<PAGE>
Pursuant to Rule 424(b)(5)
Registration Statement No. 333-39649
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 15, 1997)
$114,425,000 (APPROXIMATE)
UNITED PANAM MORTGAGE LOAN ASSET BACKED CERTIFICATES, SERIES 1997-1
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LEHMAN ABS CORPORATION,
AS DEPOSITOR
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UNITED PANAM MORTGAGE CORPORATION,
AS SELLER
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PAN AMERICAN BANK, FSB,
AS MASTER SERVICER
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The United PanAm Mortgage Loan Asset Backed Certificates, Series 1997-1
(collectively, the 'Certificates') will consist of three classes of
Certificates: the Class A Certificates (the 'Class A Certificates'), the Class X
Certificates (the 'Class X Certificates') and the Class R Certificates (the
'Class R Certificates'). The rights of the holders of the Class X Certificates
and the Class R Certificates to receive distributions with respect to the
Mortgage Loans will be subordinate to the rights of the holders of the Class A
Certificates to the extent described herein and in the Prospectus. Only the
Class A Certificates are being offered hereby.
Distributions on the Class A Certificates will be made on the 25th day of
each month or, if such day is not a business day, on the next succeeding
business day, beginning in January 1998 (each, a 'Distribution Date'). As
described more fully herein, interest payable with respect to each Distribution
Date will accrue on the Class A Certificates during the period commencing on the
immediately preceding Distribution Date (or, in the case of the first period,
commencing on the Closing Date) and ending on the day preceding the current
Distribution Date. Interest will be calculated, in the case of the Class A
Certificates, on the basis of a 360-day year and the actual number of days in
the applicable Interest Period, and will be based on the then outstanding Class
Principal Balance of the Class A Certificates and the then-applicable
Certificate Rate thereon, as reduced by certain interest shortfalls.
On or before the date of issuance of the Certificates, the Depositor will
obtain from Financial Security Assurance Inc. (the 'Certificate Insurer') a
Financial Guaranty Insurance Policy relating to the Class A Certificates (the
'Policy') in favor of the Trustee. The Policy will provide coverage of the
ultimate principal amount of, and interest due on, the Class A Certificates
pursuant to the terms of the Policy.
(cover continued on next page)
[FSA LOGO]
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PROCEEDS OF THE ASSETS IN THE TRUST FUND AND PROCEEDS FROM THE POLICY ARE THE
SOLE SOURCE OF PAYMENTS ON THE CLASS A CERTIFICATES. THE CERTIFICATES DO NOT
REPRESENT AN OBLIGATION OF OR INTEREST IN THE DEPOSITOR, THE SELLER, THE
MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS
ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY.
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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 SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH
UNDER 'RISK FACTORS' BEGINNING ON PAGE S-17 OF
THIS PROSPECTUS SUPPLEMENT.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
CLASS PUBLIC DISCOUNT THE DEPOSITOR(1)
<S> <C> <C> <C>
Per Class A Certificate........... 100% 0.35% 99.65%
Total............................. $114,425,000 $400,488 $114,024,512
</TABLE>
(1) Before deducting expenses estimated to be $365,000.
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The Class A Certificates are offered subject to prior sale, when, as and if
issued by the Trust Fund and accepted by the Underwriter and subject to its
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 Same-Day
Funds Settlement System of The Depository Trust Company, Cedel Bank, societe
anonyme and the Euroclear System against payment therefor in immediately
available funds in New York, New York on or about December 30, 1997.
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LEHMAN BROTHERS
December 22, 1997
<PAGE>
(cover continued)
The Certificate Rate on the Class A Certificates is adjustable and will be
calculated for each Distribution Date as described herein. The Certificate Rate
for the first Distribution Date will be determined on the second business day
preceding the Closing Date. Distributions in respect of principal of the Class A
Certificates will be made as described herein under 'DESCRIPTION OF THE
CERTIFICATES--Principal Distributions on the Class A Certificates.'
It is a condition of the issuance of the Class A Certificates that they be
rated 'AAA' by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. ('Standard & Poor's'), and 'Aaa' by Moody's Investors Service,
Inc. ('Moody's').
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the 'Trust Fund') consisting primarily of a segregated
pool (the 'Mortgage Pool') of conventional, one- to four-family, first lien
mortgage loans having original terms of 30 years (the 'Mortgage Loans'). The
Mortgage Loans were acquired by United PanAm Mortgage Corporation (the
'Seller'), a wholly-owned subsidiary of United PanAm Financial Corp. and were
originated, underwritten and funded by Pan American Bank, FSB, an indirect
wholly-owned subsidiary of United PanAm Financial Corp. The Seller will acquire
the Mortgage Loans from Pan American Bank, FSB in a transaction contemporaneous
with the transfer of the Mortgage Loans by the Seller to the Depositor. The
Depositor will acquire the Mortgage Loans from the Seller pursuant to a Mortgage
Loan Purchase Agreement, dated as of December 1, 1997 (the 'Purchase
Agreement'), between the Depositor and the Seller. The Trust Fund will be
created pursuant to a Pooling and Servicing Agreement, dated as of December 1,
1997 (the 'Agreement'), among the Depositor, United PanAm Mortgage Corporation,
as Seller, Pan American Bank, FSB, as Master Servicer, and Bankers Trust Company
of California, N.A., as Trustee. The Mortgage Loans that were identified as of
December 1, 1997 will be collectively referred to herein as the 'Initial
Mortgage Loans.' The initial Mortgage Pool consists of adjustable-rate Initial
Mortgage Loans having an aggregate principal balance as of the Cut-off Date, of
approximately $95,041,505.27, subject to a permitted variance as described
herein under 'THE MORTGAGE POOL.' The Agreement will provide that additional
closed-end, adjustable-rate mortgage loans (the 'Subsequent Mortgage Loans') may
be purchased by the Trust from the Depositor on the Closing Date. The maximum
outstanding principal balance of Subsequent Mortgage Loans transferred to the
Trust on the Closing Date will be $19,958,494.73. The Initial Mortgage Loans and
the Subsequent Mortgage Loans will be collectively referred to herein as the
'Mortgage Loans.' Each Mortgage Loan provides for semiannual adjustment to the
Loan Rate thereon based on the average of six-month London interbank offered
rates for six-month United States dollar denominated deposits in the London
market, as published in The Wall Street Journal (the 'Index') and for
corresponding adjustments to the monthly payment amount due thereon, in each
case subject to the limitations described herein; provided that in the case of
60.56% of the Initial Mortgage Loans, the first adjustment for such Mortgage
Loan will occur after an initial period of two years following origination, and
in the case of 5.67% of the Initial Mortgage Loans, the first adjustment for
such Mortgage Loan will occur after an initial period of three years following
origination.
The Class A Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust Company
('DTC'). The interests of beneficial owners of the Class A Certificates will be
represented by book entries on the records of participating members of DTC.
Cedel and Euroclear will hold omnibus positions on behalf of their participants
through customers' securities accounts in Cedel's and Euroclear's name on the
books of their respective depositories which in turn will hold such positions in
customers' securities accounts in the depositories' names on the books of DTC.
Definitive Certificates will be available for the Class A Certificates only
under the limited circumstances described herein. See 'DESCRIPTION OF THE
CERTIFICATES--Book-Entry Certificates' herein.
THE YIELD TO MATURITY ON THE CLASS A CERTIFICATES WILL BE SENSITIVE TO THE
RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, DEFAULTS AND
REPURCHASES) AND ANY RESULTING EFFECT ON THE WEIGHTED AVERAGE LOAN RATES OF THE
MORTGAGE LOANS. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART
AT ANY TIME; HOWEVER, WITH RESPECT TO A MAJORITY OF THE MORTGAGE LOANS, A
PREPAYMENT MAY SUBJECT THE RELATED MORTGAGOR TO A PREPAYMENT CHARGE. CERTAIN
SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO PREPAYMENTS WILL
BE OFFSET BY THE MASTER SERVICER TO THE EXTENT DESCRIBED HEREIN. SEE 'PREPAYMENT
AND YIELD CONSIDERATIONS' HEREIN.
S-2
<PAGE>
As described herein, the Trust Fund will include three segregated asset
pools, with respect to which elections will be made to treat each as a separate
'real estate mortgage investment conduit' (a 'REMIC') for federal income tax
purposes. The segregated pool comprised of the Mortgage Loans, all scheduled
payments on the Mortgage Loans due after the Cut-off Date and any amounts on
deposit in the Collection Account and Distribution Account from time to time
shall be designated as a REMIC (the 'First Tier REMIC'), the segregated pool of
assets consisting of the regular interests in the First Tier REMIC shall be
designated as a separate REMIC (the 'Second Tier REMIC') and the segregated pool
of assets consisting of the regular interests in the Second Tier REMIC shall be
designated as a separate REMIC (the 'Master REMIC'). The Class A Certificates
and the Class X Certificates will constitute regular interests in the Master
REMIC as described herein. For a description of certain tax consequences of
owning the Class A Certificates, including, without limitation, original issue
discount, see 'CERTAIN FEDERAL INCOME TAX CONSEQUENCES' herein and 'CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS' in the Prospectus.
There is currently no market for the Class A Certificates and there is no
assurance that such a market will develop or, if it does develop, that it will
continue. See 'RISK FACTORS' herein.
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Class A
Certificates. Such transactions may include stabilizing and the purchase of
Class A Certificates to cover syndicate short positions. For a description of
these activities, see 'UNDERWRITING' herein.
The Class A Certificates constitute part of a separate series of Mortgage
Loan Asset Backed Certificates being offered by the Depositor from time to time
pursuant to its Prospectus dated December 15, 1997. This Prospectus Supplement
does not contain complete information about the offering of the Class A
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 Class A Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to the documents described in the accompanying Prospectus under
'Incorporation of Certain Documents by Reference,' the financial statements of
the Certificate Insurer included in, or as exhibits to the following documents,
which have been filed with the Securities and Exchange Commission (the
'Commission'), by Financial Security Assurance Holdings Ltd. ('Holdings') are
hereby incorporated by reference in this Prospectus Supplement:
(a) the Annual Report on Form 10-K of the Certificate Insurer for the
year ended December 31, 1996; and
(b) The Quarterly Report on Form 10-Q of the Certificate of Insurer
for the period ended September 30, 1997.
All financial statements of the Certificate Insurer and its subsidiaries
which are included in the documents filed pursuant to Section 13(a), 13(c), 14
or 15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the
date of this Prospectus Supplement and prior to the termination of the offering
of the Class A Certificates shall be deemed to be incorporated by reference into
this Prospectus Supplement and to be a part hereof from the respective dates of
filing such documents.
The Depositor hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the financial
statements of the Certificate Insurer included in or as an exhibit to the
documents of the Certificate Insurer referred to above and filed pursuant to
Section 13(a) or Section 15(d) of the 1934 Act that is incorporated by reference
in the Registration Statement of which this Prospectus is a part shall be deemed
to be a new registration statement relating to the Class A Certificates offered
hereby, and the offering of such Class A Certificates at that time shall be
deemed to be the initial bona fide offering thereof.
S-3
<PAGE>
SUMMARY
The following summary of certain pertinent information is qualified in its
entirety by reference to the detailed information appearing elsewhere in this
Prospectus Supplement and in the accompanying Prospectus. Certain capitalized
terms used in the Summary are defined elsewhere in this 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..................................... United PanAm Mortgage Loan Asset Backed Certificates, Series 1997-1
(the 'Certificates'). United PanAm Mortgage Loan Trust 1997-1 (the
'Trust') will be formed pursuant to a pooling and servicing agreement
(the 'Agreement') to be dated as of December 1, 1997 among Lehman ABS
Corporation, as depositor (the 'Depositor'), United PanAm Mortgage
Corporation, as seller (the 'Seller'), Pan American Bank, FSB, as
master servicer (the 'Master Servicer'), and Bankers Trust Company of
California, N.A., as trustee (the 'Trustee'). The property of the
Trust will include: a pool of closed-end adjustable-rate mortgage
loans (the 'Mortgage Loans'), secured by first deeds of trust or
mortgages on residential properties that are primarily one- to
four-family properties (the 'Mortgaged Properties'); payments in
respect of the Mortgage Loans due after the Cut-off Date; property
that secured a Mortgage Loan which has been acquired by foreclosure
or deed in lieu of foreclosure; an assignment of the Depositor's
rights under the Purchase Agreement; rights under certain hazard
insurance policies covering the Mortgaged Properties; funds on
deposit in segregated accounts (the 'Initial Interest Coverage
Account' and the 'Funding Account'); and certain other property, as
described more fully herein. In addition, the Depositor has caused
the Certificate Insurer to issue an irrevocable and unconditional
certificate guaranty insurance policy (the 'Policy') for the benefit
of the holders of the Class A Certificates, pursuant to which the
Certificate Insurer will guarantee payments to such
Certificateholders, as described herein. The 'Cut-off Date' for any
Initial Mortgage Loan is December 1, 1997 or, if such Mortgage Loan
was originated subsequent to December 1, 1997, such Mortgage Loan's
date of origination.
The Trust property initially will include the unpaid principal
balance of each Mortgage Loan as of the Cut-off Date after
application of scheduled payments due on or prior to the Cut-off Date
whether or not received. With respect to any date, the 'Pool
Principal Balance' will be equal to the aggregate of the Principal
Balances of all Mortgage Loans as of such date. The 'Cut-off Date
Principal Balance' with respect to each Mortgage Loan is the unpaid
principal balance thereof as of the Cut-off Date after application of
scheduled payments due on or prior to the Cut-off Date whether or not
received. The 'Principal Balance' of a Mortgage Loan (other than a
Liquidated Mortgage Loan (as defined herein)) on any day is equal to
its Cut-off Date Principal Balance minus all amounts allocable to
principal with respect to such Mortgage Loan that have been included
in the Available Distribution Amount on or before such date. The
Principal Balance of a Liquidated Mortgage Loan after the Prepayment
Period in which such Mortgage Loan becomes a Liquidated Mortgage Loan
shall be zero. With respect to any date of determination, the
'Aggregate Principal Balance' shall equal the
</TABLE>
S-4
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<TABLE>
<S> <C>
sum of the Principal Balances of each Mortgage Loan outstanding as of
such date. The 'Maximum Collateral Amount' is $115,000,000 (which is
the sum of aggregate of the Cut-off Date Principal Balances of the
Initial Mortgage Loans and $19,958,494.73). A 'Liquidated Mortgage
Loan' is any Mortgage Loan with respect to which the Master Servicer
has determined that all liquidation proceeds have been recovered.
Securities................................ The United PanAm Mortgage Loan Asset Backed Certificates, Series
1997-1 (the 'Certificates') will consist of three Classes of
Certificates: the Class A Certificates (the 'Class A Certificates'),
the Class X Certificates (the 'Class X Certificates') and the Class R
Certificates (the 'Class R Certificates'). Only the Class A
Certificates (the 'Offered Certificates') are being offered hereby.
The Class A Certificates represent the right to receive payments of
interest at the rates set forth 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 approximately $114,425,000 of principal,
which represents 99.5% of the Maximum Collateral Amount. The
principal amount of Class A Certificates (the 'Class A Principal
Balance') on any date is equal to the applicable Class A Principal
Balance on the Closing Date reduced by the aggregate of (a) all
amounts allocable to principal distributed to such Certificate and
(b) any reductions in the Class A Principal Balance thereof deemed to
have occurred in connection with allocations of Realized Losses in
the manner described herein. On any date, the 'Aggregate Class A
Principal Balance' is the aggregate of the Class A Principal Balances
of all Class A Certificates on such date. The Aggregate Class A
Principal Balance is subject to a permitted variance of plus or minus
5%.
Cut-off Date.............................. With respect to any Initial Mortgage Loan, December 1, 1997 or, if
such Mortgage Loan was originated subsequent to December 1, 1997,
such Mortgage Loan's date of origination.
Closing Date.............................. On or about December 30, 1997.
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.
Seller.................................... United PanAm Mortgage Corporation, a California corporation (the
'Seller'). The Seller's corporate headquarters are located at 625 The
City Drive, Suite 490, Orange, California 92868 and its telephone
number is (714) 621-3522. See 'THE MORTGAGE POOL' herein.
Master Servicer........................... Pan American Bank, FSB, a federally chartered savings bank (the
'Master Servicer'). The Master Servicer's corporate headquarters are
located at 1300 South El Camino Real, Suite 320, San Mateo,
California 94402 and its telephone number is (415) 345-1800. See 'THE
MORTGAGE POOL' herein.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Subservicer............................... Ocwen Federal Bank FSB, a federally chartered savings bank (the
'Subservicer'). See 'OCWEN FEDERAL BANK, FSB' herein.
Trustee................................... Bankers Trust Company of California, N.A., a national banking
association (the 'Trustee').
The Mortgage Loans........................ The initial Mortgage Pool will consist primarily of approximately 799
conventional, one- to four-family adjustable-rate Mortgage Loans
secured by first liens on residential real properties (the 'Mortgaged
Properties'). The Initial Mortgage Loans have original terms to
maturity of 30 years. The Pool Principal Balance as of the Cut-off
Date of the Initial Mortgage Loans is $95,041,505.27.
Each Mortgage Loan provides for semi-annual adjustment to the rate at
which such Mortgage Loan bears interest (the 'Loan Rate') thereon on
each adjustment date applicable thereto (each such date, an
'Adjustment Date') and for corresponding adjustments to the monthly
payment thereon in the immediately following month; provided that in
the case of 60.56% of the Initial Mortgage Loans, the first
adjustment for such Initial Mortgage Loan will occur after an initial
period of two years following origination, and in the case of 5.67%
of the Initial Mortgage Loans, the first adjustment for such Initial
Mortgage Loan will occur after an initial period of three years
following origination, each by aggregate principal balance of the
Initial Mortgage Loans as of the Cut-off Date (each such Mortgage
Loan described in the preceding proviso, a 'Delayed First Adjustment
Mortgage Loan'). On each Adjustment Date for each Mortgage Loan, the
Loan Rate thereon will be adjusted to equal the sum, rounded to the
nearest multiple of 0.125%, of the Index (as described below) and a
fixed percentage amount (the 'Gross Margin'), subject to periodic,
lifetime and first adjustment limitations as described herein. See
'THE MORTGAGE POOL' herein. None of the Mortgage Loans permits the
related mortgagor to convert the adjustable Loan Rate thereon to a
fixed Loan Rate.
As of the Cut-off Date, the Initial Mortgage Loans have Loan Rates
ranging from 6.25% per annum to 14.00% per annum, a weighted average
Loan Rate of approximately 9.61% per annum, a weighted average next
Adjustment Date in May 1, 1999, Gross Margins ranging from 0.75% to
9.50% and a weighted average Gross Margin of approximately 6.00%. As
of the Cut-off Date, the Initial Mortgage Loans will have a weighted
average remaining term to maturity of approximately 359 months. See
'THE MORTGAGE POOL' herein.
The Index................................. As of any Adjustment Date, the Index applicable to the determination
of the Loan Rate on each Mortgage Loan will be the average of the
interbank offered rates for six-month United States
dollar-denominated deposits in the London market as published in The
Wall Street Journal and as most recently available as of the first
business day of the month preceding the month of such Adjustment
Date, as specified in the related Mortgage Note. See 'THE MORTGAGE
POOL--The Index' herein.
Initial Interest Coverage Account......... On the Closing Date, cash will be deposited in a segregated account
(the 'Initial Interest Coverage Account') in the name of the Trustee
on behalf of the Trust. The amount on deposit in the Initial Interest
</TABLE>
S-6
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<TABLE>
<S> <C>
Coverage Account will be used by the Trustee to fund certain interest
shortfalls on the first Distribution Date as described herein under
'DESCRIPTION OF THE CERTIFICATES--Initial Interest Coverage Account.'
Amounts remaining in the Initial Interest Coverage Account after the
first Distribution Date and not used for such purposes are required
to be paid to the Seller. The Initial Interest Coverage Account will
terminate immediately following the first Distribution Date. The
Initial Interest Coverage Account will not be an asset of the REMIC.
Funding Account........................... On the Closing Date, it is expected that approximately $19,958,494.73
of Subsequent Mortgage Loans will be transferred to the Trust. See
'DESCRIPTION OF THE CERTIFICATES Conveyance of Subsequent Mortgage
Loans.' In the event that less than such amount of Subsequent
Mortgage Loans is transferred to the Trust, an aggregate cash amount
equal to the excess of $19,958,494.73 over the aggregate Cut-off Date
Principal Balance of the related Subsequent Mortgage Loans will be
deposited by the Seller in an account which will be in the name of,
and maintained by, the Trustee on behalf of the Trust (the 'Funding
Account'). Such amounts, if any, on deposit in the Funding Account
will be transferred by the Trustee on the first Distribution Date
into the Distribution Account, and will be distributed as a principal
prepayment to Certificateholders then entitled to distributions of
principal. The Funding Account will terminate immediately after the
first Distribution Date. The Funding Account will be an asset of the
Trust; however, the REMIC election will not be made with respect to
the Funding Account. See 'RISK FACTORS--The Subsequent Mortgage
Loans,' 'PREPAYMENT AND YIELD CONSIDERATIONS' and 'DESCRIPTION OF THE
CERTIFICATES--Distributions.'
Registration of Offered 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 Cedel Bank, societe anonyme ('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 (collectively, the
'European 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 The Chase Manhattan Bank ('Chase'), the relevant
depositaries of Cedel and Euroclear, respectively, and each a
participating member of DTC. The interests of such Certificateholders
will be represented by book entries on the records of DTC and
participating members thereof. No Certificate Owner will be entitled
to receive a definitive certificate representing such person's
interest, except in the event
</TABLE>
S-7
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<TABLE>
<S> <C>
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' herein and 'ANNEX I' hereto.
Certificate Rate.......................... The 'Certificate Rate' on the Class A Certificates on each
Distribution Date after the first Distribution Date will be a rate
per annum equal to the lesser of (i) One-Month LIBOR (as defined
herein) plus 0.28%, (the 'Certificate Rate Margin') in the case of
each Distribution Date through and including the Distribution Date on
which the Aggregate Principal Balance (as defined herein) of the
Mortgage Loans is reduced to 5% or less of the Maximum Collateral
Balance, or One-Month LIBOR plus 0.56% per annum, in the case of any
Distribution Date thereafter and (ii) the weighted average of the
Loan Rates on the Mortgage Loans as of the first day of the related
Collection Period, less the Aggregate Expense Rate (the 'Net Funds
Cap'). The 'Aggregate Expense Rate' equals the sum of (a) the
Servicing Fee Rate, (b) the Trustee Fee Rate, (c) the Insurance
Premium Rate and (d) commencing on the thirteenth Distribution Date,
0.50% per annum. For the first Distribution Date, the Certificate
Rate on the Class A Certificates will be 6.24875% per annum.
As further described herein, with respect to any Distribution Date,
to the extent that (a) the amount payable if clause (i) of the
definition of Certificate Rate above is used to calculate interest
exceeds (b) the Net Funds Cap without giving effect to clause (d) in
the preceding paragraph (the 'Basis Risk Shortfall'), the holders of
the Class A Certificates will be entitled to the amount of such Basis
Risk Shortfall with interest thereon at the Certificate Rate for such
Certificates applicable from time to time. Such Basis Risk Shortfall
will be paid after certain distributions to the Certificate Insurer
and from Net Monthly Excess Cash Flow with a portion thereof treated
as paid from and to the extent of funds on deposit in a reserve fund
(the 'Basis Risk Reserve Fund') established pursuant to an agreement
(the 'Interest Rate Cap Agreement') entered into by the Seller. The
source of funds on deposit in the Basis Risk Reserve Fund is limited
to amounts that would otherwise be distributed on the Class X
Certificates. Notwithstanding the preceding sentence, the amount of
the Basis Risk Shortfall for any Distribution Date may not exceed the
excess of (x) the amount payable at the Maximum Class A Certificate
Rate over (y) the amount payable at the Net Funds Cap. The 'Unpaid
Basis Risk Shortfall' for the Class A Certificates on any
Distribution Date is equal to the aggregate of all Basis Risk
Shortfalls for any previous Distribution Dates, together with
interest thereon at the Certificate Rate, less all payments made to
the holders of the Class A Certificates in respect of such Basis Risk
Shortfalls on or prior to such Distribution Date. The Policy will not
cover Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls. See
'DESCRIPTION OF THE CERTIFICATES--Financial Guaranty Insurance
Policy.'
</TABLE>
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<S> <C>
The 'Maximum Class A Certificate Rate' for any Distribution Date is a
per annum rate equal to the weighted average of the Maximum Loan
Rates (as defined herein) on the Mortgage Loans as of the first day
of the related Collection Period less the Aggregate Expense Rate (as
defined herein).
