further, individual holders
are subject to limitations on the
deductibility of expenses of the REMIC.
See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.'
B. NON-REMIC
PASS-THROUGH
SECURITIES................. If so specified in the related
Prospectus Supplement, the Trust Fund
for a Series will be treated as a
grantor trust and will not be classified
as an association taxable as a
corporation for federal income tax
purposes and Holders of Securities of
such Series ('Pass-Through Securities')
will be treated as owning directly
rights to receive certain payments of
interest or principal, or both, on the
Primary Assets held in the Trust Fund
for such Series. All income with respect
to a Stripped Security (as defined
herein) will be accounted for as
original issue discount and, unless
otherwise specified in the related
Prospectus Supplement, will be reported
by the Trustee on an accrual basis,
which may be prior to the receipt of
cash associated with such income.
The holder of a Pass-Through Security
must include in income its share of all
income of the Trust Fund to the extent
such income is allocable to it and may,
subject to certain limitations for
individual Holders, deduct its share of
all expenses of the Trust Fund. See
'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS.'
C. OWNER TRUST
SECURITIES................. If so specified in the Prospectus
Supplement, the Trust Fund will be
treated as a partnership for purposes of
federal and state income tax. Each
Noteholder, by the acceptance of a Note
of a given series, will agree to treat
such Note as indebtedness, and each
Certificateholder, by the acceptance of
a Certificate of a given series, will
agree to treat the related Trust as a
partnership in which such
Certificateholder is a partner for
federal income and state tax purposes.
Alternative characterizations of such
Trust and such Certificates are
possible, but would not result in
materially adverse tax consequences to
Certificateholders. See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS.'
ERISA CONSIDERATIONS................. A fiduciary of any employee benefit
plan subject to the Employee Retirement
Income Security Act of 1974, as amended
('ERISA'), or the Code should carefully
review with its own legal advisors
whether the purchase or holding of
Securities could give rise to a
transaction prohibited or otherwise
impermissible under ERISA or the Code.
See 'ERISA CONSIDERATIONS.'
LEGAL INVESTMENT..................... Unless otherwise specified in the
related Prospectus Supplement,
Securities of each Series offered by
this Prospectus and the related
Prospectus Supplement will not
constitute 'mortgage related securities'
under the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA').
Investors whose investment authority is
subject to legal restrictions should
consult their own legal advisors to
determine whether and to what extent the
Securities constitute legal investments
for them. See 'LEGAL INVESTMENT.'
</TABLE>
10
<PAGE>
<TABLE>
<S> <C>
USE OF PROCEEDS...................... The Depositor will use the net proceeds
from the sale of each Series for one or
more of the following purposes: (i) to
purchase the related Primary Assets,
(ii) to repay indebtedness which has
been incurred to obtain funds to acquire
such Primary Assets, (iii) to establish
any Reserve Funds described in the
related Prospectus Supplement and (iv)
to pay costs of structuring and issuing
such Securities, including the costs of
obtaining Enhancement, if any. If so
specified in the related Prospectus
Supplement, the purchase of the Primary
Assets for a Series may be effected by
an exchange of Securities with the
Seller of such Primary Assets. See 'USE
OF PROCEEDS.'
RATINGS.............................. It will be a requirement for issuance of
any Series that the Securities offered
by this Prospectus and the related
Prospectus Supplement be rated by at
least one Rating Agency in one of its
four highest applicable rating
categories. The rating or ratings
applicable to Securities of each Series
offered hereby and by the related
Prospectus Supplement will be as set
forth in the related Prospectus
Supplement. A securities rating should
be evaluated independently of similar
ratings on different types of
securities. A securities rating does not
address the effect that the rate of
prepayments on Contracts or Underlying
Contracts relating to Private
Securities, as applicable, for a Series
may have on the yield to investors in
the Securities of such Series. See 'RISK
FACTORS--Rating of Securities.'
</TABLE>
11
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. Lehman Brothers, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in the
Securities, but have no obligation to do so.
Limited Assets. The Depositor does not have, nor is it expected to have,
any significant assets. The Securities of a Series will be payable solely from
the assets of the Trust Fund for such Securities. There will be no recourse to
the Depositor or any other person for any default on the Notes or any failure to
receive distributions on the Certificates. Further, unless otherwise stated in
the related Prospectus Supplement, at the times set forth in the related
Prospectus Supplement, certain Primary Assets and/or any balance remaining in
the Collection Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto and
will no longer be available for making payments to Holders. Consequently,
holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Primary Assets and
such other assets securing a Series of Notes, including any Enhancement, were to
become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Enhancement. Although such Enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such Enhancement will be limited, as set forth in the
related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See 'ENHANCEMENT.'
Prepayment and Yield Considerations. The yield to maturity experienced by
a holder of Securities may be affected by the rate of payment of principal of
the Contracts or Underlying Contracts relating to the Private Securities, as
applicable. The timing of principal payments of the Securities of a Series will
be affected by a number of factors, including the following: (i) the extent of
prepayments of the Contracts or Underlying Contracts relating to the Private
Securities, as applicable, which prepayments may be influenced by a variety of
factors, (ii) the manner of allocating principal payments among the Classes of
Securities of a Series as specified in the related Prospectus Supplement and
(iii) the exercise by the party entitled thereto of any right of optional
termination. See 'DESCRIPTION OF THE SECURITIES--Weighted Average Life of
Securities.' Prepayments may also result from repurchases of Contracts or
Underlying Contracts, as applicable, due to material breaches of the Seller's or
the Depositor's warranties.
12
<PAGE>
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
Nature of Mortgages; Properties. Since the Mortgages are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the Mortgaged 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 at or prior to the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder. The Trust Fund will not have any source of funds to
satisfy the senior mortgages or make payments due to the senior mortgagees.
There are several factors that could adversely affect the value of
Properties such that the outstanding balance of the related Contract, together
with any senior financing on the related Mortgaged Property, if applicable,
would equal or exceed the value of the Properties. Among the factors that could
adversely affect the value of the Properties are an overall decline in the
residential real estate market in the areas in which the Properties are located
or a decline in the general condition of the Properties as a result of failure
of borrowers to maintain adequately the Properties or of natural disasters that
are not necessarily covered by insurance, such as earthquakes and floods. Any
such decline could extinguish the value of a junior interest in Property before
having any effect on the related senior interest therein. If such a decline
occurs, the actual rates of delinquencies, foreclosure and losses on the junior
Contracts could be higher than those currently experienced in the mortgage
lending industry in general.
Environmental Risks. Real property pledged as security to a lender may be
subject to certain environmental risks. Under the laws of certain states,
contamination of a property may give rise to a lien on the property to assure
the costs of clean-up. In several states, such a lien has priority over the lien
of an existing mortgage or owner's interest against such property. In addition,
under the laws of some states and under the federal Comprehensive Environmental
Response, Compensation, and Liability Act of 1980 ('CERCLA'), a lender may be
liable, as an 'owner' or 'operator,' for costs of addressing releases or
threatened releases of hazardous substances that require remedy at a property,
if agents or employees of the lender have become sufficiently involved in the
operations of the borrower, regardless of whether or not the environmental
damage or threat was caused by a prior owner. A lender also risks such liability
on foreclosure of a Mortgaged Property.
Certain Other Legal Considerations Regarding the Contracts. Applicable
state laws generally regulate interest rates and other charges and require
certain disclosures. In addition, other state laws, public policy and general
principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Contracts. 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 Servicer to
collect all or part of the principal of or interest on the Contracts, may
entitle the borrower to a refund of amounts previously paid and, in addition,
could subject the owner of the Contract to damages and administrative
enforcement.
The Contracts are also subject to Federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms of the Contracts;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
13
<PAGE>
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust to damages and
administrative enforcement. The Loans may be subject to the Home Ownership and
Equity Protection Act of 1994 (the 'Act') which amended the Truth in Lending Act
as it applies to mortgages subject to the Act. The Act requires certain
additional disclosures, specifies the timing of such disclosures and limits or
prohibits inclusion of certain provisions in mortgages subject to the Act. The
Act also provides that any purchaser or assignee of a mortgage covered by the
Act is subject to all of the claims and defenses which the borrower could assert
against the original lender. The maximum damages that may be recovered under the
Act from an assignee is the remaining amount of indebtedness plus the total
amount paid by the borrower in connection with the Loan. If the Trust Fund
includes Loans subject to the Act, it will be subject to all of the claims and
defenses which the borrower could assert against the Seller. Any violation of
the Act which would result in such liability would be a breach of the Seller's
representations and warranties, and the Seller would be obligated to cure,
repurchase or, if permitted by the Agreement, substitute for the Loan in
question. See 'CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS' herein.
The Contracts are also subject to the Preservation of Consumers' Claims and
Defenses regulations of the Federal Trade Commission and other similar federal
and state statutes and regulations (collectively, the 'Holder in Due Course
Rules'), which protect the homeowner from defective craftsmanship or incomplete
work by a contractor. These laws permit the obligor to withhold payment if the
work does not meet the quality and durability standards agreed to by the
homeowner and the contractor. The Holder in Due Course Rules have the effect of
subjecting any assignee of the seller in a consumer credit transaction to all
claims and defenses which the obligor in the credit sale transaction could
assert against the seller of the goods.
Rating of the Securities. It will be a condition to the issuance of a
Series of Securities that they be rated in one of the four highest rating
categories by the Rating Agency identified in the related Prospectus Supplement.
Any such rating would be based on, among other things, the adequacy of the value
of the Primary Assets and any Enhancement with respect to such Series. Such
rating should not be deemed a recommendation to purchase, hold or sell
Securities, inasmuch as it does not address market price or suitability for a
particular investor. There is also no assurance that any such rating will remain
in effect for any given period of time or may not be lowered or withdrawn
entirely by the Rating Agency if in its judgment circumstances in the future so
warrant. In addition to being lowered or withdrawn due to any erosion in the
adequacy of the value of the Primary Assets, such rating might also be lowered
or withdrawn, among other reasons, because of an adverse change in the financial
or other condition of an Enhancer or a change in the rating of such Enhancer's
long term debt.
Other Considerations. There is no assurance that the market value of the
Primary Assets or any other assets for a Series will at any time be equal to or
greater than the aggregate principal amount of the Securities of such Series
then outstanding, plus accrued interest thereon. Moreover, upon an event of
default under the Indenture for a Series of Notes and a sale of the assets in
the Trust Fund or upon a sale of the assets of a Trust Fund for a Series of
Certificates, the Trustee, the Servicer, if any, the Enhancer and any other
service provider specified in the related Prospectus Supplement generally will
be entitled to receive the proceeds of any such sale to the extent of unpaid
fees and other amounts owing to such persons under the related Agreement prior
to distributions to holders of Securities. Upon any such sale, the proceeds
thereof may be insufficient to pay in full the principal of and interest on the
Securities of such Series.
Liquidation expenses with respect to defaulted 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 loan having a small remaining principal balance as it would in the
case of a defaulted loan having a larger principal balance, the amount realized
after expenses of liquidation would be smaller as a percentage of the
outstanding principal balance of the smaller loan than would be the case with a
larger loan. Because the average outstanding principal balances of the Loans are
small relative to the size of the loans in a typical pool of first mortgages,
realizations net of liquidation expenses on defaulted Loans may also be smaller
as a percentage of the principal amount of the Loans than would such net
realizations in the case of a typical pool of first mortgage loans.
14
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account and, net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the related Servicer and
any other person specified in the Prospectus Supplement, will thereafter be
deposited into the Distribution Account and will be available to make payments
on Securities of such Series on the next Distribution Date, as the case may be.
See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
VALUATION OF THE PRIMARY ASSETS
If specified in the related Prospectus Supplement for a Series of Notes,
each Primary Asset included in the related Trust Fund for a Series will be
assigned an initial 'Asset Value.' Unless otherwise specified in the related
Prospectus Supplement, at any time the Asset Value of the Primary Assets will be
equal to the product of
15
<PAGE>
the Asset Value Percentage as set forth in the Indenture and the lesser of (a)
the stream of remaining regularly scheduled payments on the Primary Assets, net,
unless otherwise provided in the related Prospectus Supplement, of certain
amounts payable as expenses, together with income earned on each such scheduled
payment received through the day preceding the next Distribution Date at the
Assumed Reinvestment Rate, if any, discounted to present value at the highest
interest rate on the Notes of such Series over periods equal to the interval
between payments on the Notes, and (b) the then principal balance of the Primary
Assets. Unless otherwise specified in the related Prospectus Supplement, the
initial Asset Value of the Primary Assets will be at least equal to the
principal amount of the Notes of the related Series at the date of issuance
thereof.
The 'Assumed Reinvestment Rate', if any, for a Series will be the highest
rate permitted by the Rating Agency or a rate insured by means of a surety bond,
guaranteed investment contract, Deposit Agreement or other arrangement
satisfactory to the Rating Agency. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set forth the terms of such
arrangement.
PAYMENTS OF INTEREST
The Securities of each Class by their terms entitled to receive interest
will bear interest (calculated, unless otherwise specified in the related
Prospectus Supplement, on the basis of a 360-day year of twelve 30-day months)
from the date and at the rate per annum specified, or calculated in the method
described, in the related Prospectus Supplement. Interest on such Securities of
a Series will be payable on the Distribution Date specified in the related
Prospectus Supplement. The rate of interest on Securities of a Series may be
variable or may change with changes in the annual percentage rates of the
Contracts or Underlying Contracts relating to the Private Securities, as
applicable included in the related Trust Fund and/or as prepayments occur with
respect to such Contracts or Underlying Contracts, as applicable. Principal Only
Securities may not be entitled to receive any interest distributions or may be
entitled to receive only nominal interest distributions. Any interest on Zero
Coupon Securities that is not paid on the related Distribution Date will accrue
and be added to the principal thereof on such Distribution Date.
Interest payable on the Securities on a Distribution Date will include all
interest accrued during the period specified in the related Prospectus
Supplement. In the event interest accrues during the calendar month preceding a
Distribution Date, the effective yield to Holders will be reduced from the yield
that would otherwise be obtainable if interest payable on the Securities were to
accrue through the day immediately preceding such Distribution Date.
PAYMENTS OF PRINCIPAL
On each Distribution Date for a Series, principal payments will be made to
the holders of the Securities of such Series on which principal is then payable,
to the extent set forth in the related Prospectus Supplement. Such payments will
be made in an aggregate amount determined as specified in the related Prospectus
Supplement and will be allocated among the respective Classes of a Series in the
manner, at the times and in the priority (which may, in certain cases, include
allocation by random lot) set forth in the related Prospectus Supplement.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date with respect to each Class of Notes
is the date no later than which principal thereof will be fully paid and with
respect to each Class of a Series of Certificates will be the date on which the
entire aggregate principal balance of such Class is expected to be reduced to
zero, in each case calculated on the basis of the assumptions applicable to such
Series described in the related Prospectus Supplement. The Final Scheduled
Distribution Date for each Class of a Series will be specified in the related
Prospectus Supplement. Since payments on the Primary Assets will be used to make
distributions in reduction of the outstanding principal amount of the
Securities, it is likely that the actual final Distribution Date of any such
Class will occur earlier, and may occur substantially earlier, than its Final
Scheduled Distribution Date. Furthermore, with respect to a Series of
Certificates, unless otherwise specified in the related Prospectus Supplement,
as a result of delinquencies, defaults and liquidations of the Primary Assets in
the Trust Fund, the actual final Distribution Date of any Certificate may occur
later than its Final Scheduled Distribution Date. No assurance can be given as
to the actual prepayment experience with respect to a Series. See 'Weighted
Average Life of the Securities' below.
16
<PAGE>
SPECIAL REDEMPTION
If so specified in the Prospectus Supplement relating to a Series of
Securities having other than monthly Distribution Dates, one or more Classes of
Securities of such Series may be subject to special redemption, in whole or in
part, on the day specified in the related Prospectus Supplement (a 'Special
Redemption Date') if, as a consequence of prepayments on the Contracts or
Underlying Contracts, as applicable, relating to such Securities or low yields
then available for reinvestment, the entity specified in the related Prospectus
Supplement determines, based on assumptions specified in the applicable
Agreement, that the amount available for the payment of interest that will have
accrued on such Securities (the 'Available Interest Amount') through the
designated interest accrual date specified in the related Prospectus Supplement
is less than the amount of interest that will have accrued on such Securities to
such date. In such event and as further described in the related Prospectus
Supplement, the Trustee will redeem a principal amount of outstanding Securities
of such Series as will cause the Available Interest Amount to equal the amount
of interest that will have accrued through such designated interest accrual date
for such Series of Securities outstanding immediately after such redemption.
OPTIONAL REDEMPTION, PURCHASE OR TERMINATION
The Depositor or the Servicer may, at its option, redeem, in whole or in
part, one or more Classes of Notes or purchase one or more Classes of
Certificates of any Series, on any Distribution Date under the circumstances, if
any, specified in the Prospectus Supplement relating to such Series.
Alternatively, if so specified in the related Prospectus Supplement for a Series
of Certificates, the Depositor, the Servicer, or another entity designated in
the related Prospectus Supplement may, at its option, cause an early termination
of a Trust Fund by repurchasing all of the Primary Assets from such Trust Fund
on or after a date specified in the related Prospectus Supplement, or on or
after such time as the aggregate outstanding principal amount of the
Certificates or Primary Assets, as specified in the related Prospectus
Supplement, is less than the amount or percentage specified in the related
Prospectus Supplement. Notice of such redemption, purchase or termination must
be given by the Depositor or the Trustee prior to the related date. The
redemption, purchase or repurchase price will be set forth in the related
Prospectus Supplement. If specified in the related Prospectus Supplement, in the
event that a REMIC election has been made, the Trustee shall receive a
satisfactory opinion of counsel that the optional redemption, purchase or
termination will be conducted so as to constitute a 'qualified liquidation'
under Section 860F of the Code.
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid significantly
earlier than would otherwise be the case if payments or distributions were
solely based on the activity of the related Primary Assets.
WEIGHTED AVERAGE LIFE OF THE SECURITIES
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of principal of such
security will be repaid to the investor. Unless otherwise specified in the
related Prospectus Supplement, the weighted average life of the Securities of a
Class will be influenced by the rate at which the amount financed under the
Contracts or Underlying Contracts relating to the Private Securities, as
applicable, included in the Trust Fund for a Series is paid, which may be in the
form of scheduled amortization or prepayments.
Prepayments on loans and other receivables can be measured relative to a
prepayment standard or model. The Prospectus Supplement for a Series of
Securities will describe the prepayment standard or model, if any, used and may
contain tables setting forth the projected weighted average life of each Class
of Securities of such Series and the percentage of the original principal amount
of each Class of Securities of such Series that would be outstanding on
specified Distribution Dates for such Series based on the assumptions stated in
such Prospectus Supplement, including assumptions that prepayments on the
Contracts or Underlying Contracts relating to the Private Securities, as
applicable, included in the related Trust Fund are made at rates corresponding
to various percentages of the prepayment standard or model specified in such
Prospectus Supplement.
There is, however, no assurance that prepayment of the Contracts or
Underlying Contracts relating to the Private Securities, as applicable, included
in the related Trust Fund will conform to any level of any prepayment standard
or model specified in the related Prospectus Supplement. The rate of principal
prepayments on pools of loans is influenced by a variety of economic,
demographic, geographic, legal, tax, social and other factors.
17
<PAGE>
The rate of prepayments of conventional housing loans and other receivables
has fluctuated significantly in recent years. In general, however, if prevailing
interest rates fall significantly below the interest rates on the Contracts or
Underlying Contracts relating to the Private Securities, as applicable, for a
Series, such contracts are likely to prepay at rates higher than if prevailing
interest rates remain at or above the interest rates borne by such loans. In
this regard, it should be noted that the Contracts or Underlying Contracts, as
applicable, for a Series may have different interest rates. In addition, the
weighted average life of the Securities may be affected by the varying
maturities of the Contracts or Underlying Contracts relating to the Private
Securities, as applicable. If any Contracts or Underlying Contracts relating to
the Private Securities, as applicable, for a Series have actual terms-to-stated
maturity of less than those assumed in calculating the Final Scheduled
Distribution Date of the related Securities, one or more Classes of the Series
may be fully paid prior to their respective Final Scheduled Distribution Dates,
even in the absence of prepayments and a reinvestment return higher than the
Assumed Reinvestment Rate.
THE TRUST FUNDS
GENERAL
The Notes of each Series will be secured by the pledge of the assets of the
related Trust Fund, and the Certificates of each Series will represent interests
in the assets of the related Trust Fund. The Trust Fund of each Series will
include assets purchased from the Seller composed of (i) the Primary Assets,
(ii) amounts available from the reinvestment of payments on such Primary Assets
at the Assumed Reinvestment Rate, if any, specified in the related Prospectus
Supplement, (iii) any Enhancement, (iv) any Property that secured a Contract but
which is acquired by foreclosure or deed in lieu of foreclosure or repossession
and (v) the amount, if any, initially deposited in the Collection Account or
Distribution Account for a Series as specified in the related Prospectus
Supplement.
The Securities will be non-recourse obligations of the related Trust Fund.
The assets of the Trust Fund specified in the related Prospectus Supplement for
a Series of Securities, unless otherwise specified in the related Prospectus
Supplement will serve as collateral only for that Series of Securities. Holders
of a Series of Notes may only proceed against such collateral securing such
Series of Notes in the case of a default with respect to such Series of Notes
and may not proceed against any assets of the Depositor or the related Trust
Fund not pledged to secure such Notes.
The Primary Assets for a Series will be sold by the Seller to the Depositor
or purchased by the Depositor in the open market or in privately negotiated
transactions, which may include transactions with affiliates and will be
transferred by the Depositor to the Trust Fund. Contracts relating to a Series
will be serviced by the Servicer, which may be the Seller, specified in the
related Prospectus Supplement, pursuant to a Pooling and Servicing Agreement,
with respect to a Series of Certificates or a servicing agreement (each, a
'Servicing Agreement') between the Trust Fund and Servicer, with respect to a
Series of Notes.
As used herein, 'Agreement' means, with respect to a Series of
Certificates, the Pooling and Servicing Agreement or Trust Agreement, and with
respect to a Series of Notes, the Indenture and the Servicing Agreement, as the
context requires.
If so specified in the related Prospectus Supplement, a Trust Fund relating
to a Series of Securities may be a business trust formed under the laws of the
state specified in the related Prospectus Supplement pursuant to a trust
agreement (each, a 'Trust Agreement') between the Depositor and the trustee of
such Trust Fund specified in the related Prospectus Supplement.
With respect to each Trust Fund, prior to the initial offering of the
related Series of Securities, the Trust Fund will have no assets or liabilities.
No Trust Fund is expected to engage in any activities other than acquiring,
managing and holding the related Primary Assets and other assets contemplated
herein and in the related Prospectus Supplement and the proceeds thereof,
issuing Securities and making payments and distributions thereon and certain
related activities. No Trust Fund is expected to have any source of capital
other than its assets and any related Enhancement.
Primary Assets included in the Trust Fund for a Series may consist of any
combination of Contracts and Private Securities, to the extent and as specified
in the related Prospectus Supplement.
18
<PAGE>
THE CONTRACTS
Contracts. The Primary Assets for a Series may consist, in whole or part,
of (i) conventional manufactured housing installment sales contracts and
installment loan agreements (the 'Manufactured Housing Contracts'), originated
by a manufactured housing dealer in the ordinary course of business and (ii)
home improvement installment sales contracts and installment loan agreements
(the 'Home Improvement Contracts' and together with Manufactured Housing
Contracts, the 'Contracts') originated by a home improvement contractor in the
ordinary course of business. As specified in the related Prospectus Supplement,
the Manufactured Housing Contracts will be secured by either Manufactured Homes
(as defined below), located in any of the fifty states or the District of
Columbia or by Mortgages on the real estate on which the Manufactured Homes are
located. As specified in the related Prospectus Supplement, the Home Improvement
Contracts will either be unsecured or secured by Mortgages primarily on Single
Family Properties which are generally subordinate to other mortgages on the same
Mortgaged Property or by purchase money security interest in the Home
Improvements financed thereby. The Contracts will be conventional contracts or
contracts insured by the Federal Housing Administration ('FHA') or partially
guaranteed by the Veterans Administration ('VA'). Unless otherwise specified in
the applicable Prospectus Supplement, the Contracts will be fully amortizing and
may have fixed interest rates or adjustable interest rates and may provide for
other payment characteristics as described below and in the related Prospectus
Supplement.
Unless otherwise specified in the related Prospectus Supplement, the home
improvements (the 'Home Improvements') securing the Home Improvement Contracts
include, but are not limited to, replacement windows, house siding, new roofs,
swimming pools, satellite dishes, kitchen and bathroom remodeling goods and
solar heating panels.
Unless otherwise specified in the related Prospectus Supplement, the
manufactured homes (the 'Manufactured Homes') securing the Manufactured Housing
Contracts will consist of manufactured homes within the meaning of 42 United
States Code, Section 5402(6), which defines a 'manufactured home' as 'a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter.'
Manufactured Homes, unlike Mortgaged Properties, and Home Improvements,
generally depreciate in value. Consequently, at any time after origination it is
possible, especially in the case of Contracts with high Loan-to-Value Ratios at
origination, that the market value of a Manufactured Home or Home Improvement
may be lower than the principal amount outstanding under the related Contract.
The Mortgaged Properties will include primarily Single Family Property
(i.e., one- to four-family residential housing, including Condominium Units and
Cooperative Dwellings). The Mortgaged Properties may consist of detached
individual dwellings, individual condominiums, townhouses, duplexes, row houses,
individual units in planned unit developments and other attached dwelling units.
Each Single Family Property will be located on land owned in fee simple by the
borrower or on land leased by the borrower for a term at least ten years (unless
otherwise provided in the related Prospectus Supplement) greater than the term
of the related Contract. Attached dwellings may include owner-occupied
structures where each borrower owns the land upon which the unit is built, with
the remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building.
Unless otherwise specified in the related Prospectus Supplement, Mortgages
on Cooperative Dwellings consist of a lien on the shares issued by such
Cooperative Dwelling and the proprietary lease or occupancy agreement relating
to such Cooperative Dwelling.
The aggregate principal balance of Contracts secured by Properties that are
owner-occupied will be disclosed in the related Prospectus Supplement. Unless
otherwise specified in the Prospectus Supplement, the sole basis for a
representation that a given percentage of the Contracts are secured by Single
Family Property that is owner-occupied will be either (i) the making of a
representation by the Mortgagor at origination of the
19
<PAGE>
Contract either that the underlying Mortgaged Property will be used by the
Mortgagor for a period of at least six months every year or that the Mortgagor
intends to use the Mortgaged Property as a primary residence, or (ii) a finding
that the address of the underlying Mortgaged Property is the Mortgagor's mailing
address as reflected in the Servicer's records. To the extent specified in the
related Prospectus Supplement, the Mortgaged Properties may include non-owner
occupied investment properties and vacation and second homes.
Unless otherwise specified in the related Prospectus Supplement, the
initial Loan-to-Value Ratio of a Home Improvement Contract is computed in the
manner described in the related Prospectus Supplement.
Additional Information. The selection criteria which shall apply with
respect to the Contracts, including, but not limited to, the Combined
Loan-to-Value Ratios or Loan-to-Value Ratios, as applicable, original terms to
maturity and delinquency information, will be specified in the related
Prospectus Supplement.
The Contracts for a Series may include Contracts that do not amortize their
entire principal balance by their stated maturity in accordance with their terms
and require a balloon payment of the remaining principal balance at maturity, as
specified in the related Prospectus Supplement. As further described in the
related Prospectus Supplement, the Contracts for a Series may include Contracts
that do not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Contracts that are Primary Assets as of the Cut-off Date,
including, among other things, and to the extent relevant (a) the aggregate
unpaid principal balance of the Contracts (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series); (b) the range and
weighted average Loan Rate on the Contracts, and, in the case of adjustable rate
Contracts, the range and weighted average of the current Loan Rates and the
Lifetime Rate Caps, if any; (c) the range and average outstanding principal
balance of the Contracts; (d) the weighted average original and remaining
term-to-stated maturity of the Contracts and the range of original and remaining
terms-to-stated maturity, if applicable; (e) the range and weighted average of
Combined Loan-to-Value Ratios or Loan-to-Value Ratios for the Contracts, as
applicable; (f) the percentage (by outstanding principal balance as of the Cut-
off Date) of Contracts that accrue interest at adjustable or fixed interest
rates; (g) any special hazard insurance policy or bankruptcy bond or other
enhancement relating to the Contracts; (h) the percentage (by principal balance
as of the Cut-off Date) of Contracts that are secured by Mortgaged Properties,
Home Improvements, Manufactured Homes, the real estate on which the Manufactured
Homes are located or are unsecured; (i) the geographic distribution of any
Mortgaged Properties securing the Contracts; (j) the percentage of Contracts (by
principal balance as of the Cut-off Date) that are secured by Single Family
Properties, shares relating to Cooperative Dwellings, Condominium Units,
investment property and vacation or second homes; (k) the lien priority of the
Contracts; and (l) the delinquency status and year of origination of the
Contracts. The related Prospectus Supplement will also specify any other
limitations on the types or characteristics of Contracts for a Series.
If information of the nature described above respecting the Contracts is
not known to the Depositor at the time the Securities are initially offered,
approximate or more general information of the nature described above will be
provided in the Prospectus Supplement and additional information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Securities.
PRIVATE SECURITIES
General. Primary Assets for a Series may consist, in whole or in part, of
Private Securities which include pass-through certificates representing
beneficial interests in loans of the type that would otherwise be eligible to be
Contracts (the 'Underlying Contracts') or (b) collateralized obligations secured
by Underlying Contracts. Such pass-through certificates or collateralized
obligations will have previously been (a) offered and distributed to the public
pursuant to an effective registration statement or (b) purchased in a
transaction not involving any public offering from a person who is not an
affiliate of the issuer of such securities at the time of sale (nor an affiliate
thereof at any time during the three preceding months); provided a period of
three years has elapsed since the later of the date the securities were acquired
from the issuer or an affiliate thereof. Although individual Underlying
Contracts may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and Private Securities themselves
will not be so insured or guaranteed.
Private Securities will have been issued pursuant to a pooling and
servicing agreement, a trust agreement or similar agreement (a 'PS Agreement').
The seller/servicer of the Underlying Contracts will have entered into
20
<PAGE>
the PS Agreement with the trustee under such PS Agreement (the 'PS Trustee').
The PS Trustee or its agent, or a custodian, will possess the Underlying
Contracts. Underlying Contracts will be serviced by a servicer (the 'PS
Servicer') directly or by one or more sub-servicers who may be subject to the
supervision of the PS Servicer.
The sponsor of the Private Securities (the 'PS Sponsor') will be a
financial institution or other entity engaged generally in the business of
lending; a public agency or instrumentality of a state, local or federal
government; or a limited purpose corporation organized for the purpose of, among
other things, establishing trusts and acquiring and selling loans to such
trusts, and selling beneficial interests in such trusts. If so specified in the
Prospectus Supplement, the PS Sponsor may be an affiliate of the Depositor. The
obligations of the PS Sponsor will generally be limited to certain
representations and warranties with respect to the assets conveyed by it to the
related trust. Unless otherwise specified in the related Prospectus Supplement,
the PS Sponsor will not have guaranteed any of the assets conveyed to the
related trust or any of the Private Securities issued under the PS Agreement.
Distributions of principal and interest will be made on the Private
Securities on the dates specified in the related Prospectus Supplement. The
Private Securities may be entitled to receive nominal or no principal
distributions or nominal or no interest distributions. Principal and interest
distributions will be made on the Private Securities by the PS Trustee or the PS
Servicer. The PS Sponsor or the PS Servicer may have the right to repurchase the
Underlying Contracts after a certain date or under other circumstances specified
in the related Prospectus Supplement.
The Underlying Contracts may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. As further described in the related Prospectus Supplement,
such Underlying Contracts will generally be secured by Mortgages on Mortgaged
Properties, purchase money security interests in Home Improvements, security
interests in Manufactured Homes, Mortgages on the real estate on which the
Manufactured Homes are located or unsecured.
Credit Support Relating to Private Securities. Credit support in the form
of Reserve Funds, subordination of other private securities issued under the PS
Agreement, guarantees, letters of credit, cash collateral accounts, insurance
policies or other types of credit support may be provided with respect to the
Underlying Contracts or with respect to the Private Securities themselves. The
type, characteristics and amount of credit support will be a function of certain
characteristics of the Underlying Contracts and other factors and will have been
established for the Private Securities on the basis of requirements of the
nationally recognized statistical rating organization that rated the Private
Securities.
Additional Information. The Prospectus Supplement for a Series for which
the Primary Assets includes Private Securities will specify (such disclosure may
be on an approximate basis and will be as of the date specified in the related
Prospectus Supplement), to the extent relevant and to the extent such
information is reasonably available to the Depositor and the Depositor
reasonably believes such information to be reliable, (i) the aggregate
approximate principal amount and type of the Private Securities to be included
in the Trust Fund for such Series; (ii) certain characteristics of the
Underlying Contracts including (A) the payment features of such Underlying
Contracts (i.e., whether they are fixed rate or adjustable rate and whether they
provide for fixed level payments or other payment features), (B) the approximate
aggregate principal balance, if known, of such Underlying Contracts insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Contracts and (D) the minimum and maximum
stated maturities of such Underlying Contracts at origination; (iii) the maximum
original term-to-stated maturity of the Private Securities; (iv) the weighted
average term-to-stated maturity of the Private Securities; (v) the pass-through
or certificate rate or ranges thereof for the Private Securities; (vi) the PS
Sponsor, the PS Servicer (if other than the PS Sponsor) and the PS Trustee for
such Private Securities; (vii) certain characteristics of credit support, if
any, such as Reserve Funds, insurance policies, letters of credit or guarantees
relating to such Contracts underlying the Private Securities or to such Private
Securities themselves; (viii) the terms on which Underlying Contracts may, or
are required to, be purchased prior to their stated maturity or the stated
maturity of the Private Securities and (ix) the terms on which Underlying
Contracts may be substituted for those originally underlying the Private
Securities.
If information of the nature described above representing the Private
Securities is not known to the Depositor at the time the Securities are
initially offered, approximate or more general information of the nature
described above will be provided in the Prospectus Supplement and the additional
information, if available, will
21
<PAGE>
be set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related Series and to be filed with the Commission
within 15 days the initial issuance of such Securities.
COLLECTION AND DISTRIBUTION ACCOUNTS
A separate Collection Account will be established by the Trustee or the
Servicer, in the name of the Trustee, for each Series of Securities for receipt
of the amount of cash, if any, specified in the related Prospectus Supplement to
be initially deposited therein by the Depositor, all amounts received on or with
respect to the Primary Assets and, unless otherwise specified in the related
Prospectus Supplement, income earned thereon. Certain amounts on deposit in such
Collection Account and certain amounts available pursuant to any Enhancement, as
provided in the related Prospectus Supplement, will be deposited in a related
Distribution Account, which will also be established by the Trustee for each
such Series of Securities, for distribution to the related Holders. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will
invest the funds in the Collection and Distribution Accounts in Eligible
Investments maturing, with certain exceptions, not later, in the case of funds
in the Collection Account, than the day preceding the date such funds are due to
be deposited in the Distribution Account or otherwise distributed and, in the
case of funds in the Distribution Account, than the day preceding the next
Distribution Date for the related Series of Securities. Eligible Investments
include, among other investments, obligations of the United States and certain
agencies thereof, federal funds, certificates of deposit, commercial paper,
demand and time deposits and banker's acceptances, certain repurchase agreements
of United States government securities and certain guaranteed investment
contracts, in each case, acceptable to the Rating Agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any Deposit Agreement or Minimum Principal Payment
Agreement as specified in the related Prospectus Supplement.
22
<PAGE>
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the Contracts in the related Trust Fund. The pool insurance policy
will cover any loss (subject to the limitations described in a related
Prospectus Supplement) by reason of default, but will not cover the portion of
the principal balance of any Contract that is required to be covered by any
primary mortgage insurance policy. The amount and terms of any such coverage
will be set forth in the related Prospectus Supplement.
Special Hazard Insurance Policy. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to Property securing a defaulted or foreclosed Contract
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such Property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
Property or (ii) upon transfer of such Property to the special hazard insurer,
the unpaid principal balance of such Contract at the time of acquisition of such
Property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Servicer with
respect to such Property. If the unpaid principal balance plus accrued interest
and certain expenses is paid by the special hazard insurer, the amount of
further coverage under the special hazard insurance policy will be reduced by
such amount less any net proceeds from the sale of such Property. Any amount
paid as the cost of repair of such Property will reduce coverage by such amount.
Special hazard insurance policies typically do not cover losses occasioned by
war, civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear reaction,
flood (if the mortgaged property is in a federally designated flood area),
chemical contamination and certain other risks.
Restoration of the Property with the proceeds described under (i) above is
expected to satisfy the condition under any pool insurance policy that such
Property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Contract secured by such
Property. The payment described under (ii) above will render unnecessary
presentation of a claim in respect of such Contract under any pool insurance
policy. Therefore, so long as such pool insurance policy remains in effect, the
payment by the special hazard insurer of the cost of repair or of the unpaid
principal balance of the related Contract plus accrued interest and certain
expenses will not affect the total insurance proceeds paid to holders of the
Securities, but will affect the relative amounts of coverage remaining under the
special hazard insurance policy and pool insurance policy.
23
<PAGE>
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Contract at an amount less than the then outstanding principal balance of such
Contract. The amount of the secured debt could be reduced to such value, and the
holder of such Contract thus would become an unsecured creditor to the extent
the outstanding principal balance of such Contract exceeds the value so assigned
to the Property by the bankruptcy court. In addition, certain other
modifications of the terms of a Contract can result from a bankruptcy
proceeding. See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS.' If so provided in the
related Prospectus Supplement, the Depositor or other entity specified in the
related Prospectus Supplement will obtain a bankruptcy bond or similar insurance
contract (the 'bankruptcy bond') covering losses resulting from proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond will cover
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a Contract or a reduction by such court
of the principal amount of a Contract and will cover certain unpaid interest on
the amount of such a principal reduction from the date of the filing of a
bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement for all Contracts in the Trust Fund for
such Series. Such amount will be reduced by payments made under such bankruptcy
bond in respect of such Contracts, unless otherwise specified in the related
Prospectus Supplement, and will not be restored.
RESERVE FUNDS
If so specified in the Prospectus Supplement relating to a Series of
Securities, the Depositor will deposit into one or more funds to be established
with the Trustee as part of the Trust Fund for such Series or for the benefit of
any Enhancer with respect to such Series (the 'Reserve Funds') cash, a letter or
letters of credit, cash collateral accounts, Eligible Investments, or other
instruments meeting the criteria of the Rating Agency rating any Series of the
Securities in the amount specified in such Prospectus Supplement. In the
alternative or in addition to such deposit, a Reserve Fund for a Series may be
funded over time through application of all or a portion of the excess cash flow
from the Primary Assets for such Series, to the extent described in the related
Prospectus Supplement. If applicable, the initial amount of the Reserve Fund and
the Reserve Fund maintenance requirements for a Series of Securities will be
described in the related Prospectus Supplement.
Amounts withdrawn from any Reserve Fund will be applied by the Trustee to
make payments on the Securities of a Series, to pay expenses, to reimburse any
Enhancer or for any other purpose, in the manner and to the extent specified in
the related Prospectus Supplement.
Amounts deposited in a Reserve Fund will be invested by the Trustee, in
Eligible Investments maturing no later than the day specified in the related
Prospectus Supplement.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
the Depositor will enter into a Minimum Principal Payment Agreement with an
entity meeting the criteria of the Rating Agency pursuant to which such entity
will provide certain payments on the Securities of such Series in the event that
aggregate scheduled principal payments and/or prepayments on the Primary Assets
for such Series are not sufficient to make certain payments on the Securities of
such Series, as provided in the Prospectus Supplement.
DEPOSIT AGREEMENT
If specified in a Prospectus Supplement, the Depositor and the Trustee for
such Series of Securities will enter into a Deposit Agreement with the entity
specified in such Prospectus Supplement on or before the sale of such Series of
Securities. The purpose of a Deposit Agreement would be to accumulate available
cash for investment so that such cash, together with income thereon, can be
applied to future distributions on one or more Classes of Securities. The
Prospectus Supplement for a Series of Securities pursuant to which a Deposit
Agreement is used will contain a description of the terms of such Deposit
Agreement.
24
<PAGE>
SERVICING OF CONTRACTS
GENERAL
Customary servicing functions with respect to Contracts comprising the
Primary Assets in the Trust Fund will be provided by the Servicer directly
pursuant to the related Servicing Agreement or Pooling and Servicing Agreement,
as the case may be, with respect to a Series of Securities.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Servicer will make reasonable efforts to collect all payments required
to be made under the Contracts and will, consistent with the terms of the
related Agreement for a Series and any applicable Enhancement, follow such
collection procedures as it follows with respect to comparable loans held in its
own portfolio. Consistent with the above, the Servicer may, in its discretion,
(i) waive any assumption fee, late payment charge, or other charge in connection
with a Contract and (ii) to the extent provided in the related Agreement,
arrange with an obligor a schedule for the liquidation of delinquencies by
extending the Due Dates for Scheduled Payments on such Contract.
If specified in the related Prospectus Supplement, the Servicer, to the
extent permitted by law, will establish and maintain escrow or impound accounts
('Escrow Accounts') with respect to Contracts in which payments by obligors to
pay taxes, assessments, mortgage and hazard insurance premiums, and other
comparable items will be deposited. Contracts may not require such payments
under the loan related documents, in which case the Servicer would not be
required to establish any Escrow Account with respect to such Contracts.
Withdrawals from the Escrow Accounts are to be made to effect timely payment of
taxes, assessments and mortgage and hazard insurance, to refund to obligors
amounts determined to be overages, to pay interest to obligors on balances in
the Escrow Account to the extent required by law, to repair or otherwise protect
the property securing the related Contract and to clear and terminate such
Escrow Account. The Servicer will be responsible for the administration of the
Escrow Accounts and generally will make advances to such account when a
deficiency exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise specified in the related Prospectus Supplement, the
Trustee or the Servicer will establish a separate account (the 'Collection
Account') in the name of the Trustee. Unless otherwise indicated in the related
Prospectus Supplement, the Collection Account will be an account maintained (i)
at a depository institution, the long-term unsecured debt obligations of which
at the time of any deposit therein are rated by each Rating Agency rating the
Securities of such Series at levels satisfactory to each Rating Agency or (ii)
in an account or accounts the deposits in which are insured to the maximum
extent available by the FDIC or which are secured in a manner meeting
requirements established by each Rating Agency.
Unless otherwise specified in the related Prospectus Supplement, the funds
held in the Collection Account may be invested, pending remittance to the
Trustee, in Eligible Investments. If so specified in the related Prospectus
Supplement, the Servicer will be entitled to receive as additional compensation
any interest or other income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer, the Depositor, the Trustee or the Seller, as appropriate, will deposit
into the Collection Account for each Series on the Business Day following the
Closing Date any amounts representing Scheduled Payments due after the related
Cut-off Date but received by the Servicer on or before the Closing Date, and
thereafter, within two business days after the date of receipt thereof, the
following payments and collections received or made by it (other than, unless
otherwise provided in the related Prospectus Supplement, in respect of principal
of and interest on the related Primary Assets due on or before such Cut-off
Date):
(i) All payments on account of principal, including prepayments, on
such Primary Assets;
(ii) All payments on account of interest on such Primary Assets after
deducting therefrom, at the discretion of the Servicer but only to the
extent of the amount permitted to be withdrawn or withheld from the
Collection Account in accordance with the related Agreement, the Servicing
Fee in respect of such Primary Assets;
(iii) All amounts received by the Servicer in connection with the
liquidation of Primary Assets or property acquired in respect thereof,
whether through foreclosure sale, repossession or otherwise, including
25
<PAGE>
payments in connection with such Primary Assets received from the obligor,
other than amounts required to be paid or refunded to the obligor pursuant
to the terms of the applicable loan documents or otherwise pursuant to law
('Liquidation Proceeds'), exclusive of, in the discretion of the Servicer,
but only to the extent of the amount permitted to be withdrawn from the
Collection Account in accordance with the related Agreement, the Servicing
Fee, if any, in respect of the related Primary Asset;
(iv) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any such Primary Asset, other than proceeds to be
applied to the restoration or repair of the related Property or released to
the obligor in accordance with the related Agreement;
(v) All amounts required to be deposited therein from any applicable
Reserve Fund for such Series pursuant to the related Agreement;
(vi) All Advances made by the Servicer required pursuant to the
related Agreement; and
(vii) All repurchase prices of any such Primary Assets repurchased by
the Depositor, the Servicer or the Seller pursuant to the related
Agreement.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it
pursuant to the related Agreement; the Servicer's right to reimburse itself
is limited to amounts received on or in respect of particular Contracts
(including, for this purpose, Liquidation Proceeds and amounts representing
proceeds of insurance policies covering the related Property) which
represent late recoveries of Scheduled Payments respecting which any such
Advance was made;
(ii) to the extent provided in the related Agreement, to reimburse
itself for any Advances for such Series that the Servicer determines in
good faith it will be unable to recover from amounts representing late
recoveries of Scheduled Payments respecting which such Advance was made or
from Liquidation Proceeds or the proceeds of insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for liquidation
expenses and for amounts expended by it in good faith in connection with
the restoration of damaged Property and, in the event deposited in the
Collection Account and not previously withheld, and to the extent that
Liquidation Proceeds after such reimbursement exceed the outstanding
principal balance of the related Contract, together with accrued and unpaid
interest thereon to the Due Date for such Contract next succeeding the date
of its receipt of such Liquidation Proceeds, to pay to itself out of such
excess the amount of any unpaid Servicing Fee and any assumption fees, late
payment charges, or other charges on the related Contract;
(iv) in the event it has elected not to pay itself the Servicing Fee
out of the interest component of any Scheduled Payment, late payment or
other recovery with respect to a particular Contract prior to the deposit
of such Scheduled Payment, late payment or recovery into the Collection
Account, to pay to itself the Servicing Fee, as adjusted pursuant to the
related Agreement, from any such Scheduled Payment, late payment or such
other recovery, to the extent permitted by the related Agreement;
(v) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related Agreement;
(vi) to pay to the applicable person with respect to each Primary
Asset or REO Property acquired in respect thereof that has been repurchased
or removed from the Trust Fund by the Depositor, the Servicer or the Seller
pursuant to the related Agreement, all amounts received thereon and not
distributed as of the date on which the related repurchase price was
determined;
(vii) to make payments to the Trustee of such Series for deposit into
the Distribution Account, if any, or for remittance to the Holders of such
Series in the amounts and in the manner provided for in the related
Agreement; and
(viii) to clear and terminate the Collection Account pursuant to the
related Agreement.
In addition, if the Servicer deposits in the Collection Account for a
Series any amount not required to be deposited therein, it may, at any time,
withdraw such amount from such Collection Account.
26
<PAGE>
ADVANCES AND LIMITATIONS THEREON
The related Prospectus Supplement will describe the circumstances, if any,
under which the Servicer will make Advances with respect to delinquent payments
on Contracts. If specified in the related Prospectus Supplement, the Servicer
will be obligated to make Advances, and such obligations may be limited in
amount, or may not be activated until a certain portion of a specified Reserve
Fund is depleted. Advances are intended to provide liquidity and, except to the
extent specified in the related Prospectus Supplement, not to guarantee or
insure against losses. Accordingly, any funds advanced are recoverable by the
Servicer out of amounts received on particular Contracts which represent late
recoveries of principal or interest, proceeds of insurance policies or
Liquidation Proceeds respecting which any such Advance was made. If an Advance
is made and subsequently determined to be nonrecoverable from late collections,
proceeds of insurance policies, or Liquidation Proceeds from the related
Contract, the Servicer may be entitled to reimbursement from other funds in the
Collection Account or Distribution Account, as the case may be, or from a
specified Reserve Fund as applicable, to the extent specified in the related
Prospectus Supplement.