The 'Interest Period' means, with respect to each Distribution Date
and the Class A Certificates, the period from the Distribution Date
in the month preceding the month of such Distribution Date (or, in
the case of the first Distribution Date, from the Closing Date)
through the day before such Distribution Date. Interest on the Class
A Certificates in respect of any Distribution Date will accrue during
the related Interest Period on the basis of a 360-day year and the
actual number of days elapsed.
Distributions, General.................... On the 25th day of each month, or if such day is not a Business Day,
then the next succeeding Business Day, commencing in January 1998
(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 Class A
Certificates on the related Record Date, in the priorities described
below, an aggregate amount equal to the sum of (a) the Interest
Distribution Amount for the Class A Certificates, and (b) the
Principal Distribution Amount.
Interest Distributions.................... On each Distribution Date, holders of the Class A Certificates will
be entitled to receive interest distributions (the 'Interest
Distribution Amount') in an amount equal to interest accrued during
the related Interest Period on the Class Principal Balance thereof
immediately prior to such Distribution Date at the then-applicable
Certificate Rate, subject to reduction only in the event of
shortfalls caused by the Relief Act (as defined herein). The Policy
will not cover any shortfalls in interest resulting from the
application of the Relief Act. Notwithstanding the foregoing, if
payments were not made as required under the Policy, additional
interest shortfalls may be allocated to the Class A Certificates, as
described herein. See 'DESCRIPTION OF THE CERTIFICATES--Interest
Distributions' herein.
Principal Distributions................... Holders of the Class A Certificates will be entitled to receive on
each Distribution Date an amount equal to the Principal Distribution
Amount (as defined herein). The Principal Distribution Amount will
include, to the extent of available funds from the Mortgage Pool and
except as otherwise described herein, the principal portion of all
scheduled monthly payments on the Mortgage Loans due during the
related Due Period to the extent received or advanced by the Master
Servicer, all unscheduled amounts received in respect of the Mortgage
Loans during the related Prepayment Period that are allocable to
principal (including proceeds of repurchases, prepayments,
liquidations and insurance (excluding payments made under the Policy)
and shortfalls relating to substitution) and certain other amounts
described herein allocable to certain Realized Losses on the Mortgage
Loans incurred during the related Collection Period, and will be
adjusted as a result of the related required level
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of overcollateralization, all as described herein. The 'Collection
Period' with respect to any Distribution Date is the calendar month
immediately preceding the month in which such Distribution Date
occurs. The 'Due Period' with respect to any Distribution Date is the
period commencing on the second day of the month preceding the month
in which such Distribution Date occurs and ending on the first day of
the month in which such Distribution Date occurs. The 'Prepayment
Period' with respect to any Distribution Date is the period
commencing on the Business Day following the Determination Date of
the month preceding the month in which such Distribution Date occurs
(or, in the case of the first Distribution Date, the day following
the Cut-off Date) and ending on the Determination Date in the month
in which such Distribution Date occurs.
In addition, on each Distribution Date, any funds received as a
result of a claim under the Policy in respect of the principal
portion of Realized Losses allocated to the Class A Certificates will
be distributed by or on behalf of the Trustee to the holders of the
Class A Certificates. See 'DESCRIPTION OF THE CERTIFICATES--Financial
Guaranty Insurance Policy' herein. Except under the limited
circumstances set forth in the Policy, the Class A Certificates will
receive payments under the Policy in respect of Realized Losses only
after the overcollateralization has been reduced to zero.
The subordination and cash flow provisions of the Class X and Class R
Certificates will, to the extent of available funds, result in a
limited acceleration of the principal payments to the holders of the
Class A Certificates to the extent the amount of overcollateralization
provided by the Mortgage Pool is less than the then current related
required amount. As of the Closing Date, the amount of
overcollateralization provided by the Mortgage Pool will be 0.50% of
the Maximum Collateral Amount, which is less than the required level.
The subordination provisions are more fully described under '--Credit
Enhancement' below and 'DESCRIPTION OF THE CERTIFICATES--
Overcollateralization Provisions' herein. Such subordination provisions
may have the effect of shortening the weighted average life of the
Class A Certificates by increasing the rate at which amounts in respect
of principal are distributed to the Class A Certificateholders.
Credit Enhancement........................ The credit enhancement provided for the benefit of the Class A
Certificateholders consists of the overcollateralization, the Policy,
and the amounts that would otherwise be distributed to the Class X
and Class R Certificates. The overcollateralization and the Policy
are described below and herein.
Overcollateralization: The cashflow provisions are expected to
result initially in an increased rate of amortization of the Class A
Certificates relative to the amortization of the Mortgage Loans
through the application of excess interest received on the Mortgage
Loans to the payment of principal of Class A Certificates. As a
result the aggregate Class Principal Balance of the Class A
Certificates will be less than the Principal Balance of the Mortgage
Loans (such difference, the 'overcollateralization') and the
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application of such excess interest will continue until a required
level of overcollateralization is achieved. Once the required level
of overcollateralization is reached or is permitted to be and is
reduced, and subject to the provisions in the Agreement, the
increased rate of amortization of the Class A Certificates will
cease, unless necessary to maintain the required level of
overcollateralization.
The Agreement provides that, subject to certain trigger tests set
forth therein, the required level of overcollateralization for the
Mortgage Pool may increase or decrease over time. An increase would
result in a further period of accelerated amortization of the Class A
Certificates to increase the actual level of overcollateralization to
its increased required level; a decrease would result in a period of
decelerated amortization of the Class A Certificates to achieve an
actual level of overcollateralization equal to its decreased required
level. To the extent the required overcollateralization level has
been reached or is permitted to be and is reduced, the distribution
of amounts in respect of principal to the Class A Certificates will
be correspondingly reduced. See 'DESCRIPTION OF THE
CERTIFICATES--Overcollateralization Provisions' herein.
The Financial Guaranty Insurance Policy: The Class A Certificates
will be entitled to the benefit of a financial guaranty insurance
policy (the 'Policy') to be issued by Financial Security Assurance
Inc. (the 'Certificate Insurer'), discussed more fully under
'--Financial Guaranty Insurance Policy' below. See also 'DESCRIPTION
OF THE CERTIFICATES' herein.
Financial Guaranty Insurance Policy....... The Certificate Insurer will issue the Policy as a means of providing
additional credit enhancement to the Class A Certificates. Under the
Policy, the Certificate Insurer will irrevocably and unconditionally
guarantee payment to or on behalf of the Trustee, for the benefit of
the holders of the Class A Certificates, on each Distribution Date,
as further described herein, of an amount that will cover any
interest shortfalls (excluding shortfalls in respect of the Relief
Act, Basis Risk Shortfalls and Unpaid Basis Risk Shortfalls)
allocated to the Class A Certificates plus the principal portion of
any Realized Losses allocated to the Class A Certificates. A payment
by the Certificate Insurer under the Policy is referred to herein as
an 'Insured Payment.' The Policy does not guarantee the holders of
the Class A Certificates any specified rate of principal payments.
See 'DESCRIPTION OF THE CERTIFICATES--Financial Guaranty Insurance
Policy' herein.
Allocation of Losses; Subordination....... Except as otherwise described herein, Realized Losses on the Mortgage
Loans will be allocated first to the Net Monthly Excess Cashflow (as
defined herein), second in reduction of the then current
overcollateralization, if any, until the Principal Balance of the
Mortgage Loans equals the Class Principal Balance, and third to the
Class A Certificates, in each case to the extent described in
'DESCRIPTION OF THE CERTIFICATES--Overcollateralization Provisions'
herein. Subject to the terms of the Policy, all Realized Losses
allocated to the Class A Certificates will be covered by the Policy.
See 'DESCRIPTION OF THE CERTIFICATES--Allocation of Losses;
Subordination' herein.
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Neither the Class A Certificates nor the Mortgage Loans are insured
or guaranteed by any governmental agency or instrumentality or by the
Depositor, the Master Servicer, the Trustee or any of their
respective affiliates.
Monthly Advances; Compensating Interest... The Master Servicer will be obligated to make Monthly Advances only
to the extent that such Monthly Advances, in the Master Servicer's
reasonable judgment, are recoverable from the related Mortgage Loan.
Monthly Advances are recoverable from collections on the Mortgage
Loans or from Net Monthly Excess Cashflow. Monthly Advances will
equal, on any Distribution Date, scheduled interest on the Mortgage
Loans due and payable during the related Due Period but uncollected
as of the related Determination Date (net of the Servicing Fee). See
'DESCRIPTION OF THE CERTIFICATES--Monthly Advances' herein. With
respect to any Distribution Date, the related 'Determination Date'
shall be five Business Days prior to such Distribution Date.
In addition, the Master Servicer will also be required to pay
Compensating Interest with respect to any prepayment received on a
Mortgage Loan during the related Prepayment Period as described
herein under 'POOLING AND SERVICING AGREEMENT--Servicing and Other
Compensation and Payment of Expenses.' The Master Servicer will not
be required to pay Compensating Interest with respect to any
Distribution Date in an amount in excess of the Servicing Fee
received by the Master Servicer for such Distribution Date.
Record Date............................... The Record Date for each Distribution Date will be the close of
business on the last business day of the month preceding the month in
which such Distribution Date occurs. See 'DESCRIPTION OF THE
CERTIFICATES--General' herein.
Optional Termination...................... At its option, the majority holder of the Class R Certificates (or if
such holder does not exercise such option, the Master Servicer or the
Certificate Insurer) may purchase all of the Mortgage Loans, together
with any properties in respect thereof acquired by the Trustee, and
thereby effect termination and early retirement of the Certificates,
on any Distribution Date on which the aggregate principal balance of
the Mortgage Loans and such properties remaining is 5% of the Maximum
Collateral Balance. In the event the majority holder of the Class R
Certificates or the Master Servicer or the Certificate Insurer
exercises such option, the purchase price payable in connection
therewith generally will be equal to par plus accrued interest for
each Mortgage Loan at the related Loan Rate to but not including the
first day of the month in which such repurchase price is distributed,
together with any amounts due to the Master Servicer for servicing
compensation at the related Servicing Fee Rate and all amounts due
and owing to the Certificate Insurer under the Insurance Agreement.
In the event the majority holder of the Class R Certificates or the
Master Servicer or the Certificate Insurer exercises such option, the
portion of the purchase price allocable to the Class A Certificates
will be, to the extent of available funds (including funds paid under
the Policy), (i) 100% of the then outstanding Class Principal Balance
thereof, plus (ii) one
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month's interest on the then outstanding Class Principal Balance
thereof at the then applicable Certificate Rate, plus (iii) any
previously accrued but unpaid interest thereon. See 'POOLING AND
SERVICING AGREEMENT--Termination' herein and 'DESCRIPTION OF THE
CERTIFICATES--Termination' in the Prospectus.
Certain Federal Income Tax Consequences... Elections will be made to treat the assets of the Trust Fund,
exclusive of the Initial Interest Coverage Account, Funding Account,
rights under the Interest Rate Cap Agreement or payments received
thereunder, as three separate real estate mortgage investment
conduits ('REMICs') for federal income tax purposes, which shall be
identified as the Master REMIC, the First Tier REMIC and the Second
Tier REMIC. The Class A Certificates and Class X Certificates will
represent the 'regular interests' in the Master REMIC (such regular
interests individually, the 'Class A Regular Interest' or the 'Class
X Regular Interest,' as applicable, and collectively, the 'Master
REMIC Regular Interests'). The Class R-1 Certificates will be
designated as the sole class of 'residual interest' in the Master
REMIC, the Class R-2 Certificates will be designated as the sole
class of 'residual interest' in the First Tier REMIC, the Class R-3
Certificates will be designated as the sole class of 'residual
interest' in the Second Tier REMIC, and the Class R-1, the Class R-2
and Class R-3 Certificates will be Class R Certificates of the Master
REMIC, the First Tier REMIC and the Second Tier REMIC, respectively,
as described in the Prospectus. Upon the issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor,
will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the Agreement, for federal income
tax purposes, the Master REMIC, the First Tier REMIC and the Second
Tier REMIC will each qualify as a REMIC under Sections 860A through
860G of the Internal Revenue Code of 1986, as amended (the 'Code').
The Class A Certificates will also represent the beneficial interest
in the right to receive payments from the Interest Rate Cap
Agreement. The Interest Rate Cap Agreement is an asset benefically
owned by the Class A Certificateholders through an arrangement with
the Trustee that qualifies as a grantor trust under subpart E and
subpart I of subchapter J of chapter 1 of subtitle A of the Internal
Revenue Code of 1986, as amended. The portion of the Trust Fund
consisting of the rights under the Interest Rate Cap Agreement will
be treated as an 'outside reserve fund' for purposes of the Code.
Beneficial owners of the Class A Certificates will be treated for
federal income tax purposes as having purchased an undivided
beneficial interest in the Class A Regular Interest in the Master
REMIC and as having acquired rights under the Interest Rate Cap
Agreement, both to the extent of the owner's proportionate interest
in the Class A Certificates. The Class A Regular Interests will be
treated as newly originated debt instruments for federal income tax
purposes. A Class A Certificateholder generally will recognize
ordinary income equal to such Certificateholder's proportionate share
of interest and original issue discount, if any, accrued on the Class
A Regular Interests and will take into account a proportionate
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share of any payments received under the Interest Rate Cap Agreement.
A Class A Certificateholder's income derived from the Class A Regular
Interest and payments received under the Interest Rate Cap Agreement
generally must be accounted for under the notional principal contract
schedules. See 'CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Taxation of
Interest Rate Cap Agreement' herein.
The Class A Regular Interests will be treated as assets described in
Section 7701(a)(19)(C) of the Code and as 'real estate assets' under
Section 856(c)(4)(A) of the Code, generally in the same proportion
that the assets in the Trust Fund would be so treated. In addition,
interest on the Class A Regular Interests will be treated as
'interest on obligations secured by mortgages on real property' under
Section 856(c)(3)(B) of the Code generally to the extent that the
Class A Regular Interests are treated as 'real estate assets' under
Section 856(c)(4)(A) of the Code. Investors are cautioned that since
the Class A Certificates comprise rights in addition to the rights
under the Class A Regular Interests, the Class A Certificates will
not in their entirety constitute assets described in section
7701(a)(19) of the Code or real estate assets described in section
856(c)(4)(A) of the Code, and income earned on the Class A Regular
Certificates will qualify as 'interest on obligations secured by
mortgages on real property' under section 856(c)(3)(B) of the Code
only to the extent that the income reflects the income so qualifying
earned by the Class A Regular Interests. The Class A Certificates
will not be treated entirely as qualified mortgages under Section
860G(a)(3) of the Code and, as a consequence, may not be appropriate
investments for other REMICs in their entirety. See 'CERTAIN FEDERAL
INCOME TAX CONSEQUENCES--Characterization of Investments in REMIC
Certificates' in the Prospectus.
If a Class A Certificate is sold, exchanged, redeemed or retired, the
selling Certificateholder will be required to allocate the amount
realized on such transaction between the interest in the Class A
Regular Interest represented by such Class A Certificate and the
proportionate rights under the Interest Rate Cap Agreement
represented by such Class A Certificate. The selling Class A
Certificateholder will be required to recognize gain or loss equal to
the difference between the amount realized on the sale, exchange,
redemption, or retirement allocable to the Certificate's
proportionate interest in the Class A Regular Interest and such
seller's adjusted basis in such Class A Regular Interest. Except as
provided below, any such gain will be and any such loss may be
capital gain or loss, provided that the Class A Certificate is held
as a 'capital asset' (generally, property held for investment) within
the meaning of Section 1221 of the Code. The Taxpayer Relief Act of
1997 (the '1997 Act') has changed the tax rates and holding periods
applicable to net capital gains of noncorporate taxpayers. In
general, under applicable provisions of the 1997 Act, which are
generally effective for gains realized after July 28, 1997, the
maximum tax rate applicable to net capital gains of noncorporate
taxpayers realized upon the sale of securities held for 18 months or
more is 20 percent, and the maximum tax rate on net capital gains of
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noncorporate taxpayers realized upon the sale of securities for more
than one year and for not more than 18 months is 28 percent. The 1997
Act does not affect the taxation of a corporation's capital gains.
Because the tax rates and applicable holding periods will vary
depending upon a Class A Certificateholder's individual
circumstances, investors should consult their own tax advisors
regarding the tax consequences to them of purchasing, holding and
selling the Class A Certificates. Gain from the sale or other
disposition of an interest in a Class A Regular Interest associated
with a Class A Certificate that might otherwise be a capital gain
will be treated as ordinary income to the extent that such gain does
not exceed the excess, if any, of (i) the amount that would have been
includible in such holder's income with respect to the Class A
Regular Interest had income accrued thereon at a rate equal to 110%
of the applicable federal rate as defined in Section 1274(d) of the
Code determined as of the date of purchase of the related Class A
Certificate, over (ii) the amount actually includible in such
holder's income.
Upon a disposition of a Class A Certificate, the amount allocable to
the Interest Rate Cap Agreement, if any, would be treated as a
termination payment (as described below under 'CERTAIN FEDERAL INCOME
TAX CONSEQUENCES--Taxation of Interest Rate Cap Agreement').
For further information regarding the federal income tax consequences
of investing in the Class A Certificates, see 'CERTAIN FEDERAL INCOME
TAX CONSEQUENCES' herein and in the Prospectus.
Ratings................................... It is a condition to the issuance of the Certificates that the Class
A Certificates be rated 'AAA' by Standard & Poor's and 'Aaa' by
Moody's. The ratings on the Class A Certificates are based in part on
the ratings of the claims-paying ability of the Certificate Insurer
by Standard & Poor's and Moody's. Any change in the ratings of the
Certificate Insurer by Standard & Poor's and Moody's may result in a
change in the ratings on the Class A Certificates. The Depositor has
not requested that any rating agency rate the Class A Certificates
other than those stated above. If any other rating agency were to
rate the Class A Certificates, such rating agency may assign a rating
different from the ratings described above. A security rating is not
a recommendation to buy, sell or hold securities and may be subject
to revision or withdrawal at any time by the assigning rating
organization. A security rating does not address the frequency of
prepayments on the Mortgage Loans or the corresponding effect on
yield to investors. See 'PREPAYMENT AND YIELD CONSIDERATIONS' and
'RATINGS' herein.
Legal Investment.......................... The appropriate characterization of the Class A Certificates under
various legal investment restrictions, and thus the ability of
investors subject to these restrictions to purchase the Class A
Certificates, may be subject to significant interpretive
uncertainties. The Class A Certificates will be 'mortgage related
securities' within the meaning of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA') so long as they are rated in at
least the second highest rating category by a nationally recognized
statistical rating
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organization and, as such, are legal investments for certain entities
to the extent provided in SMMEA. Accordingly, investors should
consult their own legal advisors to determine whether and to what
extent the Class A Certificates constitute legal investments for
them. See 'LEGAL INVESTMENT' herein and in the Prospectus.
ERISA Considerations...................... A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income Security Act of
1974, as amended ('ERISA'), or Section 4975 of the Code should review
carefully with its legal advisors whether the purchase or holding of
Class A Certificates could give rise to a transaction that is
prohibited or is not otherwise permitted either under ERISA or
Section 4975 of the Code or whether there exists any statutory or
administrative exemption applicable to an investment therein. The
U.S. Department of Labor has issued an individual exemption,
Prohibited Transaction Exemption 91-14, to the Underwriter that
generally exempts from the application of certain of the prohibited
transaction provisions of Section 406 of ERISA, and the excise taxes
imposed on such prohibited transactions by Section 4975(a)and (b) of
the Code and Section 502(i) of ERISA, transactions relating to the
purchase, sale and holding of pass-through certificates underwritten
by the Underwriter such as the Class A Certificates and the servicing
and operation of asset pools, provided that certain conditions are
satisfied. A fiduciary of any employee benefit plan subject to ERISA
or the Code should consult with its legal advisors regarding the
requirements of ERISA and the Code. See 'ERISA CONSIDERATIONS' herein
and in the Prospectus.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Class A Certificates.
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. 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. Certificate Owners 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.
RISK OF EARLY DEFAULTS
Substantially all of the Initial Mortgage Loans were originated within six
months prior to the Cut-off Date. The weighted average remaining term to stated
maturity of the Initial Mortgage Loans (by Cut-off Date Initial Principal
Balance) is approximately 359 months. Although little data is available,
defaults on mortgage loans, including mortgage loans similar to the Mortgage
Loans, are generally expected to occur with greater frequency in the early years
of the terms of mortgage loans.
PREPAYMENT CONSIDERATIONS
All of the Mortgage Loans may be prepaid in whole or in part at any time.
However, 84.31% of the Initial Mortgage Loans are subject to prepayment
penalties under certain circumstances during a one, two, three or five year
period from origination, as specified in the related Mortgage Note. The Trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing and homeowner mobility. In addition, all of the Mortgage Loans contain
due-on-sale provisions and the Master Servicer will be required by the Agreement
to enforce such provisions unless (i) such enforcement is not permitted by
applicable law or (ii) the Master Servicer, in a manner consistent with
reasonable commercial practice, permits the purchaser of the related Mortgaged
Property to assume the Mortgage Loan. To the extent permitted by applicable law,
such assumption will not release the original borrower from its obligation under
any such Mortgage Loan. See 'CERTAIN LEGAL ASPECTS OF LOANS--Due-on-Sale Clauses
in Mortgage Loans' in the Prospectus.
CERTIFICATE RATING
The rating of the Class A Certificates will depend primarily on an
assessment by the Rating Agencies of the Mortgage Loans and upon 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 Class A Certificates may result in a reduction in
the rating of the Class A Certificates. The rating by the Rating Agencies of the
Class A Certificates is not a recommendation to purchase, hold or sell the Class
A 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 on Mortgage Loans
or the possibility that Class A Certificateholders might realize a lower than
anticipated yield. The ratings of the Class A Certificates do not address the
possibility of the imposition of United States withholding tax with respect to
non-U.S. persons.
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NATURE OF COLLATERAL
Even assuming that the Mortgaged Properties provide adequate security for
the Mortgage Loans, substantial delays could be encountered in connection with
the liquidation of Mortgage Loans that are delinquent and resulting shortfalls
in distributions to Class A Certificateholders could occur if the Certificate
Insurer were unable to perform its obligations under the Policy. Further,
liquidation expenses (such as legal fees, real estate taxes, and maintenance and
preservation expenses) will reduce the proceeds payable to Certificateholders
and thereby reduce the security for the Mortgage Loans. In the event any of the
Mortgaged Properties fail to provide adequate security for the related Mortgage
Loans, Class A Certificateholders could experience a loss if the Certificate
Insurer were unable to perform its obligations under the Policy.
LEGAL CONSIDERATIONS
The sale of the Mortgage Loans from the Seller to the Depositor and from
the Depositor to the Trust will be treated by the Seller, the Depositor and the
Trust as a sale of the Mortgage Loans. The Seller will warrant that such
transfer is a sale of its interest in the Mortgage Loans. The Depositor will
warrant in the Agreement that the transfer of the Mortgage Loans to the Trust is
a valid transfer and assignment of such Mortgage Loans to the Trustee. In the
event of an insolvency of the Seller, it is possible that a receiver or
conservator for, or a creditor of, the Seller, may argue that the transaction
between the Seller and the Depositor, with respect to the Mortgage Loans was a
pledge of such Mortgage Loans in connection with a borrowing by the Seller
rather than a true sale. Such an attempt, even if unsuccessful, could result in
delays in distributions on the Class A Certificates.
PAYMENTS ON THE MORTGAGE LOANS
When a principal prepayment in full is made on a Mortgage Loan, the
Mortgagor is charged interest only up to the date of such prepayment, instead of
for a full month which may result in a Prepayment Interest Shortfall. Any
shortfalls in interest collections resulting from a prepayment in full or in
part by the related borrower under a Mortgage Loan are referred to as
'Prepayment Interest Shortfalls.' The Master Servicer is obligated to pay those
shortfalls in interest collections payable on the Class A Certificates that are
attributable to Prepayment Interest Shortfalls, but only to the extent of the
Servicing Fee for the related Due Period.
THE SUBSEQUENT MORTGAGE LOANS
The Seller will not select the Mortgage Loans in a manner that it believes
is adverse to the interest of the holders of the Class A Certificates. However,
Subsequent Mortgage Loans originated or purchased by the Seller and sold to the
Trust may be of a different credit quality than the Initial Mortgage Loans.
Following the transfer of Subsequent Mortgage Loans to the Trust, the aggregate
characteristics of the Mortgage Loans then held in the Trust may vary from those
of the Initial Mortgage Loans. See 'DESCRIPTION OF THE CERTIFICATES--Conveyance
of the Subsequent Mortgage Loans' herein.