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
Standard Hazard Insurance; Flood Insurance. Except as otherwise specified
in the related Prospectus Supplement, the Servicer will be required to maintain
or to cause the obligor on each Contract to maintain a standard hazard insurance
policy providing coverage of the standard form of fire insurance with extended
coverage for certain other hazards as is customary in the state in which the
related Property is located. The standard hazard insurance policies will provide
for coverage at least equal to the applicable state standard form of fire
insurance policy with extended coverage for property of the type securing the
related Contracts. In general, the standard form of fire and extended coverage
policy will cover physical damage to or destruction of, the related Property
caused by fire, lightning, explosion, smoke, windstorm, hail, riot, strike and
civil commotion, subject to the conditions and exclusions particularized in each
policy. Because the standard hazard insurance policies relating to the Contracts
will be underwritten by different hazard insurers and will cover Properties
located in various states, such policies will not contain identical terms and
conditions. The basic terms, however, generally will be determined by state law
and generally will be similar. Most such policies typically will not cover any
physical damage resulting from war, revolution, governmental actions, floods and
other water-related causes, earth movement (including earthquakes, landslides,
and mudflows), nuclear reaction, 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. Uninsured risks not covered by a special hazard insurance policy
or other form of Enhancement will adversely affect distributions to Holders.
When a Mortgaged Property securing a Contract is located in a flood area
identified by HUD pursuant to the Flood Disaster Protection Act of 1973, as
amended, the Servicer will be required to cause flood insurance to be maintained
with respect to such Property, to the extent available.
The standard hazard insurance policies covering Properties securing
Contracts typically will contain a 'coinsurance' clause which, in effect, will
require the insured at all times to carry hazard insurance of a specified
percentage (generally 80% to 90%) of the full replacement value of the Property,
including the improvements on any Property, in order to recover the full amount
of any partial loss. If the insured's coverage falls below this specified
percentage, such clause will provide that the hazard insurer's liability in the
event of partial loss will not exceed the greater of (i) the actual cash value
(the replacement cost less physical depreciation) of the Property, including the
improvements, if any, damaged or destroyed or (ii) such proportion of the loss,
without deduction for depreciation, as the amount of insurance carried bears to
the specified percentage of the full replacement cost of such Property and
improvements. Since the amount of hazard insurance to be maintained on the
improvements securing the Contracts declines as the principal balances owing
thereon decrease, and since the value of the Properties will fluctuate in value
over time, the effect of this requirement in the event of partial loss may be
that hazard insurance proceeds will be insufficient to restore fully the damage
to the affected Property.
Unless otherwise specified in the related Prospectus Supplement, coverage
will be in an amount at least equal to the greater of (i) the amount necessary
to avoid the enforcement of any co-insurance clause contained in the policy or
(ii) the outstanding principal balance of the related Contract. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted
27
<PAGE>
Contract and that has been acquired upon foreclosure, deed in lieu of
foreclosure, or repossession, a standard hazard insurance policy in an amount
that is at least equal to the maximum insurable value of such REO Property. No
earthquake or other additional insurance will be required of any obligor or will
be maintained on REO Property acquired in respect of a defaulted Contract, other
than pursuant to such applicable laws and regulations as shall at any time be in
force and shall require such additional insurance.
Any amounts collected by the Servicer under any such policies of insurance
(other than amounts to be applied to the restoration or repair of the Property,
released to the obligor in accordance with normal servicing procedures or used
to reimburse the Servicer for amounts to which it is entitled to reimbursement)
will be deposited in the Collection Account. In the event that the Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Contracts, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Contract or related REO Property. This blanket policy may
contain a deductible clause, in which case the Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
REALIZATION UPON DEFAULTED LOANS
The Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the Properties
securing the related Contracts 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 such foreclosure or other conversion, the Servicer
will follow such practices and procedures as it deems necessary or advisable and
as are normal and usual in its servicing activities with respect to comparable
loans serviced by it. However, the Servicer will not be required to expend its
own funds in connection with any foreclosure or towards the restoration of the
Property unless it determines that: (i) such restoration or foreclosure will
increase the Liquidation Proceeds in respect of the related Contract available
to the Holders after reimbursement to itself for such expenses and (ii) such
expenses will be recoverable by it either through Liquidation Proceeds or the
proceeds of insurance. Notwithstanding anything to the contrary herein, in the
case of a Trust Fund for which a REMIC election has been made, the Servicer
shall liquidate any Property acquired through foreclosure within two years after
the acquisition of the beneficial ownership of such Property. While the holder
of a Property acquired through foreclosure can often maximize its recovery by
providing financing to a new purchaser, the Trust Fund, if applicable, will have
no ability to do so and neither the Servicer nor the Depositor will be required
to do so.
The Servicer may arrange with the obligor on a defaulted Contract, a
modification of such Contract (a 'Modification') to the extent provided in the
related Prospectus Supplement. Such Modifications may only be entered into if
they meet the underwriting policies and procedures employed by the Servicer in
servicing receivables for its own account and meet the other conditions set
forth in the related Prospectus Supplement.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Property is about to be conveyed by the obligor, the Servicer
will, to the extent it has knowledge of such prospective conveyance and prior to
the time of the consummation of such conveyance, exercise its rights to
accelerate the maturity of the related Contract under the applicable
'due-on-sale' clause, if any, unless it reasonably believes that such clause is
not enforceable under applicable law or if the enforcement of such clause would
result in loss of coverage under any primary mortgage insurance policy. In such
event, the Servicer is authorized to accept from or enter into an assumption
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 Contract and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Contract. Any
fee collected in connection with an assumption will be retained by the Servicer
as additional servicing compensation. The terms of a Contract may not be changed
in connection with an assumption.
28
<PAGE>
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted Contracts.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Contracts, including, without limitation, the payment of the fees and
expenses of the Trustee and independent accountants, payment of insurance policy
premiums and the cost of credit support, if any, and payment of expenses
incurred in preparation of reports to Holders.
When an obligor makes a principal prepayment in full between Due Dates on
the related Contract, the obligor will generally be required to pay interest on
the amount prepaid only to the date of prepayment. If and to the extent provided
in the related Prospectus Supplement, in order that one or more Classes of the
Holders of a Series will not be adversely affected by any resulting shortfall in
interest, the amount of the Servicing Fee may be reduced to the extent necessary
to include in the Servicer's remittance to the Trustee for deposit into the
Distribution Account an amount equal to one month's interest on the related
Contract (less the Servicing Fee). If the aggregate amount of such shortfalls in
a month exceeds the Servicing Fee for such month, a shortfall to Holders may
occur.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will be entitled to reimbursement for certain expenses incurred by it
in connection with the liquidation of defaulted Contracts. The related Holders
will suffer no loss by reason of such expenses to the extent expenses are
covered under related insurance policies or from excess Liquidation Proceeds. If
claims are either not made or paid under the applicable insurance policies or if
coverage thereunder has been exhausted, the related Holders will suffer a loss
to the extent that Liquidation Proceeds, after reimbursement of the Servicer's
expenses, are less than the outstanding principal balance of and unpaid interest
on the related Contract which would be distributable to Holders. In addition,
the Servicer will be entitled to reimbursement of expenditures incurred by it in
connection with the restoration of property securing a defaulted Contract, such
right of reimbursement being prior to the rights of the Holders to receive any
related proceeds of insurance policies, Liquidation Proceeds or amounts derived
from other Enhancement. The Servicer is generally also entitled to reimbursement
from the Collection Account for Advances.
Unless otherwise specified in the related Prospectus Supplement, the rights
of the Servicer to receive funds from the Collection Account for a Series,
whether as the Servicing Fee or other compensation, or for the reimbursement of
Advances, expenses or otherwise, are not subordinate to the rights of Holders of
such Series.
EVIDENCE AS TO COMPLIANCE
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will provide that each year, a firm of independent
public accountants will furnish a statement to the Trustee to the effect that
such firm has examined certain documents and records relating to the servicing
of the Contracts by the Servicer and that, on the basis of such examination,
such firm is of the opinion that the servicing has been conducted in compliance
with such Agreement, except for (i) such exceptions as such firm believes to be
immaterial and (ii) such other exceptions as are set forth in such statement.
If so specified in the related Prospectus Supplement, the applicable
Agreement for each Series will also provide for delivery to the Trustee for such
Series of an annual statement signed by an officer of the Servicer to the effect
that the Servicer has fulfilled its obligations under such Agreement, throughout
the preceding calendar year.
29
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
30
<PAGE>
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of Contracts. Unless otherwise specified in the related
Prospectus Supplement, the Depositor will as to each Contract, deliver or cause
to be delivered to the Trustee (or the Custodian) the original Contract and
copies of documents and instruments related to each Contract and, other than in
the case of unsecured Contracts, the security interest in the property securing
such Contract. In order to give notice of the right, title and interest of
Securityholders to the Contracts, the Depositor will cause a UCC-1 financing
statement to be executed by the Depositor or the Seller identifying the Trustee
as the secured party and identifying all Contracts as collateral. Unless
otherwise specified in the related Prospectus Supplement, the Contracts will not
be stamped or otherwise marked to reflect their assignment to the Trust.
Therefore, if, through negligence, fraud or otherwise, a subsequent purchaser
were able to take physical possession of the Contracts without notice of such
assignment, the interest of Securityholders in the Contracts could be defeated.
See 'CERTAIN LEGAL ASPECTS OF THE CONTRACTS--The Contracts.'
With respect to Contracts secured by Mortgages, if so specified in the
related Prospectus Supplement, the Depositor will, at the time of issuance of
the Securities, cause assignments to the Trustee of the Mortgages relating to
the Contracts for a Series to be recorded in the appropriate public office for
real property records, except in states where, in the opinion of counsel
acceptable to the Trustee, such recording is not required to protect the
Trustee's interest in the related Contracts. If specified in the related
Prospectus Supplement, the Depositor will cause such assignments to be so
recorded within the time after issuance of the Securities as is specified in the
related Prospectus Supplement, in which event, the Agreement may, as specified
in the related Prospectus Supplement, require the Depositor to repurchase from
the Trustee any Contract the related Mortgage of which is not recorded within
such time, at the price described below with respect to repurchases by reason of
defective documentation. Unless otherwise provided in the related Prospectus
Supplement, the enforcement of the repurchase obligation would constitute the
sole remedy available to the Holders or the Trustee for the failure of a
Mortgage to be recorded.
Each Contract will be identified in a schedule appearing as an exhibit to
the related Agreement (the 'Contract Schedule'). Such Contract Schedule will
specify with respect to each Contract: the original principal amount and unpaid
principal balance as of the Cut-off Date; the current interest rate; the current
Scheduled Payment of principal and interest; the maturity date, if any, of the
related Mortgage Note; if the Contract is an adjustable rate Contract, the
Lifetime Rate Cap, if any, and the current index.
Assignment of Private Securities. The Depositor will cause Private
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its nominee or correspondent) will have
possession of any certificated Private Securities. Unless otherwise specified in
the related Prospectus Supplement, the Trustee will not be in possession of or
be assignee of record of any underlying assets for a Private Security. See 'THE
TRUST FUNDS--Private Securities' herein. Each Private Security will be
identified in a schedule appearing as an exhibit to the related Agreement (the
'Certificate Schedule'), which will specify the original principal amount,
outstanding principal balance as of the Cut-off Date, annual pass-through rate
or interest rate and maturity date for each Private Security conveyed to the
Trust Fund. In the Agreement, the Depositor will represent and warrant to the
Trustee regarding the Private Securities: (i) that the information
31
<PAGE>
contained in the Certificate Schedule is true and correct in all material
respects; (ii) that, immediately prior to the conveyance of the Private
Securities, the Depostior had good title thereto, and was the sole owner thereof
(subject to any Retained Interest); (iii) that there has been no other sale by
it of such Private Securities; and (iv) that there is no existing lien, charge,
security interest or other encumbrance (other than any Retained Interest) on
such Private Securities.
Repurchase and Substitution of Non-Conforming Primary Assets. Unless
otherwise provided in the related Prospectus Supplement, if any document in the
file relating to the Primary Assets delivered by the Depositor to the Trustee
(or Custodian) is found by the Trustee within 90 days of the execution of the
related Agreement (or promptly after the Trustee's receipt of any document
permitted to be delivered after the Closing Date) to be defective in any
material respect and the Depositor or Seller does not cure such defect within 90
days, or within such other period specified in the related Prospectus
Supplement, the Depositor or Seller will, not later than 90 days or within such
other period specified in the related Prospectus Supplement, after the Trustee's
notice to the Depositor or the Seller, as the case may be, of the defect,
repurchase the related Primary Asset or any property acquired in respect thereof
from the Trustee at a price equal to, unless otherwise specified in the related
Prospectus Supplement, (a) the lesser of (i) the outstanding principal balance
of such Primary Asset and (ii) the Trust Fund's federal income tax basis in the
Primary Asset and (b) accrued and unpaid interest to the date of the next
scheduled payment on such Primary Asset at the rate set forth in the related
Agreement (less any unreimbursed Advances respecting such Primary Asset),
provided, however, the purchase price shall not be limited in (i) above to the
Trust Fund's federal income tax basis if the repurchase at a price equal to the
outstanding principal balance of such Primary Asset will not result in any
prohibited transaction tax under Section 860F(a) of the Code.
If provided in the related Prospectus Supplement, the Depositor or Seller,
as the case may be, may, rather than repurchase the Primary Asset as described
above, remove such Primary Asset from the Trust Fund (the 'Deleted Primary
Asset') and substitute in its place one or more other Primary Assets (each, a
'Qualifying Substitute Primary Asset') provided, however, that (i) with respect
to a Trust Fund for which no REMIC election is made, such substitution must be
effected within 120 days of the date of initial issuance of the Securities and
(ii) with respect to a Trust Fund for which a REMIC election is made, after a
specified time period, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC or otherwise subject the Trust Fund to a prohibited transaction tax.
Unless otherwise specified in the related Prospectus Supplement, any
Qualifying Substitute Primary Asset will have, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Primary Asset (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to Holders),
(ii) an interest rate not less than (and not more than 2% greater than) the
interest rate of the Deleted Primary Asset, (iii) a remaining term-to-stated
maturity not greater than (and not more than two years less than) that of the
Deleted Primary Asset, and will comply with all of the representations and
warranties set forth in the applicable agreement as of the date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Holders or the Trustee for a material defect in a
document for a Primary Asset.
The Depositor or another entity will make representations and warranties
with respect to Primary Assets for a Series. If the Depositor or such entity
cannot cure a breach of any such representations and warranties in all material
respects within the time period specified in the related Prospectus Supplement
after notification by the Trustee of such breach, and if such breach is of a
nature that materially and adversely affects the value of such Primary Asset,
the Depositor or such entity is obligated to repurchase the affected Primary
Asset or, if provided in the related Prospectus Supplement, provide a Qualifying
Substitute Primary Asset therefor, subject to the same conditions and
limitations on purchases and substitutions as described above.
32
<PAGE>
The Depositor's only source of funds to effect any cure, repurchase or
substitution will be through the enforcement of the corresponding obligations of
the responsible originator or Seller of such Primary Assets. See 'RISK
FACTORS--Limited Assets.'
No Holder of Securities of a Series, solely by virtue of such Holder's
status as a Holder, will have any right under the applicable Agreement for such
Series to institute any proceeding with respect to such Agreement, unless such
Holder previously has given to the Trustee for such Series written notice of
default and unless the Holders of Securities evidencing not less than 51% of the
aggregate voting rights of the Securities for such Series have made written
request upon the Trustee to institute such proceeding in its own name as Trustee
thereunder and have offered to the Trustee reasonable indemnity, and the Trustee
for 60 days has neglected or refused to institute any such proceeding.
REPORTS TO HOLDERS
The Trustee or other entity specified in the related Prospectus Supplement
will prepare and forward to each Holder on each Distribution Date, or as soon
thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series, among other things:
(i) the amount of principal distributed to holders of the related
Securities and the outstanding principal balance of such Securities
following such distribution;
(ii) the amount of interest distributed to holders of the related
Securities and the current interest on such Securities;
(iii) the amounts of (a) any overdue accrued interest included in such
distribution, (b) any remaining overdue accrued interest with respect to
such Securities or (c) any current shortfall in amounts to be distributed
as accrued interest to holders of such Securities;
(iv) the amounts of (a) any overdue payments of scheduled principal
included in such distribution, (b) any remaining overdue principal amounts
with respect to such Securities, (c) any current shortfall in receipt of
scheduled principal payments on the related Primary Assets or (d) any
realized losses or Liquidation Proceeds to be allocated as reductions in
the outstanding principal balances of such Securities;
(v) the amount received under any related Enhancement, and the
remaining amount available under such Enhancement;
(vi) the amount of any delinquencies with respect to payments on the
related Primary Assets;
(vii) the book value of any REO Property acquired by the related Trust
Fund; and
(viii) such other information as specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Trustee, unless otherwise specified in the related Prospectus
Supplement, will furnish to each Holder of record at any time during such
calendar year: (a) the aggregate of amounts reported pursuant to (i), (ii), and
(iv)(d) above for such calendar year and (b) such information specified in the
related Agreement to enable Holders to prepare their tax returns including,
without limitation, the amount of original issue discount accrued on the
Securities, if applicable. Information in the Distribution Date and annual
statements provided to the Holders will not have been examined and reported upon
by an independent public accountant. However, the Servicer will provide to the
Trustee a report by independent public accountants with respect to the
Servicer's servicing of the Contracts. See 'SERVICING OF CONTRACTS--Evidence as
to Compliance' herein.
33
<PAGE>
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
Contracts include (i) any failure by the Servicer to deposit amounts in the
Collection Account and Distribution Account to enable the Trustee to distribute
to Holders of such Series any required payment, which failure continues
unremedied for the number of days specified in the related Prospectus Supplement
after the giving of written notice of such failure to the Servicer by the
Trustee for such Series, or to the Servicer and the Trustee by the Holders of
such Series evidencing not less than 25% of the aggregate voting rights of the
Holders for such Series, (ii) any failure by the Servicer duly to observe or
perform in any material respect any other of its covenants or agreements in the
applicable Agreement which continues unremedied for the number of days specified
in the related Prospectus Supplement after the giving of written notice of such
failure to the Servicer by the Trustee, or to the Servicer and the Trustee by
the Holders of such Series evidencing not less than 25% of the aggregate voting
rights of the Holders and (iii) certain events of insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings and certain
actions by the Servicer indicating its insolvency, reorganization or inability
to pay its obligations.
So long as an Event of Default remains unremedied under the applicable
Agreement for a Series of Securities relating to the servicing of Contracts,
unless otherwise specified in the related Prospectus Supplement, the Trustee for
such Series or Holders of Securities of such Series evidencing not less than 51%
of the aggregate voting rights of the Securities for such Series may terminate
all of the rights and obligations of the Servicer as servicer under the
applicable Agreement (other than its right to recovery of other expenses and
amounts advanced pursuant to the terms of such Agreement which rights the
Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Servicer
under such Agreement and will be entitled to reasonable servicing compensation
not to exceed the applicable servicing fee, together with other servicing
compensation in the form of assumption fees, late payment charges or otherwise
as provided in such Agreement.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, a finance
institution, bank or loan servicing institution with a net worth specified in
the related Prospectus Supplement to act as successor Servicer under the
provisions of the applicable Agreement. The successor Servicer would be entitled
to reasonable servicing compensation in an amount not to exceed the Servicing
Fee as set forth in the related Prospectus Supplement, together with the other
servicing compensation in the form of assumption fees, late payment charges or
otherwise, as provided in such Agreement.
During the continuance of any Event of Default of a Servicer under an
Agreement for a Series of Securities, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Holders of such Series, and, unless
otherwise specified in the related Prospectus Supplement, Holders of Securities
evidencing not less than 51% of the aggregate voting rights of the Securities
for such Series may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred upon that Trustee. However, the Trustee will not be under any
obligation to pursue any such remedy or to exercise any of such trusts or powers
unless such Holders have offered the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred by the Trustee
therein or thereby. Also, the Trustee may decline to follow any such direction
if the Trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve it in personal liability or be unjustly
prejudicial to the nonassenting Holders.
Indenture. Unless otherwise specified in the related Prospectus
Supplement, Events of Default under the Indenture for each Series of Notes
include: (i) a default for thirty (30) days or more in the payment of any
principal of or interest on any Note of such Series; (ii) failure to perform any
other covenant of the Depositor or the Trust Fund in the Indenture which
continues for a period of sixty (60) days after notice thereof is given in
accordance with the procedures described in the related Prospectus Supplement;
(iii) any representation or warranty made by the Depositor or the Trust Fund in
the Indenture or in any certificate or other writing delivered pursuant thereto
or in connection therewith with respect to or affecting such Series having been
incorrect in a material respect as of the time made, and such breach is not
cured within sixty (60) days after notice thereof is
34
<PAGE>
given in accordance with the procedures described in the related Prospectus
Supplement; (iv) certain events of bankruptcy, insolvency, receivership or
liquidation of the Depositor or the Trust Fund; or (v) any other Event of
Default provided with respect to Notes of that Series.
If an Event of Default with respect to the Notes of any Series at the time
outstanding occurs and is continuing, either the Trustee or the holders of a
majority of the then aggregate outstanding amount of the Notes of such Series
may declare the principal amount (or, if the Notes of that Series are Zero
Coupon Securities, such portion of the principal amount as may be specified in
the terms of that Series, as provided in the related Prospectus Supplement) of
all the Notes of such Series to be due and payable immediately. Such declaration
may, under certain circumstances, be rescinded and annulled by the holders of a
majority in aggregate outstanding amount of the Notes of such Series.
If, following an Event of Default with respect to any Series of Notes, the
Notes of such Series have been declared to be due and payable, the Trustee may,
in its discretion, notwithstanding such acceleration, elect to maintain
possession of the collateral securing the Notes of such Series and to continue
to apply distributions on such collateral as if there had been no declaration of
acceleration if such collateral continues to provide sufficient funds for the
payment of principal of and interest on the Notes of such Series as they would
have become due if there had not been such a declaration. In addition, the
Trustee may not sell or otherwise liquidate the collateral securing the Notes of
a Series following an Event of Default, other than a default in the payment of
any principal or interest on any Note of such Series for thirty (30) days or
more, unless (a) the holders of 100% of the then aggregate outstanding amount of
the Notes of such Series consent to such sale, (b) the proceeds of such sale or
liquidation are sufficient to pay in full the principal of and accrued interest,
due and unpaid, on the outstanding Notes of such Series at the date of such sale
or (c) the Trustee determines that such collateral would not be sufficient on an
ongoing basis to make all payments on such Notes as such payments would have
become due if such Notes had not been declared due and payable, and the Trustee
obtains the consent of the holders of 66 2/3% of the then aggregate outstanding
amount of the Notes of such Series.
In the event that the Trustee liquidates the collateral in connection with
an Event of Default involving a default for thirty (30) days or more in the
payment of principal of or interest on the Notes of a Series, the Indenture
provides that the Trustee will have a prior lien on the proceeds of any such
liquidation for unpaid fees and expenses. As a result, upon the occurrence of
such an Event of Default, the amount available for distribution to the
Noteholders would be less than would otherwise be the case. However, the Trustee
may not institute a proceeding for the enforcement of its lien except in
connection with a proceeding for the enforcement of the lien of the Indenture
for the benefit of the Noteholders after the occurrence of such an Event of
Default.
Unless otherwise specified in the related Prospectus Supplement, in the
event the principal of the Notes of a Series is declared due and payable, as
described above, the holders of any such Notes issued at a discount from par may
be entitled to receive no more than an amount equal to the unpaid principal
amount thereof less the amount of such discount which is unamortized.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing with respect
to a Series of Notes, the Trustee shall be under no obligation to exercise any
of the rights or powers under the Indenture at the request or direction of any
of the holders of Notes of such Series, unless such holders offered to the
Trustee security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in complying with such request or
direction. Subject to such provisions for indemnification and certain
limitations contained in the Indenture, the holders of a majority of the then
aggregate outstanding amount of the Notes of such Series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or exercising any trust or power conferred on the
Trustee with respect to the Notes of such Series, and the holders of a majority
of the then aggregate outstanding amount of the Notes of such Series may, in
certain cases, waive any default with respect thereto, except a default in the
payment of principal or interest or a default in respect of a covenant or
provision of the Indenture that cannot be modified without the waiver or consent
of all the holders of the outstanding Notes of such Series affected thereby.
35
<PAGE>
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to Contracts), and the Trustee with respect to such
Series, without notice to or consent of the Holders (i) to cure any ambiguity,
(ii) to correct any defective provisions or to correct or supplement any
provision therein, (iii) to add to the duties of the Depositor, the Trust Fund
or Servicer, (iv) to add any other provisions with respect to matters or
questions arising under such Agreement or related Enhancement, (v) to add or
amend any provisions of such Agreement as required by a Rating Agency in order
to maintain or improve the rating of the Securities, or (vi) to comply with any
36
<PAGE>
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will not adversely affect in any material respect
the interests of any Holders of such Series, as evidenced by an opinion of
counsel. Any such amendment except pursuant to clause (vi) of the preceding
sentence shall be deemed not to adversely affect in any material respect the
interests of any Holder if the Trustee receives written confirmation from each
Rating Agency rating such Securities that such amendment will not cause such
Rating Agency to reduce the then current rating thereof. Unless otherwise
specified in the Prospectus Supplement, the Agreement for each Series may also
be amended by the Trustee, the Servicer, if applicable, and the Depositor with
respect to such Series with the consent of the Holders possessing not less than
66 2/3% of the aggregate outstanding principal amount of the Securities of such
Series or, if only certain Classes of such Series are afffected by such
amendment, 66 2/3% of the aggregate outstanding principal amount of the
Securities of each Class of such Series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of such Agreement or modifying in any manner the rights of Holders of
such Series; provided, however, that no such amendment may (a) reduce the amount
or delay the timing of payments on any Security without the consent of the
Holder of such Security; or (b) reduce the aforesaid percentage of the aggregate
outstanding principal amount of Securities of each Class, the Holders of which
are required to consent to any such amendment without the consent of the Holders
of 100% of the aggregate outstanding principal amount of each Class of
Securities affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series.
LIST OF HOLDERS
Upon written request of three or more Holders of record of a Series for
purposes of communicating with other Holders with respect to their rights under
the Agreement, which request is accompanied by a copy of the communication which
such Holders propose to transmit, the Trustee will afford such Holders access
during business hours to the most recent list of Holders of that Series held by
the Trustee.
No Agreement will provide for the holding of any annual or other meeting of
Holders.
REMIC ADMINISTRATOR
For any Series with respect to which a REMIC election is made, preparation
of certain reports and certain other administrative duties with respect to the
Trust Fund may be performed by a REMIC administrator, who may be an affiliate of
the Depositor.
TERMINATION
Pooling and Servicing Agreement; Trust Agreement. The obligations created
by the Pooling and Servicing Agreement or Trust Agreement for a Series will
terminate upon the distribution to Holders of all amounts distributable to them
pursuant to such Agreement after the earlier of (i) the later of (a) the final
payment or other liquidation of the last Primary Asset remaining in the Trust
Fund for such Series and (b) the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure or repossession in respect of any
Primary Asset or (ii) the repurchase, as described below, by the Servicer or
other entity specified in the related Prospectus Supplement from the Trustee for
such Series of all Primary Assets and other property at that time subject to
such Agreement. The Agreement for each Series permits, but does not require, the
Servicer or other entity specified in the related Prospectus Supplement to
purchase from the Trust Fund for such Series all remaining Primary Assets at a
price equal to, unless otherwise specified in the related Prospectus Supplement,
100% of the aggregate Principal Balance of such Primary Assets plus, with
respect to any property acquired in respect of a Primary Asset, if any, the
outstanding Principal Balance of the related Primary Asset at the time of
foreclosure, less, in either case, related unreimbursed Advances (in the case of
the Primary Assets, only to the extent not already reflected in the computation
of the aggregate Principal Balance of such Primary Assets) and unreimbursed
expenses (that are reimbursable pursuant to the terms of the Pooling and
Servicing Agreement) plus, in either
37
<PAGE>
case, accrued interest thereon at the weighted average rate on the related
Primary Assets through the last day of the Due Period in which such repurchase
occurs; provided, however, that if an election is made for treatment as a REMIC
under the Code, the repurchase price may equal the greater of (a) 100% of the
aggregate Principal Balance of such Primary Assets, plus accrued interest
thereon at the applicable net rates on the Primary Assets through the last day
of the month of such repurchase and (b) the aggregate fair market value of such
Primary Assets plus the fair market value of any property acquired in respect of
a Primary Asset and remaining in the Trust Fund. The exercise of such right will
effect early retirement of the Securities of such Series, but such entity's
right to so purchase is subject to the aggregate Principal Balance of the
Primary Assets at the time of repurchase being less than a fixed percentage, to
be set forth in the related Prospectus Supplement, of the aggregate Principal
Balance of the Primary Assets as of the Cut-off Date. In no event, however, will
the trust created by the Agreement continue beyond the expiration of 21 years
from the death of the last survivor of certain persons identified therein. For
each Series, the Servicer or the Trustee, as applicable, will give written
notice of termination of the Agreement to each Holder, and the final
distribution will be made only upon surrender and cancellation of the Securities
at an office or agency specified in the notice of termination. If so provided in
the related Prospectus Supplement for a Series, the Depositor or another entity
may effect an optional termination of the Trust Fund under the circumstances
described in such Prospectus Supplement. See 'DESCRIPTION OF THE
SECURITIES--Optional Redemption, Purchase or Termination' herein.
Indenture. The Indenture will be discharged with respect to a Series of
Notes (except with respect to certain continuing rights specified in the
Indenture) upon the delivery to the Trustee for cancellation of all the Notes of
such Series or, with certain limitations, upon deposit with the Trustee of funds
sufficient for the payment in full of all of the Notes of such Series.
In addition to such discharge with certain limitations, the Indenture will
provide that, if so specified with respect to the Notes of any Series, the
related Trust Fund will be discharged from any and all obligations in respect of
the Notes of such Series (except for certain obligations relating to temporary
Notes and exchange of Notes, to register the transfer of or exchange Notes of
such Series, to replace stolen, lost or mutilated Notes of such Series, to
maintain paying agencies and to hold monies for payment in trust) upon the
deposit with the Trustee, in trust, of money and/or direct obligations of or
obligations guaranteed by the United States of America which through the payment
of interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of and each
installment of interest on the Notes of such Series on the Last Scheduled
Distribution Date for such Notes and any installment of interest on such Notes
in accordance with the terms of the Indenture and the Notes of such Series. In
the event of any such defeasance and discharge of Notes of such Series, holders
of Notes of such Series would be able to look only to such money and/or direct
obligations for payment of principal and interest, if any, on their Notes until
maturity.
38
<PAGE>
CERTAIN LEGAL ASPECTS OF THE CONTRACTS
The following discussion contains summaries of certain legal aspects of
manufactured housing and home improvement installment sales contracts and
installment loan agreements which are general in nature. Because certain of such
legal aspects are governed by applicable state law (which laws may differ
substantially), the summaries do not purport to be complete nor reflect the laws
of any particular state, nor encompass the laws of all states in which the
properties securing the Contracts are situated. The summaries are qualified in
their entirety by reference to the applicable federal and state laws governing
the Contracts.
CONTRACTS SECURED BY MORTGAGES
Mortgages
Certain Contracts for a Series may be secured by either mortgages or deeds
of trust or deeds to secure debt (such Contracts are hereinafter referred to in
this section as 'mortgage loans'), depending upon the prevailing practice in the
state in which the property subject to a mortgage loan is located. The filing of
a mortgage, deed of trust or deed to secure debt creates a lien or title
interest upon the real property covered by such instrument and represents the
security for the repayment of an obligation that is customarily evidenced by a
promissory note. It is not prior to the lien for real estate taxes and
assessments or other charges imposed under governmental police powers and may
also be subject to other liens pursuant to the laws of the jurisdiction in which
the Mortgaged Property is located. Priority with respect to such instruments
depends on their terms, the knowledge of the parties to the mortgage 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/property owner or the land trustee (as described below), and the
mortgagee, who is the lender. Under the mortgage instrument, the mortgagor
delivers to the mortgagee a note or bond and the mortgage. In the case of a land
trust, there are three parties because title to the property is held by a land
trustee under a land trust agreement of which the borrower/property owner is the
beneficiary; at origination of a mortgage loan, the borrower executes a separate
undertaking to make payments on the mortgage note. A deed of trust transaction
normally has three parties, the trustor, who is the borrower/property owner; the
beneficiary, 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. The mortgagee's authority under a mortgage and the trustee's
authority under a deed of trust are governed by the law of the state in which
the real property is located, the express provisions of the mortgage or deed of
trust, and, in some cases, in deed of trust transactions, the directions of the
beneficiary.
Foreclosure on Mortgages
Foreclosure of a mortgage is generally accomplished by judicial action.
Generally, the action is initiated by the service of legal pleadings upon all
parties having an interest of record in the real property. Delays in completion
of the foreclosure occasionally may result from difficulties in locating
necessary parties defendant. When the mortgagee's right to foreclosure is
contested, the legal proceedings necessary to resolve the issue can be
time-consuming and expensive. After the completion of a judicial foreclosure
proceeding, the court may issue a judgment of foreclosure and appoint a receiver
or other officer to conduct the sale of the property. In some states, mortgages
may also be foreclosed by advertisement, pursuant to a power of sale provided in
the mortgage. Foreclosure of a mortgage by advertisement is essentially similar
to foreclosure of a deed of trust by non-judicial 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 any default by the borrower under the
terms of the note or deed of trust. In certain states, such foreclosure also may
be accomplished by judicial action in the manner provided for foreclosure of
mortgages. In some states, 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, the trustee in
some states must provide notice to any other individual having an interest in
the real property, including any junior lienholders. If the deed of trust is not
reinstated within any applicable cure period, a notice of sale must be posted in
a public place and, in most states, published for a specified period of time in
one or more newspapers. In addition, some state laws require that a copy of the
notice of sale be posted on the property and sent to all parties having an
interest of record in the property. The trustor, borrower, or any person having
a junior encumbrance on the real estate, may, during a reinstatement period,
cure the default by paying the entire amount in arrears plus the costs and
expenses incurred
39
<PAGE>
in enforcing the obligation. Generally, state law controls the amount of
foreclosure expenses and costs, including attorney's fees, which may be
recovered by a lender. If the deed of trust is not reinstated, a notice of sale
must be posted in a public place and, in most states, published for a specified
period of time in one or more newspapers. In addition, some state laws require
that a copy of the notice of sale be posted on the property, recorded and sent
to all parties having an interest in the real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the related mortgage note and
the mortgage as made and cannot be relieved from his default if the mortgagee
has exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counter-claims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the related
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 the 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 a public
sale. However, because of the difficulty potential third party purchasers at the
sale 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 a
foreclosure sale. Rather, it is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the unpaid
principal amount of the mortgage note secured by the mortgage or deed of trust
plus accrued and unpaid interest and the expenses of foreclosure, in which event
the mortgagor's debt will be extinguished or the lender may purchase for a
lesser amount in order to preserve its right against a borrower to seek a
deficiency judgment in states where such a judgment is available. Thereafter,
subject to the right of the borrower in some states to remain in possession
during the redemption period, the lender will assume the burdens of ownership,
including obtaining hazard insurance, paying taxes and making such repairs at
its own expense as are necessary to render the property suitable for sale. The
lender will commonly obtain the services of a real estate broker and pay the
broker's commission in connection with the sale of the property. Depending upon
market conditions, the ultimate proceeds of the sale of the property may not
equal the lender's investment in the property. Any loss may be reduced by the
receipt of any mortgage guaranty insurance proceeds.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a non-statutory right that must be exercised prior to the foreclosure sale.
In some states, redemption may occur only upon payment of the entire principal
balance of the loan, 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 at a foreclosure
sale, or of any purchaser from the lender subsequent to foreclosure or sale
under a deed of trust. Consequently the practical effect of a right of
redemption is to force the lender to retain the property and pay the expenses of
ownership until the redemption period has run. In some states, there is no right
to redeem property after a trustee's sale under a deed of trust.
40
<PAGE>
Junior Mortgages; Rights of Senior Mortgages
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a 'future
advance' clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
Anti-Deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by
41
<PAGE>
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, when
applicable, is that lenders will usually proceed first against the security
rather than bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a foreclosure 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 foreclosure sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws, the Federal
Soldiers' and Sailors' Relief Act, and state laws affording relief to debtors,
may interfere with or affect the ability of the secured lender to realize upon
collateral and/or enforce a deficiency judgment. For example, with respect to
federal bankruptcy law, the filing of a petition acts as a stay against the
enforcement of remedies for collection of a debt. Moreover, a court with federal
bankruptcy jurisdiction may permit a debtor through a Chapter 13 Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 petition. Some courts with federal bankruptcy
jurisdiction have approved plans, based on the particular facts of the
reorganization case, that effected the curing of a loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan may be modified if the borrower has filed a petition
under Chapter 13. These courts have suggested that such modifications may
include reducing the amount of each monthly payment, changing the rate of
interest, altering the repayment schedule and reducing the lender's security
interest to the value of the residence, thus leaving the lender a general
unsecured creditor for the difference between the value of the residence and the
outstanding balance of the loan. Federal bankruptcy law and limited case law
indicate that the foregoing modifications could not be applied to the terms of a
loan secured by property that is the principal residence of the debtor. In all
cases, the secured creditor is entitled to the value of its security plus
post-petition interest, attorney's fees and costs to the extent the value of the
security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted mortgage loan. In addition, substantive requirements are
imposed upon lenders in connection with the organization and the servicing of
mortgage loans by numerous federal and some state consumer protection laws. The
laws include the federal Truth-in-Lending Act, Real Estate Settlement Procedures
Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Credit
Reporting Act and related statutes and regulations. These federal laws impose
specific statutory liabilities upon lenders who originate loans and who fail to
comply with the provisions of the law. In some cases, this liability may affect
assignees of the loans.
Due-on-Sale Clauses
Due-on-sale clauses permit the lender to accelerate the maturity of the
loan if the borrower sells or transfers, whether voluntarily or involuntarily,
all or part of the real property securing the loan without the lender's prior
written consent. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases, typically involving
single family residential mortgage transactions, their enforceability has been
limited or denied. In any event, the Garn-St. Germain Depository Institutions
Act of 1982 (the 'Garn-St. Germain Act') preempts state constitutional,
statutory and case law that prohibits the enforcement of due-on-sale
42
<PAGE>
clauses and permits lenders to enforce these clauses in accordance with their
terms, subject to certain exceptions. As a result, due-on-sale clauses have
become generally enforceable except in those states whose legislatures exercised
their authority to regulate the enforceability of such clauses with respect to
mortgage loans that were (i) originated or assumed during the 'window period'
under the Garn-St. Germain Act which ended in all cases not later than October
15, 1982, and (ii) originated by lenders other than national banks, federal
savings institutions and federal credit unions. FHLMC has taken the position in
its published mortgage servicing standards that, out of a total of eleven
'window period states,' five states (Arizona, Michigan, Minnesota, New Mexico
and Utah) have enacted statutes extending, on various terms and for varying
periods, the prohibition on enforcement of due-on-sale clauses with respect to
certain categories of window period loans. Also, the Garn-St. Germain Act does
'encourage' lenders to permit assumption 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.
In addition, under federal bankruptcy law, due-on-sale clauses may not be
enforceable in bankruptcy proceedings and may, under certain circumstances, be
eliminated in any modified mortgage resulting from such bankruptcy proceeding.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security, courts
have invoked 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 fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ('Title V'), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
Title V authorizes any state to reimpose interest rate limits by adopting,
before April 1, 1983, a state law, or by
43
<PAGE>
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. 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.
CONTRACTS NOT SECURED BY MORTGAGES
General
The Contracts, other than those Contracts that are unsecured or secured by
mortgages on real estate (such Contracts are hereinafter referred to in this
section as 'contracts') generally are 'chattel paper' or constitute 'purchase
money security interests' each as defined in the Uniform Commercial Code (the
'UCC'). Pursuant to the UCC, the sale of chattel paper is treated in a manner
similar to perfection of a security interest in chattel paper. Under the related
Agreement, the Depositor will transfer physical possession of the contracts to
the Trustee or a designated custodian or may retain possession of the contracts
as custodian for the Trustee. In addition, the Depositor will make an
appropriate filing of a UCC-1 financing statement in the appropriate states to
give notice of the Trustee's ownership of the contracts. Unless otherwise
specified in the related Prospectus Supplement, the contracts will not be
stamped or otherwise marked to reflect their assignment from the Depositor to
the Trustee. Therefore, if through negligence, fraud or otherwise, a subsequent
purchaser were able to take physical possession of the contracts without notice
of such assignment, the Trustee's interest in the contracts could be defeated.
Security Interests in Home Improvements
The contracts that are secured by the home improvements financed thereby
grant to the originator of such contracts a purchase money security interest in
such home improvements to secure all or part of the purchase price of such home
improvements and related services. A financing statement generally is not
required to be filed to perfect a purchase money security interest in consumer
goods. Such purchase money security interests are assignable. In general, a
purchase money security interest grants to the holder a security interest that
has priority over a conflicting security interest in the same collateral and the
proceeds of such collateral. However, to the extent that the collateral subject
to a purchase money security interest becomes a fixture, in order for the
related purchase money security interest to take priority over a conflicting
interest in the fixture, the holder's interest in such Home Improvement must
generally be perfected by a timely fixture filing. In general, under the UCC, a
security interest does not exist under the UCC in ordinary building material
incorporated into an improvement on land. Home Improvement Contracts that
finance lumber, bricks, other types of ordinary building material or other goods
that are deemed to lose such characterization, upon incorporation of such
materials into the related property, will not be secured by a purchase money
security interest in the Home Improvement being financed.
Security Interests in the Manufactured Homes
The Manufactured Homes securing the manufactured housing contracts may be
located in all 50 states. Security interests in manufactured homes may be
perfected either by notation of the secured party's lien on the certificate of
title or by delivery of the required documents and payment of a fee to the state
motor vehicle authority, depending on state law. In some nontitle states,
perfection pursuant to the provisions of the UCC is required. 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, under certain circumstances, may 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 claiming an interest in the manufactured home under applicable state
real estate law. In order to perfect a security interest in a manufactured home
under real estate laws, the secured party 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 manufactured home is located.
If so specified in the related Prospectus Supplement, the manufactured housing
contracts may 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 maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, the related lender may be required to perfect a security interest
in the Manufactured Home under applicable real estate laws.
44
<PAGE>
In the event that the owner of a Manufactured Home moves it to a state
other than the state in which such Manufactured Home initially is registered,
under the laws of most states the perfected security interest in the
Manufactured Home would continue for four months after such relocation and
thereafter only if and after the owner re-registers the Manufactured Home in
such state. If the owner were to relocate a Manufactured Home to another state
and not re-register the Manufactered Home in such state, and if steps are not
taken to re-perfect a security interest in such state, the security interest in
the Manufactured Home would cease to be perfected. A majority of states
generally require surrender of a certificate of title to re-register a
Manufactured Home; accordingly, the secured party must surrender possession if
it holds the certificate of title to such Manufactured Home or, in the case of
Manufactured Homes registered in states which provide for notation of lien on
the certificate of title, notice of surrender would be given to the secured
party noted on the certificate of title. In states which do not require a
certificate of title for registration of a manufactured home, re-registration
could defeat perfection.
Under the laws of most states, liens for repairs performed on a
Manufactured Home and liens for personal property taxes take priority over a
perfected security interest in the Manufactured Home.
Enforcement of Security Interest in Manufactured Homes and Home
Improvements
So long as the Manufactured Home or Home Improvement has not become subject
to the real estate law, a creditor can repossess a Manufactured Home or Home
Improvement securing a contract by voluntary surrender, by 'self-help'
repossession that is 'peaceful' (i.e., without breach of the peace) or, in the
absence of voluntary surrender and the ability to repossess without breach of
the peace, by judicial process. The holder of a contract must give the debtor a
number of days' notice, which varies from 10 to 30 days depending on the state,
prior to commencement of any repossession. The UCC and consumer protection laws
in most states place restrictions on repossession sales, including requiring
prior notice to the debtor and commercial reasonableness in effecting such a
sale. The law in most states also requires that the debtor be given notice of
any sale prior to resale of the unit that the debtor may redeem it at or before
such resale.
Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgement from a debtor for any deficiency on repossession and
resale of the property securing the debtor's loan. However, some states impose
prohibitions or limitations on deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws
The so-called 'Holder-in-Due-Course' rule of the Federal Trade Commission
is intended to defeat the ability of the transferor of a consumer credit
contract which is the seller of goods which gave rise to the transaction (and
certain related lenders and assignees) to transfer such contract free of notice
of claims by the debtor thereunder. The effect of this rule is to subject the
assignee of such a contract to all claims and defenses which the debtor could
assert against the seller of goods. Liability under this rule is limited to
amounts paid under a contract; however, the obligor also may be able to assert
the rule to set off remaining amounts due as a defense against a claim brought
by the Trustee against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination and lending
pursuant to the contracts, including the Truth in Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
contract.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, as amended ('Title V'), provides that, subject to the following
conditions, state usury limitations shall not apply to any contract which is
secured by a first lien on certain kinds of consumer goods. The contracts would
be covered if they satisfy certain conditions, among other things, governing the
terms of any prepayments, late charges and deferral fees and requiring a 30-day
notice period prior to instituting any action leading to repossession of the
related unit.
45
<PAGE>
Title V authorized any state to reimpose limitations on interest rates and
finance charges by adopting before April 1, 1983 a law or constitutional
provision which expressly rejects application of the federal law. Fifteen states
adopted such a law prior to the April 1, 1983 deadline. In addition, even where
Title V was not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on loans covered by Title V.
INSTALLMENT SALES CONTRACTS
The Contracts may also consist of installment sales contracts. Under
certain types of installment sales contracts ('Installment Sales Contracts') the
seller (hereinafter referred to in this section as the 'lender') retains legal
title to the property and enters into an agreement with the purchaser
(hereinafter referred to in this section as the 'borrower') for the payment of
the purchase price, plus interest, over the term of such contract. Only after
full performance by the borrower of the contract is the lender obligated to
convey title to the property to the purchaser. As with mortgage or deed of trust
financing, during the effective period of the Installment Sales Contract, the
borrower is generally responsible for maintaining the property in good condition
and for paying real estate taxes, assessments and hazard insurance premiums
associated with the property.
The method of enforcing the rights of the lender under an Installment Sales
Contract varies on a state-by-state basis depending upon the extent to which
state courts are willing, or able pursuant to state statute, to enforce the
contract strictly according to the terms. The terms of Installment Sales
Contracts generally provide that upon a default by the borrower, the borrower
loses his or her right to occupy the property, the entire indebtedness is
accelerated, and the buyer's equitable interest in the property is forfeited.