In the event that on the Closing Date the Pool Principal Balance is less
than the aggregate of the Class Principal Balance of the Class A Certificates,
the holders of the Class A Certificates will receive, on the first Distribution
Date, an additional distribution allocable to principal in an amount equal to
such difference.
The ability of the Trust to invest in Subsequent Mortgage Loans is largely
dependent upon the ability of the Seller to originate or purchase additional
loans. The ability of the Seller to originate or purchase additional loans may
be affected as a result of a variety of economic and social factors. Economic
factors include interest rates, unemployment levels, the rate of inflation and
consumer perception of economic conditions generally. However, the Seller is
unable to determine and has no basis to predict whether or to what extent
economic or social factors will affect the Seller's ability to originate or
purchase additional loans and therefore the availability of Subsequent Mortgage
Loans.
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE
Approximately 42.14%, 13.55%, 7.11%, 6.61% and 6.48% (by Cut-off Date
Initial Principal Balance) of the Initial Mortgage Loans are secured by
Mortgaged Properties in California, Washington, Colorado, Utah and Ohio,
respectively. To the extent that the States of California, Washington, Colorado,
Utah and Ohio have experienced or may experience in the future weaker economic
conditions or greater rates of decline in real estate
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values than the United States generally, such a concentration of the Mortgage
Loans may be expected to exacerbate the foregoing risks. The Seller and the
Depositor can neither quantify the impact of any recent property value declines
on the Mortgage Loans nor predict whether, to what extent or for how long such
declines may continue.
UNDERWRITING STANDARDS, LIMITED OPERATING HISTORY AND POTENTIAL DELINQUENCIES
THE UNDERWRITING STANDARDS APPLICABLE TO THE MORTGAGE LOANS ARE PRIMARILY
INTENDED TO EVALUATE THE APPLICANT'S CREDIT HISTORY AND CAPACITY TO REPAY THE
LOAN, THE VALUE OF THE PROPOSED COLLATERAL AND THE ADEQUACY OF SUCH COLLATERAL
FOR THE LOAN. THE SELLER PROVIDES LOANS PRIMARILY TO BORROWERS WHO DO NOT
QUALIFY FOR LOANS CONFORMING TO FANNIE MAE AND FREDDIE MAC GUIDELINES BUT WHO
HAVE EQUITY IN THEIR PROPERTY.
AS A RESULT OF THE APPLICATION OF SUCH UNDERWRITING STANDARDS, THE MORTGAGE
LOANS ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE AND BANKRUPTCY
THAT ARE HIGHER, AND THAT MAY BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER.
As described below under 'THE MORTGAGE POOL', the Seller commenced
operations in July 1997. Accordingly, the Seller (whether as an originator or
acquirer of mortgage loans) does not have representative historical delinquency,
bankruptcy, foreclosure or default experience that may be referred to for
purposes of estimating the future delinquency and loss experience of the
Mortgage Loans.
ADDITIONAL RISKS ASSOCIATED WITH THE MORTGAGE LOANS
Approximately 23.76% of the Initial Mortgage Loans by aggregate principal
balance of the related Mortgage Loans as of the Cut-off Date, had a
Loan-to-Value Ratio at origination in excess of 80%. Mortgage Loans with higher
Loan-to-Value Ratios may present a greater risk of loss. See 'THE MORTGAGE
POOL--General' herein.
Certain of the Subsequent Mortgage Loans may have a first Due Date (as
defined herein) after January 1, 1998.
LIMITED OBLIGATIONS
The Class A Certificates will not represent an interest in or obligation of
the Depositor, the Master Servicer, the Trustee or any of their respective
affiliates. The only obligations of the foregoing entities with respect to the
Certificates or any Mortgage Loan will be the obligations of the Depositor and
the Seller pursuant to certain limited representations and warranties made with
respect to the Mortgage Loans and of the Master Servicer with respect to its
servicing obligations under the Agreement (including the limited obligation to
make certain Monthly Advances). Neither the Certificates nor the underlying
Mortgage Loans will be guaranteed or insured by any governmental agency or
instrumentality, or by the Depositor, the Seller, the Master Servicer, the
Trustee or any of their respective affiliates. The Class A Certificates are
covered by the Policy, as and to the extent described under the caption
'DESCRIPTION OF THE CERTIFICATES--Financial Guaranty Insurance Policy' herein.
Proceeds of the assets included in the Trust Fund (including the Mortgage Loans)
and of the Policy will be the sole source of payments on the Class A
Certificates, and there will be no recourse to the Depositor, the Seller, the
Master Servicer, the Trustee or any other entity in the event that such proceeds
are insufficient or otherwise unavailable to make all payments provided for
under the Class A Certificates.
RISK OF LOAN RATES REDUCING THE CERTIFICATE RATE OF THE CLASS A CERTIFICATES
The calculation of the Certificate Rate of the Class A Certificates is
based upon (i) the value of One-Month LIBOR which is different from the value of
the Index applicable to the Mortgage Loans (either as a result of the use of a
different index, a different rate determination date or a different rate
adjustment date) and (ii) the weighted average of the Loan Rates (net of certain
amounts described herein) of the Mortgage Loans, which are subject to periodic
adjustment caps, maximum rate caps and minimum rate floors and in certain
instances, limitations on the amount of an initial interest rate adjustment. In
general, the Mortgage Loans adjust based upon Six-Month LIBOR whereas the
Certificate Rate on the Class A Certificates adjusts monthly based upon
S-19
<PAGE>
One-Month LIBOR, as described under 'DESCRIPTION OF THE
CERTIFICATES--Calculation of One-Month LIBOR' herein, subject to the Net Funds
Cap. Consequently, the interest which becomes due on the Mortgage Loans (net of
the Servicing Fee, the Insurance Premium Amount, the Trustee Fee and certain
reductions required by the Certificate Insurer) during any Due Period may not
equal the amount of interest that would accrue on the Class A Certificates at
One-Month LIBOR plus the Certificate Rate Margin during the related Interest
Period. In particular the Class A Certificate Rate adjusts monthly, while the
Loan Rates of the Mortgage Loans adjust less frequently with the result that the
Net Funds Cap may limit increases in the Class A Certificate Rate for extended
periods in a rising interest rate environment. The Loan Rate on 60.56% and 5.67%
of the Initial Mortgage Loans, in each case based upon the aggregate principal
balance of the Initial Mortgage Loans as of the Cut-off Date, will not adjust
for either two years and three years, respectively, following origination. In
addition, the Loan Rates on certain of the Mortgage Loans may respond to
different economic and market factors than the Class A Certificate Rate and
there is not necessarily a correlation between them. Thus, it is possible, for
example, that the Loan Rates on certain of the Mortgage Loans may fall during
periods in which One-Month LIBOR is stable or is rising or that, even if both
the Loan Rates on the Mortgage Loans and One-Month LIBOR fall during the same
period, the Loan Rates on certain of the Mortgage Loans may fall more rapidly
than One-Month LIBOR. Furthermore, if the Net Funds Cap is used to determine the
Class A Certificate Rate for a Distribution Date, the value of the Class A
Certificates may be temporarily reduced.
If, with respect to any Distribution Date, the amount of interest that
would accrue during the related Interest Period on the Class A Certificates
based on the applicable level of One-Month LIBOR plus the Certificate Rate
Margin is greater than the weighted average (calculated as described herein) of
the Loan Rates on the Mortgage Loans as of the first day of the related Due
Period, less the Aggregate Expense Rate then the Certificate Rate on the Class A
Certificates will be based on the Net Funds Cap, and Basis Risk Shortfall will,
except as provided below, occur. However, no assurance can be given that there
will be sufficient Net Monthly Excess Cashflow generated from the Mortgage Loans
to pay the Unpaid Basis Risk Shortfall on any given Distribution Date. The
Policy will not cover any Basis Risk Shortfall or Unpaid Basis Risk Shortfall.
Moreover, to the extent that the Net Funds Cap for any Distribution Date equals
the Maximum Class A Certificate Rate, the Basis Risk Shortfall for such
Distribution Date will equal zero.
YIELD CONSIDERATIONS WITH RESPECT TO THE MORTGAGE LOANS
The yield to maturity on the Class A Certificates may be affected by the
resetting of the Loan Rates on the Mortgage Loans on the related Adjustment
Dates. In addition, because the Loan Rate for each Mortgage Loan is based on the
Index plus the related Gross Margin, such rate could be higher than prevailing
market interest rates, and this may result in an increase in the rate of
prepayments on the Mortgage Loans after such adjustment. Finally, because the
Loan Rates on the Mortgage Loans are based on the Index while the Certificate
Rate on the Class A Certificates is based in part on One-Month LIBOR, and a
substantial number of the Mortgage Loans are Delayed First Adjustment Mortgage
Loans, any resulting Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls, to
the extent not covered by amounts otherwise payable to the Class X and Class R
Certificates, as described herein, will adversely affect the yield to maturity
on the Class A Certificates. The Policy will not cover Basis Risk Shortfalls or
Unpaid Basis Risk Shortfalls.
S-20
<PAGE>
THE MORTGAGE POOL
GENERAL
The Mortgage Pool will initially consist of approximately 799 conventional,
one- to four-family, adjustable rate Mortgage Loans secured by first liens on
residential real properties (the 'Mortgaged Properties'). The Initial Mortgage
Loans have original terms to maturity of 30 years and have an aggregate
principal balance as of the Cut-off Date of approximately $95,041,505.27, in
each case after application of scheduled payments of principal due on or before
the Cut-off Date whether or not received, and in each case subject to a
permitted variance of plus or minus 5%.
All of the Mortgage Loans are secured by first mortgages or deeds of trust
or other similar security instruments creating first liens on primarily one- to
four-family residential properties consisting of detached or semi-detached one-
to four-family dwelling units, individual condominium units and individual units
in planned unit developments. The Mortgage Loans to be included in the Mortgage
Pool will be acquired by the Depositor from the Seller. See '--Underwriting
Standards; Representations' herein. Pan American Bank, FSB will act as the
master servicer for the Mortgage Loans pursuant to the Agreement (in such
capacity, the 'Master Servicer') and Ocwen Federal Bank FSB will initially act
as subservicer.
Approximately 23.76% of the Initial Mortgage Loans had a Loan-to-Value
Ratio at origination in excess of 80%. No Initial Mortgage Loan will have a
Loan-to-Value Ratio at origination exceeding 90.00%. There can be no assurance
that the Loan-to-Value Ratio of any Mortgage Loan determined at any time after
origination is less than or equal to its original Loan-to-Value Ratio.
Substantially all of the Mortgage Loans have scheduled monthly payments due
on the first day of the month (with respect to each Mortgage Loan, a 'Due
Date'). Each Mortgage Loan will contain a customary 'due-on-sale' clause.
Approximately 84.31% of the Initial Mortgage Loans provide for payment by
the mortgagor of a prepayment charge in limited circumstances on certain
prepayments. Generally, each such Mortgage Loan provides for payment of a
prepayment charge on certain partial prepayments and all prepayments in full
made within one year, two years, three years or five years from the date of
origination of such Mortgage Loan. The amount of the prepayment charge is as
provided in the related Mortgage Note but is generally equal to six months'
interest on any amounts prepaid in excess of 20% of the then outstanding
principal balance of the related Mortgage Loan in any 12 month period. The
Master Servicer will be entitled to all prepayment charges received on the
Mortgage Loans and such amounts will not be available for distribution on the
Certificates.
Each Mortgage Loan provides for semi-annual adjustment to the Loan Rate
thereon on each adjustment date applicable thereto (each such date, an
'Adjustment Date') and for corresponding adjustments in the monthly payments
thereon in the immediately following month; provided that the first adjustment
for such Mortgage Loan will occur after an initial period of two years in the
case of 60.56% of the Initial Mortgage Loans and three years in the case of
5.67% of the Mortgage Loans, each by aggregate principal balance of the Initial
Mortgage Loans as of the Cut-off Date. On each Adjustment Date for each Mortgage
Loan, the Loan Rate thereon will be adjusted to equal the sum, rounded to the
nearest multiple of 0.125%, of the Index (as described below) and a fixed
percentage amount (the 'Gross Margin'); provided, however, that the Loan Rate on
each such Mortgage Loan generally will not increase or decrease by more than 1%
per annum on any related Adjustment Date (the 'Periodic Rate Cap') and will not
exceed a specified maximum Loan Rate over the life of such Mortgage Loan (the
'Maximum Loan Rate') or be less than a specified minimum Loan Rate over the life
of such Mortgage Loan (the 'Minimum Loan Rate') and provided that with respect
to the Delayed First Adjustment Mortgage Loans, the Loan Rate will not increase
or decrease on the first Adjustment Date by more than 3%. The Delayed First
Adjustment Mortgage Loans have a weighted average Initial Periodic Rate Cap of
approximately 3.00% per annum. Effective with the first monthly payment due on
each Mortgage Loan after each related Adjustment Date, the monthly payment
amount will be adjusted to an amount that will amortize fully the outstanding
principal balance of the related Mortgage Loan over its remaining term, and pay
interest at the Loan Rate as so adjusted. Due to the application of the Periodic
Rate Caps and the Maximum Loan Rates, the Loan Rate on each such Mortgage Loan,
as adjusted on any related Adjustment Date, may be less than the sum of the
Index and related
S-21
<PAGE>
Gross Margin, rounded as described herein. See 'The Index' herein. None of the
Mortgage Loans permits the related mortgagor to convert the adjustable Loan Rate
thereon to a fixed Loan Rate.
The Mortgage Pool consists of loans originated under the Seller's Six-Month
Libor ARM, 2/28 Intermediate Term Six-Month Libor ARM and 3/27 Intermediate Term
Six-Month Libor ARM programs.
Each Mortgage Loan originated under the Six-Month Libor ARM program
provides for semiannual adjustments to the Loan Rate thereon and for
corresponding adjustments to the monthly payment amount due thereon on the sixth
payment due date. On the sixth payment due date for each such Mortgage Loan, the
Loan Rate will be adjusted to equal the sum, rounded to the nearest multiple of
0.125%, of the Index, as described below, and a fixed percentage amount (the
'Gross Margin'); provided, however, that the Loan Rate on each such Mortgage
Loan will not increase or decrease as a result by more than 1% (2% per annum),
will not exceed a rate per annum in excess of the initial Loan Rate plus, for
the six-month LIBOR Mortgage Loans 6%, or be less than the initial Loan Rate
over the life of the Mortgage Loan. Mortgage Loans originated under the
Six-Month Libor ARM program have fully amortizing terms of 30 years.
Each Mortgage Loan originated under the 2/28 Intermediate Term Six-Month
Libor ARM or the 3/27 Intermediate Term Six-Month Libor ARM provides for a fixed
rate of interest until the 24th payment due date in the case of the 2/28
Intermediate Term Six-Month Libor ARM, or the 36th payment due date in the case
of the 3/27 Intermediate Term Six-Month Libor ARM. On the 24th or 36th payment
due date, as applicable, the Mortgage Rate is adjusted to equal the sum, rounded
to the nearest multiple of 0.125%, of the Index, as described below, and the
Gross Margin; provided, however, that the Loan Rate on each such Mortgage Loan
will not increase or decrease as a result by more than 3% per annum for the
first adjustment or 1% (2% per annum) on any subsequent adjustment, will not,
over the life of the Mortgage Loan, exceed a rate in excess of the initial Loan
Rate plus seven percent and will not, over the life of the Mortgage Loan, be
less than the initial Loan Rate. Beginning with the 25th payment due date in the
case of the 2/28 Intermediate Term Six-Month Libor ARM and the 37th payment due
date in the case of the 3/27 Intermediate Term Six-Month Libor ARM, and on each
sixth payment due date thereafter, each Mortgage Loan provides for adjustments
to the Loan Rate as described above for six-month LIBOR ARM program and for to
the monthly payment thereon. Mortgage Loans originated under the 2/28
Intermediate Term Six-Month Libor ARM or the 3/27 Intermediate Term Six-Month
Libor ARM program have fully amortizing terms of 30 years.
The Initial Mortgage Loans had Loan Rates as of the Cut-off Date of not
less than 6.25% per annum and not more than 14.00% per annum and the weighted
average Loan Rate was approximately 9.61% per annum. As of the Cut-off Date, the
Initial Mortgage Loans had Gross Margins ranging from 0.75% to 9.50%, Minimum
Loan Rates ranging from 6.25% per annum to 14.00% per annum and Maximum Loan
Rates ranging from 12.25% per annum to 21.00% per annum. As of the Cut-off Date,
the weighted average Gross Margin was approximately 6.00%, the weighted average
Minimum Loan Rate was approximately 9.61% per annum and the weighted average
Maximum Loan Rate was approximately 16.27% per annum. The latest first
Adjustment Date following the Cut-off Date on any Initial Mortgage Loan occurs
in December 1, 2000 and the weighted average next Adjustment Date for all of the
Initial Mortgage Loans following the Cut-off Date is May 1, 1999.
The weighted average remaining term to maturity of the Initial Mortgage
Loans was approximately 359 months as of the Cut-off Date. None of the Initial
Mortgage Loans will have a first Due Date prior to July 1, 1997 or after January
1, 1998, or will have a remaining term to maturity of less than 354 months or
greater than 30 years as of the Cut-off Date. The latest maturity date of any
Initial Mortgage Loan is December 1, 2027.
The average principal balance of the Initial Mortgage Loans at origination
was approximately $119,111.70. No Initial Mortgage Loan had a principal balance
at origination of greater than $750,000.00 or less than $10,125.00. The average
principal balance of the Initial Mortgage Loans as of the Cut-off Date was
approximately $118,950.57. No Mortgage Loan had a principal balance as of the
Cut-off Date of greater than $749,187.50 or less than $10,125.00.
S-22
<PAGE>
STATISTICAL INFORMATION
Set forth below is certain approximate statistical information as of the
Cut-off Date regarding the Initial Mortgage Loans. On the Closing Date
subsequent Mortgage Loans will be delivered to the Trust. In addition, prior to
the Closing Date, Initial Mortgage Loans may be removed from the Trust and other
Mortgage Loans may be substituted therefor. Accordingly certain characteristics
of the Mortgage Loans may vary. The sum of the percentage columns in the
following tables may not equal 100% due to rounding.
PRINCIPAL BALANCES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PRINCIPAL BALANCES($) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
0.01 - 50,000.00........................................... 127 $ 4,644,089.71 4.89%
50,000.01 - 100,000.00........................................... 278 20,748,466.02 21.83
100,000.01 - 150,000.00........................................... 206 25,033,664.68 26.34
150,000.01 - 200,000.00........................................... 87 15,023,592.60 15.81
200,000.01 - 250,000.00........................................... 48 10,737,911.64 11.30
250,000.01 - 300,000.00........................................... 23 6,216,697.02 6.54
300,000.01 - 350,000.00........................................... 12 4,012,360.77 4.22
350,000.01 - 400,000.00........................................... 6 2,307,357.66 2.43
400,000.01 - 450,000.00........................................... 4 1,749,649.38 1.84
450,000.01 - 500,000.00........................................... 3 1,451,963.20 1.53
500,000.01 or greater............................................. 5 3,115,752.59 3.28
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-23
<PAGE>
INITIAL MORTGAGE LOAN PROPERTY TYPES
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
PROPERTY TYPE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
2-4 Family........................................................ 45 $ 4,940,533.91 5.20%
Condominium....................................................... 29 3,560,277.71 3.75
Manufactured Housing.............................................. 4 347,371.96 0.37
PUD............................................................... 52 9,389,538.07 9.88
Single Family Detached............................................ 669 76,803,783.62 80.81
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
INITIAL MORTGAGE LOAN OCCUPANCY STATUS (1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
OCCUPANCY OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
Primary Home...................................................... 652 $ 81,713,074.60 85.98%
Second Home....................................................... 1 34,987.17 0.04
Investment........................................................ 146 13,293,443.50 13.99
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
(1) The occupancy status of a Mortgaged Property is based on representations by
the mortgagor in its loan application.
S-24
<PAGE>
LOAN RATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
LOAN RATE(%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
6.001 - 6.500................................................... 6 $ 723,360.42 0.76%
6.501 - 7.000................................................... 6 797,764.50 0.84
7.001 - 7.500................................................... 15 2,549,667.58 2.68
7.501 - 8.000................................................... 43 5,710,859.48 6.01
8.001 - 8.500................................................... 43 7,055,475.76 7.42
8.501 - 9.000................................................... 105 14,322,727.71 15.07
9.001 - 9.500................................................... 106 14,121,156.58 14.86
9.501 - 10.000................................................... 159 19,414,619.72 20.43
10.001 - 10.500................................................... 102 11,151,770.16 11.73
10.501 - 11.000................................................... 97 8,736,446.20 9.19
11.001 - 11.500................................................... 63 5,432,562.45 5.72
11.501 - 12.000................................................... 25 2,231,307.57 2.35
12.001 - 12.500................................................... 5 465,530.21 0.49
12.501 - 13.000................................................... 9 853,435.02 0.90
13.001 - 13.500................................................... 10 1,015,671.91 1.07
13.501 - 14.000................................................... 5 459,150.00 0.48
--- ----------------- -----------------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -----------------
--- ----------------- -----------------
</TABLE>
S-25
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
ORIGINAL LOAN-TO-VALUE RATIO (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ ------ ----------------- -----------------
<S> <C> <C> <C>
25.01 - 30.00..................................................... 1 $ 29,456.25 0.03%
30.01 - 35.00..................................................... 2 110,461.11 0.12
35.01 - 40.00..................................................... 5 254,760.62 0.27
40.01 - 45.00..................................................... 4 280,641.77 0.30
45.01 - 50.00..................................................... 7 508,873.99 0.54
50.01 - 55.00..................................................... 13 1,036,126.78 1.09
55.01 - 60.00..................................................... 14 1,231,338.61 1.30
60.01 - 65.00..................................................... 58 5,560,583.11 5.85
65.01 - 70.00..................................................... 76 7,948,971.44 8.36
70.01 - 75.00..................................................... 206 25,034,929.75 26.34
75.01 - 80.00..................................................... 234 30,459,014.77 32.05
80.01 - 85.00..................................................... 155 19,442,598.30 20.46
85.01 - 90.00..................................................... 24 3,143,748.77 3.31
------ ----------------- -------
Total........................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-26
<PAGE>
GEOGRAPHIC DISTRIBUTION OF THE MORTGAGED PROPERTIES SECURING THE INITIAL
MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
STATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Alaska............................................................. 1 $ 174,400.00 0.18%
Arizona............................................................ 52 4,992,368.60 5.25
California......................................................... 240 40,054,442.03 42.14
Colorado........................................................... 66 6,757,790.85 7.11
Connecticut........................................................ 1 208,000.00 0.22
District of Columbia............................................... 1 114,000.00 0.12
Florida............................................................ 72 5,674,892.78 5.97
Idaho.............................................................. 7 632,446.12 0.67
Illinois........................................................... 2 140,500.00 0.15
Indiana............................................................ 21 757,156.12 0.80
Maryland........................................................... 10 897,860.00 0.94
Michigan........................................................... 2 108,400.00 0.11
Minnesota.......................................................... 1 95,143.79 0.10
Missouri........................................................... 3 253,499.23 0.27
Montana............................................................ 7 444,929.48 0.47
North Carolina..................................................... 1 113,050.00 0.12
North Dakota....................................................... 1 122,449.98 0.13
New Jersey......................................................... 13 1,667,185.19 1.75
New Mexico......................................................... 9 869,535.48 0.91
Nevada............................................................. 3 301,900.00 0.32
New York........................................................... 3 614,709.44 0.65
Ohio............................................................... 95 6,154,518.79 6.48
Oklahoma........................................................... 3 249,500.00 0.26
Oregon............................................................. 23 2,446,718.34 2.57
Pennsylvania....................................................... 2 121,888.67 0.13
South Carolina..................................................... 1 54,000.00 0.06
Utah............................................................... 39 6,280,981.83 6.61
Virginia........................................................... 8 1,721,367.03 1.81
Washington......................................................... 111 12,873,936.95 13.55
Wyoming............................................................ 1 143,934.57 0.15
-------- ----------------- -------
Total............................................................ 799 $ 95,041,505.27 100.00%
-------- ----------------- -------
-------- ----------------- -------
</TABLE>
The greatest geographic concentration of Initial Mortgage Loans, by
aggregate principal balance as of the Cut-off Date, was approximately
$1,477,708.40 in California in the 92640 zip code.
S-27
<PAGE>
DOCUMENTATION LEVEL OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
DOCUMENTATION LEVEL OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
Stated Income..................................................... 220 $ 28,255,652.01 29.73%
Full Documentation................................................ 528 61,580,111.60 64.79
Flex Documentation................................................ 51 5,205,741.66 5.48
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
RISK CATEGORIES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
RISK CATEGORIES OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
A................................................................. 257 $ 33,370,667.15 35.11%
A-................................................................ 238 30,299,500.83 31.88
B................................................................. 202 21,438,465.10 22.56
C................................................................. 44 4,061,808.59 4.27
C-................................................................ 30 2,979,895.99 3.14
D................................................................. 28 2,891,167.61 3.04
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-28
<PAGE>
MAXIMUM LOAN RATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MAXIMUM LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
12.001 - 12.500.................................................... 6 $ 723,360.42 0.76%
12.501 - 13.000.................................................... 6 797,764.50 0.84
13.001 - 13.500.................................................... 13 2,366,769.94 2.49
13.501 - 14.000.................................................... 32 4,237,362.39 4.46
14.001 - 14.500.................................................... 33 5,514,332.73 5.80
14.501 - 15.000.................................................... 60 9,436,637.55 9.93
15.001 - 15.500.................................................... 47 6,045,081.44 6.36
15.501 - 16.000.................................................... 81 10,285,923.05 10.82
16.001 - 16.500.................................................... 78 10,479,024.28 11.03
16.501 - 17.000.................................................... 143 16,138,465.13 16.98
17.001 - 17.500.................................................... 97 10,725,561.69 11.29
17.501 - 18.000.................................................... 91 8,504,225.67 8.95
18.001 - 18.500.................................................... 62 5,274,112.45 5.55
18.501 - 19.000.................................................... 25 2,073,180.68 2.18
19.001 - 19.500.................................................... 5 448,263.10 0.47
19.501 - 20.000.................................................... 6 593,601.23 0.62
20.001 - 20.500.................................................... 9 938,689.02 0.99
20.501 - 21.000.................................................... 5 459,150.00 0.48
--- ----------------- -------
Total......................................................... 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
MINIMUM LOAN RATES OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
MINIMUM LOAN RATE (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
6.001 - 6.500.................................................... 6 $ 723,360.42 0.76%
6.501 - 7.000.................................................... 6 797,764.50 0.84
7.001 - 7.500.................................................... 15 2,549,667.58 2.68
7.501 - 8.000.................................................... 43 5,710,859.48 6.01
8.001 - 8.500.................................................... 43 7,055,475.76 7.42
8.501 - 9.000.................................................... 105 14,322,727.71 15.07
9.001 - 9.500.................................................... 106 14,121,156.58 14.86
9.501 - 10.000.................................................... 159 19,414,619.72 20.43
10.001 - 10.500.................................................... 102 11,151,770.16 11.73
10.501 - 11.000.................................................... 97 8,736,446.20 9.19
11.001 - 11.500.................................................... 63 5,432,562.45 5.72
11.501 - 12.000.................................................... 25 2,231,307.57 2.35
12.001 - 12.500.................................................... 5 465,530.21 0.49
12.501 - 13.000.................................................... 9 853,435.02 0.90
13.001 - 13.500.................................................... 10 1,015,671.91 1.07
13.501 - 14.000.................................................... 5 459,150.00 0.48
--- ----------------- -------
Total.............................................................. 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-29
<PAGE>
GROSS MARGINS OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
GROSS MARGINS (%) OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------ -------- ----------------- -----------------
<S> <C> <C> <C>
0.501 - 0.750..................................................... 1 $ 95,000.00 0.10%
4.001 - 4.250..................................................... 14 1,432,704.81 1.51
4.251 - 4.500..................................................... 10 1,361,254.09 1.43
4.501 - 4.750..................................................... 32 2,930,899.02 3.08
4.751 - 5.000..................................................... 41 4,235,250.55 4.46
5.001 - 5.250..................................................... 85 11,785,097.97 12.40
5.251 - 5.500..................................................... 70 8,636,953.08 9.09
5.501 - 5.750..................................................... 115 12,057,873.79 12.69
5.751 - 6.000..................................................... 88 10,452,431.16 11.00
6.001 - 6.250..................................................... 65 7,269,459.43 7.65
6.251 - 6.500..................................................... 89 11,319,728.62 11.91
6.501 - 6.750..................................................... 64 8,483,134.93 8.93
6.751 - 7.000..................................................... 37 4,261,719.53 4.48
7.001 - 7.250..................................................... 24 3,177,265.16 3.34
7.251 - 7.500..................................................... 31 2,925,531.88 3.08
7.501 - 7.750..................................................... 12 2,264,699.40 2.38
7.751 - 8.000..................................................... 10 1,239,203.42 1.30
8.001 - 8.250..................................................... 8 794,337.75 0.84
8.251 - 8.500..................................................... 1 129,960.68 0.14
8.501 - 8.750..................................................... 1 117,000.00 0.12
9.251 - 9.500..................................................... 1 72,000.00 0.08
--- ----------------- -------
Total........................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-30
<PAGE>
NEXT ADJUSTMENT DATE FOR THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
NEXT ADJUSTMENT DATE OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
February 1998...................................................... 3 $ 519,692.73 0.55%
March 1998......................................................... 3 371,835.60 0.39
April 1998......................................................... 83 14,030,386.85 14.76
May 1998........................................................... 109 13,858,211.23 14.58
June 1998.......................................................... 25 3,317,900.00 3.49
June 1999.......................................................... 1 69,772.22 0.07
July 1999.......................................................... 2 390,997.02 0.41
August 1999........................................................ 4 504,715.72 0.53
September 1999..................................................... 6 657,949.53 0.69
October 1999....................................................... 152 18,579,629.79 19.55
November 1999...................................................... 286 29,833,255.31 31.39
December 1999...................................................... 74 7,520,310.00 7.91
October 2000....................................................... 8 912,191.28 0.96
November 2000...................................................... 34 3,782,557.99 3.98
December 2000...................................................... 9 692,100.00 0.73
--- ----------------- -------
Total......................................................... 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
As of the Cut-off Date, the weighted average Next Adjustment Date of the
Initial Mortgage Loans was May 1999.
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL FIXED TERM/ NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
SUBSEQUENT ADJUSTABLE RATE TERM OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
Two Years/Twenty-Eight Years....................................... 525 $ 57,556,629.59 60.56%
Three Years/Twenty-Seven Years..................................... 51 5,386,849.27 5.67
Six Months......................................................... 223 32,098,026.41 33.77
--- ----------------- -------
Total............................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
S-31
<PAGE>
PREPAYMENT PENALTIES OF THE INITIAL MORTGAGE LOANS(1)
<TABLE>
<CAPTION>
% OF AGGREGATE
PRINCIPAL BALANCE PRINCIPAL BALANCE
PENALTIES ASSESSED DURING NUMBER OUTSTANDING AS OF OUTSTANDING AS OF
YEARS FROM ORIGINATION OF LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- -------- ----------------- -----------------
<S> <C> <C> <C>
None(2)............................................................ 127 $ 14,907,999.45 15.69%
1 Year............................................................. 81 13,083,672.00 13.77
2 Years............................................................ 150 19,757,732.88 20.79
3 Years............................................................ 260 28,952,690.16 30.46
5 Years............................................................ 181 18,339,410.78 19.30
--- ----------------- -------
Total............................................................ 799 $ 95,041,505.27 100.00%
--- ----------------- -------
--- ----------------- -------
</TABLE>
- ------------------
(1) Prepayment penalties are required when the related Mortgage Loan is subject
to a prepayment in full during the specified period from origination.
(2) 'None' signifies that no prepayment penalties apply.
STATED REMAINING TERM TO MATURITY OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
STATED REMAINING TERM TO MATURITY (MONTHS) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- ------ ----------------- -----------------
<S> <C> <C> <C>
349 to 360......................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
Total......................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
INITIAL PERIODIC RATE CAP OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
INITIAL PERIODIC OF OUTSTANDING AS OF OUTSTANDING AS OF
RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- ------ ----------------- -----------------
<S> <C> <C> <C>
1.00............................................................... 222 $ 32,006,426.41 33.68%
3.00............................................................... 577 63,035,078.86 66.32
------ ----------------- -------
Total......................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
PERIODIC RATE CAP OF THE INITIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
% OF AGGREGATE
NUMBER PRINCIPAL BALANCE PRINCIPAL BALANCE
OF OUTSTANDING AS OF OUTSTANDING AS OF
PERIODIC RATE CAP (%) LOANS THE CUT-OFF DATE THE CUT-OFF DATE
- ------------------------------------------------------------------- ------ ----------------- -----------------
<S> <C> <C> <C>
1.00............................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
Total......................................................... 799 $ 95,041,505.27 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-32
<PAGE>
THE INDEX
As of any Adjustment Date, the Index applicable to the determination of the
Loan Rate on each Mortgage Loan will be the average of the interbank offered
rates for six-month United States dollar deposits in the London market as
published in The Wall Street Journal as of the first business day of the month
preceding the month of such Adjustment Date, as specified in the related
Mortgage Note.
In the event that the Index becomes unavailable or otherwise unpublished,
the Master Servicer will select a comparable alternative index over which it has
no direct control and which is readily verifiable.
CONVEYANCE OF THE SUBSEQUENT MORTGAGE LOANS
The Agreement permits the Trust to acquire up to approximately
$19,958,494.73 aggregate principal balance of Subsequent Mortgage Loans on the
Closing Date. Accordingly, the statistical characteristics of the Mortgage Loans
in the Trust will vary as of the Closing Date upon the acquisition of the
Subsequent Mortgage Loans.
The inclusion of Subsequent Mortgage Loans in the Trust on the Closing Date
is subject to receipt of the consent of the Certificate Insurer. In any event,
the inclusion of any Subsequent Mortgage Loans will be subject to, among other
things, the following requirements (unless the Certificate Insurer, in its
discretion, waives any such requirements): (i) no Subsequent Mortgage Loan may
be 30 days Delinquent as of the applicable Cut-Off Date; (ii) no Subsequent
Mortgage Loan may have a remaining term to maturity in excess of 30 years; (iii)
no Subsequent Mortgage Loan may have a combined loan-to-value ratio greater than
85%; (iv) no Subsequent Mortgage Loan will have a Gross Margin of less than
4.25% and (v) following the purchase of such Subsequent Mortgage Loans by the
Trust Fund, the Mortgage Loans (a) will have a weighted average Mortgage Rate of
at least 9.59%; (b) will have a weighted average Loan-to-Value Ratio of not more
than 77.00%; (c) will not have a weighted average remaining term to stated
maturity of not more than 360 months; and (d) will, in each case, have a
Principal Balance not in excess of $450,000 as of the Cut-Off Date.
UNDERWRITING STANDARDS
The Mortgage Loans will be acquired by the Depositor from the Seller on the
Closing Date. All of the Mortgage Loans were acquired by United PanAm Mortgage
Corporation (the 'Seller'), a wholly-owned subsidiary of United PanAm Financial
Corp., and were originated, underwritten and funded by Pan American Bank, FSB,
generally in accordance with the underwriting criteria described herein. For
purposes of this Section, '--Underwriting Standards,' the term 'Seller' shall
refer to the subprime mortgage lending business currently conducted by Pan
American Bank, FSB.
The Seller's loan production generally consists of subprime residential
mortgage loans which are made to borrowers whose borrowing needs may not be met
by traditional financial institutions due to credit history or other factors.
The Seller originates loans in accordance with underwriting criteria that
generally do not satisfy traditional underwriting standards such as those
utilized by FNMA or FHLMC. Subprime mortgage loans like the loans originated by
the Seller bear higher interest rates and origination fees than would be
applicable to traditional prime mortgage lending. Therefore, the loans may
exhibit rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by loans originated and
underwritten in a more traditional manner.
The Seller's loan production is generated through both retail and wholesale
origination. The retail division originates loans through the direct
solicitation of borrowers by mail and telemarketing from nine offices located in
California, two in Arizona, two in Washington and one in Colorado. All
regionally originated retail applications are approved and funded through a
single central office located in Orange, California. The wholesale division
originates loans through independent loan brokers from five regional branch
offices located in Orange, California; Bellevue, Washington; Clearwater,
Florida; Worthington, Ohio; and Midvale, Utah. The independent brokers receive a
portion of the loan origination fee charged to the borrower at the time the loan
is made as compensation for loan origination services. The retail and wholesale
divisions generated 41% and 59% of the Seller's loan production, respectively,
during the nine months ended September 30, 1997.
The Seller's underwriting guidelines are intended to evaluate the
applicant's credit history and capacity to repay the loan, the value of the
proposed collateral and the adequacy of such collateral for the loan. The
Seller's underwriting process relies heavily upon assessment of the applicant's
ability to pay in the judgment of the underwriter based upon the application,
credit information and information regarding the valuation of the
S-33
<PAGE>
collateral, and does not rely on automated credit scoring tools intended to
predict the statistical likelihood of repayment. The Seller's underwriters
review the applicant's credit profile to evaluate whether an impaired credit
history is a result of previous adverse circumstances or a continuing inability
or unwillingness to meet credit obligations in a timely manner.
Underwriters are required to have had either substantial subprime
underwriting experience or substantial experience with the Seller in other
aspects of its subprime mortgage finance business before becoming part of the
Seller's underwriting department. Underwriters are not given approval authority
until their work has been reviewed by the chief credit officer of the Seller for
a period of time and deemed satisfactory. No branch-based underwriter has an
approval limit greater than $250,000. Two branch-based underwriters may approve
loans up to $400,000 with a Loan-to-Value Ratio up to 85%. An additional
signature is required with a Loan-to-Value Ratio over 85%. Loans over $400,000
and up to $500,000 require approval from the Chief Credit Officer, Chief
Operating Officer or Secondary Marketing Officer or a designated corporate-based
underwriter. Loans in excess of $500,000 up to $750,000 require at least two
signatures from the Chief Credit Officer, Chief Operating Officer or Secondary
Marketing Officer. Exceptions from these established guidelines are also subject
to approvals, often at the corporate level. This approval process is reviewed
periodically by the Board of Directors. The Chief Credit Officer periodically
reevaluates the authority levels of all underwriting personnel.
Retail applicants for a mortgage loan complete an application which
includes information with respect to the applicant's liabilities, income, credit
history, employment history and personal information. With respect to loans
generated through the Seller's wholesale division, loan application packages,
which generally contain relevant information with respect to the applicant's
liabilities, income, credit and employment on the loan request, are compiled by
the applicable correspondent or broker and submitted to the Seller for approval
and purchase.
The Seller's underwriting guidelines require a credit report generated by
the Seller for each applicant from two credit reporting agencies. The report
typically contains information relating to such matters as credit history with
local and national merchants and lenders, installment debt payments and any
record of defaults, bankruptcies, repossessions, or judgments. The Seller's
underwriters review the applicant's credit history based on the information
contained in the application and reports available from credit reporting
agencies in order to determine if the applicant's credit history meets the
Seller's underwriting guidelines. A number of factors determine a loan
applicant's creditworthiness, including debt ratios, payment history and the
combined loan-to-value ratio for all existing mortgages on a property. Based
upon this review, the underwriter assigns a preliminary rating to the
application.
All mortgaged properties are appraised by qualified, licensed independent
appraisers prior to funding of a proposed loan. Such appraisers inspect the
interior and exterior and appraise the subject property and report the property
condition. Following each inspection, the appraiser prepares a FNMA/FHLMC
eligible report which includes a market value analysis based on recent sales of
comparable homes in the area and, when deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home, or a
valuation based upon income generated by the property with respect to investment
property. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice. Review appraisals are required on substantially
all wholesale loans (consistent with industry standards since the appraiser
involved on a wholesale origination would generally not be on a list of approved
appraisers maintained by the Seller) and retail loans where the appraisal was
prepared by an appraiser who has not been approved by the Seller or in which the
loan has certain high risk characteristics such as a Loan-to-Value Ratio
exceeding 85%, a loan amount in excess of $300,000, or other risk
characteristics as determined by the underwriter.
The Mortgage Loans are underwritten by the Seller's regular lending
divisions pursuant to the Seller's 'Full Documentation,' 'Flex Documentation,'
and 'Stated Income' residential loan programs. Under each of the programs, the
Seller reviews the loan applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar documentation,
reviews the credit history of the applicant, calculates the debt ratio to
determine the applicant's ability to repay the loan, reviews the type and use of
the property being financed and review the property for compliance with the
Seller's standards. In determining the ability of the applicant to repay the
loan, the Seller uses the interest rate that would be in effect at the first
adjustment period for the six-month adjustable program and the start rate for
the Delayed First Adjustment Date Mortgage Loans (the 'Qualifying Rate'). The
Seller's underwriting standards are applied in a standardized procedure which
complies with applicable federal and state laws and regulations and requires
their underwriters and the appraiser to be satisfied that the value of the
property being financed currently supports the outstanding loan balance.
S-34
<PAGE>
The Seller's maximum loan amount is generally $400,000 with a Loan-to-Value
Ratio of 90%, $500,000 with a Loan-to-Value Ratio of 85% and $750,000 with a
Loan-to-Value Ratio of 75%. None of the Mortgage Loans has a principal balance
at origination higher than $750,000.
The Seller verifies the income of each borrower under their various
programs as follows:
FULL DOCUMENTATION: Under the Full Documentation program, borrowers are
generally required to submit verification of stable income for a two-year
period. For self-employed applicants either two years' federal income tax
returns (both personal and business) and a year-to-date profit and loss
statement, or 24 months personal bank statements and a 12 month profit and loss
statement, are required. Salaried applicants are required to submit a two-year
history from VOE, or W-2 and a recent paycheck stub, or two years' tax returns
and year-to-date paystubs, or 24 months personal bank statements.
FLEX DOCUMENTATION: Under the Flex Documentation program, applicants are
generally required to submit verification of stable income for the past six
months. Self-employed applicants may submit six months personal bank statements
and a signed profit and loss statement, and salaried applicants my submit either
six months bank statements or a year to date pay stub.
STATED INCOME: Under the Stated Income program, the applicants may be
qualified based upon the monthly income stated on the mortgage application,
without verification. For applicants employed by relatives, federal income tax
returns and pay stubs may also be required. A copy of the business license is
required or other generally acceptable evidence of business conduct for
self-employed applicants under all programs.
Under all of the programs, the Seller performs a telephone verification of
the applicant's employment prior to funding the loan.
The Seller has implemented a loan quality control process designed to
effect compliance with its policies and procedures. Prior to funding a loan, the
Seller performs a pre-funding quality control audit, which consists in part of
verifying a loan applicant's credit and employment, and review of the appraisal.
The Seller also reviews all loan files on a post-funding basis to determine that
the documentation is complete and all compliance requirements have been
satisfied. The post-funding quality control process also includes a sampling of
loans based on predetermined risk characteristics and/or by random selection, to
confirm compliance with the Seller's origination, underwriting and prefunding
quality control requirements.
The underwriting guidelines are set forth in the following Section. The
letter grades applied to each sub-prime borrower category reflect solely the
Seller's internal standards, and may not be comparable to those used by other
subprime mortgage lenders.
The Seller uses the following categories and characteristics as guidelines
to assign risk grades to mortgage loans:
'A' RISK. A maximum of one 30-day late payment on mortgage debt in the
last 12 months is permitted in this risk category. Non-mortgage consumer credit
must evidence no payments over 30 days late within the last 24 months, and at
least three non-mortgage consumer credit accounts should have been open for a
minimum of six months, with less than 25% of open accounts reporting previous
delinquency. For purposes of determining how long mortgage debt has been late,
the Seller does not allow a 'rolling 30-day period,' i.e., the Seller considers
a continuous sequence of 30-day late payments as increasing the past due status
of the account by an additional 30 days for each such late payment. No
chargeoffs, liens, judgments or garnishments may have occurred in the preceding
24 months. No bankruptcies may have occurred, and no notice of default may have
been recorded, within the 36 months preceding the loan. All bankruptcies must
have been discharged or dismissed, and established excellent credit since
discharge or dismissal is required. With respect to loans on owner-occupied
properties originated under the Full Documentation program, a maximum
Loan-to-Value Ratio of 90% is permitted for Mortgage Loans secured by
single-family dwellings, condominium units or two- to four-family dwellings, and
a maximum Loan-to-Value Ratio of 80% is permitted for manufactured housing. With
respect to loans on non-owner-occupied property originated under the Full
Documentation program, a maximum Loan-to-Value of Ratio 80% is permitted for
Mortgage Loans secured by single-family dwellings, 75% for condominium units or
two- to four-family dwellings and 70% for manufactured housing. With respect to
loans on owner-occupied property originated under the Flex Documentation
program, the maximum Loan-to-Value Ratio is 80% for Mortgage Loans secured by
single-family dwellings, condominium units and two- to four-family dwellings,
the maximum Loan-to-Value Ratio is 75% for Mortgage Loans secured by
manufactured housing. With respect to loans on non-owner-occupied property
originated under the Seller's Flex Documentation
S-35
<PAGE>
program, the maximum Loan-to-Value Ratio is 75% for Mortgage Loans secured by
single-family dwellings, 70% for Mortgage Loans secured by condominium units or
two-to-four family dwellings and 65% for Mortgage Loans secured by manufactured
housing. With respect to loans on owner-occupied property originated under the
Seller's Stated Income program, the maximum Loan-to-Value Ratio is 80% for
Mortgage Loans secured by single-family dwellings and 75% for Mortgage Loans
secured by condominium units, two- to four-family dwellings or manufactured
housing. With respect to loans on non-owner-occupied property originated under
the Stated Income program, the maximum Loan-to-Value Ratio is 70% for Mortgage
Loans secured by single-family dwellings, 65% for Mortgage Loans secured by
condominium units or two-to-four dwellings and 60% for Mortgage Loans secured by
manufactured housing. The maximum Debt Ratio is 45% for Mortgage Loans having a
Loan-to-Value Ratio of 80% or less and 42% for Mortgage Loans having a
Loan-to-Value Ratio of greater than 80% to 90%. The Seller will allow a 1%
increase in the maximum Debt Ratio for each 1% decrease in Loan-to-Value Ratio
below 80% or the program maximum, whichever is lower, subject to a maximum Debt
Ratio of 45%.
'A-' RISK. A maximum of two 30-day late payments on mortgage debt in the
last 12 months is permitted in this riskcategory. Non-mortgage consumer credit
must evidence no payments over 60 days late within the last 12 months and at
least three non-mortgage consumer credit accounts should have been open for a
minimum of six months, with less than 35% of open accounts reporting a previous
delinquency. For purposes of determining how long mortgage debt has been late,
the Seller allows a 'rolling 30-day period,' i.e., the Seller generally will
consider a continuous sequence of 30-day late payments as a single 30-day late
payment up to a maximum of six months. If such sequence continues beyond six
months, each additional late payment increases the past due status by an
additional 30 days. No chargeoffs, liens, judgments or garnishments may have
occurred in the preceding 12 months. No bankruptcies may have occurred, and no
notice of default may have occurred, within the 24 months preceding the making
of the loan. Chapter 7 bankruptcies must have been discharged at least 24 months
prior to the making of the loan and Chapter 13 bankruptcies must have at least
24 months since the filing date, with evidence that the Chapter 13 plan has been
paid as agreed. Re-established credit consistent with an 'A-' risk grade since
discharge or dismissal is required. With respect to loans on owner-occupied
property originated under the Full Documentation program, a maximum
Loan-to-Value Ratio of 90% is permitted for Mortgage Loans secured by
single-family dwellings, condominium units or two-to-four family dwellings, and
a maximum Loan-to-Value Ratio of 75% is permitted for Mortgage Loan secured by
manufactured housing. With respect to loans on non-owner-occupied property
originated under the Full Documentation program, the maximum Loan-to-Value Ratio
is 80% for Mortgage Loans secured by single-family dwellings, 75% for Mortgage
Loans secured by condominium units or two-to-four family dwellings and 70% for
Mortgage Loans secured by manufactured housing. With respect to loans on
owner-occupied property originated under the Flex Documentation program, the
maximum Loan-to-Value Ratio is 80% for Mortgage Loans secured by single-family
dwellings, 75% for Mortgage Loans secured by condominium units and two-to-four
family dwellings, and 70% for Mortgage Loans secured by manufactured housing.
With respect to loans on non-owner-occupied property originated under the
Seller's Flex Documentation program, the maximum Loan-to-Value Ratio is 75% for
Mortgage Loans secured by single-family dwellings, 70% for Mortgage Loans
secured by condominium units and two-to-four family dwellings and 65% for
Mortgage Loans secured by manufactured housing. With respect to loans on owner-
occupied property originated under the Seller's Stated Income program the
maximum Loan-to-Value Ratio is 80% for Mortgage Loans secured by single-family
dwellings and 70% for Mortgage Loans secured by condominium units, two-to-four
family dwellings or manufactured housing. With respect to loans on non-owner-
occupied property originated under the Stated Income program, a maximum
Loan-to-Value Ratio of 70% is permitted for Mortgage Loans secured by
single-family dwellings, 65% for Mortgage Loans secured by condominium units or
two-to-four family dwellings, and 60% for Mortgage Loans secured by manufactured
housing. The maximum Debt Ratio is 45% for a cash out refinance and 50% for
purchase or equity refinance. The maximum Debt Ratio for Mortgage Loans having a
Loan-to-Value Ratio of greater than 75% to 80% is 45% under the Stated Income
Program. The Seller will allow a 1% increase in the Debt Ratio for each 1%
decrease in Loan-to-Value Ratio below 80% or the program maximum, whichever is
lower, subject to a maximum Debt Ratio of 60%.