The lender in such a situation does not have to foreclose in order to obtain
title to the property, although in some cases a quiet title action is in order
if the borrower has filed the Installment Sales Contract in local land records
and an ejectment action may be necessary to recover possession. In a few states,
particularly in cases of borrower default during the early years of an
Installment Sales Contract, the courts will permit ejectment of the buyer and a
forfeiture of his or her interest in the property. However, most state
legislatures have enacted provisions by analogy to mortgage law protecting
borrowers under Installment Sales Contracts from the harsh consequences of
forfeiture. Under such statutes, a judicial or nonjudicial foreclosure may be
required, the lender may be required to give notice of default and the borrower
may be granted some grace period during which the Installment Sales Contract may
be reinstated upon full payment of the default amount and the borrower may have
a post-foreclosure statutory redemption right. In other states, courts in equity
may permit a borrower with significant investment in the property under an
Installment Sales Contract for the sale of real estate to share in the proceeds
of sale of the property after the indebtedness is repaid or may otherwise refuse
to enforce the forfeiture clause. Nevertheless, generally speaking, the lender's
procedures for obtaining possession and clear title under an Installment Sales
Contract in a given state are simpler and less time-consuming and costly than
are the procedures for foreclosing and obtaining clear title to a property
subject to one or more liens.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT OF 1940
Under the Soldiers' and Sailors' Civil Relief Act of 1940, members of all
branches of the military on active duty, including draftees and reservists in
military service, (i) are entitled to have interest rates reduced and capped at
6% per annum, on obligations (including Contracts) incurred prior to the
commencement of military service for the duration of military service, (ii) may
be entitled to a stay of proceedings on any kind of foreclosure or repossession
action in the case of defaults on such obligations entered into prior to
military service for the duration of military service and (iii) may have the
maturity of such obligations incurred prior to military service extended, the
payments lowered and the payment schedule readjusted for a period of time after
the completion of military service. However, the benefits of (i), (ii), or (iii)
above are subject to challenge by creditors and if, in the opinion of the court,
the ability of a person to comply with such obligations is not materially
impaired by military service, the court may apply equitable principles
accordingly. If a borrower's obligation to repay amounts otherwise due on a
Contract included in a Trust Fund for a Series is relieved pursuant to the
Soldiers' and Sailors' Civil Relief Act of 1940, none of the Trust Fund, the
Servicer, the Depositor nor the Trustee will be required to advance such
amounts, and any loss in respect thereof may reduce the amounts available to be
paid to the holders of the Certificates of such Series. Unless otherwise
specified in the related Prospectus Supplement, any shortfalls in interest
collections on Contracts or Underlying Contracts relating to the Private
Securities, as applicable, included in a Trust Fund for a Series resulting from
application of the Soldiers' and Sailors' Civil Relief Act of 1940 will be
allocated to each Class of Securities of such Series that is entitled to receive
interest in
46
<PAGE>
respect of such Contracts or Underlying Contracts in proportion to the interest
that each such Class of Securities would have otherwise been entitled to receive
in respect of such Contracts or Underlying Contracts had such interest shortfall
not occurred.
THE DEPOSITOR
GENERAL
The Depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of LCPI, which is a wholly-owned
subsidiary of Lehman Brothers, a wholly-owned subsidiary of Holdings. The
Depositor's principal executive offices are located at Three World Financial
Center, New York, New York 10285. Its telephone number is (212) 298-2000.
The Depositor will not engage in any activities other than to authorize,
issue, sell, deliver, purchase and invest in (and enter into agreements in
connection with), and/or to engage in the establishment of one or more trusts
which will issue and sell, bonds, notes, debt or equity securities, obligations
and other securities and instruments ('Depositor Securities') collateralized or
otherwise secured or backed by, or otherwise representing an interest in, among
other things, receivables or pass through certificates, or participations or
certificates of participation or beneficial ownership in one or more pools of
receivables, and the proceeds of the foregoing, that arise in connection with
(i) the sale or lease of automobiles, trucks or other motor vehicles, equipment,
merchandise and other personal property, (ii) credit card purchases or cash
advances, (iii) the sale, licensing or other commercial provision of services,
rights, intellectual properties and other intangibles, (iv) trade financings,
(v) loans secured by certain first or junior mortgages on real estate, (vi)
loans to employee stock ownership plans and (vii) any and all other commercial
transactions and commercial, sovereign, student or consumer loans or
indebtedness and, in connection therewith or otherwise, purchasing, acquiring,
owning, holding, transferring, conveying, servicing, selling, pledging,
assigning, financing and otherwise dealing with such receivables, pass-through
certificates, or participations or certificates of participation or beneficial
ownership. Article Third of the Depositor's Certificate of Incorporation limits
the Depositor's activities to the above activities and certain related
activities, such as credit enhancement with respect to such Depositor
Securities, and to any activities incidental to and necessary or convenient for
the accomplishment of such purposes. The Certificate of Incorporation of the
Depositor provides that any Depositor Securities, except for subordinated
Depositor Securities, must be rated in one of the four highest categories by a
nationally recognized rating agency.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series of Securities for one or more of the following purposes:
(i) to purchase the related Primary Assets, (ii) to repay indebtedness which has
been incurred to obtain funds to acquire such Primary Assets, (iii) to establish
any Reserve Funds described in the related Prospectus Supplement and (iv) to pay
costs of structuring and issuing such Securities, including the costs of
obtaining Enhancement, if any. If so specified in the related Prospectus
Supplement, the purchase of the Primary Assets for a Series may be effected by
an exchange of Securities with the Seller of such Primary Assets.
47
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advise of Brown & Wood, special counsel to the Depositor. The
summary is based upon the provisions of the Code, the regulations promulgated
thereunder, including, where applicable, proposed regulations, and the judicial
and administrative rulings and decisions now in effect, all of which are subject
to change or possible differing interpretations. The statutory provisions,
regulations, and interpretations on which this interpretation is based are
subject to change, and such a change could apply retroactively.
The summary does not purport to deal with all aspects of federal income
taxation that may affect particular investors in light of their individual
circumstances, nor with certain types of investors subject to special treatment
under the federal income tax laws. This summary focuses primarily upon investors
who will hold Securities as 'capital assets' (generally, property held for
investment) within the meaning of Section 1221 of the Code, but much of the
discussion is applicable to other investors as well. Prospective Investors are
advised to consult their own tax advisers concerning the federal, state, local
and any other tax consequences to them of the purchase, ownership and
disposition of the Securities.
The federal income tax consequences to Holders will vary depending on
whether (i) the Securities of a Series are classified as indebtedness; (ii) an
election is made to treat the Trust Fund relating to a particular Series of
Securities as a real estate mortgage investment conduit ('REMIC') under the
Internal Revenue Code of 1986, as amended (the 'Code'); (iii) the Securities
represent an ownership interest in some or all of the assets included in the
Trust Fund for a Series or (iv) an election is made to treat the Trust Fund
relating to a particular Series of Certificates as a partnership. The Prospectus
Supplement for each Series of Securities will specify how the Securities will be
treated for federal income tax purposes and will discuss whether a REMIC
election, if any, will be made with respect to such Series.
TAXATION OF DEBT SECURITIES
Status as Real Property Contracts. Except to the extent provided otherwise
in a Supplement as to each Series of Securities Brown & Wood will have advised
the Depositor that: (i) Securities held by a mutual savings bank or domestic
building and loan association will represent interests in 'qualifying real
property loans' within the meaning of Code section 593(d); (ii) Securities held
by a domestic building and loan association will constitute 'loans . . . secured
by an interest in real property' within the meaning of Code section
7701(a)(19)(C)(v); (iii) Securities held by a real estate investment trust will
constitute 'real estate assets' within the meaning of Code section 856(c)(5)(A)
and interest on Securities will be considered '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 (iv) Securities representing interests
in obligations secured by manufactured housing treated as single family
residences under Code Section 25(e)(10) will be considered interests in
'qualified mortgages' as defined in Code Section 860G(a)(3).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ('Regular Interest Securities') are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the Holder's normal accounting method. Interest (other than original issue
discount) on Securities (other than Regular Interest Securities) that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
'Debt Securities.'
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with 'original issue discount' ('OID').
The following discussion is based in part on the rules governing OID which are
set forth in Sections 1271-1275 of the Code and the Treasury regulations issued
thereunder on February 2, 1994 (the 'OID Regulations'). A Holder should be
aware, however, that the OID Regulations do not adequately address certain
issues relevant to prepayable securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general,
48
<PAGE>
OID must be included in income in advance of the receipt of the cash
representing that income. The amount of OID on a Debt Security will be
considered to be zero if it is less than a de minimis amount determined under
the Code.
The issue price of a Debt Security is the first price at which a
substantial amount of Debt Securities of that class are sold to the public
(excluding bond houses, brokers, underwriters or wholesalers). If less than a
substantial amount of a particular class of Debt Securities is sold for cash on
or prior to the Closing Date, the issue price for such class will be treated as
the fair market value of such class on the Closing Date. The issue price of a
Debt Security also includes the amount paid by an initial Debt Security holder
for accrued interest that relates to a period prior to the issue date of the
Debt Security. The stated redemption price at maturity of a Debt Security
includes the original principal amount of the Debt Security, but generally will
not include distributions of interest if such distributions constitute
'qualified stated interest.'
Under the OID Regulations, qualified stated interest generally means
interest payable at a single fixed rate or qualified variable rate (as described
below) provided that such interest payments are unconditionally payable at
intervals of one year or less during the entire term of the Debt Security. The
OID Regulations state that interest payments are unconditionally payable only if
a late payment or nonpayment is expected to be penalized or reasonable remedies
exist to compel payment. Certain Debt Securities may provide for default
remedies in the event of late payment or nonpayment of interest. The interest on
such Debt Securities will be unconditionally payable and constitute qualified
stated interest, not OID. However, absent clarification of the OID Regulations,
where Debt Securities do not provide for default remedies, the interest payments
will be included in the Debt Security's stated redemption price at maturity and
taxed as OID. Interest is payable at a single fixed rate only if the rate
appropriately takes into account the length of the interval between payments.
Distributions of interest on Debt Securities with respect to which deferred
interest will accrue will not constitute qualified stated interest payments, in
which case the stated redemption price at maturity of such Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first Distribution Date on a Debt
Security is either longer or shorter than the interval between subsequent
Distribution Dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and such income will be capital gain if the Debt Security
is held as a capital asset. However, accrual method holders may elect to accrue
all de minimis OID as well as market discount under a constant interest method.
Debt Securities may provide for interest based on a qualified variable
rate. Under the OID Regulations, interest is treated as payable at a qualified
variable rate and not as contingent interest if, generally, (i) such interest is
unconditionally payable at least annually, (ii) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (iii)
interest is based on a 'qualified floating rate,' an 'objective rate,' or a
combination of 'qualified floating rates' that do not operate in a manner that
significantly accelerates or defers interest payments on such Debt Security. In
the case of Compound Interest Securities, certain Interest Weighted Securities,
and certain of the other Debt Securities, none of the payments under the
instrument will be considered qualified stated interest, and thus the aggregate
amount of all payments will be included in the stated redemption price.
The holder of a Debt Security issued with OID must include in gross income,
for all days during its taxable year on which it holds such Debt Security, the
sum of the 'daily portions' of such original issue discount. The
49
<PAGE>
amount of OID includible in income by a holder will be computed by allocating to
each day during a taxable year a pro rata portion of the original issue discount
that accrued during the relevant accrual period. In the case of a Debt Security
that is not a Regular Interest Security and the principal payments on which are
not subject to acceleration resulting from prepayments on the Contracts, the
amount of OID includible in income of a Holder for an accrual period (generally
the period over which interest accrues on the debt instrument) will equal the
product of the yield to maturity of the Debt Security and the adjusted issue
price of the Debt Security, reduced by any payments of qualified stated
interest. The adjusted issue price is the sum of its issue price plus prior
accruals or OID, reduced by the total payments made with respect to such Debt
Security in all prior periods, other than qualified stated interest payments.
The amount of OID to be included in income by a holder of a debt
instrument, such as certain Classes of the Debt Securities, that is subject to
acceleration due to prepayments on other debt obligations securing such
instruments (a 'Pay-Through Security'), is computed by taking into account the
anticipated rate of prepayments assumed in pricing the debt instrument (the
'Prepayment Assumption'). The amount of OID that will accrue during an accrual
period on a Pay-Through Security is the excess (if any) of the sum of (a) the
present value of all payments remaining to be made on the Pay-Through Security
as of the close of the accrual period and (b) the payments during the accrual
period of amounts included in the stated redemption price of the Pay-Through
Security, over the adjusted issue price of the Pay-Through Security at the
beginning of the accrual period. The present value of the remaining payments is
to be determined on the basis of three factors: (i) the original yield to
maturity of the Pay-Through Security (determined on the basis of compounding at
the end of each accrual period and properly adjusted for the length of the
accrual period), (ii) events which have occurred before the end of the accrual
period and (iii) the assumption that the remaining payments will be made in
accordance with the original Prepayment Assumption. The effect of this method is
to increase the portions of OID required to be included in income by a Holder to
take into account prepayments with respect to the Contracts at a rate that
exceeds the Prepayment Assumption, and to decrease (but not below zero for any
period) the portions of original issue discount required to be included in
income by a Holder of a Pay-Through Security to take into account prepayments
with respect to the Contracts at a rate that is slower than the Prepayment
Assumption. Although original issue discount will be reported to Holders of
Pay-Through Securities based on the Prepayment Assumption, no representation is
made to Holders that Contracts will be prepaid at that rate or at any other
rate.
The Depositor may adjust the accrual of OID on a Class of Regular Interest
Securities (or other regular interests in a REMIC) in a manner that it believes
to be appropriate, to take account of realized losses on the Contracts, although
the OID Regulations do not provide for such adjustments. If the Internal Revenue
Service were to require that OID be accrued without such adjustments, the rate
of accrual of OID for a Class of Regular Interest Securities could increase.
Certain classes of Regular Interest Securities may represent more than one
class of REMIC regular interests. Unless the applicable Prospectus Supplement
specifies otherwise, the Trustee intends, based on the OID Regulations, to
calculate OID on such Securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt Security's issue price) to offset such
OID by comparable economic accruals of portions of such excess.
Effects of Defaults and Delinquencies. Holders will be required to report
income with respect to the related Securities under an accrual method without
giving effect to delays and reductions in distributions attributable to a
default or delinquency on the Contracts, except possibly to the extent that it
can be established that such amounts are uncollectible. As a result, the amount
of income (including OID) reported by a holder of such a Security in any period
could significantly exceed the amount of cash distributed to such holder in that
period. The holder will eventually be allowed a loss (or will be allowed to
report a lesser amount of income) to the extent that the aggregate amount of
distributions on the Securities is reduced as a result of a Contract default.
However, the timing and character of such losses or reductions in income are
uncertain and, accordingly, holders of Securities should consult their own tax
advisors on this point.
Interest Weighted Securities. It is not clear how income should be accrued
with respect to Regular Interest Securities or Stripped Securities (as defined
under '--Tax Status as a Grantor Trust; General' herein) the payments on which
consist solely or primarily of a specified portion of the interest payments on
qualified
50
<PAGE>
mortgages held by the REMIC or on Contracts, underlying Pass-Through Securities
('Interest Weighted Securities'). The Issuer intends to take the position that
all of the income derived from an Interest Weighted Security should be treated
as OID and that the amount and rate of accrual of such OID should be calculated
by treating the Interest Weighted Security as a Compound Interest Security.
However, in the case of Interest Weighted Securities that are entitled to some
payments of principal and that are Regular Interest Securities the Internal
Revenue Service could assert that income derived from an Interest Weighted
Security should be calculated as if the Security were a security purchased at a
premium equal to the excess of the price paid by such holder for such Security
over its stated principal amount, if any. Under this approach, a holder would be
entitled to amortize such premium only if it has in effect an election under
Section 171 of the Code with respect to all taxable debt instruments held by
such holder, as described below. Alternatively, the Internal Revenue Service
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. Such treatment may be
more likely in the case of Interest Weighted Securities that are Stripped
Securities as described below. See '--Tax Status as a Grantor Trust--Discount or
Premium on Pass-Through Securities.'
Variable Rate Debt Securities. In the case of Debt Securities bearing
interest at a rate that varies directly, according to a fixed formula, with an
objective index, it appears that (i) the yield to maturity of such Debt
Securities and (ii) in the case of Pay-Through Securities, the present value of
all payments remaining to be made on such Debt Securities, should be calculated
as if the interest index remained at its value as of the issue date of such
Securities. Because the proper method of adjusting accruals of OID on a variable
rate Debt Security is uncertain, holders of variable rate Debt Securities should
consult their own tax advisers regarding the appropriate treatment of such
Securities for federal income tax purposes.
Market Discount. A purchaser of a Security may be subject to the market
discount rules of Sections 1276-1278 of the Code. A Holder that acquires a Debt
Security with more than a prescribed de minimis amount of 'market discount'
(generally, the excess of the principal amount of the Debt Security over the
purchaser's purchase price) will be required to include accrued market discount
in income as ordinary income in each month, but limited to an amount not
exceeding the principal payments on the Debt Security received in that month
and, if the Securities are sold, the gain realized. Such market discount would
accrue in a manner to be provided in Treasury regulations but, until such
regulations are issued, such market discount would in general accrue either (i)
on the basis of a constant yield (in the case of a Pay-Through Security, taking
into account a prepayment assumption) or (ii) in the ratio of (a) in the case of
Securities (or in the case of a Pass-Through Security, as set forth below, the
Contracts underlying such Security) not originally issued with original issue
discount, stated interest payable in the relevant period to total stated
interest remaining to be paid at the beginning of the period or (b) in the case
of Securities (or, in the case of a Pass-Through Security, as described below,
the Contracts underlying such Security) originally issued at a discount, OID in
the relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security (or, in the case of a Pass-Through Security, the
Contracts), the excess of interest paid or accrued to purchase or carry a
Security (or, in the case of a Pass-Through Security, as described below, the
Underlying Contracts) with market discount over interest received on such
Security is allowed as a current deduction only to the extent such excess is
greater than the market discount that accrued during the taxable year in which
such interest expense was incurred. In general, the deferred portion of any
interest expense will be deductible when such market discount is included in
income, including upon the sale, disposition, or repayment of the Security (or
in the case of a Pass-Through Security, an Underlying Contract). A holder may
elect to include market discount in income currently as it accrues, on all
market discount obligations acquired by such holder during the taxable year such
election is made and thereafter, in which case the interest deferral rule will
not apply.
Premium. A holder who purchases a Debt Security (other than an Interest
Weighted Security to the extent described above) at a cost greater than its
stated redemption price at maturity, generally will be considered to have
purchased the Security at a premium, which it may elect to amortize as an offset
to interest income on such Security (and not as a separate deduction item) on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the Securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a Class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such Class. If a holder makes an election
to amortize premium on a
51
<PAGE>
Debt Security, such election will apply to all taxable debt instruments
(including all REMIC regular interests and all pass-through certificates
representing ownership interests in a trust holding debt obligations) held by
the holder at the beginning of the taxable year in which the election is made,
and to all taxable debt instruments acquired thereafter by such holder, and will
be irrevocable without the consent of the Internal Revenue Service. Purchasers
who pay a premium for the Securities should consult their tax advisers regarding
the election to amortize premium and the method to be employed.
Election to Treat All Interest as Original Issue Discount. The OID
Regulations permit a holder of a Debt Security to elect to accrue all interest,
discount (including de minimis market or original issue discount) and premium in
income as interest, based on a constant yield method for Debt Securities
acquired on or after April 4, 1994. If such an election were to be made with
respect to a Debt Security with market discount, the holder of the Debt Security
would be deemed to have made an election to include in income currently market
discount with respect to all other debt instruments having market discount that
such holder of the Debt Security acquires during the year of the election or
thereafter. Similarly, a holder of a Debt Security that makes this election for
a Debt Security that is acquired at a premium will be deemed to have made an
election to amortize bond premium with respect to all debt instruments having
amortizable bond premium that such holder owns or acquires. The election to
accrue interest, discount and premium on a constant yield method with respect to
a Debt Security is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood, special counsel to the Depositor,
if a REMIC election is made with respect to a Series of Securities, then the
arrangement by which the Securities of that Series are issued will be treated as
a REMIC as long as all of the provisions of the applicable Agreement are
complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as 'Regular Interests' or 'Residual Interests' in
a REMIC, as specified in the related Prospectus Supplement.
Except to the extent specified otherwise in a Prospectus Supplement, if a
REMIC election is made with respect to a Series of Securities, (i) Securities
held by a mutual savings bank or domestic building and loan association will
represent interests in 'qualifying real property loans' within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
'qualifying real property loans'); (ii) Securities held by a domestic building
and loan association will constitute 'a regular or a residual interest in a
REMIC' within the meaning of Code Section 7701(a)(19)(C)(xi) (assuming that at
least 95% of the REMIC's assets consist of cash, government securities, 'loans
secured by an interest in real property,' and other types of assets described in
Code Section 7701(a)(19)(C)); and (iii) Securities held by a real estate
investment trust will constitute 'real estate assets' within the meaning of Code
Section 856(c)(6)(B), and income with respect to the Securities will be
considered '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)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (i), (ii) or (iii) above, then a Security will qualify for the tax
treatment described in (i), (ii) or (iii) in the proportion that such REMIC
assets are qualifying assets.
Status of Manufactured Housing Contracts. The REMIC Regulations provide
that obligations secured by interests in manufactured housing that qualify as
'single family residences' within the meaning of Code Section 25(e)(10) may be
treated as 'qualified mortgages' of the REMIC.
Under Section 25(e)(10), the term 'single family residence' includes any
manufactured home which has a minimum of 400 square feet of living space and a
minimum width in excess of 102 inches and which is of a kind customarily used at
a fixed location.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Interest Securities. In the case of a 'single
class REMIC,' however, the expenses will be allocated, under Treasury
regulations, among the holders of the Regular Interest Securities and the
holders of the Residual Interest Securities on a daily basis in proportion to
the relative amounts of income accruing to each Holder on that day. In the case
of a holder of a Regular Interest Security who is an individual or a
'pass-through interest holder' (including certain pass-through entities but not
including real estate investment trusts), such expenses will be deductible only
to the extent that such expenses, plus other 'miscellaneous itemized deductions'
of the Holder, exceed 2% of such Holder's adjusted gross income. In addition,
for taxable years beginning after December 31,
52
<PAGE>
1990, the amount of itemized deductions otherwise allowable for the taxable year
for an individual whose adjusted gross income exceeds the applicable amount
(which amount will be adjusted for inflation for taxable years beginning after
1990) will be reduced by the lesser of (i) 3% of the excess of adjusted gross
income over the applicable amount, or (ii) 80% of the amount of itemized
deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
Regular Interest Security to such a Holder. In general terms, a single class
REMIC is one that either (i) would qualify, under existing Treasury regulations,
as a grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
stated in the applicable Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related residual interest securities.
TAXATION OF THE REMIC
General. Although a REMIC is a separate entity for federal income tax
purposes, a REMIC is not generally subject to entity-level tax. Rather, the
taxable income or net loss of a REMIC is taken into account by the holders of
residual interests. As described above, the regular interests are generally
taxable as debt of the REMIC.
Tiered REMIC Structures. For certain series of REMIC Certificates, two or
more separate elections may be held to treat designated portions of the related
Trust Fund as REMICs ('Tiered REMICs') for federal income tax purposes. Upon the
issuance of any such series of REMIC Certificates, 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 Tiered REMICs will each qualify as a REMIC and the REMIC Certificates issued
by the Tiered REMICs, respectively, will be considered to evidence ownership of
Regular Certificates or Residual Certificates in the related REMIC within the
meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
'qualifying real property loans' under Section 593(d) of the Code, 'real estate
assets' within the meaning of Section 856(c)(5)(A) of the Code, and 'loans
secured by an interest in real property' under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Calculation of REMIC Income. The taxable income or net loss of a REMIC is
determined under an accrual method of accounting and in the same manner as in
the case of an individual, with certain adjustments. In general, the taxable
income or net loss will be the difference between (i) the gross income produced
by the REMIC's assets, including stated interest and any original issue discount
or market discount on loans and other assets, and (ii) deductions, including
stated interest and original issue discount accrued on Regular Interest
Securities, amortization of any premium with respect to Contracts, and servicing
fees and other expenses of the REMIC. A holder of a Residual Interest Security
that is an individual or a 'pass-through interest holder' (including certain
pass-through entities, but not including real estate investment trusts) will be
unable to deduct servicing fees payable on the loans or other administrative
expenses of the REMIC for a given taxable year, to the extent that such
expenses, when aggregated with such holder's other miscellaneous itemized
deductions for that year, do not exceed two percent of such holder's adjusted
gross income.
For purposes of computing its taxable income or net loss, the REMIC should
have an initial aggregate tax basis in its assets equal to the aggregate fair
market value of the regular interests and the residual interests on the Startup
Day (generally, the day that the interests are issued). That aggregate basis
will be allocated among the assets of the REMIC in proportion to their
respective fair market values.
The OID provisions of the Code apply to loans of individuals originated on
or after March 2, 1984, and the market discount provisions apply to loans
originated after July 18, 1984. Subject to possible application of the de
minimis rules, the method of accrual by the REMIC of OID income on such loans
will be equivalent to the method under which holders of Pay-Through Securities
accrue original issue discount (i.e., under the constant yield method taking
into account the Prepayment Assumption). The REMIC will deduct OID on the
Regular Interest Securities in the same manner that the holders of the Regular
Interest Securities include such discount in income, but without regard to the
de minimis rules. See 'Taxation of Debt Securities' above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
53
<PAGE>
To the extent that the REMIC's basis allocable to loans that it holds
exceeds their principal amounts, the resulting premium, if attributable to
mortgages originated after September 27, 1985, will be amortized over the life
of the loans (taking into account the Prepayment Assumption) on a constant yield
method. Although the law is somewhat unclear regarding recovery of premium
attributable to loans originated on or before such date, it is possible that
such premium may be recovered in proportion to payments of loan principal.
Prohibited Transactions and Contributions Tax. The REMIC will be subject
to a 100% tax on any net income derived from a 'prohibited transaction.' For
this purpose, net income will be calculated without taking into account any
losses from prohibited transactions or any deductions attributable to any
prohibited transaction that resulted in a loss. In general, prohibited
transactions include: (i) subject to limited exceptions, the sale or other
disposition of any qualified mortgage transferred to the REMIC; (ii) subject to
a limited exception, the sale or other disposition of a cash flow investment;
(iii) the receipt of any income from assets not permitted to be held by the
REMIC pursuant to the Code; or (iv) the receipt of any fees or other
compensation for services rendered by the REMIC. It is anticipated that a REMIC
will not engage in any prohibited transactions in which it would recognize a
material amount of net income. In addition, subject to a number of exceptions, a
tax is imposed at the rate of 100% on amounts contributed to a REMIC after the
close of the three-month period beginning on the Startup Day. The holders of
Residual Interest Securities will generally be responsible for the payment of
any such taxes imposed on the REMIC. To the extent not paid by such holders or
otherwise, however, such taxes will be paid out of the Trust Fund and will be
allocated pro rata to all outstanding Classes of Securities of such REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of a Certificate representing a residual interest (a 'Residual
Interest Security') will take into account the 'daily portion' of the taxable
income or net loss of the REMIC for each day during the taxable year on which
such holder held the Residual Interest Security. The daily portion is determined
by allocating to each day in any calendar quarter its ratable portion of the
taxable income or net loss of the REMIC for such quarter, and by allocating that
amount among the holders (on such day) of the Residual Interest Securities in
proportion to their respective holdings on such day.
The holder of a Residual Interest Security must report its proportionate
share of the taxable income of the REMIC whether or not it receives cash
distributions from the REMIC attributable to such income or loss. The reporting
of taxable income without corresponding distributions could occur, for example,
in certain REMIC issues in which the loans held by the REMIC were issued or
acquired at a discount, since mortgage prepayments cause recognition of discount
income, while the corresponding portion of the prepayment could be used in whole
or in part to make principal payments on REMIC Regular Interests issued without
any discount or at an insubstantial discount. (If this occurs, it is likely that
cash distributions will exceed taxable income in later years.) Taxable income
may also be greater in earlier years of certain REMIC issues as a result of the
fact that interest expense deductions, as a percentage of outstanding principal
on REMIC Regular Interest Securities, will typically increase over time as lower
yielding Securities are paid, whereas interest income with respect to loans will
generally remain constant over time as a percentage of loan principal.
In any event, because the holder of a residual interest is taxed on the net
income of the REMIC, the taxable income derived from a Residual Interest
Security in a given taxable year will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pretax yield. Therefore, the after-tax
yield on the Residual Interest Security may be less than that of such a bond or
instrument.
Limitation on Losses. The amount of the REMIC's net loss that a holder may
take into account currently is limited to the holder's adjusted basis at the end
of the calendar quarter in which such loss arises. A holder's basis in a
Residual Interest Security will initially equal such holder's purchase price,
and will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased (but not below zero) by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of the REMIC generated by the same REMIC. The ability of
holders of Residual Interest Securities to deduct net losses may be subject to
additional limitations under the Code, as to which such holders should consult
their tax advisers.
Distributions. Distributions on a Residual Interest Security (whether at
their scheduled times or as a result of prepayments) will generally not result
in any additional taxable income or loss to a holder of a Residual Interest
Security. If the amount of such payment exceeds a holder's adjusted basis in the
Residual Interest
54
<PAGE>
Security, however, the holder will recognize gain (treated as gain from the sale
of the Residual Interest Security) to the extent of such excess.
Sale or Exchange. A holder of a Residual Interest Security will recognize
gain or loss on the sale or exchange of a Residual Interest Security equal to
the difference, if any, between the amount realized and such holder's adjusted
basis in the Residual Interest Security at the time of such sale or exchange.
Except to the extent provided in regulations, which have not yet been issued,
any loss upon disposition of a Residual Interest Security will be disallowed if
the selling holder acquires any residual interest in a REMIC or similar mortgage
pool within six months before or after such disposition.
Excess Inclusions. The portion of the REMIC taxable income of a holder of
a Residual Interest Security consisting of 'excess inclusion' income may not be
offset by other deductions or losses, including net operating losses, on such
holder's federal income tax return. An exception applies to organizations to
which Code Section 593 applies (generally, certain thrift institutions);
however, such exception will not apply if the aggregate value of the Residual
Interest Securities is not considered to be 'significant,' as described below.
Further, if the holder of a Residual Interest Security is an organization
subject to the tax on unrelated business income imposed by Code Section 511,
such holder's excess inclusion income will be treated as unrelated business
taxable income of such holder. In addition, under Treasury regulations yet to be
issued, if a real estate investment trust, a regulated investment company, a
common trust fund, or certain cooperatives were to own a Residual Interest
Security, a portion of dividends (or other distributions) paid by the real
estate investment trust (or other entity) would be treated as excess inclusion
income. If a Residual Security is owned by a foreign person excess inclusion
income is subject to tax at a rate of 30% which may not be reduced by treaty, is
not eligible for treatment as 'portfolio interest' and is subject to certain
additional limitations. See 'Tax Treatment of Foreign Investors.' Regulations
provide that a Residual Interest Security has significant value only if (i) the
aggregate issue price of the Residual Interest Security is at least 2% of the
aggregate of the issue prices of all Regular Interest Securities and Residual
Interest Securities in the REMIC and (ii) the anticipated weighted average life
(determined as specified in the Proposed Regulations) of the Residual Interest
Securities is at least 20% of the weighted average life of the REMIC.
The excess inclusion portion of a REMIC's income is generally equal to the
excess, if any, of REMIC taxable income for the quarterly period allocable to a
Residual Interest Security, over the daily accruals for such quarterly period of
(i) 120% of the long term applicable federal rate on the Startup Date multiplied
by (ii) the adjusted issue price of such Residual Interest Security at the
beginning of such quarterly period. The adjusted issue price of a Residual
Interest at the beginning of each calendar quarter will equal its issue price
(calculated in a manner analogous to the determination of the issue price of a
Regular Interest), increased by the aggregate of the daily accruals for prior
calendar quarters, and decreased (but not below zero) by the amount of loss
allocated to a holder and the amount of distributions made on the Residual
Interest Security before the beginning of the quarter. The long-term federal
rate, which is announced monthly by the Treasury Department, is an interest rate
that is based on the average market yield of outstanding marketable obligations
of the United States government having remaining maturities in excess of nine
years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See '--Restrictions on Ownership and
Transfer of Residual Interest Securities' and '--Tax Treatment of Foreign
Investors' below.
Restrictions on Ownership and Transfer of Residual Interest Securities. As
a condition to qualification as a REMIC, reasonable arrangements must be made to
prevent the ownership of a REMIC residual interest by any 'Disqualified
Organization.' Disqualified Organizations include the United States, any State
or political subdivision thereof, any foreign government, any international
organization, or any agency or instrumentality of any of the foregoing, a rural
electric or telephone cooperative described in Section 1381(a)(2)(C) of the
Code, or any entity exempt from the tax imposed by Sections 1-1399 of the Code,
if such entity is not subject to tax on its unrelated business income.
Accordingly, the applicable Pooling and Servicing Agreement will prohibit
Disqualified Organizations from owning a Residual Interest Security. In
addition, no transfer of a Residual Interest Security will be permitted unless
the proposed transferee shall have furnished to the Trustee an affidavit
representing and warranting that it is neither a Disqualified Organization nor
an agent or nominee acting on behalf of a Disqualified Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
55
<PAGE>
Interest Security at the time of the transfer. In addition, if a Disqualified
Organization holds an interest in a pass-through entity after March 31, 1988
(including, among others, a partnership, trust, real estate investment trust,
regulated investment company, or any person holding as nominee), that owns a
Residual Interest Security, the pass-through entity will be required to pay an
annual tax on its allocable share of the excess inclusion income of the REMIC.
Under the REMIC Regulations, if a Residual Interest Security is a
'noneconomic residual interest,' as described below, a transfer of a Residual
Interest Security to a United States person will be disregarded for all Federal
tax purposes unless no significant purpose of the transfer was to impede the
assessment or collection of tax. A Residual Interest Security is a 'noneconomic
residual interest' unless, at the time of the transfer (i) the present value of
the expected future distributions on the Residual Interest Security at least
equals the product of the present value of the anticipated excess inclusions and
the highest rate of tax for the year in which the transfer occurs, and (ii) the
transferor reasonably expects that the transferee will receive distributions
from the REMIC at or after the time at which the taxes accrue on the anticipated
excess inclusions in an amount sufficient to satisfy the accrued taxes. If a
transfer of a Residual Interest is disregarded, the transferor would be liable
for any Federal income tax imposed upon taxable income derived by the transferee
from the REMIC. The REMIC Regulations provide no guidance as to how to determine
if a significant purpose of a transfer is to impede the assessment or collection
of tax. A similar type of limitation exists with respect to certain transfers of
residual interests by foreign persons to United States persons. See '--Tax
Treatment of Foreign Investors.'
Mark to Market Rules. Prospective purchasers of a REMIC Residual Interest
Security should be aware that on December 28, 1993, the Internal Revenue Service
released temporary regulations (the 'Temporary Mark to Market Regulations')
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 Temporary Mark to Market
Regulations provide that for purposes of this mark-to-market requirement, a
'negative value' REMIC residual interest is not treated as a security and thus
may not be marked to market. In addition, a dealer is not required to identify
such REMIC Residual Interest Security as held for investment. In general, a
REMIC Residual Interest Security has negative value if, as of the date a
taxpayer acquires the REMIC Residual Interest Security, the present value of the
tax liabilities associated with holding the REMIC Residual Interest Security
exceeds the sum of (i) the present value of the expected future distributions on
the REMIC Residual Interest Security, and (ii) the present value of the
anticipated tax savings associated with holding the REMIC Residual Interest
Security as the REMIC generates losses. The amounts and present values of the
anticipated tax liabilities, expected future distributions and anticipated tax
savings are all to be determined using (i) the prepayment and reinvestment
assumptions adopted under Section 1272(a)(6), or that would have been adopted
had the REMIC's regular interests been issued with OID, (ii) any required or
permitted clean up calls, or required qualified liquidation provided for in the
REMIC's organizational documents and (iii) a discount rate equal to the
'applicable Federal rate' (as specified in Section 1274(d)(1) that would apply
to a debt instrument issued on the date of acquisition of the REMIC Residual
Interest Security. Furthermore, the Temporary Mark to Market Regulations provide
the IRS with the authority to treat any REMIC Residual Interest Security having
substantially the same economic effect as a 'negative value' residual interest
as a 'negative value' residual interest.
On January 3, 1995, the IRS released proposed regulations under section 475
(the 'Proposed Mark-to-Market Regulations'). The Proposed Mark-to-Market
Regulations provide that any REMIC Residual Interest acquired after January 3,
1995 cannot be marked to market, regardless of the value of such REMIC residual
interest. The Temporary Mark-to-Market Regulations described above still apply
to any REMIC Residual Interest acquired on or prior to Janaury 3, 1995. Thus,
holders of positive value REMIC Residual Interests acquired on or prior to
January 3, 1995 may continue to mark such residual interests to market for the
entire economic life of such interests.
ADMINISTRATIVE MATTERS
The REMIC's books must be maintained on a calendar year basis and the REMIC
must file an annual federal income tax return. The REMIC will also be subject to
the procedural and administrative rules of the Code applicable to partnerships,
including the determination of any adjustments to, among other things, items of
REMIC income, gain, loss, deduction, or credit, by the Internal Revenue Service
in a unified administrative proceeding.
56
<PAGE>
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood, special
counsel to the Depositor, the Trust Fund relating to a Series of Securities will
be classified for federal income tax purposes as a grantor trust under Subpart
E, Part 1 of Subchapter J of the Code and not as an association taxable as a
corporation (the Securities of such Series, 'Pass-Through Securities'). In some
Series there will be no separation of the principal and interest payments on the
Contracts. In such circumstances, a Holder will be considered to have purchased
a pro rata undivided interest in each of the Contracts. In other cases
('Stripped Securities'), sale of the Securities will produce a separation in the
ownership of all or a portion of the principal payments from all or a portion of
the interest payments on the Contracts.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Contracts (not reduced by the amount payable as
fees to the Trustee and the Servicer and similar fees (collectively, the
'Servicing Fee')), at the same time and in the same manner as such items would
have been reported under the Holder's tax accounting method had it held its
interest in the Contracts directly, received directly its share of the amounts
received with respect to the Contracts, and paid directly its share of the
Servicing Fees. In the case of Pass-Through Securities other than Stripped
Securities, such income will consist of a pro rata share of all of the income
derived from all of the Contracts and, in the case of Stripped Securities, such
income will consist of a pro rata share of the income derived from each stripped
bond or stripped coupon in which the Holder owns an interest. The holder of a
Security will generally be entitled to deduct such Servicing Fees under Section
162 or Section 212 of the Code to the extent that such Servicing Fees represent
'reasonable' compensation for the services rendered by the Trustee and the
Servicer (or third parties that are compensated for the performance of
services). In the case of a noncorporate holder, however, Servicing Fees (to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation) will be deductible in computing such holder's regular tax
liability only to the extent that such fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount (which
amount will be adjusted for inflation in taxable years beginning after 1990)
will be reduced by the lesser of (i) 3% of the excess of adjusted gross income
over the applicable amount or (ii) 80% of the amount of itemized deductions
otherwise allowable for such taxable year.
Discount or Premium on Pass-Through Securities. The holder's purchase
price of a Pass-Through Security is to be allocated among the Contracts in
proportion to their fair market values, determined as of the time of purchase of
the Securities. In the typical case, the Trustee (to the extent necessary to
fulfill its reporting obligations) will treat each Contract as having a fair
market value proportional to the share of the aggregate principal balances of
all of the Contracts that it represents, since the Securities, unless otherwise
specified in the applicable Prospectus Supplement, will have a relatively
uniform interest rate and other common characteristics. To the extent that the
portion of the purchase price of a Pass-Through Security allocated to a Contract
(other than to a right to receive any accrued interest thereon and any
undistributed principal payments) is less than or greater than the portion of
the principal balance of the Contract allocable to the Security, the interest in
the Contract allocable to the Pass-Through Security will be deemed to have been
acquired at a discount or premium, respectively.
The treatment of any discount will depend on whether the discount
represents OID or market discount. In the case of a Contract with OID in excess
of a prescribed de minimis amount or a Stripped Security, a holder of a Security
will be required to report as interest income in each taxable year its share of
the amount of OID that accrues during that year in the manner described above.
OID with respect to a Contract could arise, for example, by virtue of the
financing of points by the originator of the Loan, or by virtue of the charging
of points by the originator of the Contract in an amount greater than a
statutory de minimis exception, in circumstances under which the points are not
currently deductible pursuant to applicable Code provisions. Any market discount
or premium on a Contract will be includible in income, generally in the manner
described above, except that in the case of Pass-Through Securities, market
discount is calculated with respect to the Contracts underlying the Certificate,
rather than with respect to the Security. A Holder that acquires an interest in
a Contract originated after July 18, 1984 with more than a de minimis amount of
market discount (generally, the excess of the principal amount of the Contract
over the purchaser's allocable purchase price) will be required to include
accrued market
57
<PAGE>
discount in income in the manner set forth above. See '--Taxation of Debt
Securities; Market Discount' and '--Premium' above.
In the case of market discount on a Pass-Through Security attributable to
Contracts originated on or before July 18, 1984, the holder generally will be
required to allocate the portion of such discount that is allocable to a loan
among the principal payments on the Contract and to include the discount
allocable to each principal payment in ordinary income at the time such
principal payment is made. Such treatment would generally result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described in the preceding paragraph.
Stripped Securities. A Stripped Security may represent a right to receive
only a portion of the interest payments on the Contracts, a right to receive
only principal payments on the Contracts, or a right to receive certain payments
of both interest and principal. Certain Stripped Securities ('Ratio Strip
Securities') may represent a right to receive differing percentages of both the
interest and principal on each Contract. Pursuant to Section 1286 of the Code,
the separation of ownership of the right to receive some or all of the interest
payments on an obligation from ownership of the right to receive some or all of
the principal payments results in the creation of 'stripped bonds' with respect
to principal payments and 'stripped coupons' with respect to interest payments.
Section 1286 of the Code applies the OID rules to stripped bonds and stripped
coupons. For purposes of computing original issue discount, a stripped bond or a
stripped coupon is treated as a debt instrument issued on the date that such
stripped interest is purchased with an issue price equal to its purchase price
or, if more than one stripped interest is purchased, the ratable share of the
purchase price allocable to such stripped interest.
Servicing fees in excess of reasonable servicing fees ('excess servicing')
will be treated under the stripped bond rules. If the excess servicing fee is
less than 100 basis points (i.e. 1% interest on the Contract principal balance)
or the Securities are initially sold with a de minimis discount (assuming no
prepayment assumption is required), any non-de minimis discount arising from a
subsequent transfer of the Securities should be treated as market discount. The
IRS appears to require that reasonable servicing fees be calculated on a
Contract by Contract basis, which could result in some Contracts being treated
as having more than 100 basis points of interest stripped off.
The Code, OID Regulations and judicial decisions provide no direct guidance
as to how the interest and original issue discount rules are to apply to
Stripped Securities and other Pass-Through Securities. Under the method
described above for Pay-Through Securities (the 'Cash Flow Bond Method'), a
prepayment assumption is used and periodic recalculations are made which take
into account with respect to each accrual period the effect of prepayments
during such period. However, the 1986 Act does not, absent Treasury regulations,
appear specifically to cover instruments such as the Stripped Securities which
technically represent ownership interests in the Underlying Contracts, rather
than being debt instruments 'secured by' those loans. Nevertheless, it is
believed that the Cash Flow Bond Method is a reasonable method of reporting
income for such Securities, and it is expected that OID will be reported on that
basis unless otherwise specified in the related Prospectus Supplement. In
applying the calculation to Pass-Through Securities, the Trustee will treat all
payments to be received by a holder with respect to the underlying Contracts as
payments on a single installment obligation. The Internal Revenue Service could,
however, assert that original issue discount must be calculated separately for
each Contract underlying a Security.
Under certain circumstances, if the Contracts prepay at a rate faster than
the Prepayment Assumption, the use of the Cash Flow Bond Method may accelerate a
Holder's recognition of income. If, however, the Contracts prepay at a rate
slower than the Prepayment Assumption, in some circumstances the use of this
method may decelerate a Holder's recognition of income.
In the case of a Stripped Security that is an Interest Weighted Security,
the Trustee intends, absent contrary authority, to report income to Security
holders as OID, in the manner described above for Interest Weighted Securities.
Possible Alternative Characterizations. The characterizations of the
Stripped Securities described above are not the only possible interpretations of
the applicable Code provisions. Among other possibilities, the Internal Revenue
Service could contend that (i) in certain Series, each non-Interest Weighted
Security is composed of an unstripped undivided ownership interest in Contracts
and an installment obligation consisting of stripped principal payments; (ii)
the non-Interest Weighted Securities are subject to the contingent payment
provisions of
58
<PAGE>
the Proposed Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Contracts and an
installment obligation consisting of stripped interest payments.
Given the variety of alternatives for treatment of the Stripped Securities
and the different federal income tax consequences that result from each
alternative, potential purchasers are urged to consult their own tax advisers
regarding the proper treatment of the Securities for federal income tax
purposes.
Character as Qualifying Contracts. In the case of Stripped Securities
there is no specific legal authority existing regarding whether the character of
the Securities, for federal income tax purposes, will be the same as the
Contracts. The IRS could take the position that the Contracts' character is not
carried over to the Securities in such circumstances. Pass-Through Securities
will be, and, although the matter is not free from doubt, Stripped Securities
should be considered to represent 'qualifying real property loans' within the
meaning of Section 593(d) of the Code, 'real estate assets' within the meaning
of Section 856(c)(6)(B) of the Code, and 'loans secured by an interest in real
property' within the meaning of Section 7701(a)(19)(C)(v) of the Code; and
interest income attributable to the Securities should be considered to represent
'interest on obligations secured by mortgages on real property or on interests
in real property' with the meaning of Section 856(c)(3)(B) of the Code. Reserves
or funds underlying the Securities may cause a proportionate reduction in the
above-described qualifying status categories of Securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, a Holder's tax basis in its Security is the price
such holder pays for a Security, plus amounts of original issue or market
discount included in income and reduced by any payments received (other than
qualified stated interest payments) and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a Security, measured by the
difference between the amount realized and the Security's basis as so adjusted,
will generally be capital gain or loss, assuming that the Security is held as a
capital asset. In the case of a Security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of (i) the amount that
would have been includible in the holder's income if the yield on such Regular
Interest Security had equaled 110% of the applicable federal rate as of the
beginning of such holder's holding period, over the amount of ordinary income
actually recognized by the holder with respect to such Regular Interest
Security. For taxable years beginning after December 31, 1993, the maximum tax
rate on ordinary income for individual taxpayers is 39.6% and the maximum tax
rate on long-term capital gains reported after December 31, 1990 for such
taxpayers is 28%. The maximum tax rate on both ordinary income and long-term
capital gains of corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to Trust
Funds as to which a partnership election is made, a Holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
'backup withholding' at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the Securities. This withholding generally applies
if the holder of a Security (i) fails to furnish the Trustee with its taxpayer
identification number ('TIN'); (ii) furnishes the Trustee an incorrect TIN;
(iii) fails to report properly interest, dividends or other 'reportable
payments' as defined in the Code; or (iv) under certain circumstances, fails to
provide the Trustee or such holder's securities broker with a certified
statement, signed under penalty of perjury, that the TIN provided is its correct
number and that the holder is not subject to backup withholding. Backup
withholding will not apply, however, with respect to certain payments made to
Holders, including payments to certain exempt recipients (such as exempt
organizations) and to certain Nonresidents (as defined below). Holders should
consult their tax advisers as to their qualification for exemption from backup
withholding and the procedure for obtaining the exemption.
The Trustee will report to the Holders and to the Servicer for each
calendar year the amount of any 'reportable payments' during such year and the
amount of tax withheld, if any, with respect to payments on the Securities.
59
<PAGE>
TAX TREATMENT OF FOREIGN INVESTORS
Subject to the discussion below with respect to Trust Funds as to which a
partnership election is made, under the Code, unless interest (including OID)
paid on a Security (other than a Residual Interest Security) is considered to be
'effectively connected' with a trade or business conducted in the United States
by a nonresident alien individual, foreign partnership or foreign corporation
('Nonresidents'), such interest will normally qualify as portfolio interest
(except where (i) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (ii) the recipient
is a controlled foreign corporation to which the issuer is a related person) and
will be exempt from federal income tax. Upon receipt of appropriate ownership
statements, the issuer normally will be relieved of obligations to withhold tax
from such interest payments. These provisions supersede the generally applicable
provisions of United States law that would otherwise require the issuer to
withhold at a 30% rate (unless such rate were reduced or eliminated by an
applicable tax treaty) on, among other things, interest and other fixed or
determinable, annual or periodic income paid to Nonresidents. Holders of
Pass-Through Securities and Stripped Securities, including Ratio Strip
Securities, however, may be subject to withholding to the extent that the
Contracts were originated on or before July 18, 1984.
Interest and OID of Holders who are foreign persons are not subject to
withholding if they are effectively connected with a United States business
conducted by the Holder. They will, however, generally be subject to the regular
United States income tax.