'B' RISK. The following are permitted under this risk category within the
12-month period prior to funding: a maximum of (i) four 30-day late payments on
mortgage debt for proposed Mortgage Loans having a Loan-to-Value Ratio of
greater than 80% to 85%; (ii) two 30-day late payments and one 60-day late
payment on mortgage debt for proposed Mortgage Loans having a Loan-to-Value
Ratio of greater than 75% to 80% or
S-36
<PAGE>
(iii) three 30-day late payments and one 60-day late payment on mortgage debt
for proposed Mortgage Loans having a Loan-to-Value Ratio of up to 75%. No
payments over 90 days late within the last 12 months is acceptable for
outstanding non-mortgage consumer credit and at least three accounts should be
open for a minimum of six months, with less than 50% of open accounts reporting
a previous delinquency. For purposes of determining the delinquency status of
mortgage debt, the Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment up to a maximum of six,
after which each additional late payment increases the past due status by an
additional 30 days. No collections, chargeoffs, liens, judgments or
garnishments, may have occurred in the preceding 12 months. No bankruptcies may
have occurred during the preceding 18 months and no notice of default may have
been recorded in the preceding 24 months. Chapter 7 bankruptcies must have been
discharged one year, or 18 months if there is no re-established credit. Chapter
13 bankruptcies must have at least 18 months since the filing date with evidence
that the Chapter 13 plan has been paid as agreed. Re-established good credit
since the discharge or dismissal is required for all bankruptcies. With respect
to loans on owner-occupied property originated under the Full Income program, a
maximum Loan-to-Value Ratio of 85% is permitted for Mortgage Loans secured by
single-family dwellings or condominium units, and a maximum Loan-to-Value Ratio
of 75% is permitted for Mortgage Loans secured by two-to-four family dwellings
or manufactured housing. With respect to loans on non-owner- occupied property
originated under the Full Documentation program, a maximum Loan-to-Value Ratio
of 80% is required for Mortgage Loans secured by single-family dwellings, 75%
for Mortgage Loans secured by condominium units or two-to-four family dwellings
and 70% for Mortgage Loans secured by manufactured housing. With respect to
loans on owner-occupied property originated under the Flex Documentation
program, the maximum Loan-to-Value Ratio is 75% for Mortgage Loans secured by
single-family dwellings or condominium units and the maximum Loan-to-Value is
70% for Mortgage Loans secured by two-to-four family dwellings or manufactured
housing. With respect to loans on non-owner-occupied property originated under
the Seller's Flex Documentation program, the maximum Loan-to-Value Ratio is 70%
for Mortgage Loans secured by single-family dwellings, 65% for Mortgage Loans
secured by condominium units and 60% on Mortgage Loans secured by two-to-four
family dwellings or manufactured housing. With respect to loans on
owner-occupied property originated under the Originator's Stated Documentation
program the maximum Loan-to-Value Ratio is 75% for mortgage loans secured by
single-family dwellings and 70% for Mortgage Loans secured by condominium units,
two-to-four family dwellings or manufactured housing. With respect to loans on
non-owner-occupied property originated under the Stated Documentation program, a
maximum Loan-to-Value Ratio of 70% for Mortgage Loans secured by single-family
dwellings and 60% for Mortgage Loans secured by condominium units, two-to-four
family dwellings or manufactured housing. The maximum Debt Ratio is 50%. The
Seller will allow a 1% increase in the Debt Ratio for each 1% decrease in
Loan-to-Value Ratio below 80% or the program maximum, whichever is lower,
subject to a maximum Debt Ratio of 60%.
'C' RISK. The following are permitted under this risk category within the
12-month period prior to funding: maximum of (i) six 30-day late payments and
two 60-day late payments on mortgage debt for proposed Mortgage Loans having a
Loan-to-Value Ratio of greater than 75% to 80% or (ii) six 30-day late payments,
two 60-day late payments and one 90-day late payments on mortgage debt for
proposed Mortgage Loans having a Loan-to-Value Ratio up to 75% or outstanding
non-mortgage consumer credit may be up to 100% delinquent. For purposes of
determining the delinquency status of mortgage debt the Seller generally will
consider a continuous sequence of 30-day late payments as a single 30-day late
payment up to a maximum of six, after which then each additional late payment
increases the past due status by an additional 30 days. All judgments,
garnishments and liens of record must be paid in full at funding. Charge offs
within the preceding 12 months must be paid at closing or included in the debt
ratio with liens, judgments and garnishments within the preceding 12 months. No
notice of default may have occurred in the preceding 12 months. Chapter 7
bankruptcies must have been filed one year previously and must be discharged.
Chapter 13 bankruptcies must have at least 12 months since the filing date. With
respect to loans on owner-occupied property originated under the Full
Documentation program, a maximum Loan-to-Value Ratio of 80% is permitted for
Mortgage Loans secured by single-family dwellings, 75% for condominium units,
and a maximum Loan-to-Value Ratio of 70% is permitted for two-to-four family
dwellings and manufactured housing. With respect to loans on non-owner-occupied
property originated under the Full Documentation program, the maximum
Loan-to-Value Ratio is 70% for Mortgage Loans secured by single-family dwellings
and 65% for Mortgage Loans secured by condominium units or two-to-four family
dwellings or manufactured housing. With respect to loans on owner-occupied
property originated under the Flex
S-37
<PAGE>
Documentation program, the maximum Loan-to-Value Ratio is 70% for Mortgage Loans
secured by single-family dwellings or condominium units and the maximum
Loan-to-Value Ratio is 65% for Mortgage Loans secured by two-to-four family
dwellings or manufactured housing. With respect to loans on non-owner-occupied
property originated under the Seller's Flex Documentation program, the maximum
Loan-to-Value Ratio is 65% for Mortgage Loans secured by single-family dwellings
or condominium units and 60% on two-to four family dwellings or manufactured
housing. With respect to loans on owner-occupied property originated under the
Seller's Stated Income program the maximum Loan-to-Value Ratio is 70% for
Mortgage Loans secured by single-family dwellings and condominium units, and 65%
for Mortgage Loans secured by two-to-four family dwellings or manufactured
housing. With respect to loans on non- owner-occupied property originated under
the Stated Income program, a maximum Loan-to-Value Ratio of 60% for Mortgage
Loans secured by single-family dwellings, condominium units, two-to-four family
dwellings or manufactured housing. The maximum Debt Ratio is 55%. The Seller
will allow a 1% increase in the Debt Ratio for each 1% decrease in Loan-to-Value
Ratio below 80% or the program maximum, whichever is lower, subject to a maximum
Debt Ratio of 60%.
'C-' RISK. The following are permitted under this risk category within the
12-month period prior to funding: (i) a maximum of one 120-day late payments on
mortgage debt for proposed Mortgage Loans having a Loan-to-Value Ratio of up to
75%. Consumer credit delinquencies are generally not a factor with respect to
this credit grade. All judgments, garnishments and liens of record must be paid
in full at funding. No bankruptcies may have occurred during the preceding 12
months and no notice of default may have occurred in the preceding 12 months.
Chapter 7 bankruptcies must have been discharged prior to application. Chapter
13 proceedings may have been filed in the preceding 12 months but must be paid
through closing. With respect to loans on owner-occupied property originated
under the Full Documentation program, a maximum Loan-to-Value Ratio of 75% is
permitted for Mortgage Loans secured by single-family dwellings, and a maximum
Loan-to-Value Ratio of 70% is permitted Mortgage Loans secured by condominium
units, two-to-four family dwellings and manufactured housing. With respect to
loans on non-owner-occupied property originated under the Full Documentation
program, the maximum Loan-to-Value Ratio of 70% is permitted for Mortgage Loans
secured by single-family dwellings, 65% for Mortgage Loans secured by
condominium units or two-to-four family dwellings and 60% for Mortgage Loans
secured by manufactured housing. With respect to loans on owner-occupied
property originated under the Flex Documentation program, the maximum
Loan-to-Value Ratio is 70% for Mortgage Loans secured by single-family dwellings
or condominium units and the maximum Loan-to-Value Ratio is 60% for Mortgage
Loans secured by two-to-four family dwellings or manufactured housing. With
respect to loans on non-owner-occupied property originated under the Seller's
Flex Documentation program, the maximum Loan-to-Value Ratio is 65% for Mortgage
Loans secured by single-family dwellings, 60% for Mortgage Loans secured by
condominium units, two-to four family dwellings or manufactured housing. With
respect to loans on owner-occupied property originated under the Seller's Stated
Income program, the maximum Loan-to-Value Ratio is 65% for Mortgage Loans
secured by single-family dwellings, condominium units, two-to-four family
dwellings and 60% for manufactured housing. With respect to loans on
non-owner-occupied property originated under the Stated Income program, a
maximum Loan-to-Value Ratio of 60% for Mortgage Loans secured by single-family
dwellings, condominium units, two-to-four family dwellings or manufactured
housing. The maximum Debt Ratio is 55%. The Seller will allow a 1% increase in
the Debt Ratio for each 1% decrease in Loan-to-Value Ratio below 80% or the
program maximum, whichever is lower, subject to a maximum Debt Ratio of 60%.
'D' RISK. Under this risk category, account ratings are not taken into
consideration. Notice of sale can be filed on any notice of default. An existing
mortgage loan is not required to be current at the time the application is
submitted. Judgments and collections that do not appear in the public records
need not be paid at funding. The mortgagor can be currently in bankruptcy;
however, the bankruptcy must be paid off through the closing. With respect to
loans on owner-occupied property originated under the Full Documentation
program, a maximum Loan-to-Value Ratio of 65% is permitted for Mortgage Loans
secured by single-family dwellings, condominium units or two- to four-family
dwellings. With respect to loans on non-owner-occupied property originated under
the Full Documentation program, a maximum Loan-to-Value Ratio of 65% for
Mortgage Loans secured by single-family dwellings and 60% for Mortgage Loans
secured by condominium units or two-to-four family dwellings. With respect to
loans on owner-occupied property originated under the Flex Documentation
program, the maximum Loan-to-Value Ratio is 65% for Mortgage Loans secured by
single-family dwellings, condominium units or two-to-four family dwellings. With
respect to loans on non-owner-occupied property originated under the Seller's
Flex Documentation program, the maximum Loan-to-Value Ratio is 60% for
S-38
<PAGE>
Mortgage Loans secured by single-family dwellings, condominium units and
two-to-four family dwellings. With respect to loans on owner-occupied property
originated under the Seller's Stated Income program, the maximum Loan-to-Value
Ratio is 65% for Mortgage Loans secured by single-family dwellings, condominium
units and two-to-four family dwellings. With respect to loans on
non-owner-occupied property originated under the Stated Documentation program, a
maximum Loan-to-Value Ratio of 60% is permitted for Mortgage Loans secured by
single-family dwellings, condominium units and two-to-four family dwellings. The
maximum Debt Ratio is 60%.
COMPENSATING FACTORS. The Seller uses the foregoing categories and
characteristics as guidelines only. The Seller may determine that the
prospective mortgagor warrants a risk upgrade or an exception from certain
requirements of a particular risk category. A one level credit upgrade in 'B'
'C' and 'C-' risk grade loans only may be allowed if the application reflects
certain compensating factors, such as a low Loan-to-Value, stable employment,
ownership of the applicant's current residence for five or more years and good
condition rating of the property, among other factors. An upgrade may also be
granted if the applicant has tendered a minimum down payment of 20% or more, the
new loan reduces the applicant's housing expense by more than 25% and if the
mortgage credit history evidences no more than one 30-day past due in the last
12 months or no 30-day past due in the last 24 months, as documented liquid
reserves equal to at least three months, payments, taxes and insurance.
THE MASTER SERVICER
Pursuant to the terms of the Agreement, Pan American Bank, FSB will act as
master servicer. Pan American Bank, FSB has recently commenced servicing loans
such as the Mortgage Loans. In connection with its duties under the Agreement,
Pan American Bank, FSB will appoint Ocwen Federal Bank FSB as subservicer. See
'OCWEN FEDERAL BANK FSB' below.
OCWEN FEDERAL BANK FSB
The information set forth in the following paragraphs has been provided by
Ocwen Federal Bank FSB. None of the Depositor, the Trustee, the Underwriter, the
Certificate Insurer or any of their respective affiliates have made or will make
any representation as to the accuracy or completeness of such information.
Ocwen Federal Bank FSB ('Ocwen'), a federally-chartered savings bank, with
its home office in Fort Lee, New Jersey and its servicing operations and
corporate offices in West Palm Beach, Florida, will serve as the Subservicer for
the Mortgage Loans (the 'Subservicer'). Ocwen is a wholly-owned subsidiary of
Ocwen Financial Corporation, a public financial services holding company. At
September 30, 1997, Ocwen had approximately $2.548 billion in assets,
approximately $2.276 billion in liabilities and approximately $272 million in
equity. At September 30, 1997, Ocwen tangible and leveraged capital ratio was
approximately 10.48% and its risk-based capital ratio was approximately 13.99%.
For the nine months ended September 30, 1997, Ocwen income from continuing
operations was approximately $63 million. For the calendar quarter ended
September 30, 1997, Ocwen income from continuing operations was approximately
$22 million.
In its capacity as subservicer, Ocwen will perform the day-to-day servicing
duties on behalf of the Master Servicer. Compensation to the subservicer will be
paid by the Master Servicer from the Servicing Fee.
The major business of Ocwen has been the resolution of nonperforming
single-family, multi-family and commercial mortgage loan portfolios acquired
from the Resolution Trust Corporation, from private investors, and most
recently, from the United States Department of Housing and Urban Development
('HUD') through HUD's auction of defaulted FHA Loans.
The following table sets forth, for the non-conforming credit mortgage loan
('BCD Mortgage Loan') servicing portfolio serviced by Ocwen as of December 31,
1996, and as of September 30, 1997, certain information relating to the
delinquency experience (including loans in foreclosure included in Ocwen's
servicing portfolio (which portfolio does not include mortgage loans that are
subserviced by others)) at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a contractual
basis. No mortgage loan is considered delinquent for these purposes until it is
one month past due on a contractual basis. The information contained in the
monthly remittance reports which will be sent to investors will be compiled
using the same methodology as that used to compile the information contained in
the table below.
S-39
<PAGE>
The following tables set forth, for the BCD Mortgage Loan servicing
portfolio derived from Ocwen as of December 31, 1996, and as of September 30,
1997, certain information relating to the foreclosure, REO and loan loss
experience of BCD Mortgage Loans included in Ocwen's servicing portfolio (which
portfolio does not include mortgage loans that are subserviced by others) at the
end of the indicated periods.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------------------------------ ------------------------------------------
PERCENT PERCENT
BY PERCENT BY BY PERCENT BY
BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR BY NO. DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- -------- -------- ------ -------- -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio......... 2,834 $305,085 100.00% 100.00% 4,215 $465,602 100.00% 100.00%
Period of Delinquency:
30-59 Days............ 107 10,554 3.78% 3.46 % 132 15,326 3.13% 3.29 %
60-89 Days............ 38 4,321 1.34% 1.42 % 51 5,337 1.21% 1.15 %
90 Days or more....... 138 17,969 4.87% 5.89 % 199 24,799 4.72% 5.33 %
Total Delinquent
Loans................. 283 32,844 9.99% 10.77 % 382 45,462 9.06% 9.76 %
Loans in
Foreclosure(1)........ 136 17,805 4.80% 5.84 % 226 28,571 5.36% 6.14 %
</TABLE>
- ------------------
(1) Loans in foreclosure are also included under the heading 'Total Delinquent
Loans.'
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 SEPTEMBER 30, 1997
------------------ ------------------
BY NO. BY BY NO. BY
OF DOLLAR OF DOLLAR
LOANS AMOUNT LOANS AMOUNT
------ -------- ------ --------
<S> <C> <C> <C> <C>
Total Portfolio......................................................... 2,834 $305,085 4,215 $465,602
Foreclosed Loans(1)..................................................... 34 3,329 54 6,591
Foreclosed Ratio(2)..................................................... 1.20 % 1.09% 1.28 % 1.42%
</TABLE>
- ------------------
(1) For the purposes of these tables, Foreclosed Loans means the principal
balance of mortgage loans secured by mortgaged properties the title to which
has been acquired by the Special Servicer.
(2) The Foreclosure Ratio is equal to the aggregate principle balance or number
of Foreclosed Loans divided by the aggregate principal balance, or number,
as applicable, or mortgage loans in the total Portfolio at the end of the
indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
AS OF SEPTEMBER 30,
DECEMBER 31, 1996 1997
----------------- -----------------
<S> <C> <C>
Total Portfolio(1)......................................................... $ 305,085 $ 465,602
Net Gains/(Losses)(2)...................................................... 24 (607)
Net Gains/(Losses) as a Percentage of Total Portfolio(3)................... 0.01% -0.13%
</TABLE>
(Footnotes on next page)
S-40
<PAGE>
(Footnotes from previous page)
- ------------------
(1) 'Total Portfolio' on the date stated above is the principal balance of the
mortgage loans outstanding on the last day of the period.
(2) 'Net Gains/(Losses)' are actual gains or losses incurred on liquidated
properties and shortfall payoffs for each respective period. Gains or losses
on liquidated properties are calculated as net sales proceeds less book
value (exclusive of loan purchase premium or discount). Shortfall payoffs
are calculated as the difference between principal payoff amount and unpaid
principal at the time of payoff.
(3) September 30, 1997 percentage has been based on annualized net gains/losses.
It is unlikely that the delinquency experience of the Mortgage Loans
comprising the Mortgage Pool will correspond to the delinquency experience of
Ocwen's mortgage portfolio set forth in the foregoing tables. The statistics
shown above represent the delinquency experience for Ocwen's mortgage servicing
portfolio only for the periods presented, whereas the aggregate delinquency
experience on the Mortgage Loans comprising the Mortgage Pool will depend on the
results obtained over the life of the Mortgage Pool. Ocwen commenced receiving
applications for mortgage loans under its BCD Mortgage Loan program in December
1994. Accordingly, Ocwen (whether as an originator or acquirer of mortgage loans
or as a servicer of such mortgage loans) does not have significant historical
delinquency, bankruptcy, foreclosure or default experience that may be referred
to for purposes of estimating the future delinquency and loss experience of
Mortgage Loans. There can be no assurance that the Mortgage Loans comprising the
Mortgage Pool will perform consistent with the delinquency or foreclosure
experience described herein. It should be noted that if the residential real
estate market should experience an overall decline in property values, the
actual rates of delinquencies and foreclosures could be higher than those
previously experienced by Ocwen. In addition, adverse economic conditions may
affect the timely payment by Mortgagors of scheduled payments of principal and
interest on the Mortgage Loans and, accordingly, the actual rates of
delinquencies and foreclosures with respect to the Mortgage Pool.
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
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 Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans and by the rate of principal prepayments (including for this purpose
prepayments resulting from refinancing, liquidations of the Mortgage Loans due
to defaults, casualties, condemnations and repurchases by the Seller). The
Mortgage Loans may be prepaid by the Mortgagors at any time with, in most cases,
a penalty.
PREPAYMENTS
Prepayments, liquidations and purchases of the Mortgage Loans (including
any optional purchase by the Master Servicer of a Delinquent Mortgage Loan and
any optional purchase of the remaining Mortgage Loans in connection with the
termination of the Trust) will result in distributions on the Class A
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of such Mortgage Loans. Since the rate of payment of principal
of the Mortgage Loans will depend on future events and a variety of factors, no
assurance can be given as to 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 a 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 such
Mortgage Loans. The rate of prepayment on the Mortgage Loans cannot be
predicted. The prepayment experience of the Trust with respect to the Mortgage
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. All of the Mortgage Loans contain
'due-on-sale' provisions, and the Master Servicer is required by the Agreement
to enforce such provisions, unless such enforcement is not permitted by
applicable law. The enforcement of a 'due-on-sale' provision will have the same
effect as a prepayment of the related Mortgage Loan. See 'CERTAIN LEGAL ASPECTS
OF LOANS-- Due-on-Sale Clauses in Mortgage Loans' in the Prospectus.
S-41
<PAGE>
The Trust may experience increased levels of prepayment during periods of
lower interest rates due to refinancing by mortgagors attempting to lock in
lower interest rates.
In addition to the foregoing factors affecting the weighted average life of
the Class A Certificates, the use of Net Monthly Excess Cashflow to pay
principal of the Class A Certificates to the extent required by the Agreement
will result in the acceleration of the Class A Certificates, relative to the
amortization of the Mortgage Loans in early months of the transaction than would
otherwise be the case. This acceleration feature creates overcollateralization
which results from the excess of the Pool Principal Balance of Mortgage Loans
over the aggregate Class A Principal Balance. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization. See
'DESCRIPTION OF THE CERTIFICATES--Overcollateralization Provisions.'
MANDATORY PREPAYMENT
On the Closing Date, it is expected that approximately $19,958,494.73 of
Subsequent Mortgage Loans will be transferred to the Trust. In the event that
less than such amount of Subsequent Mortgage Loans are transferred to the
Trustee, the holders of the Class A Certificates will receive on the first
Distribution Date, an additional distribution allocable to principal in an
amount equal to the excess of $19,958,494.73 over the aggregate Cut-off Date
Principal Balances of the Subsequent Mortgage Loans. Although no assurances can
be given, the Seller intends that the principal amount of Mortgage Loans will
substantially equal the aggregate of the Class Principal Balance of the Class A
Certificates.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Class A Certificates purchased at a price less than par and will
decrease the yield on Class A Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal prepayments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average life of the
Class A Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
defaulted Mortgage Loans and foreclosed properties.
The 'weighted average life' of a Certificate refers to the average amount
of time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
the Class A Certificates will be influenced by, among other factors, the rate at
which principal payments are made on the Mortgage Loans.
Prepayments on Mortgage Loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is
the prepayment assumption (the 'Prepayment Assumption'), which represents an
assumed rate of prepayment each month relative to the then outstanding principal
balance of the pool of mortgage loans for the life of such mortgage loans. A
100% Prepayment Assumption assumes a conditional prepayment rate ('CPR') of 4%
per annum of the outstanding principal balance of such mortgage loans in the
first month of the life of the mortgage loans and approximately an additional
1.455% (precisely 16/11) (expressed as a percentage per annum) in each month
thereafter until the twelfth month; beginning in the twelfth month and in each
month thereafter during the life of the mortgage loans, a conditional prepayment
rate of 20% per annum each month is assumed. As used in the table below, 100%
Prepayment Assumption assumes a conditional prepayment rate equal to 100% of the
Prepayment Assumption. Correspondingly, 75% Prepayment Assumption assumes
prepayment rates equal to 75% of the Prepayment Assumption, 175% Prepayment
Assumption assumes prepayment rates equal to 175% of the Prepayment Assumption,
and 200% Prepayment Assumption assumes prepayment rates equal to 200% of the
Prepayment Assumption. The Prepayment Assumption does not purport to be a
historical description of prepayment experience or a prediction of the
anticipated rate of prepayment of any pool of mortgage loans, including the
Mortgage Loans. The Depositor believes that no existing statistics of which it
is aware provide a reliable basis for holders of Class A Certificates to predict
the amount or the timing of receipt of prepayments on the Mortgage Loans.
S-42
<PAGE>
Since the following table was prepared on the basis of the assumptions in
the following paragraph, there are discrepancies between characteristics of the
actual Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy may have an effect upon the
percentages of the Class A Principal Balance outstanding and weighted average
lives of the Class A Certificates set forth in the tables. In addition, since
the actual Mortgage Loans in the Trust have characteristics which differ from
those assumed in preparing the tables set forth below, the distributions of
principal on the Class A Certificates may be made earlier or later than as
indicated in the tables.
For the purpose of the table below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay amortization characteristics
set forth below, (ii) the Closing Date for the Class A Certificates is December
30, 1997, (iii) distributions on the Class A Certificates are made on the 25th
day of each month regardless of the day on which the Distribution Date actually
occurs, commencing in January 1998 and are made in accordance with the
priorities described herein, (iv) the scheduled monthly payments of principal
and interest on the Mortgage Loans will be timely delivered on the first day of
each month commencing in January 1998 (with no defaults), (v) the Mortgage
Loans' prepayment rates are a multiple of the Prepayment Assumption, (vi) all
prepayments are prepayments in full received on the last day of each month
commencing in December 1997 and include 30 days' interest thereon, (vii) no
optional termination is exercised (other than with respect to the information
set forth opposite Weighted Average Life to Optional Termination), (viii) the
Class A Certificates have the Certificate Rate and initial Class Principal
Balance set forth herein, (ix) the overcollateralization levels are set
initially as specified in the Agreement, and thereafter decrease in accordance
with the provisions of the Agreement, (x) the level of the Certificate Index and
6-month LIBOR remain constant at 6.00% and 6.00%, respectively, and (xi) the
Aggregate Expense Rate is assumed to be approximately 0.764%.
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
CURRENT MONTHS TO ORIGINAL REMAINING
LOAN NEXT INITIAL TERM TO TERM TO
PRINCIPAL RATE ADJUSTMENT GROSS LIFETIME LIFETIME PERIODIC PERIODIC MATURITY MATURITY
BALANCE ($) (%) DATE MARGIN (%) CAP (%) FLOOR (%) CAP (%) CAP(%) (IN MONTHS) (IN MONTHS)
------------- ------ ---------- ---------- -------- --------- -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
18,055,482.61 8.717 4 6.024 14.717 6.024 1.000 1.000 360 358
20,783,054.58 8.763 5 6.098 14.763 6.098 1.011 1.000 360 360
24,445,660.72 9.983 22 6.151 16.983 6.151 3.000 1.000 360 358
36,098,169.44 10.088 23 5.918 17.088 5.918 3.000 1.000 360 360
9,099,557.58 10.088 24 5.756 17.088 5.756 3.000 1.000 360 360
6,518,075.07 10.052 35 5.920 17.052 5.920 3.000 1.000 360 360
</TABLE>
S-43
<PAGE>
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION*
<TABLE>
<CAPTION>
DISTRIBUTION DATE 50% 75% 100% 125% 150% 175% 200%
- ------------------------------------------------------------ ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.......................................... 100 100 100 100 100 100 100
December 25, 1998........................................... 90 87 84 80 77 74 70
December 25, 1999........................................... 80 72 65 58 52 46 40
December 25, 2000........................................... 71 60 51 43 36 30 24
December 25, 2001........................................... 63 50 40 32 25 19 14
December 25, 2002........................................... 56 42 32 24 17 12 9
December 25, 2003........................................... 50 36 25 18 12 8 5
December 25, 2004........................................... 44 30 20 13 8 5 3
December 25, 2005........................................... 39 25 16 10 6 3 1
December 25, 2006........................................... 35 21 13 7 4 2 1
December 25, 2007........................................... 31 18 10 5 3 1 0
December 25, 2008........................................... 28 15 8 4 2 0 0
December 25, 2009........................................... 25 13 6 3 1 0 0
December 25, 2010........................................... 22 11 5 2 0 0 0
December 25, 2011........................................... 19 9 4 1 0 0 0
December 25, 2012........................................... 17 7 3 1 0 0 0
December 25, 2013........................................... 15 6 2 0 0 0 0
December 25, 2014........................................... 13 5 1 0 0 0 0
December 25, 2015........................................... 11 4 1 0 0 0 0
December 25, 2016........................................... 10 3 1 0 0 0 0
December 25, 2017........................................... 8 2 0 0 0 0 0
December 25, 2018........................................... 7 2 0 0 0 0 0
December 25, 2019........................................... 6 1 0 0 0 0 0
December 25, 2020........................................... 5 1 0 0 0 0 0
December 25, 2021........................................... 4 1 0 0 0 0 0
December 25, 2022........................................... 3 0 0 0 0 0 0
December 25, 2023........................................... 2 0 0 0 0 0 0
December 25, 2024........................................... 1 0 0 0 0 0 0
December 25, 2025........................................... 1 0 0 0 0 0 0
December 25, 2026........................................... 0 0 0 0 0 0 0
December 25, 2027........................................... 0 0 0 0 0 0 0
Weighted Average Life to Maturity (years)................... 8.07 5.75 4.40 3.54 2.94 2.51 2.19
Weighted Average Life to Optional Termination (years)....... 7.95 5.60 4.27 3.43 2.85 2.44 2.12
</TABLE>
- ------------------
* The weighted average life of a Certificate is determined by (i) multiplying
the amount of each distribution in reduction of the Class Principal Balance by
the number of years from the date of issuance of the Certificate to the
related Distribution Date, (ii) adding the results and (iii) dividing such sum
by the original Class Principal Balance of such Certificate.
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<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will consist of three classes of Certificates, designated
as (i) the Class A Certificates (the 'Class A Certificates'), (ii) the Class X
Certificates (the 'Class X Certificates') and (iii) the Class R Certificates
(the 'Class R Certificates'). Only the Class A Certificates are offered hereby.
The Class X Certificates and the Class R Certificates are referred to herein
collectively as the 'Subordinated Certificates.' The Subordinated Certificates,
which are not being offered hereby, will initially be held by the Seller and may
be sold at any time on or after the Closing Date in accordance with the
Agreement.
The Certificates represent in the aggregate the entire beneficial ownership
interest in a Trust Fund (the 'Trust Fund') consisting primarily of a pool (the
'Mortgage Pool') of conventional, one- to four-family, first lien mortgage loans
having original terms to maturity of 30 years (the 'Mortgage Loans').
The Class A Certificates in the aggregate will have an initial Class
Principal Balance of approximately $114,425,000. The Certificate Rate on the
Class A Certificates is adjustable and is calculated as described under
'--Certificate Rate' herein. The Class A Certificates in the aggregate initially
evidence an interest of 99.5% in the principal of the Trust Fund. The Class A
Certificates will initially have an aggregate Class Principal Balance equal to
99.5% of the aggregate principal balance as of the Cut-off Date of the Mortgage
Loans.
The Class A Certificates will initially be represented by one or more
global certificates registered in the name of the nominee of DTC (together with
any successor clearing agency selected by the Depositor, the 'Clearing Agency'),
except as provided below. The Depositor has been informed by DTC that DTC's
nominee will be Cede & Co. ('Cede'). No Certificate Owner will be entitled to
receive a certificate representing such person's interest except as set forth
below under '--Book-Entry Certificates.' Unless and until Definitive
Certificates are issued under the limited circumstances described herein, all
references to actions by Certificateholders with respect to the Class A
Certificates shall refer to actions taken by DTC upon instructions from its
Participants (as defined below), and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the Class
A Certificates shall refer to distributions, notices, reports and statements to
DTC or Cede, as the registered holder of the Class A Certificates, for
distribution to Certificate Owners in accordance with DTC procedures. See
'--Book Entry Certificates' herein.
All distributions to holders of the Class A Certificates, other than the
final distribution on the Class A Certificates, will be made by or on behalf of
the Trustee to the persons in whose names such Class A Certificates are
registered at the close of business on each Record Date, which will be the last
business day of the month preceding the month in which the related Distribution
Date occurs. Such distributions will be made either (i) by check mailed to the
address of each such Certificateholder as it appears in the Certificate Register
or (ii) upon written request to the Trustee at least five business days prior to
the relevant Record Date by any holder of Class A Certificates having an
aggregate initial Class Principal Balance that is in excess of $5,000,000 by
wire transfer in immediately available funds to the account of such
Certificateholder specified in the request. The final distribution on the Class
A Certificates will be made in like manner, but only upon presentment and
surrender of such Class A Certificates at the corporate trust office of the
Trustee or such other location specified in the notice to Certificateholders of
such final distribution.
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 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 Chase 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 representing Certificate
Principal Balances of $100,000 and in multiples of $1 in excess thereof. Except
as described below, no person acquiring a Book-Entry Certificate (each, a
'beneficial owner') will be entitled to receive a physical
S-45
<PAGE>
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 Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners 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 Offered 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 Owners.
Because of time zone differences, credits of securities received in Cedel
or Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such 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--Federal Income Tax Consequences to Foreign Investors' and
'--Backup Withholding' herein and 'GLOBAL CLEARANCE, SETTLEMENT AND TAX
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
S-46
<PAGE>
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 is incorporated under the laws of Luxembourg as a professional
depository. Cedel holds securities for its participating organizations ('Cedel
Participants') and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally-traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for its participants
('Euroclear Participants') and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
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 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
S-47
<PAGE>
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--Federal Income Tax Consequences to 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 & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry 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-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 Servicing
Termination (as defined herein), beneficial owners having Percentage Interests
aggregating not less than 51% of the aggregate Class A Principal Balance 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 Depositor, 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.
CERTIFICATE RATE
The Certificate Rate on the Class A Certificates on each Distribution Date
after the first Distribution Date will be a rate per annum equal to the lesser
of (i) One-Month LIBOR (as defined herein) plus 0.28%, in the case of each
Distribution Date through and including the Distribution Date on which the
Aggregate Principal Balance (as defined herein) of the Mortgage Loans is reduced
to 5% of the Maximum Collateral Amount, or One-Month LIBOR plus 0.56% per annum,
in the case of any Distribution Date thereafter and (ii) the weighted average of
the Loan Rates on the Mortgage Loans as of the first day of the related
Collection Period, less the Aggregate
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<PAGE>
Expense Rate (the 'Net Funds Cap'). The 'Aggregate Expense Rate' equals the sum
of (a) the Servicing Fee Rate, (b) the Trustee Fee Rate, (c) the Insurance
Premium Rate and (d) commencing on the thirteenth Distribution Date, 0.50% per
annum. For the first Distribution Date, the Certificate Rate on the Class A
Certificates will be 6.24875% per annum.
With respect to any Distribution Date, to the extent that (a) the amount
payable if clause (i) of the definition of Certificate Rate above is used to
calculate interest exceeds (b) the Net Funds Cap without giving effect to clause
(d) in the preceding paragraph (the 'Basis Risk Shortfall'), the holders of the
Class A Certificates will be entitled to the amount of such Basis Risk Shortfall
with interest thereon at the Certificate Rate for such Certificates applicable
from time to time after certain distributions to the Certificate Insurer but
before the Class X and Class R Certificates are entitled to any distributions.
The Class A Certificateholders will be entitled to receive the amount of such
Basis Risk Shortfall from Net Monthly Excess Cashflow with a portion thereof to
be treated as paid from and to the extent of funds on deposit in a reserve fund
(the 'Basis Risk Reserve Fund') established pursuant to an agreement (the
'Interest Rate Cap Agreement') entered into by the Seller. The source of funds
on deposit in the Basis Risk Reserve Fund is limited to amounts that would
otherwise be distributed on the Class X Certificates. Notwithstanding the
foregoing, the amount of the Basis Risk Shortfall for any Distribution Date may
not exceed the excess of (x) the amount payable at the Maximum Class A
Certificate Rate over (y) the amount payable at the Net Funds Cap. The 'Unpaid
Basis Risk Shortfall' for the Class A Certificates on any Distribution Date is
equal to the aggregate of all Basis Risk Shortfalls for any previous
Distribution Dates, together with interest thereon at the Certificate Rate, less
all payments made to the holders of the Class A Certificates in respect of such
Basis Risk Shortfalls on or prior to such Distribution Date. The Policy will not
cover Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls. See 'DESCRIPTION OF
THE CERTIFICATES--Overcollateralization Provisions' and '--Financial Guaranty
Insurance Policy' herein.
The 'Maximum Class A Certificate Rate' for any Distribution Date is a per
annum rate equal to the weighted average of the Maximum Loan Rates (as defined
herein) less the Aggregate Expense Rate.
The Certificate Rate on the Class A Certificates for the current Interest
Period, to the extent it has been determined, and for the immediately preceding
Interest Period may be obtained by telephoning the Trustee at (800) 735-7777.
INTEREST DISTRIBUTIONS
Distributions in respect of interest on each Distribution Date will be made
to the holders of the Class A Certificates in an amount equal to the Interest
Distribution Amount.
The Interest Distribution Amount on any Distribution Date is equal to
interest accrued during the related Interest Period on the Class Principal
Balance thereof immediately prior to such Distribution Date at the then
applicable Certificate Rate, reduced (to not less than zero) by any shortfalls
resulting from the application of the Relief Act.
Distributions of the Interest Distribution Amount will be made on each
Distribution Date, commencing with the first Distribution Date. The Interest
Period for any Distribution Date is the period commencing on the preceding
Distribution Date (or, in the case of the first period, commencing on the
Closing Date) and ending on the day preceding the current Distribution Date, and
all distributions of interest will be based on a 360-day year and the actual
number of days in the applicable Interest Period.
Subject to the terms of the Policy, any interest losses allocable to the
Class A Certificates (other than shortfalls resulting from the application of
the Relief Act, Basis Risk Shortfalls and Unpaid Basis Risk Shortfalls) will be
covered under the Policy. Notwithstanding the foregoing, if payments are not
made as required under the Policy, any such interest losses may be allocated to
the Class A Certificates.
The 'Class Principal Balance' of a Class A Certificate outstanding at any
time represents the then maximum amount that the holder thereof is thereafter
entitled to receive as distributions allocable to principal from the cash flow
on the Mortgage Loans and the other assets in the Trust Fund. The Class
Principal Balance of a Class A Certificate as of any date of determination is
equal to the initial Class Principal Balance thereof reduced by the aggregate of
(a) all amounts allocable to principal previously distributed with respect to
such Certificate and (b) any reductions in the Class Principal Balance thereof
deemed to have occurred in connection with allocations of Realized Losses in the
manner described herein.
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<PAGE>
CALCULATION OF ONE-MONTH LIBOR
With respect to each Distribution Date, the Certificate Index shall be
established by the Trustee and will equal the rate for one month United States
dollar deposits quoted on Telerate Page 3750 as of 11:00 A.M., London time, on
the second LIBOR Business Day prior to the first day of the related Interest
Period (or the second LIBOR Business Day prior to the Closing Date, in the case
of the first Distribution Date) (each, a 'LIBOR Determination Date'). 'Telerate
Page 3750' means the display designated as page 3750 on the Telerate Service (or
such other page as may replace page 3750 on that service for the purpose of
displaying London interbank offered rates of major banks). If such rate does not
appear on such page (or such other page as may replace that page on that
service, or if such service is no longer offered, such other service for
displaying LIBOR or comparable rates as may be selected by the Trustee after
consultation with the Master Servicer), the rate will be the Reference Bank
Rate. The 'Reference Bank Rate' will be determined on the basis of the rates at
which deposits in U.S. Dollars are offered by the reference banks (which shall
be three major banks that are engaged in transactions in the London interbank
market, selected by the Trustee after consultation with the Master Servicer) as
of 11:00 A.M., London time, on the day that is two LIBOR Business Days prior to
the immediately preceding Distribution Date to prime banks in the London
interbank market for a period of one month in amounts approximately equal to the
Class Principal Balance of the Class A Certificates. The Trustee will request
the principal London office of each of the reference banks to provide a
quotation of its rate. If at least two such quotations are provided, the rate
will be the arithmetic mean of the quotations. If on such date fewer than two
quotations are provided as requested, the rate will be the arithmetic mean of
the rates quoted by one or more major banks in New York City, selected by the
Trustee after consultation with the Master Servicer, as of 11:00 A.M., New York
City time, on such date for loans in U.S. Dollars to leading European banks for
a period of one month in amounts approximately equal to the Class Principal
Balance of the Class A Certificates. If no such quotations can be obtained, the
rate will be LIBOR for the prior Distribution Date. 'LIBOR Business Day' means
any day other than (i) a Saturday or a Sunday or (i) a day on which banking
institutions in the State of New York or in the city of London, England are
required or authorized by law to be closed.
PRINCIPAL DISTRIBUTIONS ON THE CLASS A CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date the Principal Distribution Amount. The 'Principal Distribution
Amount' for any Distribution Date will be the lesser of:
(a) the excess of the Available Distribution Amount over the Interest
Distribution Amount; and
(b) the sum of:
(i) the principal portion of all scheduled monthly payments on
the Mortgage Loans due during the related Due Period to the extent
received or advanced by the Master Servicer;
(ii) the principal portion of all proceeds of the repurchase of
a related Mortgage Loan (or, in the case of a substitution, certain
amounts representing a principal adjustment) as required by the
Agreement during the related Prepayment Period;
(iii) the principal portion of all other unscheduled
collections, including insurance proceeds, liquidation proceeds and
all full and partial principal prepayments, received during the
related Prepayment Period, to the extent applied as recoveries of
principal on the related Mortgage Loans;
(iv) the principal portion of any Realized Losses incurred on
any related Mortgage Loans in the calendar month preceding such
Distribution Date and the principal portion of any Realized Losses
previously allocated to the Class A Certificates and with respect to
which a distribution has not previously been made pursuant to this
clause, in each case to the extent covered by Net Monthly Excess
Cashflow (as defined herein) for such Distribution Date; and
(v) the amount of any Subordination Increase Amount (as defined
herein) for such Distribution Date;
minus
(vi) the amount of any Subordination Reduction Amount (as
defined herein) for such Distribution Date.
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<PAGE>
Notwithstanding the foregoing, as described under '--Overcollateralization
Provisions' herein, no amounts will be distributed to the holders of the Class A
Certificates pursuant to clause (v) above except to the extent of any Net
Monthly Excess Cashflow remaining after payment to the holders of the Class A
Certificates of all amounts in respect of Realized Losses pursuant to clause
(iv) above and payment to the Certificate Insurer of the full amount of any
Cumulative Insurance Payments. As of any Distribution Date, 'Cumulative
Insurance Payments' refers to the aggregate of any payments (other than those
attributable to Excess Bankruptcy Losses, Excess Fraud Losses and Excess Special
Hazard Losses) made by the Certificate Insurer under the Policy to the extent
not previously reimbursed, plus interest thereon.
In no event will the Principal Distribution Amount with respect to any
Distribution Date be (x) less than zero or (y) greater than the then outstanding
aggregate Class Principal Balance of the Class A Certificates.
The 'Available Distribution Amount' for the Class A Certificates for any
Distribution Date is equal to the sum, net of amounts reimbursable therefrom to
the Master Servicer, of (i) the aggregate amount of monthly payments on the
Mortgage Loans due on the related Due Date and received by the Trustee on or
prior to the related Distribution Date, after deduction of the Servicing Fee,
the Trustee Fee and the premium payable with respect to the Policy, (ii) certain
unscheduled payments in respect of the related Mortgage Loans, including
prepayments, insurance proceeds, liquidation proceeds and proceeds from
repurchases of and substitutions for such Mortgage Loans occurring during the
related Prepayment Period and (iii) all Monthly Advances with respect to the
related Mortgage Loans received by the Trustee for such Distribution Date.
In addition, on each Distribution Date, funds received as a result of a
claim under the Policy in respect of the principal portion of Realized Losses
allocated to the Class A Certificates will be distributed by or on behalf of the
Trustee to the holders of such Certificates. See '--Financial Guaranty Insurance
Policy' herein.
The Principal Balance of any Mortgage Loan as of any date of determination
is equal to the principal balance thereof as of the Cut-off Date, reduced by all
amounts allocable to principal with respect to such Mortgage Loan which have
been included in the Available Distribution Amount on or before such date. The
principal balance of a liquidated loan shall be zero.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Net Monthly
Excess Cashflow, if any, be applied on such Distribution Date as an accelerated
payment of principal on the Class A Certificates, but only to the limited extent
hereafter described. The 'Net Monthly Excess Cashflow' for any Distribution Date
is equal to the sum of (a) any Subordination Reduction Amount and (b) the excess
of the (x) the Available Distribution Amount for such Distribution Date over (y)
the sum for such Distribution Date of (A) the Interest Distribution Amount
payable to the holders of the Class A Certificates and (B) the amount described
in clauses (b)(i) through (iii) of the definition of Principal Distribution
Amount.
With respect to any Distribution Date, any Net Monthly Excess Cashflow
(or, in the case of clause first below, the Net Monthly Excess Cashflow
exclusive of any Subordination Reduction Amount) shall be paid as follows:
first, to the holders of the Class A Certificates in an amount equal
to any interest shortfalls (other than Prepayment Interest Shortfalls to
the extent not covered by Compensating Interest paid by the Master
Servicer, shortfalls resulting from the application of the Relief Act,
Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls) and the principal
portion of any Realized Losses incurred or deemed to have been incurred on
the Mortgage Loans;
second, to the Certificate Insurer, in an amount equal to any
Cumulative Insurance Payments;
third, to the holders of the Class A Certificates, in an amount equal
to the Subordination Increase Amount;
fourth, to the holders of the Class A Certificates, in an amount equal
to any Prepayment Interest Shortfalls on the Mortgage Loans to the extent
not covered by Compensating Interest paid by the Master Servicer and any
shortfalls resulting from the application of the Relief Act with respect to
the Mortgage Loans;
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fifth, to the holders of the Class A Certificates in an amount equal
to any Basis Risk Shortfall;
sixth, to the holders of the Class A Certificates, in an amount equal
to any Unpaid Basis Risk Shortfall;
seventh, to the Certificate Insurer, any amounts remaining due to the
Certificate Insurer under the terms of the Insurance Agreement (other than
those attributable to Excess Bankruptcy Losses, Excess Fraud Losses and
Excess Special Hazard Losses);
eighth, to the holders of the Class X Certificates; and
ninth, to the holders of the Class R Certificates.
With respect to any Distribution Date, the excess, if any, of (a) the
aggregate Principal Balance of the Mortgage Loans immediately following such
Distribution Date over (b) the Class Principal Balance of the Class A
Certificates as of such date (after taking into account the payment of the
amounts described in clauses (b)(i) through (iv) of the definition of Principal
Distribution Amount, on such Distribution Date) is the 'Subordinated Amount' as
of such Distribution Date. Any amount of Net Monthly Excess Cashflow actually
applied as an accelerated payment of principal to the extent the Required
Subordinated Amount exceeds the Subordinated Amount as of such Distribution Date
is a 'Subordination Increase Amount.' The required level of the Subordinated
Amount with respect to a Distribution Date is the 'Required Subordinated Amount'
with respect to such Distribution Date. With respect to any Distribution Date,
the Required Subordinated Amount will be specified in the Agreement which may,
subject to certain triggers, caps and floors, step up or down as required by the
Agreement.
In the event that the Required Subordinated Amounts are required to step up
on any Distribution Date, the Agreement provides that all Net Monthly Excess
Cashflow remaining after the distributions described in clauses first and second
above will be distributed in respect of the Subordination Increase Amount until
the Subordinated Amount equals the Required Subordinated Amount.
In the event that the Required Subordinated Amount is permitted to step
down on any Distribution Date, the Agreement provides that a portion of the
principal which would otherwise be distributed to the holders of the Class A
Certificates on such Distribution Date shall be distributed to the holders of
the Class X and Class R Certificates on such Distribution Date. This has the
effect of decelerating the amortization of the Class A Certificates, relative to
the amortization of the Mortgage Loans, and of reducing the Subordinated Amount.
With respect to any Distribution Date, the excess, if any, of (a) the
Subordinated Amount over (b) the Required Subordinated Amount is the 'Excess
Subordinated Amount.' If, on any Distribution Date, the Excess Subordinated
Amount is, or, after taking into account all other distributions to be made on
such Distribution Date would be, greater than zero (i.e., the Subordinated
Amount is or would be greater than the Required Subordinated Amount), then any
amounts relating to principal which would otherwise be distributed to the
holders of the Class A Certificates on such Distribution Date shall instead be
distributed to the holders of the Class X and Class R Certificates in an amount
equal to the lesser of (x) the Excess Subordinated Amount and (y) the amount
available for distribution specified in clauses (b)(i) through (iii) of the
definition of Principal Distribution Amount, on such Distribution Date; such
amount being the 'Subordination Reduction Amount' for such Distribution Date.
INITIAL INTEREST COVERAGE ACCOUNT
On the Closing Date, cash will be deposited in an account (the 'Initial
Interest Coverage Account') in the name of the Trustee on behalf of the Trust.
The amount on deposit in the Initial Interest Coverage Account will be used by
the Trustee to fund certain shortfalls on the first Distribution Date. Amounts
remaining in the Initial Interest Coverage Account after the first Distribution
Date and not used for such purposes are required to be paid to the Seller. The
Initial Interest Coverage Account will terminate immediately following the first
Distribution Date.
Amounts on deposit in the Initial Interest Coverage Account will be
invested in Eligible Investments. The Initial Interest Coverage Account will not
be an asset of the REMIC. Any reinvestment income earned on the Initial Interest
Coverage Account will be taxable to the Seller.