Payments to holders of Residual Interest Securities who are foreign persons
will generally be treated as interest for purposes of the 30% (or lower treaty
rate) United States withholding tax. Holders should assume that such income does
not qualify for exemption from United States withholding tax as 'portfolio
interest.' It is clear that, to the extent that a payment represents a portion
of REMIC taxable income that constitutes excess inclusion income, a holder of a
Residual Interest Security will not be entitled to an exemption from or
reduction of the 30% (or lower treaty rate) withholding tax rule. If the
payments are subject to United States withholding tax, they generally will be
taken into account for withholding tax purposes only when paid or distributed
(or when the Residual Interest Security is disposed of). The Treasury has
statutory authority, however, to promulgate regulations which would require such
amounts to be taken into account at an earlier time in order to prevent the
avoidance of tax. Such regulations could, for example, require withholding prior
to the distribution of cash in the case of Residual Interest Securities that do
not have significant value. Under the REMIC Regulations, if a Residual Interest
Security has tax avoidance potential, a transfer of a Residual Interest Security
to a Nonresident will be disregarded for all Federal tax purposes. A Residual
Interest Security has tax avoidance potential unless, at the time of the
transfer the transferor reasonably expects that the REMIC will distribute to the
transferee residual interest holder amounts that will equal at least 30% of each
excess inclusion, and that such amounts will be distributed at or after the time
at which the excess inclusions accrue and not later than the calendar year
following the calendar year of accrual. If a Nonresident transfers a Residual
Interest Security to a United States person, and if the transfer has the effect
of allowing the transferor to avoid tax on accrued excess inclusions, then the
transfer is disregarded and the transferor continues to be treated as the owner
of the Residual Interest Security for purposes of the withholding tax provisions
of the Code. See '--Excess Inclusions.'
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood, special counsel to the Depositor, will deliver its opinion
that a Trust Fund for which a partnership election is made will not be 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 Trust Agreement and related documents will be complied with,
and on counsel's conclusions that (1) the Trust Fund will not have certain
characteristics necessary for a business trust to be classified as an
association taxable as a corporation and (2) the nature of the income of the
Trust Fund will exempt it from the rule that certain publicly traded
partnerships are taxable as corporations or the issuance of the Certificates has
been structured as a private placement under an IRS safe harbor, so that the
Trust Fund will not be characterized as a publicly traded partnership taxable as
a corporation.
If the Trust Fund were taxable as a corporation for federal income tax
purposes, the Trust Fund would be subject to corporate income tax on its taxable
income. The Trust Fund's taxable income would include all its income, possibly
reduced by its interest expense on the Notes. Any such corporate income tax
could materially reduce cash available to make payments on the Notes and
distributions on the Certificates, and Certificateholders could be liable for
any such tax that is unpaid by the Trust Fund.
60
<PAGE>
TAX CONSEQUENCES TO HOLDERS OF THE NOTES
Treatment of the Notes as Indebtedness. The Trust Fund will agree, and the
Noteholders will agree by their purchase of Notes, to treat the Notes as debt
for federal income tax purposes. Special counsel to the Depositor will, except
as otherwise provided in the related Prospectus Supplement, advise the Depositor
that the Notes will be classified as debt for federal income tax purposes. The
discussion below assumes this characterization of the Notes is correct.
OID, Indexed Securities, etc. The discussion below assumes that all
payments on the Notes are denominated in U.S. dollars, and that the Notes are
not Indexed Securities or Strip Notes. Moreover, the discussion assumes that the
interest formula for the Notes meets the requirements for 'qualified stated
interest' under the OID regulations, and that any OID on the Notes (i.e., any
excess of the principal amount of the Notes over their issue price) does not
exceed a de minimis amount (i.e., 0.25% of their principal amount multiplied by
the number of full years included in their term), all within the meaning of the
OID regulations. If these conditions are not satisfied with respect to any given
series of Notes, additional tax considerations with respect to such Notes will
be disclosed in the applicable Prospectus Supplement.
Interest Income on the Notes. Based on the above assumptions, except as
discussed in the following paragraph, the Notes will not be considered issued
with OID. The stated interest thereon will be taxable to a Noteholder as
ordinary interest income when received or accrued in accordance with such
Noteholder's method of tax accounting. Under the OID regulations, a holder of a
Note issued with a de minimis amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the Note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a Note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a Note that has a fixed maturity date of not more than one year
from the issue date of such Note (a 'Short-Term Note') may be subject to special
rules. An accrual basis holder of a Short-Term Note (and certain cash method
holders, including regulated investment companies, as set forth in Section 1281
of the Code) generally would be required to report interest income as interest
accrues on a straight-line basis over the term of each interest period. Other
cash basis holders of a Short-Term Note would, in general, be required to report
interest income as interest is paid (or, if earlier, upon the taxable
disposition of the Short-Term Note). However, a cash basis holder of a
Short-Term Note reporting interest income as it is paid may be required to defer
a portion of any interest expense otherwise deductible on indebtedness incurred
to purchase or carry the Short-Term Note until the taxable disposition of the
Short-Term Note. A cash basis taxpayer may elect under Section 1281 of the Code
to accrue interest income on all nongovernment debt obligations with a term of
one year or less, in which case the taxpayer would include interest on the
Short-Term Note in income as it accrues, but would not be subject to the
interest expense deferral rule referred to in the preceding sentence. Certain
special rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a Noteholder sells a Note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the Note. The
adjusted tax basis of a Note to a particular Noteholder will equal the holder's
cost for the Note, increased by any market discount, acquisition discount, OID
and gain previously included by such Noteholder in income with respect to the
Note and decreased by the amount of bond premium (if any) previously amortized
and by the amount of principal payments previously received by such Noteholder
with respect to such Note. Any such gain or loss will be capital gain or loss if
the Note was held as a capital asset, except for gain representing accrued
interest and accrued market discount not previously included in income. Capital
losses generally may be used only to offset capital gains.
Foreign Holders. Interest payments made (or accrued) to a Noteholder who
is a nonresident alien, foreign corporation or other non-United States person (a
'foreign person') generally will be considered 'portfolio interest', and
generally will not be subject to United States federal income tax and
withholding tax, if the interest is not effectively connected with the conduct
of a trade or business within the United States by the foreign person and the
foreign person (i) is not actually or constructively a '10 percent shareholder'
of the Trust or the Seller (including a holder of 10% of the outstanding
Certificates) or a 'controlled foreign corporation' with respect to which the
Trust or the Seller is a 'related person' within the meaning of the Code and
(ii) provides the Owner Trustee or other person who is otherwise required to
withhold U.S. tax with respect to the Notes with an appropriate statement (on
Form W-8 or a similar form), signed under penalties of perjury, certifying that
the beneficial owner of the Note is a foreign person and providing the foreign
person's name and address. If a Note is
61
<PAGE>
held through a securities clearing organization or certain other financial
institutions, the organization or institution may provide the relevant signed
statement to the withholding agent; in that case, however, the signed statement
must be accompanied by a Form W-8 or substitute form provided by the foreign
person that owns the Note. If such interest is not portfolio interest, then it
will be subject to United States federal income and withholding tax at a rate of
30 percent, unless reduced or eliminated pursuant to an applicable tax treaty.
Any capital gain realized on the sale, redemption, retirement or other
taxable disposition of a Note by a foreign person will be exempt from United
States federal income and withholding tax, provided that (i) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (ii) in the case of an individual foreign
person, the foreign person is not present in the United States for 183 days or
more in the taxable year.
Backup Withholding. Each holder of a Note (other than an exempt holder
such as a corporation, tax-exempt organization, qualified pension and
profit-sharing trust, individual retirement account or nonresident alien who
provides certification as to status as a nonresident) will be required to
provide, under penalties of perjury, a certificate containing the holder's name,
address, correct federal taxpayer identification number and a statement that the
holder is not subject to backup withholding. Should a nonexempt Noteholder fail
to provide the required certification, the Trust Fund will be required to
withhold 31 percent of the amount otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the Company, the IRS successfully asserted that one or
more of the Notes did not represent debt for federal income tax purposes, the
Notes might be treated as equity interests in the Trust Fund. If so treated, the
Trust Fund might be taxable as a corporation with the adverse consequences
described above (and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on Notes recharacterized as
equity). Alternatively, and most likely in the view of special counsel to the
Depositor, the Trust Fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the Notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities (including pension
funds) would be 'unrelated business taxable income', income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the Trust Fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The Trust Fund and the
Servicer will agree, and the Certificateholders will agree by their purchase of
Certificates, to treat the Trust Fund 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
Trust Fund, the partners of the partnership being the Certificateholders, and
the Notes being debt of the partnership. However, the proper characterization of
the arrangement involving the Trust Fund, the Certificates, the Notes, the Trust
Fund and the Servicer is not clear because there is no authority on transactions
closely comparable to that contemplated herein.
A variety of alternative characterizations are possible. For example,
because the Certificates have certain features characteristic of debt, the
Certificates might be considered debt of the Trust Fund. Any such
characterization would not result in materially adverse tax consequences to
Certificateholders as compared to the consequences from treatment of the
Certificates as equity in a partnership, described below. The following
discussion assumes that the Certificates represent equity interests in a
partnership.
Indexed Securities, etc. The following discussion assumes that all
payments on the Certificates are denominated in U.S. dollars, none of the
Certificates are Indexed Securities or Strip Certificates, and that a Series of
Securities includes a single class of Certificates. If these conditions are not
satisfied with respect to any given Series of Certificates, additional tax
considerations with respect to such Certificates will be disclosed in the
applicable Prospectus Supplement.
Partnership Taxation. As a partnership, the Trust Fund will not be subject
to federal income tax. Rather, each Certificateholder will be required to
separately take into account such holder's allocated share of income, gains,
losses, deductions and credits of the Trust Fund. The Trust Fund's income will
consist primarily of interest and finance charges earned on the Contracts
(including appropriate adjustments for market discount, OID and bond premium)
and any gain upon collection or disposition of Contracts. The Trust Fund's
deductions will consist primarily of interest accruing with respect to the
Notes, servicing and other fees, and losses or deductions upon collection or
disposition of Contracts.
62
<PAGE>
The tax items of a partnership are allocable to the partners in accordance
with the Code, Treasury regulations and the partnership agreement (here, the
Trust Agreement and related documents). The Trust Agreement will provide, in
general, that the Certificateholders will be allocated taxable income of the
Trust Fund for each month equal to the sum of (i) the interest that accrues on
the Certificates in accordance with their terms for such month, including
interest accruing at the Pass Through Rate for such month and interest on
amounts previously due on the Certificates but not yet distributed; (ii) any
Trust Fund income attributable to discount on the Contracts that corresponds to
any excess of the principal amount of the Certificates over their initial issue
price; (iii) prepayment premium payable to the Certificateholders for such
month; and (iv) any other amounts of income payable to the Certificateholders
for such month. Such allocation will be reduced by any amortization by the Trust
Fund of premium on Contracts that corresponds to any excess of the issue price
of Certificates over their principal amount. All remaining taxable income of the
Trust Fund will be allocated to the Company. Based on the economic arrangement
of the parties, this approach for allocating 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 Certificateholders. Moreover, even under the foregoing method of allocation,
Certificateholders may be allocated income equal to the entire Pass Through Rate
plus the other items described above even though the Trust Fund might not have
sufficient cash to make current cash distributions of such amount. Thus, cash
basis holders will in effect be required to report income from the Certificates
on the accrual basis and Certificateholders may become liable for taxes on Trust
Fund income even if they have not received cash from the Trust Fund to pay such
taxes. In addition, because tax allocations and tax reporting will be done on a
uniform basis for all Certificateholders but Certificateholders may be
purchasing Certificates at different times and at different prices,
Certificateholders may be required to report on their tax returns taxable income
that is greater or less than the amount reported to them by the Trust Fund.
All of the taxable income allocated to a Certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity
(including an individual retirement account) will constitute 'unrelated business
taxable income' generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the Trust Fund (including
fees to the Servicer but not interest expense) would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to such holder over the life of
the Trust Fund.
The Trust Fund intends to make all tax calculations relating to income and
allocations to Certificateholders on an aggregate basis. If the IRS were to
require that such calculations be made separately for each Contract, the Trust
Fund might be required to incur additional expense but it is believed that there
would not be a material adverse effect on Certificateholders.
Discount and Premium. It is believed that the Contracts were not issued
with OID, and, therefore, the Trust should not have OID income. However, the
purchase price paid by the Trust Fund for the Contracts may be greater or less
than the remaining principal balance of the Contracts at the time of purchase.
If so, the Contract will have been acquired at a premium or discount, as the
case may be. (As indicated above, the Trust Fund will make this calculation on
an aggregate basis, but might be required to recompute it on a Contract by
Contract basis.)
If the Trust Fund acquires the Contracts at a market discount or premium,
the Trust Fund will elect to include any such discount in income currently as it
accrues over the life of the Contracts or to offset any such premium against
interest income on the Contracts. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Under Section 708 of the Code, the Trust Fund
will be deemed to terminate for federal income tax purposes if 50% or more of
the capital and profits interests in the Trust Fund are sold or exchanged within
a 12-month period. If such a termination occurs, the Trust Fund will be
considered to distribute its assets to the partners, who would then be treated
as recontributing those assets to the Trust Fund as a new partnership. The Trust
Fund will not comply with certain technical requirements that might apply when
such a constructive termination occurs. As a result, the Trust Fund may be
subject to certain tax penalties and may incur additional expenses if it is
required to comply with those requirements. Furthermore, the Trust Fund might
not be able to comply due to lack of data.
Disposition of Certificates. Generally, capital gain or loss will be
recognized on a sale of Certificates in an amount equal to the difference
between the amount realized and the seller's tax basis in the Certificates sold.
A Certificateholder's tax basis in a Certificate will generally equal the
holder's cost increased by the holder's share
63
<PAGE>
of Trust Fund income (includible in income) and decreased by any distributions
received with respect to such Certificate. In addition, both the tax basis in
the Certificates and the amount realized on a sale of a Certificate would
include the holder's share of the Notes and other liabilities of the Trust Fund.
A holder acquiring Certificates at different prices may be required to maintain
a single aggregate adjusted tax basis in such Certificates, and, upon sale or
other disposition of some of the Certificates, allocate a portion of such
aggregate tax basis to the Certificates sold (rather than maintaining a separate
tax basis in each Certificate for purposes of computing gain or loss on a sale
of that Certificate).
Any gain on the sale of a Certificate attributable to the holder's share of
unrecognized accrued market discount on the Receivables would generally be
treated as ordinary income to the holder and would give rise to special tax
reporting requirements. The Trust Fund does not expect to have any other assets
that would give rise to such special reporting requirements. Thus, to avoid
those special reporting requirements, the Trust Fund will elect to include
market discount in income as it accrues.
If a Certificateholder is required to recognize an aggregate amount of
income (not including income attributable to disallowed itemized deductions
described above) over the life of the Certificates that exceeds the aggregate
cash distributions with respect thereto, such excess will generally give rise to
a capital loss upon the retirement of the Certificates.
Allocations Between Transferors and Transferees. In general, the Trust
Fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the Certificateholders
in proportion to the principal amount of Certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
Certificates may be allocated tax items (which will affect its tax liability and
tax basis) attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed (or only applies to
transfers of less than all of the partner's interest), taxable income or losses
of the Trust Fund might be reallocated among the Certificateholders. The Trust
Fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a Certificateholder sells its
Certificates at a profit (loss), the purchasing Certificateholder will have a
higher (lower) basis in the Certificates than the selling Certificateholder had.
The tax basis of the Trust Fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the 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 Trust Fund will not make such
election. As a result, Certificateholders might be allocated a greater or lesser
amount of Trust Fund income than would be appropriate based on their own
purchase price for Certificates.
Administrative Matters. The Owner Trustee is required to keep or have kept
complete and accurate books of the Trust Fund. Such books will be maintained for
financial reporting and tax purposes on an accrual basis and the fiscal year of
the Trust will be the calendar year. The Trustee will file a partnership
information return (IRS Form 1065) with the IRS for each taxable year of the
Trust Fund and will report each Certificateholder's allocable share of items of
Trust Fund income and expense to holders and the IRS on Schedule K-1. The Trust
Fund will provide the Schedule K-1 information to nominees that fail to provide
the Trust Fund with the information statement described below and such nominees
will be required to forward such information to the beneficial owners of the
Certificates. Generally, holders must file tax returns that are consistent with
the information return filed by the Trust Fund or be subject to penalties unless
the holder notifies the IRS of all such inconsistencies.
Under Section 6031 of the Code, any person that holds Certificates as a
nominee at any time during a calendar year is required to furnish the Trust Fund
with a statement containing certain information on the nominee, the beneficial
owners and the Certificates so held. Such information includes (i) the name,
address and taxpayer identification number of the nominee and (ii) as to each
beneficial owner (x) the name, address and identification number of such person,
(y) whether such person is a United States person, a tax-exempt entity or a
foreign government, an international organization, or any wholly owned agency or
instrumentality of either of the foregoing, and (z) certain information on
Certificates that were held, bought or sold on behalf of such person throughout
the year. In addition, brokers and financial institutions that hold Certificates
through a nominee are required to furnish directly to the Trust Fund information
as to themselves and their ownership of Certificates. A clearing agency
registered under Section 17A of the Exchange Act is not required to furnish any
such information statement to the Trust Fund. The information referred to above
for any calendar year must be furnished to the
64
<PAGE>
Trust Fund on or before the following January 31. Nominees, brokers and
financial institutions that fail to provide the Trust Fund with the information
described above may be subject to penalties.
The Company will be designated as the tax matters partner in the related
Trust Agreement and, as such, will be responsible for representing the
Certificateholders 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 before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the Trust Fund by the appropriate taxing authorities
could result in an adjustment of the returns of the Certificateholders, and,
under certain circumstances, a Certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the Trust Fund. An
adjustment could also result in an audit of a Certificateholder's returns and
adjustments of items not related to the income and losses of the Trust Fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the Trust Fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the Trust Fund would be engaged in a trade or business in the United States
for such purposes, the Trust Fund will withhold as if it were so engaged in
order to protect the Trust Fund from possible adverse consequences of a failure
to withhold. The Trust Fund expects to withhold on the portion of its taxable
income that is allocable to foreign Certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the Trust Fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return (including, in the case of a corporation, the branch
profits tax) on its share of the Trust Fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the Trust on Form W-8 in order to assure appropriate crediting of the taxes
withheld. A foreign holder generally would be entitled to file with the IRS a
claim for refund with respect to taxes withheld by the Trust Fund taking the
position that no taxes were due because the Trust Fund was not engaged in a U.S.
trade or business. However, interest payments made (or accrued) to a
Certificateholder who is a foreign person generally will be considered
guaranteed payments to the extent such payments are determined without regard to
the income of the Trust Fund. If these interest payments are properly
characterized as guaranteed payments, then the interest will not be considered
'portfolio interest.' As a result, Certificateholders will be subject to United
States federal income tax and withholding tax at a rate of 30 percent, unless
reduced or eliminated pursuant to an applicable treaty. In such case, a foreign
holder would only be entitled to claim a refund for that portion of the taxes in
excess of the taxes that should be withheld with respect to the guaranteed
payments.
Backup Withholding. Distributions made on the Certificates and proceeds
from the sale of the Certificates will be subject to a 'backup' withholding tax
of 31% if, in general, the Certificateholder fails to comply with certain
identification procedures, unless the holder is an exempt recipient under
applicable provisions of the Code.
STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in 'Certain
Federal Income Tax Considerations,' potential investors should consider the
state and local income tax consequences of the acquisition, ownership, and
disposition of the Securities. State and local income tax law may differ
substantially from the corresponding federal law, and this discussion does not
purport to describe any aspect of the income tax laws of any state or locality.
Therefore, potential investors should consult their own tax advisors with
respect to the various state and local tax consequences of an investment in the
Securities.
65
<PAGE>
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA')
and the Code impose certain restrictions on employee benefit plans subject to
ERISA and on plans and other arrangements subject to Section 4975 of the Code
('Plans'), and on persons who are parties in interest or disqualified persons
('parties in interest') with respect to such Plans. Certain employee benefit
plans, such as governmental plans and church plans (if no election has been made
under Section 410(d) of the Code), are not subject to the restrictions of ERISA,
and assets of such plans may be invested in the Securities without regard to the
ERISA considerations described below, subject to other applicable federal and
state law. However, any such governmental or church plan which is qualified
under Section 401(a) of the Code and exempt from taxation under Section 501(a)
of the Code is subject to the prohibited transaction rules set forth in Section
503 of the Code.
Investments by Plans are 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.
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions ('prohibited transactions') involving a
Plan and its assets unless a statutory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to Section 502(i) of ERISA)
on parties in interest which engage in non-exempt prohibited transactions.
The United States Department of Labor ('DOL') has issued a final regulation
(29 C.F.R. Section 2510.3-101) containing rules for determining what constitutes
the assets of a Plan. This regulation provides that, as a general rule, the
underlying assets and properties of corporations, partnerships, trusts and
certain other entities in which a Plan makes an investment in an 'equity
interest' will be deemed for purposes of ERISA to be assets of the Plan unless
certain exceptions apply.
Under the terms of the regulation, the Trust Fund may be deemed to hold
plan assets by reason of a Plan's investment in a Security; such plan assets
would include an undivided interest in the Primary Assets and any other assets
held by the Trust Fund. In such an event, persons providing services with
respect to the assets of the Trust Fund, may be parties in interest, subject to
the fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA (and of Section 4975
of the Code), with respect to transactions involving such assets unless such
transactions are subject to a statutory or administrative exemption.
One such exception applies if the interest described is treated as
indebtedness under applicable local law and which has no substantial equity
features. Generally, a profits interest in a partnership, an undivided ownership
interest in property and a beneficial ownership interest in a trust are deemed
to be 'equity interests' under the final regulation. If Notes of a particular
Series were deemed to be indebtedness under applicable local law without any
substantial equity features, an investing Plan's assets would include such
Notes, but not, by reason of such purchase, the underlying assets of the Trust
Fund.
Another such exception applies if the class of equity interests in question
is: (i) 'widely held' (held by 100 or more investors who are independent of the
Depositor and each other); (ii) freely transferable; and (iii) sold as part of
an offering pursuant to (A) an effective registration statement under the
Securities Act of 1933, and then subsequently registered under the Securities
Exchange Act of 1934 or (B) an effective registration statement under Section
12(b) or 12(g) of the Securities Exchange Act of 1934 ('Publicly Offered
Securities'). In addition, the regulation provides that if at all times more
than 75% of the value of all classes of equity interests in the Depositor or the
Trust Fund are held by investors other than benefit plan investors (which is
defined as including plans subject to ERISA, government plans and individual
retirement accounts), the investing Plan's assets will not include any of the
underlying assets of the Depositor or the Trust Fund.
An additional exemption may also be available. On February 22, 1991, the
DOL granted to Lehman Brothers an administrative exemption, Prohibited
Transaction Exemption 91-14 (Application No. D-7958, 56 Fed. Reg. 7414) (the
'Exemption'), from certain of the prohibited transaction rules of ERISA with
respect to the initial purchase, the holding and the subsequent resale by Plans
of securities representing interests in asset-backed pass-through trusts that
consist of certain receivables, loans and other obligations that meet the
conditions and
66
<PAGE>
requirements of the Exemption. These securities should include the Certificates,
and depending upon the particular characteristics of a Series, may include the
Notes. The obligations covered by the Exemption include obligations such as the
Primary Assets (other than Private Securities which are not insured or
guaranteed by the United States or an agency or instrumentality thereof, or Home
Improvement Contracts that are unsecured). The Exemption will apply to the
acquisition, holding and resale of the Securities by a Plan, provided that
certain conditions (certain of which are described below) are met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(i) The acquisition of the Securities by a Plan is on terms (including
the price for the Securities) that are at least as favorable to the Plan as
they would be in an arm's-length transaction with an unrelated party;
(ii) The rights and interests evidenced by the Securities acquired by
the Plan are not subordinated to the rights and interests evidenced by
other securities of the trust;
(iii) The Securities 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 Ratings Group ('Standard &
Poor's'), Moody's Investors Service, Inc. ('Moody's'), Duff & Phelps Inc.
('D&P') or Fitch Investors Service, Inc. ('Fitch');
(iv) The sum of all payments made to the underwriter in connection
with the distribution of the Securities represents not more than reasonable
compensation for underwriting the Securities. The sum of all payments made
to and retained by the seller pursuant to the sale of the obligations to
the trust represents not more than the fair market value of such
obligations. 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 related servicing agreement and reimbursement of the
servicer's reasonable expenses in connection therewith;
(v) The Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(vi) The Plan investing in the Securities is 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.
The trust also must meet the following requirements:
(i) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(ii) securities in such other investment pools must have been rated in
one of the three highest rating categories of Standard & Poor's, Moody's,
D&P or Fitch for at least one year prior to the Plan's acquisition of
securities; and
(iii) securities 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 Securities.
Moreover, the Exemption provides relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire securities in a trust in which the fiduciary (or its
affiliate) is an obligor on the receivables held in the trust provided that,
among other requirements: (i) in the case of an acquisition in connection with
the initial issuance of Securities, at least fifty (50) percent of each Class of
Securities in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty (50) percent of the aggregate interest
in the trust is acquired by persons independent of the Restricted Group; (ii)
such fiduciary (or its affiliate) is an obligor with respect to five (5) percent
or less of the fair market value of the obligations contained in the trust;
(iii) the Plan's investment in Securities does not exceed twenty-five (25)
percent of all of the Securities outstanding after the acquisition; and (iv) no
more than twenty-five (25) percent of the assets of the Plan are invested in
securities representing an interest in one or more trusts containing assets sold
or serviced by the same entity. The Exemption does not apply to Plans sponsored
by the Company, the underwriters of the Securities, the Trustee, the Servicer,
any obligor with respect to obligations included in a Trust Fund constituting
more than five (5) percent of the aggregate unamortized principal balance of the
assets in a Trust Fund, or any affiliate of such parties (the 'Restricted
Group').
67
<PAGE>
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the potential application of the
Exemption to the purchase and holding of the Securities and the potential
consequences to their specific circumstances, prior to making an investment in
the Securities. Moreover, each Plan fiduciary should determine whether under the
general fiduciary standards of investment procedure and diversification an
investment in the Securities is appropriate for the Plan, taking into account
the overall investment policy of the Plan and the composition of the Plan's
investment portfolio. In this regard, purchasers that are insurance companies
should consult with their counsel with respect to the recent United States
Supreme Court case interpreting the fiduciary responsibility rules of ERISA,
John Hancock Mutual Life Insurance Co. v. Harris Trust and Savings Bank (decided
December 13, 1993). In John Hancock, the Supreme Court ruled that assets held in
an insurance company's general account may be deemed to be 'plan assets' for
purposes of ERISA under certain circumstances. Prospective purchasers should
determine whether the decision affects their ability to purchase the Securities.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Securities will not constitute 'mortgage-related securities' within the meaning
of SMMEA. Accordingly, investors whose investment authority is subject to legal
restrictions should consult their own legal advisors to determine whether and to
what extent the Securities constitute legal investments for them.
PLAN OF DISTRIBUTION
The Depositor may offer each Series of Securities through Lehman Brothers
Inc. ('Lehman Brothers') or one or more other firms that may be designated at
the time of each offering of such Securities. The participation of Lehman
Brothers in any offering will comply with Schedule E to the By-Laws of the
National Association of Securities Dealers, Inc. The Prospectus Supplement
relating to each Series of Securities will set forth the specific terms of the
offering of such Series of Securities and of each Class within such Series, the
names of the underwriters, the purchase price of the Securities, the proceeds to
the Depositor from such sale, any securities exchange on which the Securities
may be listed, and, if applicable, the initial public offering prices, the
discounts and commissions to the underwriters and any discounts and concessions
allowed or reallowed to certain dealers. The place and time of delivery of each
Series of Securities will also be set forth in the Prospectus Supplement
relating to such Series. Lehman Brothers is an affiliate of the Depositor.
LEGAL MATTERS
Unless otherwise specified in the related Prospectus Supplement, certain
legal matters in connection with the Securities will be passed upon for the
Company by Brown & Wood, New York, New York.
EXPERTS
The financial statements and schedules for the fiscal years ended December
31, 1991, December 31, 1992 and December 31, 1993, audited by Ernst & Young,
independent auditors, are included or incorporated by reference in the
Depositor's Annual Report on Form 10-K for the fiscal year ended December 31,
1993 (the '1993 Form 10-K'). The 1993 Form 10-K is incorporated by reference in
this Prospectus in reliance upon the opinions of such firms appearing therein
given upon the authority of those firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C. Copies may be obtained at rates
prescribed by the Commission upon request to the Commission, and may be
inspected, without charge, at the offices of the Commission, 450 Fifth Street,
N.W., Washington, D.C. See 'Available Information.'
68
<PAGE>
GLOSSARY OF TERMS
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a 'Supplemental Glossary' in
the Prospectus Supplement for a Series, such definitions shall apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the related Agreement for a Series and the related Agreement for a
Series generally provides a more complete definition of certain of the terms.
Reference should be made to the related Agreement for a Series for a more
compete definition of such terms.
'Accrual Termination Date' means, with respect to a Class of Compound
Interest Securities, the Distribution Date specified in the related Prospectus
Supplement.
'Advance' means cash advanced by the Servicer in respect of delinquent
payments of principal of and interest on a Contract and for any other purposes
specified in the related Prospectus Supplement.
'Agreement' means, with respect to a Series of Certificates, the Pooling
and Servicing Agreement or Trust Agreement, and, with respect to a Series of
Notes, the Indenture and the Servicing Agreement, as the context requires.
'Appraised Value' means, with respect to property securing a Contract, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Contract or sales price of such mortgaged property at such time.
'Asset Group' means, with respect to the Primary Assets and other assets
comprising the Trust Fund of a Series, a group of such Primary Assets and other
assets having the characteristics described in the related Prospectus
Supplement.
'Assumed Reinvestment Rate' means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the 'Assumed Reinvestment Rate' for funds held in any fund
or account for the Series.
'Available Distribution Amount' means the amount in the Distribution
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Holders on a Distribution Date.
'Bankruptcy Code' means the federal bankruptcy code, 11 United States Code
101 et seq., and related rules and regulations promulgated thereunder.
'Business Day' means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulations or executive order to be closed.
'Certificate' means the Asset-Backed Certificates.
'Class' means a Class of Securities of a Series.
'Closing Date' means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Securities of such Series are
first issued.
'Code' means the Internal Revenue Code of 1986, as amended, and regulations
(including proposed regulations) or other pronouncements of the Internal Revenue
Service promulgated thereunder.
'Collection Account' means, with respect to a Series, the account
established in the name of the Servicer for the deposit by the Servicer of
payments received from the Primary Assets.
'Combined Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement taking into account
the amounts of any related senior mortgage loans on the related Mortgaged
Property.
'Commission' means the Securities and Exchange Commission.
'Compound Interest Security' means any Security of a Series on which all or
a portion of the interest accrued thereon is added to the principal balance of
such Security on each Distribution Date, through the Accrual
69
<PAGE>
Termination Date, and with respect to which no interest shall be payable until
such Accrual Termination Date, after which interest payments will be made on the
Compound Value thereof.
'Compound Value' means, with respect to a Class of Compound Interest
Securities, the original principal balance of such Class, plus all accrued and
unpaid interest, if any, previously added to the principal balance thereof and
reduced by any payments of principal previously made on such Class of Compound
Interest Securities.
'Condominium' means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
'Condominium Association' means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
'Condominium Building' means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'Contracts' means Home Improvement Contracts and Manufactured Housing
Contracts, collectively.
'Cooperative' means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership securities in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units and which is described in Section 216 of the Code.
'Cooperative Dwelling' means an individual housing unit in a building owned
by a Cooperative.
'Cut-off Date' means the date designated as such in the related Prospectus
Supplement for a Series.
'Debt Securities' means Securities characterized as indebtedness for
federal income tax purposes, and Regular Interest Securities.
'Deferred Interest' means the excess of the interest accrued on the
outstanding principal balance of a Contract during a specified period over the
amount of interest required to be paid by an obligor on such Contract on the
related Due Date.
'Deposit Agreement' means a guaranteed investment contract or reinvestment
agreement providing for the investment of funds held in a fund or account,
guaranteeing a minimum or a fixed rate of return on the investment of moneys
deposited therein.
'Depositor' means Lehman ABS Corporation.
'Disqualified Organization' means the United States, any State or political
subdivision thereof, any possession of the United States, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income.
'Distribution Account' means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Servicer with respect to the Primary Assets.
'Distribution Date' means, with respect to a Series or Class of Securities,
each date specified as a distribution date for such Series or Class in the
related Prospectus Supplement.
'Due Date' means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable by the obligor on any Primary Asset pursuant to the terms thereof.
'Eligible Investments' means any one or more of the obligations or
securities described as such in the related Agreement.
70
<PAGE>
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a Contract, into which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums and other comparable items
required to be paid to the mortgagee are deposited.
'FHLMC' means the Federal Home Loan Mortgage Corporation.
'Final Scheduled Distribution Date' means, with respect to a Class of Notes
of a Series, the date no later than which principal thereof will be fully paid
and with respect to a Class of Certificates of a Series, the date after which no
Certificates of such Class will remain outstanding, in each case based on the
assumptions set forth in the related Prospectus Supplement.
'FNMA' means the Federal National Mortgage Association.
'Holder' means the person or entity in whose name a Security is registered.
'Home Improvements' means the home improvements financed by a Home
Improvement Contract.
'Home Improvement Contract' means any home improvement installment sales
contract or installment loan agreement which may be unsecured or secured by
purchase money security interests in the Home Improvement financed thereby or by
a mortgage on the related Mortgaged Property.
'HUD' means the United States Department of Housing and Urban Development.
'Indenture' means the indenture relating to a Series of Notes between the
Trust Fund and the Trustee.
'Index' means the index applicable to any adjustments in the Loan Rates of
any adjustable rate Contracts.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Contracts.
'Insurance Proceeds' means amounts paid by the insurer under any of the
Insurance Policies covering any Contract or Mortgaged Property.
'Interest Only Securities' means a Class of Securities entitled solely or
primarily to distributions of interest and which is identified as such in the
related Prospectus Supplement.
'IRS' means the Internal Revenue Service.
'LCPI' means Lehman Commercial Paper Inc.
'Lehman Brothers' means Lehman Brothers Inc.
'Lifetime Rate Cap' means the lifetime limit, if any, on the Loan Rate
during the life of each adjustable rate Contract.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Contract, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Contract.
'Loan-to-Value Ratio' means, with respect to a Contract, the ratio
determined as set forth in the related Prospectus Supplement.
'Manufactured Housing Contract' means any conventional manufactured housing
installment sales contract or installment loan agreement originated by a
manufactured housing dealer in the ordinary course of
71
<PAGE>
business secured either by the related Manufactured Home or by a Mortgage on the
real estate on which the Manufactured Home is located.
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Contract.
'Minimum Principal Payment Agreement' means a minimum principal payment
agreement with an entity meeting the criteria of the Rating Agencies.
'Modification' means a change in any term of a Contract.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Contract.
'Mortgagor' means the obligor on a Mortgage Note.
'1986 Act' means the Tax Reform Act of 1986.
'Notes' means the Asset-Backed Notes.
'Notional Amount' means the amount set forth in the related Prospectus
Supplement for a Class of Interest Only Securities.
'PAC' ('Planned Amortization Class Securities') means a Class of Securities
of a Series on which payments of principal are made in accordance with a
schedule specified in the related Prospectus Supplement, based on certain
assumptions stated therein.
'Participating Securities' means Securities entitled to receive payments of
principal and interest and an additional return on investment as described in
the related Prospectus Supplement.
'Pass-Through Security' means a security representing an undivided
beneficial interest in a pool of assets, including the right to receive a
portion of all principal and interest payments relating to those assets.
'Pay Through Security' means Regular Interest Securities and certain Debt
Securities that are subject to acceleration due to prepayments on the underlying
Primary Assets.
'Person' means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
'Pooling and Servicing Agreement' means the pooling and servicing agreement
relating to a Series of Certificates among the Depositor, the Servicer (if such
Series relates to Contracts) and the Trustee.
'Primary Assets' means the Private Securities and/or Contracts, as the case
may be, which are included in the Trust Fund for such Series. A Primary Asset
refers to a specific Private Security or Contract, as the case may be.
'Principal Balance' means, with respect to a Primary Asset and as of a Due
Date, the original principal amount of the Primary Asset, plus the amount of any
Deferred Interest added to such principal amount, reduced by all payments, both
scheduled or otherwise, received on such Primary Asset prior to such Due Date
and applied to principal in accordance with the terms of the Primary Asset.
'Principal Only Securities' means a Class of Securities entitled solely or
primarily to distributions of principal and identified as such in the Prospectus
Supplement.
'Private Security' means a participation or pass-through certificate
representing a fractional, undivided interest in Underlying Contracts or
collateralized obligations secured by Underlying Contracts. Such pass-through
securities or collateralized obligations will have previously been offered and
distributed to the public pursuant to an effective registration statement.
'Property' means either a Home Improvement, a Manufactured Home or a
Mortgaged Property securing a Contract, as the context requires.
72
<PAGE>
'PS Agreement' means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Security is issued.
'PS Servicer' means the servicer of the Underlying Contracts.
'PS Sponsor' means, with respect to Private Securities, the sponsor or
depositor under a PS Agreement.
'PS Trustee' means the trustee designated under a PS Agreement.
'Qualified Insurer' means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
'Rating Agency' means the nationally recognized statistical rating
organization (or organizations) which was (or were) requested by the Depositor
to rate the Securities upon the original issuance thereof.
'Regular Interest' means a regular interest in a REMIC.
'REMIC' means a real estate mortgage investment conduit.
'REMIC Administrator' means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
'REMIC Provisions' means the provisions of the federal income tax law
relating to real estate mortgage investment conduits, which appear at sections
860A through 860G of Subchapter M of Chapter 1 of the Code, and related
provisions, and regulations, including proposed regulations and rulings, and
administrative pronouncements promulgated thereunder, as the foregoing may be in
effect from time to time.
'REO Property' means real property which secured a defaulted Contract,
beneficial ownership of which has been acquired upon foreclosure, deed in lieu
of foreclosure, repossession or otherwise.
'Reserve Fund' means, with respect to a Series, any Reserve Fund
established pursuant to the related Agreement.
'Residual Interest' means a residual interest in a REMIC.
'Retained Interest' means, with respect to a Primary Asset, the amount or
percentaged specified in the related Prospectus Supplement which is not included
in the Trust Fund for the related Series.
'Scheduled Payments' means the scheduled payments of principal and interest
to be made by the borrower on a Primary Asset.
'Securities' means the Notes or the Certificates.
'Seller' means the seller of the Primary Assets to the Depositor identified
in the related Prospectus Supplement for a Series.
'Senior Securityholder' means a holder of a Senior Security.
'Senior Securities' means a Class of Securities as to which the holders'
rights to receive distributions of principal and interest are senior to the
rights of holders of Subordinate Securities, to the extent specified in the
related Prospectus Supplement.
'Series' means a separate series of Securities sold pursuant to this
Prospectus and the related Prospectus Supplement.
'Servicer' means, with respect to a Series relating to Contracts, the
Person if any, designated in the related Prospectus Supplement to service
Contracts for that Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Contract consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
'Stripped Securities' means Pass-Through Securities representing interests
in Primary Assets with respect to which all or a portion of the principal
payments have been separated from all or a portion of the interest payments.
73
<PAGE>
'Subordinate Securityholder' means a Holder of a Subordinate Security.
'Subordinated Securities' means a Class of Securities as to which the
rights of holders to receive distributions of principal, interest or both is
subordinated to the rights of holders of Senior Securities, and may be allocated
losses and shortfalls prior to the allocation thereof to other Classes of
Securities, to the extent and under the circumstances specified in the related
Prospectus Supplement.
'Trustee' means the trustee under the applicable Agreement and its
successors.
'Trust Fund' means, with respect to any Series of Securities, the trust
holding all money, instruments, securities and other property, including all
proceeds thereof, which are, with respect to a Series of Certificates, held for
the benefit of the Holders by the Trustee under the Pooling and Servicing
Agreement or Trust Agreement, or, with respect to a Series of Notes, pledged to
the Trustee under the Indenture as a security for such Notes, including, without
limitation, the Primary Assets (except any Retained Interests), all amounts in
the Distribution Account, Collection Account or Reserve Funds, distributions on
the Primary Assets (net of servicing fees), and reinvestment earnings on such
net distributions and any Enhancement and all other property and interests held
by or pledged to the Trustee pursuant to the related Agreement for such Series.
'UCC' means the Uniform Commercial Code.
'Underlying Contracts' means loans of the type eligible to be Contracts
underlying or securing Private Securities.
'Variable Interest Security' means a Security on which interest accrues at
a rate that is adjusted, based upon a predetermined index, at fixed periodic
intervals, all as set forth in the related Prospectus Supplement.
'Zero Coupon Security' means a Security entitled to receive payments of
principal only.
74
<PAGE>
[This page intentionally left blank]
<PAGE>
------------------------------------------------------
------------------------------------------------------
No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained in this Prospectus Supplement or the
Prospectus and, if given or made, such information or representation must not be
relied upon as having been authorized by the Company or Lehman Brothers. This
Prospectus Supplement and the Prospectus do not constitute an offer of any
securities other than those to which they relate or an offer to sell, or a
solicitation of an offer to buy, to any person in any jurisdiction where such an
offer or solicitation would be unlawful. Neither the delivery of this Prospectus
Supplement and the Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information contained herein is
correct as of any time subsequent to their respective dates.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference................................... S-2
Summary....................................... S-3
Risk Factors.................................. S-15
The First National Bank of Keystone........... S-18
Origination and Underwriting Guidelines....... S-19
The Title I Loan Program and the Contract of
Insurance................................... S-19
The Master Servicer and Claims
Administrator............................... S-25
Contract of Insurance Holder.................. S-25
Description of the Loans...................... S-25
Prepayment and Yield Considerations........... S-30
Description of the Certificates............... S-37
Description of the Purchase Agreement......... S-56
The Certificate Insurer....................... S-56
Use of Proceeds............................... S-57
Certain Federal Income Tax Consequences....... S-57
State Taxes................................... S-59
ERISA Considerations.......................... S-59
Legal Investment Considerations............... S-60
Underwriting.................................. S-60
Legal Matters................................. S-61
Experts....................................... S-61
Ratings....................................... S-61
Index of Defined Terms........................ S-62
Annex I--Global Clearance, Settlement and Tax
Documentation Procedures.................... A-I-1
Annex II--Capital Markets Assurance
Corporation Financial Statements............ A-II-1
PROSPECTUS
Prospectus Supplement......................... 2
Available Information......................... 2
Reports to Holders............................ 2
Summary of Terms.............................. 3
Risk Factors.................................. 12
Description of the Securities................. 15
The Trust Funds............................... 18
Enhancement................................... 23
Servicing of Contracts........................ 25
The Agreements................................ 31
Certain Legal Aspects of the Contracts........ 39
The Depositor................................. 47
Use of Proceeds............................... 47
Certain Federal Income Tax Considerations..... 48
State Tax Considerations...................... 65
ERISA Considerations.......................... 66
Legal Investment.............................. 68
Plan of Distribution.......................... 68
Legal Matters................................. 68
Experts....................................... 68
Additional Information........................ 68
Glossary of Terms............................. 69
</TABLE>
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
$205,041,000
LEHMAN FHA TITLE I
LOAN TRUST 1995-6
FHA TITLE I LOAN
ASSET BACKED CERTIFICATES,
SERIES 1995-6
$68,600,000 CLASS A-1 6.68% CERTIFICATES
$32,340,000 CLASS A-2 6.63% CERTIFICATES
$42,140,000 CLASS A-3 6.68% CERTIFICATES
$12,740,000 CLASS A-4 7.06% CERTIFICATES
$49,221,000 CLASS A-5 7.32% CERTIFICATES
0.4925% CLASS S CERTIFICATES
THE FIRST NATIONAL BANK OF KEYSTONE,
AS SELLER
LEHMAN ABS CORPORATION,
AS DEPOSITOR
-----------------------------------------
PROSPECTUS SUPPLEMENT
NOVEMBER 13, 1995
-----------------------------------------
LEHMAN BROTHERS
COAST PARTNERS SECURITIES, INC.
------------------------------------------------------
------------------------------------------------------
<PAGE>
=================================================================
No dealer, salesman or other person has been authorized to give any information
or to make any representation not contained in this Supplement, the Prospectus
Supplement or the Prospectus and, if given or made, such information or
representations must not be relied upon as having been authorized by the
Depositor or Lehman Brothers. This Supplement, the Prospectus Supplement and the
Prospectus do not constitute an offer of any securities other than those to
which they relate or an offer to sell, or a solicitation of an offer to buy, to
any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Supplement, the Prospectus Supplement and
the Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that the information contained herein is correct as of
any time subsequent to their respective dates.
_______________
TABLE OF CONTENTS
SUPPLEMENT Page
Incorporation of Certain
Documents by Reference................................. S1-2
Available Information.................................... S1-2
General.................................................. S1-3
Risk Factors............................................. S1-3
The First National Bank of Keystone...................... S1-5
Description of the Certificates.......................... S1-5
Description of the Loans................................. S1-7
Certain Statistical Characteristics of the Loans......... S1-8
Historical Payments of Principal......................... S1-11
Sensitivity of the Pre-Tax Yield and Weighted
Average Life of the Class S Certif1cates............... S1-12
The Certificate Insurer.................................. S1-16
Certain Federal Income Tax Consequences.................. S1-16
Experts.................................................. S1-17
Ratings.................................................. S1-17
Annex A Capital Markets Assurance Corporation
Financial Statements
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference.............................................. S-2
Summary.................................................. S-3
Risk Factors............................................. S-15
The First National Bank of Keystone...................... S-18
Origination and Underwriting Guidelines.................. S-19
The Title I Loan Program and the Contract of
Insurance.............................................. S-19
The Master Servicer and Claims Administrator............. S-25
Contract of Insurance Holder............................. S-25
Description of the Loans................................. S-25
Prepayment and Yield Considerations...................... S-30
Description of the Certificates.......................... S-37
Description of the Purchase Agreement.................... S-56
The Certificate Insurer.................................. S-56
Use of Proceeds.......................................... S-57
Certain Federal Income Tax Consequences.................. S-57
State Taxes.............................................. S-59
ERISA Considerations..................................... S-59
Legal Investment Considerations.......................... S-60
Underwriting............................................. S-60
Legal Matters............................................ S-61
Experts.................................................. S-61
Ratings.................................................. S-61
Index of Defined Terms................................... S-62
Annex I Global Clearance, Settlement and Tax
Documentation Procedures............................... A-I-1
Annex II Capital Markets Assurance Corporation
Financial Statements................................... A-II-1
PROSPECTUS
Prospectus Supplement.................................... 2
Available Information.................................... 2
Reports to Holders....................................... 2
Summary of Terms......................................... 3
Risk Factors............................................. 12
Description of the Securities............................ 15
The Trust Funds.......................................... 18
Enhancement.............................................. 23
Servicing of Contracts................................... 25
The Agreements........................................... 31
Certain Legal Aspects of the Contracts................... 39
The Depositor............................................ 47
Use of Proceeds.......................................... 47
Certain Federal Income Tax Considerations................ 48
State Tax Considerations................................. 65
ERISA Considerations..................................... 66
Legal Investment......................................... 68
Plan of Distribution..................................... 68
Legal Matters............................................ 68
Experts.................................................. 68
Additional Information................................... 68
Glossary of Terms........................................ 69
=================================================================
=================================================================
LEHMAN FHA TITLE I
LOAN TRUST 1995-6
FHA TITLE I LOAN
ASSET-BACKED
CERTIFICATES,
SERIES 1995-6
Notional Amount Class S 0.4925% Certificate Rate
THE FIRST NATIONAL BANK OF
KEYSTONE,
AS SELLER
-----------------
SUPPLEMENT
November 20, 1996
-----------------
LEHMAN BROTHERS
=================================================================