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FUNDING ACCOUNT
On the Closing Date, it is expected that approximately $19,958,494.73 of
Subsequent Mortgage Loans will be transferred to the Trust. See 'DESCRIPTION OF
THE CERTIFICATES--Conveyance of the Subsequent Mortgage Loans.' In the event
that less than such amount of Subsequent Mortgage Loans is transferred to the
Trust, an aggregate cash amount equal to the excess of $19,958,494.73 over the
aggregate Cut-off Date Principal Balances of the Subsequent Mortgage Loans will
be deposited by the Seller in an account which will be in the name of, and
maintained by, the Trustee on behalf of the Trust (the 'Funding Account'). Such
amounts, if any, on deposit in the Funding Account will be transferred by the
Trustee on the first Distribution Date into the Distribution Account and will be
distributed as a principal prepayment to Certificateholders. Amounts on deposit
in the Funding Account will be invested in Eligible Investments. Any
reinvestment income earned on amounts on deposit in the Funding Account will be
taxable to the Seller. The Funding Account will terminate immediately after the
first Distribution Date. The Funding Account will be an asset of the Trust;
however, the REMIC election will not be made with respect to the Funding Account
FINANCIAL GUARANTY INSURANCE POLICY
The following summary of the terms of the Policy does not purport to be
complete and is qualified in its entirety by reference to the Policy. A form of
the Policy may be obtained, upon request, from the Depositor.
Simultaneously with the issuance of the Class A Certificates, the
Certificate Insurer will deliver the Policy to the Trustee for the benefit of
the holders of the Class A Certificates. Under the Policy, the Certificate
Insurer will irrevocably and unconditionally guarantee payment on each
Distribution Date to the Trustee for the benefit of the holders of the Class A
Certificates of Insured Payments with respect to the Class A Certificates,
calculated in accordance with the original terms of the Class A Certificates
when issued and without regard to any amendment or modification of the Class A
Certificates or the Agreement except amendments or modifications to which the
Certificate Insurer has given its prior written consent. 'Insured Payments'
shall mean with respect to the Class A Certificates as of any Distribution Date
(i) any shortfall in amounts available in the Distribution Account (as defined
in the Agreement) to pay the Interest Distribution Amount with respect to such
Certificates for the related Interest Period, (ii) the principal portion of any
Realized Losses allocated to the Class A Certificates and, without duplication,
the excess, if any, of (a) the aggregate Class Principal Balance of the Class A
Certificates then outstanding over (b) the aggregate principal balances of the
Mortgage Loans then outstanding and (iii) without duplication of the amount
specified in clause (ii), the aggregate Class Principal Balance of the Class A
Certificates to the extent unpaid on the final Distribution Date or earlier
termination of the Trust Fund pursuant to the terms of the Agreement; provided,
however, that the Certificate Insurer is permitted at its sole option, but not
required, to pay any losses in connection with the liquidation of a Mortgage
Loan in accordance with the terms of the Policy. The Policy does not cover
Relief Act Shortfalls, Basis Risk Shortfalls or Unpaid Basis Risk Shortfalls.
If any Insured Payment is avoided as a preference payment under applicable
bankruptcy, insolvency, receivership or similar law, the Certificate Insurer
will pay such amount out of funds of the Certificate Insurer on the later of (a)
the date when due to be paid pursuant to the Order referred to below or (b) the
first to occur of (i) the fourth Business Day following Receipt by the
Certificate Insurer from the Trustee of (A) a certified copy of the order of the
court or other governmental body which exercised jurisdiction to the effect that
a holder of Class A Certificates is required to return principal or interest
distributed with respect to a Class A Certificate during the Term of the Policy
because such distributions were avoidable preferences under applicable
bankruptcy law (the 'Order'), (B) a certificate of such holder of Class A
Certificates that the Order has been entered and is not subject to any stay, and
(C) an assignment duly executed and delivered by such holder of Class A
Certificates, in such form as is reasonably required by the Certificate Insurer
and provided to such holder of Class A Certificates by the Certificate Insurer,
irrevocably assigning to the Certificate Insurer all rights and claims of such
holder of Class A Certificates relating to or arising under such Certificates
against the debtor which made such preference payment or otherwise with respect
to such preference payment, or (ii) the date of Receipt by the Certificate
Insurer from the Trustee of the items referred to in clauses (A), (B) and (C)
above if, at least four Business Days prior to such date of Receipt, the
Certificate Insurer shall have Received written notice from the Trustee that
such items were to be delivered on such date and such date was specified in such
notice. Such payment shall be disbursed to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order and not to the
Trustee or holder of Class A Certificates directly (unless a holder of Class A
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Certificates has previously paid such amount to the receiver, conservator,
debtor-in-possession or trustee in bankruptcy named in the Order, in which case
such payment shall be disbursed to the Trustee for distribution to such
Certificateholder upon proof of such payment reasonably satisfactory to the
Certificate Insurer). In connection with the foregoing, the Certificate Insurer
shall have the rights provided pursuant to the Agreement.
Payment of claims under the Policy will be made by the Certificate Insurer
following Receipt by the Certificate Insurer of the appropriate notice for
payment on the later to occur of (a) 12:00 noon, New York City time, on the
second Business Day following Receipt of such notice for payment, and (b) 12:00
noon, New York City time, on the relevant Distribution Date.
The terms 'Receipt' and 'Received,' with respect to the Policy, mean actual
delivery to the Certificate Insurer and to its fiscal agent appointed by the
Certificate Insurer at its option, if any, prior to 12:00 p.m., New York City
time, on a Business Day; delivery either on a day that is not a Business Day or
after 12:00 p.m., New York City time, shall be deemed to be Receipt on the next
succeeding Business Day. If any notice or certificate given under the Policy by
the Trustee is not in proper form or is not properly completed, executed or
delivered, it shall be deemed not to have been Received, and the Certificate
Insurer or the fiscal agent shall promptly so advise the Trustee and the Trustee
may submit an amended notice.
Under the Policy, 'Business Day' means any day other than (i) a Saturday or
Sunday or (ii) a day on which banking institutions in the City of New York, New
York, the State of New York or in the city in which the corporate trust office
of the Trustee is located, are authorized or obligated by law or executive order
to be closed. The Certificate Insurer's obligations under the Policy to make
Insured Payments shall be discharged to the extent funds are transferred to the
Trustee as provided in the Policy, whether or not such funds are properly
applied by the Trustee.
'Term of the Policy' means the period from and including the date of
issuance of the Policy to and including the date on which the Class Principal
Balances of the Class A Certificates are zero, plus such additional period, to
the extent specified in the Policy, during which any payment on the Class A
Certificates could be avoided in whole or in part as a preference payment.
The Certificate Insurer shall be subrogated to the rights of the holders of
the Class A Certificates to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Policy. To the extent
the Certificate Insurer makes Insured Payments, either directly or indirectly
(as by paying through the Trustee), to the holders of the Class A Certificates,
the Certificate Insurer will be subrogated to the rights of the holders of the
Class A Certificates, as applicable, with respect to such Insured Payment and
shall be deemed to the extent of the payments so made to be a registered holder
of Class A Certificates for purposes of payment.
Claims under the Policy constitute direct unsecured and unsubordinated
obligations of the Certificate Insurer, and will rank equally with any other
unsecured and unsubordinated obligations of the Certificate Insurer except for
certain obligations in respect to tax and other payments to which preference is
or may become afforded by statute. The terms of the Policy cannot be modified,
altered or affected by any other agreement or instrument, or by the merger,
consolidation or dissolution of the Depositor. The Policy by its terms may not
be canceled or revoked prior to distribution in full of all Guaranteed
Distributions (as defined therein). The Policy is governed by the laws of the
State of New York. The Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law.
To the fullest extent permitted by applicable law, the Certificate Insurer
agrees under the Policy not to assert, and waives, for the benefit of each
holder of Class A Certificates, all its rights (whether by counterclaim, setoff
or otherwise) and defenses (including, without limitation, the defense of
fraud), whether acquired by subrogation, assignment or otherwise, to the extent
that such rights and defenses may be available to the Certificate Insurer to
avoid payment of its obligations under the Policy in accordance with the express
provisions of the Policy.
Pursuant to the terms of the Agreement, unless an Insurer Default exists,
the Certificate Insurer will be entitled to exercise certain rights of the
holders of the Class A Certificates, without the consent of such
Certificateholders, and the holders of the Class A Certificates may exercise
such rights only with the prior written
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consent of the Certificate Insurer. See 'POOLING AND SERVICING AGREEMENT--Voting
Rights' and '--Certain Matters Regarding the Certificate Insurer' herein.
The Depositor, the Seller, the Master Servicer and the Certificate Insurer
will enter into an Insurance and Indemnity Agreement (the 'Insurance Agreement')
pursuant to which the Seller and the Master Servicer will agree to reimburse,
with interest, the Certificate Insurer for amounts paid pursuant to claims under
the Policy. The Seller will further agree to pay the Certificate Insurer all
reasonable charges and expenses which the Certificate Insurer may pay or incur
relative to any amounts paid under the Policy or otherwise in connection with
the transaction and to indemnify the Certificate Insurer against certain
liabilities. Except to the extent provided therein, amounts owing under the
Insurance Agreement will be payable solely from the Trust Fund. An event of
default by the Seller under the Insurance Agreement will constitute an Event of
Default by the Master Servicer under the Agreement and allow the Certificate
Insurer, among other things, to direct the Trustee to terminate the Master
Servicer. An 'event of default' by the Seller under the Insurance Agreement
includes (i) a failure by the Seller to pay when due any amount owed under the
Insurance Agreement or certain other documents, (ii) the untruth or
incorrectness in any material respect of any representation or warranty of the
Seller in the Insurance Agreement or certain other documents or of the Master
Servicer in the Agreement, (iii) a failure by the Seller or the Master Servicer
to perform or to observe any covenant or agreement in the Insurance Agreement,
the Agreement or certain other documents, (iv) a failure by the Seller to pay
its debts in general or the occurrence of certain events of insolvency or
bankruptcy with respect to the Seller, and (v) the occurrence of an Event of
Default by the Master Servicer under the Agreement or by the Seller under
certain other documents.
MONTHLY ADVANCES
Subject to the following limitations, the Master Servicer will be obligated
to advance or cause to be advanced on or before each Distribution Date its own
funds, or funds in the Collection Account that are not included in the Available
Distribution Amount for such Distribution Date, in an amount equal to the
aggregate of all payments of interest, net of the Servicing Fee, that were due
during the related Due Period on the Mortgage Loans, and that were delinquent on
the related Determination Date, plus certain amounts representing assumed
payments not covered by any current net income on the Mortgaged Properties
acquired by foreclosure or deed in lieu of foreclosure (any such advance, a
'Monthly Advance').
Monthly Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
insurance proceeds or liquidation proceeds. The purpose of making such Monthly
Advances is to maintain a regular cash flow to the Certificateholders, rather
than to guarantee or insure against losses. The Master Servicer will not be
required to make any Monthly Advances with respect to reductions in the amount
of the monthly payments on the Mortgage Loans due to bankruptcy proceedings or
the application of the Relief Act.
All Monthly Advances will be reimbursable to the Master Servicer from late
collections, insurance proceeds and liquidation proceeds from the Mortgage Loan
as to which such unreimbursed Monthly Advance was made. In addition, any Monthly
Advances previously made in respect of any Mortgage Loan that are deemed by the
Master Servicer to be nonrecoverable from related late collections, insurance
proceeds or liquidation proceeds may be reimbursed to the Master Servicer out of
any funds in the Collection Account prior to the distributions on the
Certificates. In the event the Master Servicer fails in its obligation to make
any such advance, the Trustee will be obligated to make any such advance, to the
extent required in and under the circumstances specified in the Agreement.
ALLOCATION OF LOSSES; SUBORDINATION
The Policy will cover all Realized Losses allocated to the Class A
Certificates. Notwithstanding the foregoing, if payments are not made as
required under the Policy, Realized Losses will be allocable to the Class A
Certificates.
With respect to any defaulted Mortgage Loan that is finally liquidated
through foreclosure sale, disposition of the related Mortgaged Property (if
acquired on behalf of the Certificateholders by deed-in-lieu of foreclosure) or
otherwise, the amount of loss realized, if any, will equal the portion of the
unpaid principal balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally
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liquidated, after application of all amounts recovered (net of amounts
reimbursable to the Master Servicer for Monthly Advances and expenses, including
attorneys' fees) towards interest and principal owing on the Mortgage Loan. Such
amount of loss realized and any Special Hazard Losses, Fraud Losses, Bankruptcy
Losses and Extraordinary Losses are referred to herein as 'Realized Losses.'
Any Realized Losses on the Mortgage Loans other than Excess Special Hazard
Losses, Excess Bankruptcy Losses and Excess Fraud Losses on the Mortgage Loans
will be allocated on any Distribution Date, (i) first to the Net Monthly Excess
Cashflow, (ii) second, in reduction of the then current overcollateralization,
if any, until the principal balance of the Mortgage Loans equals the Class
Principal Balance and (iii) third, to the Class A Certificates.
Excess Special Hazard Losses, Excess Bankruptcy Losses and Excess Fraud
Losses will be allocated on any Distribution Date among the Class A Certificates
and the overcollateralization pro rata based on the Class Principal Balance of
the Class A Certificates after giving effect to the distribution in respect of
principal on such Distribution Date and the amount of overcollateralization
immediately after the preceding Distribution Date.
Any allocation of a Realized Loss to the Class A Certificates will be made
by reducing the Class Principal Balance thereof by the amount so allocated as of
the Distribution Date in the month following the calendar month in which such
Realized Loss was incurred. Any amounts distributed in respect to Realized
Losses previously allocated to the Class A Certificates pursuant to clause (iv)
under 'Principal Distribution on the Class A Certificates' will not result in a
further reduction of the Class Principal Balance.
The aggregate amount of Realized Losses which may be allocated to the
Subordinated Certificates in connection with Special Hazard Losses on the
Mortgage Loans (the 'Special Hazard Amount') shall initially be equal to
approximately $1,144,250. As of any date of determination following the Cut-off
Date, the Special Hazard Amount shall equal the amount set forth in the
preceding sentence subject to adjustments as specified in the Agreement.
The aggregate amount of Realized Losses which may be allocated to the
Subordinated Certificates in connection with Fraud Losses on the Mortgage Loans
(the 'Fraud Loss Amount') shall initially be equal to approximately $3,432,750.
As of any date of determination after the Cut-off Date, the Fraud Loss Amount
shall equal (X) prior to the first anniversary of the Cut-off Date an amount
equal to 3% of the aggregate principal balance of all of the related Mortgage
Loans as of the Cut-off Date minus the aggregate amounts allocated to the
Subordinated Certificates in respect of related Fraud Losses on such Mortgage
Loans up to such date of determination, (Y) from the first to the second
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
related Fraud Loss Amount as of the most recent anniversary of the Cut-off Date
and (b) 2% of the aggregate principal balance of all of the related Mortgage
Loans as of the most recent anniversary of the Cut-off Date minus (2) the
aggregate amounts allocated to the Subordinated Certificates in respect of Fraud
Losses on such Mortgage Loans since the most recent anniversary of the Cut-off
Date up to such date of determination and (Z) from the second to the fifth
anniversary of the Cut-off Date, an amount equal to (1) the lesser of (a) the
related Fraud Loss Amount as of the most recent anniversary of the Cut-off Date,
and (b) 1% of the aggregate principal balance of all of the related Mortgage
Loans as of the most recent anniversary of the Cut-off Date minus (2) the
aggregate amounts allocated to the Subordinated Certificates in respect of Fraud
Losses on such Mortgage Loans since the most recent anniversary of the Cut-off
Date up to such date of determination. On and after the fifth anniversary of the
Cut-off Date, the each Fraud Loss Amount shall be zero.
The aggregate amount of Realized Losses which may be allocated to the
Subordinated Certificates in connection with Bankruptcy Losses on the Mortgage
Loans (the 'Bankruptcy Amount') will initially be equal to approximately
$100,000. As of any date of determination, the Bankruptcy Amount shall equal the
approximate amount set forth in the preceding sentence less the sum of any
amounts allocated to the Subordinated Certificates in respect of Bankruptcy
Losses on the Mortgage Loans up to such date of determination.
A 'Special Hazard Loss' is a loss incurred in respect of any defaulted
Mortgage Loan as a result of direct physical loss or damage to the Mortgaged
Property (except as a result of the exclusions described below), which is not
insured against under the standard hazard insurance policy or blanket policy
insuring against hazard losses which the Master Servicer is required to cause to
be maintained on each Mortgage Loan. See 'Description of Primary Insurance
Policies--Primary Hazard Insurance Policies' in the Prospectus.
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Special Hazard Losses will not include any loss (an 'Extraordinary Loss')
resulting from:
(i) nuclear or chemical reaction or nuclear radiation or radioactive
or chemical contamination. all whether controlled or uncontrolled and
whether such loss be direct or indirect, proximate or remote or be in whole
or in part caused by, contributed to or aggravated by a peril insured
against;
(ii) hostile or warlike action in time of peace or war, including
action in hindering, combating or defending against an actual, impending or
expected attack by any government or sovereign power, de jure or de facto,
or by any authority maintaining or using military, naval or air forces, or
by military, naval or air forces, or by an agent of any such government,
power, authority or forces;
(iii) any weapon of war employing atomic fission or radioactive forces
whether in time of peace or war;
(iv) insurrection, rebellion, revolution, civil war, usurped power or
action taken by governmental authority in hindering, combating or defending
against such an occurrence, seizure or destruction under quarantine or
customs regulations, confiscation by order of any government or public
authority, or risks of contraband or illegal transactions or trade;
(v) wear and tear, deterioration, rust or corrosion, mold, wet or dry
rot; inherent vice or latent defect; animals, birds, vermin, insects;
(vi) smog, smoke, vapor, liquid or dust discharge from agricultural or
industrial operations; pollution; contamination;
(vii) settling, subsidence, cracking, shrinkage, bulging or expansion
of pavements, foundations, walls, floors, roofs or ceilings;
(viii) errors in design, faulty workmanship or faulty materials,
unless the collapse of the property or a part thereof ensues and then only
for the ensuing loss;
'Excess Special Hazard Losses' are Special Hazard Losses in excess of the
Special Hazard Amount.
A 'Fraud Loss' is a loss incurred on a defaulted Mortgage Loan as to which
there was intentional fraud, dishonesty or misrepresentation in the origination
of such Mortgage Loan.
'Excess Fraud Losses' are Fraud Losses in excess of the Fraud Loss Amount.
A 'Bankruptcy Loss' is a Deficient Valuation or a Debt Service Reduction.
With respect to any Mortgage Loan, a 'Deficient Valuation' is a valuation by a
court of competent jurisdiction of the Mortgaged Property in an amount less than
the then outstanding indebtedness under the Mortgage Loan, which valuation
results from a proceeding initiated under the United States Bankruptcy Code. A
'Debt Service Reduction' is any reduction in the amount which a mortgagor is
obligated to pay on a monthly basis with respect to a Mortgage Loan as a result
of any proceeding initiated under the United States Bankruptcy Code, other than
a reduction attributable to a Deficient Valuation.
'Excess Bankruptcy Losses' are Bankruptcy Losses in excess of the
Bankruptcy Amount.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement, a form of which
is filed as an exhibit to the Registration Statement. The Trust Fund created
under the Agreement will consist of (i) all of the Depositor's right, title and
interest in the Mortgage Loans, the related Mortgage Notes, Mortgages and other
related documents, (ii) all payments on or collections in respect of the
Mortgage Loans due after the Cut-off Date, together with any proceeds thereof,
(iii) any Mortgaged Properties acquired on behalf of Certificateholders by
foreclosure or by deed in lieu of foreclosure, and any revenues received
thereon, (iv) the rights of the Trustee under all insurance policies required to
be maintained pursuant to the Agreement, (v) the rights of the Depositor under
the Mortgage Loan Purchase Agreement between the Depositor and the Seller and
(vi) the Funding Account. Reference is made to the Prospectus for important
information in addition to that set forth herein
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regarding the Trust Fund, the terms and conditions of the Agreement and the
Class A Certificates. The Class A Certificates will be transferable and
exchangeable at the corporate trust offices of the Trustee.
ASSIGNMENT OF THE MORTGAGE LOANS
On the Closing Date the Depositor will transfer to the Trust all of its
right, title and interest in and to each Mortgage Loan, the related Mortgage
Notes, Mortgages and other related documents (collectively, the 'Related
Documents'), including all payments due on each such Mortgage Loan after the
applicable Cut-Off Date. The Trustee, concurrently with such transfer, will
deliver the Certificates to the Depositor. Each Mortgage Loan transferred to the
Trust will be identified on a schedule (the 'Mortgage Loan Schedule') delivered
to the Trustee pursuant to the Agreement. Such schedule will include information
such as the Principal Balance of each Mortgage Loan as of the applicable Cut-Off
Date, its Loan Rate as well as other information.
The Agreement will require that, within the time period specified therein,
the Seller will deliver or cause to be delivered to the Trustee (or a custodian,
as the Trustee's agent for such purpose) the Mortgage Loans endorsed to the
Trustee on behalf of the Certificateholders or in blank and the Related
Documents. In lieu of delivery of original mortgages, if such original is not
available, the Seller 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.
Within 90 days of the Closing Date, the Trustee will review the Mortgage
Loans and the Related Documents pursuant to the Agreement and if any Mortgage
Loan or Related Document is found to be defective in any material respect and
such defect is not cured within 90 days following notification thereof to the
Seller by the Trustee, the Seller will be obligated to either (i) substitute for
such Mortgage Loan an Eligible Substitute Mortgage Loan; however, such
substitution is permitted only within two years of the Closing Date and may not
be made unless an opinion of counsel is provided to the effect that such
substitution will not disqualify the Trust as a REMIC or result in a prohibited
transaction tax under the Code or (ii) purchase such Mortgage Loan at a price
(the 'Purchase Price') equal to the outstanding Principal Balance of such
Mortgage Loan as of the date of purchase, plus all accrued and unpaid interest
thereon, computed at the Loan Rate, plus the amount of any unreimbursed
Servicing Advances made by the Master Servicer. 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 Mortgage Loan is the sole remedy
regarding any defects in the Mortgage Loans and Related Documents available to
the Trustee or the Certificateholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the Seller will be required to deposit in the Collection Account on or
prior to the next succeeding Determination Date after such obligation arises an
amount (the 'Substitution Adjustment') equal to the excess of the Principal
Balance of the related Defective Mortgage Loan over the Principal Balance of
such Eligible Substitute Mortgage Loan.
An 'Eligible Substitute Mortgage Loan' is a mortgage loan substituted by
the Seller for a Defective Mortgage 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 Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a Gross Margin,
not less than the Gross Margin, of the Defective Mortgage Loan and not more than
1% in excess of the Gross Margin, of such Defective Mortgage Loan; (iii) have a
mortgage of the same level of priority as the mortgage relating to the Defective
Mortgage Loan; (iv) have a remaining term to maturity not more than twelve
months earlier and not later than the remaining term to maturity of the
Defective Mortgage Loan; (v) comply with each representation and warranty as to
the Mortgage Loans set forth in the Agreement (deemed to be made as of the date
of substitution); and (vi) satisfy certain other conditions specified in the
Agreement.
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 Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon
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discovery of a breach of any such representation and warranty which materially
and adversely affects the interests of the Certificateholders or the Certificate
Insurer in the related Mortgage Loan and Related Documents, the Seller will have
a period of 60 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 60-day period, the Seller will be
obligated to (i) substitute for such Defective Mortgage Loan an Eligible
Substitute Mortgage Loan or (ii) purchase such Defective Mortgage Loan from the
Trust. The same procedure and limitations that are set forth above for the
substitution or purchase of Defective Mortgage Loans as a result of deficient
documentation relating thereto will apply to the substitution or purchase of a
Defective Mortgage 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.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as 'Defective Mortgage Loans.'
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth herein.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain or cause to be maintained
in the name of the Trustee a separate trust account (the 'Collection Account')
for the benefit of the holders of the Certificates. The Collection Account will
be an Eligible Account (as defined herein). Upon receipt by the Master Servicer
of amounts in respect of the Mortgage Loans (excluding amounts representing the
Servicing Fee, reimbursement for Monthly Advances and Servicing Advances and
insurance proceeds to be applied to the restoration or repair of a Mortgaged
Property or similar items), the Master Servicer will deposit such amounts in the
Collection Account. Amounts so deposited may be invested in Eligible Investments
(as described in the Agreement) 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 amounts withdrawn from the
Collection Account 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 a segregated account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the short-term debt rating of A-1 by Standard & Poor's and P-1 by Moody's
and whose accounts are insured to the maximum extent provided by either the
Savings Association Insurance Fund ('SAIF') or the Bank Insurance Fund ('BIF')
of the Federal Deposit Insurance Corporation established by such fund with a
minimum long-term unsecured debt rating of 'A2' by Moody's and 'A' by Standard &
Poor's and which is any of (a) a federal savings and loan association duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (b) an institution duly organized, validly existing and in
good standing under the applicable banking laws of any state, (c) a national
banking association duly organized, validly existing and in good standing under
the federal banking laws or (d) a principal subsidiary of a bank holding
company, and in each case of (a) - (d), approved in writing by the Certificate
Insurer, (ii) a segregated trust account maintained with the corporate trust
department of a federal or state chartered depository institution or trust
company, having capital and surplus of not less than $50,000,000, acting in its
fiduciary capacity or (iii) otherwise acceptable to each Rating Agency and the
Certificate Insurer as evidenced by a letter from each Rating Agency and the
Certificate Insurer to the Trustee, without reduction or withdrawal of their
then current ratings of the Certificates. 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.
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THE TRUSTEE
Bankers Trust Company of California, N.A., a national banking association
organized and existing under the laws of the United States, will be named
Trustee pursuant to the Pooling and Servicing Agreement. The Trustee will
initially serve as custodian for the Related Documents.
The principal compensation to be paid to the Trustee in respect of its
obligations under the Agreement will be equal to accrued interest at the Trustee
Fee Rate specified in the Agreement. The Agreement will provide that the Trustee
and any director, officer, employee or agent of the Trustee will be indemnified
by the Master Servicer and will be held harmless against any loss, liability or
expense (not including expenses incurred in the ordinary course of the Trustee's
performance in accordance with the provisions of the Agreement) incurred by the
Trustee arising out of or in connection with the acceptance or administration of
its obligations and duties under the Agreement, other than any loss, liability
or expense (i) resulting from the Master Servicer's actions or omissions in
connection with the Agreement and the Mortgage Loans, (ii) that constitutes a
specific liability of Trustee under the Agreement or (iii) incurred by reason of
willful misfeasance, bad faith or negligence in the performance of the Trustee's
duties under the Agreement or as a result of a breach, or by reason of reckless
disregard, of the Trustee's obligations and duties under the Agreement.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The principal compensation to be paid to the Master Servicer in respect of
its servicing activities for the Certificates will be equal to accrued interest
at the Servicing Fee Rate of 0.50% per annum with respect to each Mortgage Loan
on the Principal Balance of each Mortgage Loan. As additional servicing
compensation, the Master Servicer is entitled to retain all assumption fees,
prepayment penalties and late payment charges, to the extent collected from
mortgagors, together with any interest or other income earned on funds held in
the Collection Account and any escrow accounts. The Master Servicer is obligated
to offset any Prepayment Interest Shortfall on any Distribution Date (payments
made by the Master Servicer in satisfaction of such obligation, 'Compensating
Interest') to the extent of its aggregate servicing fee for such Distribution
Date described in the first sentence of this paragraph. The Master Servicer is
obligated to pay certain insurance premiums and certain ongoing expenses
associated with the Mortgage Pool and incurred by the Master Servicer in
connection with its responsibilities under the Agreement and is entitled to
reimbursement therefor as provided in the Agreement.
VOTING RIGHTS
With respect to any date of determination, the percentage of all the Voting
Rights allocated among holders of the Class A Certificates and of the
Subordinated Certificates shall be the fraction, expressed as a percentage, the
numerator of which is the aggregate Class Principal Balance of all the
Certificates of such class then outstanding and the denominator of which is the
aggregate Principal Balance of the Mortgage Loans then outstanding. The Voting
Rights allocated to each class of Certificates shall be allocated among all
holders of each such class in proportion to the outstanding Class Principal
Balance of such Certificates. Unless an Insurer Default exists, the Certificate
Insurer will be entitled to exercise certain voting and other rights of the
holders of the Class A Certificates. See '--Certain Matters Regarding the
Certificate Insurer' herein.
CERTAIN MATTERS REGARDING THE CERTIFICATE INSURER
Under the Agreement, on each Distribution Date, the Trustee is required to
pay from amounts on deposit in the Distribution Account to the Certificate
Insurer a premium with respect to the Policy (the 'Insurance Premium Rate').
Pursuant to the terms of the Agreement, unless there exists a continuance
of any failure by the Certificate Insurer to make a required payment under the
Policy or there exists a proceeding in bankruptcy by or against the Certificate
Insurer (either such condition, an 'Insurer Default'), the Certificate Insurer
will be entitled to exercise, among others, the following rights of the holders
of the Class A Certificates, without the consent of such holders, and the
holders of the Class A Certificates may exercise such rights only with the prior
written consent of the Certificate Insurer: (i) the right to direct the Trustee
to terminate the rights and obligations of the Master Servicer under the
Agreement in the event of a default by the Master Servicer; (ii) the right to
consent to or direct any waivers of defaults by the Master Servicer; (iii) the
right to remove the Trustee pursuant to the
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Agreement; and (iv) the right to institute proceedings against the Master
Servicer in the event of default by the Master Servicer and refusal of the
Trustee to institute such proceedings. In addition, unless an Insurer Default
exists, the Certificate Insurer will have the right to direct all matters
relating to any proceeding seeking the avoidance as a preferential transfer
under applicable bankruptcy, insolvency, receivership or similar law of any
distribution made with respect to the Class A Certificates, and, unless an
Insurer Default exists, the Certificate Insurer's consent will be required prior
to, among other things, (i) the removal of the Trustee, (ii) the appointment of
any successor Trustee or Master Servicer or (iii) any amendment to the
Agreement.
TERMINATION
The circumstances under which the obligations created by the Agreement will
terminate in respect of the Certificates are described in 'DESCRIPTION OF THE
CERTIFICATES--Termination' in the Prospectus. The majority holder of the Class R
Certificates (or if such holder does not exercise such option, the Master
Servicer or the Certificate Insurer) will have the right to purchase all
remaining Mortgage Loans and any properties acquired in respect thereof and
thereby effect early retirement of the Certificates on any Distribution Date
following the Collection Period during which the aggregate principal balance of
the Mortgage Loans and such properties at the time of purchase is 5% or less of
the Maximum Collateral Amount. In the event the majority holder of the Class R
Certificates or the Master Servicer or the Certificate Insurer exercises such
option, the purchase price payable in connection therewith generally will be
equal to par plus accrued interest for each Mortgage Loan at the related Loan
Rate to but not including the first day of the month in which such repurchase
price is distributed, together with any amounts due to the Master Servicer for
servicing compensation at the related Servicing Fee Rate and all amounts due and
owing to the Certificate Insurer under the Insurance Agreement. In the event the
majority holder of the Class R Certificates or the Master Servicer or the
Certificate Insurer exercises such option, the portion of the purchase price
allocable to the Class A Certificates will be, to the extent of available funds
(including funds paid under the Policy), (i) 100% of the then outstanding Class
Principal Balance thereof, plus (ii) one month's interest on the then
outstanding Class Principal Balance thereof at the then applicable Certificate
Rate, plus (iii) any previously accrued but unpaid interest thereon. No such
termination shall be permitted without the prior written consent of the
Certificate Insurer if it would result in a draw under the Policy. In no event
will the trust created by the Agreement continue beyond the expiration of 21
years from the death of the survivor of the persons named in the Agreement. See
'DESCRIPTION OF THE CERTIFICATES-- Termination' in the Prospectus.
THE CERTIFICATE INSURER
The following information has been supplied by Financial Security Assurance
Inc. (the 'Certificate Insurer') for inclusion in this Prospectus Supplement. No
representation is made by the Depositor, the Trustee or the Underwriter as to
the accuracy and completeness of such information.
GENERAL
The Certificate Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged in the business of
writing financial guaranty insurance, principally in respect of securities
offered in domestic and foreign markets. In general, financial guaranty
insurance consists of the issuance of a guaranty of scheduled payments of an
issuer's securities, thereby enhancing the credit rating of those securities, in
consideration for the payment of a premium to the Certificate Insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly-issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
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The Certificate Insurer is a wholly-owned subsidiary of Financial Security
Assurance Holdings Ltd. ('Holdings'), a New York Stock Exchange Listed company.
Major shareholders of Holdings include Fund American Enterprises Holdings, Inc.,
US West Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd. No
shareholder of Holdings is obligated to pay any debt of the Certificate Insurer
or any claim under any insurance policy issued by the Certificate Insurer or to
make any additional contribution to the capital of the Certificate Insurer.
The principal executive offices of the Certificate Insurer are located at
350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
REINSURANCE
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by the Certificate Insurer or
any of its domestic operating insurance company subsidiaries are reinsured among
such companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, the Certificate Insurer reinsures a portion of its
liabilities under certain of its financial guaranty insurance policies with
other reinsurers under various quota share treaties and on a
transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
RATINGS OF CLAIMS-PAYING ABILITY
The Certificate Insurer's claims-paying ability is rated 'Aaa' by Moody's
and 'AAA' by each of Standard & Poor's, Fitch Investors Service. L.P., Nippon
Investors Service, Inc. and Standard & Poor's (Australia) Pty. Ltd. 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. See 'RATINGS' herein.
CAPITALIZATION
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
(UNAUDITED)
<S> <C>
Deferred Premium Revenue (net of prepaid reinsurance premiums)..................................... $ 402,891
-------------
Shareholder's Equity:
Common Stock..................................................................................... 15,000
Additional Paid-In Capital....................................................................... 646,620
Unrealized Gain on Investments (net of deferred income taxes).................................... 20,808
Accumulated Earnings............................................................................. 212,033
-------------
Total Shareholder's Equity......................................................................... 894,461
-------------
Total Deferred Premium Revenue and Shareholder's Equity............................................ $ 1,297,352
-------------
-------------
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and its
subsidiaries, and the notes thereto, incorporated by reference herein. Copies of
the statutory quarterly and annual financial statements filed with the State of
New York Insurance Department by the Certificate Insurer are available upon
request to the State of New York Insurance Department.
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INSURANCE REGULATION
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ('single risks') and the
volume of transactions ('aggregate risks') that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from United PanAm Mortgage Corporation (the 'Seller')
pursuant to the Purchase Agreement to be entered into between the Depositor, as
purchaser of the Mortgage Loans, and the Seller, as seller of the Mortgage Loans
(the 'Purchase Agreement'). Under the Purchase Agreement, the Seller will agree
to transfer the Mortgage Loans to the Depositor. Pursuant to the Agreement, the
Mortgage Loans will be immediately transferred by the Depositor to the Trust,
and the Depositor will assign its rights in, to and under the Purchase
Agreement, to the Trust.
In the Purchase Agreement, the Seller will make representations and
warranties similar to those representations and warranties made by the Seller in
the Agreement. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the
Certificateholders or the Certificate Insurer, the Seller will repurchase or
substitute for the Mortgage Loans as described herein under 'THE POOLING AND
SERVICING AGREEMENT--Assignment of the Mortgage Loans.'
The Seller has also agreed 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.
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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 Mortgage Loans.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
Elections will be made to treat the assets of the Trust Fund, exclusive of
the Initial Interest Coverage Account, the Funding Account, the rights under
Interest Rate Cap Agreement and payments received thereunder, as three separate
real estate mortgage investment conduits ('REMICs') for federal income tax
purposes, which shall be identified as the Master REMIC, the First Tier REMIC
and the Second Tier REMIC. The Class A Certificates and Class X Certificates
will represent beneficial ownership interests in the Class A and Class X
'regular interests' in the Master REMIC (such regular interests individually,
the 'Class A Regular Interest' or the 'Class X Regular Interest,' as applicable,
and collectively, the 'Master REMIC Regular Interests'), and the Class A
Certificates will, in addition, represent beneficial interests in the right to
receive payments under the Interest Rate Cap Agreement. The Class R-1
Certificates will be designated as the sole class of 'residual interest' in the
Master REMIC, the Class R-2 Certificates will be designated as the sole class of
'residual interest' in the First Tier REMIC, and the Class R-3 Certificates will
be designated as the sole class of 'residual interest' in the Second Tier REMIC,
and the Class R-1, Class R-2 and Class R-3 Certificates will be Class R
Certificates of the Master REMIC, the First Tier REMIC and the Second Tier
REMIC, respectively, as described in the Prospectus. Upon the issuance of the
Certificates, Brown & Wood LLP, special tax counsel to the Depositor, will
deliver its opinion generally to the effect that, assuming compliance with all
provisions of the Agreement, for federal income tax purposes, each of the Master
REMIC, the First Tier REMIC and the Second Tier REMIC will qualify as a REMIC
under Sections 860A through 860G of the Internal Revenue Code of 1986 (the
'Code'). In addition, in the opinion of Brown & Wood LLP, the Class A
Certificateholders will be treated as holding their interests in the Interest
Rate Cap Agreement through an arrangement with the Trustee that qualifies as a
grantor trust under Subpart E, Part I of Subchapter J, Chapter 1 of the Code.
The rights under the Interest Rate Cap Agreement will be an 'outside reserve
fund' beneficially owned by the Depositor for federal income tax purposes.
TAXATION OF REGULAR INTERESTS
A Class A Certificateholder generally will be treated for federal income
tax purposes as having purchased an undivided interest in the corresponding
Class A Regular Interests and as having acquired proportionate rights under the
Interest Rate Cap Agreement and must allocate its purchase price based on the
fair market value of each. For purposes of tax information reporting, it is
anticipated that the Trustee will assume that only a nominal portion of the
purchase price is allocable to such Class A Certificateholder's undivided
interest in the Interest Rate Cap Agreement. However, no assurance can be given
that the IRS will not take a contrary position, which, if sustained, may require
inclusion of income attributable to original issue discount by such Class A
Certificateholder and have other tax consequences. See 'Taxation of Interest
Rate Cap Agreement' below.
Upon the sale, exchange, redemption or retirement of a Class A Certificate
by a Class A Certificateholder, the amount realized must be allocated between
the undivided interest in the Class A Regular Interests and the proportionate
rights under the Interest Rate Cap Agreement represented by such Class A
Certificate, based on the interests' relative fair market values at the time of
the disposition. The selling Class A Certificateholder will be required to
recognize gain or loss equal to the difference between the amount realized on
the sale, exchange, redemption, or retirement allocable to the Certificate's
proportionate interest in the Class A Regular Interests and such selling Class A
Certificateholder's adjusted basis therein. Except as provided below, any such
gain or loss will be capital gain or loss, provided that the Class A Certificate
is held as a 'capital asset' (generally, property held for investment) within
the meaning of Section 1221 of the Code. The Taxpayer Relief Act of 1997 (the
'1997 Act') has changed the tax rates and holding periods applicable to net
capital gains of noncorporate taxpayers. In general, under applicable provisions
of the 1997 Act, which are generally effective for capital gains realized after
July 28, 1997, the maximum tax rate applicable to net capital gains of
noncorporate taxpayers
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realized upon the sale of securities held for 18 months or more is 20 percent,
and the maximum tax rate on net capital gains of noncorporate taxpayers realized
upon the sale of securities for more than one year and for not more than 18
months is 28 percent. The 1997 Act does not affect the taxation of a
corporation's capital gains. Because the tax rates and applicable holding
periods will vary depending upon each Certificateholder's own circumstances,
investors should consult their own tax advisors concerning the effect of these
1997 Act changes. Gain from the sale or other disposition of an interest in a
Class A Regular Interest associated with a Class A Certificate that might
otherwise be a capital gain will be treated as ordinary income to the extent
that such gain does not exceed the excess, if any, of (i) the amount that would
have been includible in such holder's income with respect to the Class A Regular
Interest had income accrued thereon at a rate equal to 110% of the applicable
federal rate as defined in Section 1274(d) of the Code determined as of the date
of purchase of the related Class A Certificate, over (ii) the amount actually
includible in such holder's income. The portion of the amount realized on a
sale, redemption or retirement of a Class A Certificate that is allocable to
such Certificate's proportionate rights under the Interest Rate Cap Agreement,
if any, will be treated as a termination payment (as described below under
'--Taxation of Interest Rate Cap Agreement').
The Internal Revenue Service (the 'IRS') has issued regulations (the 'OID
Regulations') under Sections 1271 to 1275 of the Code generally addressing the
treatment of debt instruments issued with original issue discount. Purchasers of
the Class A Certificates should be aware that the OID Regulations do not
adequately address certain issues relevant to, or are not applicable to,
securities such as the Class A Certificates. In addition, there is considerable
uncertainty concerning the application of the OID Regulations to REMIC Regular
Certificates that provide for payments based on an adjustable rate. Because of
the uncertainty concerning the application of Section 1272(a)(6) of the Code to
such Certificates and because the rules of the OID Regulations relating to debt
instruments having an adjustable rate of interest are limited in their
application in ways that could preclude their application to such Certificates
even in the absence of Section 1272(a)(6) of the Code, the IRS could assert that
the Class A Certificates should be treated as issued with original issue
discount or should be governed by the rules applicable to debt instruments
having contingent payments or by some other method not yet set forth in
regulations. Prospective purchasers of the Class A Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates.
It appears that a reasonable method of reporting original issue discount
with respect to the Class A Certificates if such Certificates are required to be
treated as issued with original issue discount generally would be to report all
income with respect to such Certificates as original issue discount for each
period, computing such original issue discount (i) by assuming that the value of
the applicable Index will remain constant for purposes of determining the
original yield to maturity of, and projecting future distributions on such
Certificates, thereby treating such Certificates as fixed rate instruments to
which the original issue discount computation rules described in the Prospectus
can be applied, and (ii) by accounting for any positive or negative variation in
the actual value of the applicable Index in any period from its assumed value as
a current adjustment to original issue discount with respect to such period. See
'CERTAIN FEDERAL INCOME TAX CONSEQUENCES REMICs--Taxation of Owners of REMIC
Regular Certificates--Original Issue Discount' in the Prospectus.
The Class A Certificates may be treated for federal income tax purposes as
having been issued at a premium. Whether any holder of a Class A Certificate
will be treated as holding a Certificate with amortizable bond premium will
depend on such Certificateholder's purchase price and the distributions
remaining to be made on such Certificate at the time of its acquisition by such
Certificateholder. Holders of the Class A Certificates should consult their own
tax advisors regarding the possibility of making an election to amortize such
premium. See 'CERTAIN FEDERAL INCOME TAX CONSEQUENCES--REMICs--Taxation of
Owners of REMIC Regular Certificates--Premium' in the Prospectus.
STATUS OF CLASS A CERTIFICATES
The Class A Regular Interests will be treated as assets described in
Section 7701 (a)(19)(C) of the Code and as 'real estate assets', under Section
856(c)(4)(A) of the Code, generally in the same proportion that the assets in
the Trust Fund would be so treated. In addition, interest on the Class A Regular
Interests will be treated as 'interest on obligations secured by mortgages on
real property' under Section 856(c)(3)(B) of the Code generally to the extent
that the Class A Regular Interests are treated as 'real estate assets' under
Section 856(c)(4)(A) of the Code. Investors are cautioned that since the Class A
Certificates comprise rights in
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addition to the rights under the Class A Regular Interests, the Class A
Certificates will not in their entirety constitute assets described in section
7701(a)(19) of the Code or real estate assets described in Section 856(c)(4)(A)
of the Code, and income earned on the Class A Regular Certificates will qualify
as 'interest on obligations secured by mortgages on real property' under section
856(c)(3)(B) of the Code only to the extent that the income reflects the income
so qualifying earned by the Class A Regular Interests. The Class A Certificates
will not be treated as 'qualified mortgages' under Section 860G(a)(3) of the
Code and are not appropriate investments for other REMICs. See 'CERTAIN FEDERAL
INCOME TAX CONSEQUENCES-- Characterization of Investments in REMIC Certificates'
in the Prospectus.
TAXATION OF INTEREST RATE CAP AGREEMENT
General. Class A Certificateholders will be treated for federal income tax
purposes as having entered into a notional principal contract pursuant to its
rights under the Interest Rate Cap Agreement on the date it purchases its
Certificate. The IRS has issued final regulations under Section 446 of the Code
relating to notional principal contracts (the 'Swap Regulations').
Cap Premium. In general, the Class A Certificateholders must allocate the
price they pay for the Class A Certificates between their REMIC interests and
the Interest Rate Cap Agreement based on the fair market value of each. For
purposes of tax information reporting, it is anticipated that the Trustee will
allocate only a nominal amount of the purchase price for the Class A
Certificates to the Interest Rate Cap Agreement. Any amount so allocated will be
treated as a cap premium (the 'Cap Premium'). A Class A Certificateholder will
be required to amortize the Cap Premium under a level payment method as if the
Cap Premium represented the present value of a series of equal payments made
over the life of the Interest Rate Cap Agreement (adjusted to take into account
decreases in notional principal amount), discounted at a rate equal to the rate
used to determine the amount of the Cap Premium (or some other reasonable rate).
Prospective purchasers of Class A Certificates should consult their own tax
advisors regarding the appropriate method of amortizing any Cap Premium. The
Swap Regulations treat a nonperiodic payment made under a cap contract as a loan
for federal income tax purposes if the payment is 'significant.' It is not known
whether any Cap Premium will be treated in part as a loan under the Swap
Regulations.
Periodic Payments. Under the Swap Regulations, (i) all taxpayers must
recognize periodic payments with respect to a notional principal contract under
the accrual method of accounting, and (ii) any periodic payments received under
the Interest Rate Cap Agreements must be netted against payments, if any, deemed
made as a result of the Cap Premiums over the recipient's taxable year, rather
than accounted for on a gross basis. Net income or deduction with respect to net
payments under a notional principal contract for a taxable year should
constitute ordinary income or ordinary deduction.
Termination Payments. Any amount of proceeds from the sale, redemption or
retirement of a Class A Certificate that is considered to be allocated to rights
under the Interest Rate Cap Agreement would be considered a 'termination
payment' under the Swap Regulations. It is anticipated that the Trustee will
account for any termination payments for reporting purposes in accordance with
the Swap Regulations, as described below.
A Certificateholder will have gain or loss from termination of the interest
Rate Cap Agreement based on the difference between any termination payment it
receives or is deemed to have received and the unamortized portion of any Cap
Premium paid (or deemed paid) by such Class A Certificateholder.
Gain or loss realized upon the termination of the Interest Rate Cap
Agreement will generally be treated as capital gain or loss. Moreover, in the
case of a bank or thrift institution, Section 582(c) of the Code would likely
not apply to treat such gain or loss as ordinary.
PROHIBITED TRANSACTIONS
It is not anticipated that the Trust Fund will engage in any transactions
that would subject it to the prohibited transactions tax as defined in Section
860F(a)(2) of the Code, the contributions tax as defined in Section 860G(d) of
the Code or the tax on net income from foreclosure property as defined in
Section 860G(c) of the Code. However, in the event that any such tax is imposed
on the Trust Fund, such tax will be borne (i) by the Trustee, if the Trustee has
breached its obligations with respect to REMIC compliance under the Agreement,
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(ii) the Master Servicer, if the Master Servicer has breached its obligations
with respect to REMIC compliance under the Agreement, and (iii) otherwise by the
Trust Fund, with a resulting reduction in amounts otherwise distributable to
holders of the Class A Certificates. See 'DESCRIPTION OF THE
CERTIFICATES--General' and 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICs--Prohibited Transactions Tax and Other Taxes' in the
Prospectus.
INFORMATION RETURNS
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee or the Master Servicer. See 'CERTAIN
FEDERAL INCOME TAX CONSEQUENCES--REMICs--Reporting and Other Administrative
Matters' in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Class A Certificates, see 'CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--REMICs' in the Prospectus.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
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 Certificates.
ERISA CONSIDERATIONS
Any Plan fiduciary which proposes to cause a Plan to acquire any of the
Class A 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 CONSIDERATIONS' in the Prospectus.
The U.S. Department of Labor has granted to Lehman Brothers Inc. ('Lehman
Brothers') Prohibited Transaction Exemption 91-14 (the 'Exemption') which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which Lehman Brothers or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the Class A Certificates 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:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories from either Standard & Poor's, Moody's, or Duff &
Phelps Credit Rating Co.;
(4) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting such Certificates; the
sum of all payments made to and retained by the Seller pursuant to the sale
of the Mortgage Loans to the Trust represents not more than the fair market
value of such Mortgage Loans; the sum of all payments made to and retained
by the Master Servicer represent not more than reasonable
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compensation for the Master Servicer's services under the Agreement and
reimbursement of the Master Servicer's reasonable expenses in connection
therewith;
(5) The Trustee is not an affiliate of the Underwriter, the Seller,
the Master Servicer, the Certificate Insurer, any borrower whose
obligations under one or more Mortgage Loans constitute more than 5% of the
aggregate unamortized principal balance of the assets in the Trust, or any
of their respective affiliates (the 'Restricted Group'); and
(6) The Plan investing in the Class A Certificates is an 'accredited
investor' as defined in Rule 501(a)(1) of Regulation D of the Securities
and Exchange Commission under the Securities Act of 1933, as amended.
The Underwriter believes that the Exemption will apply to the acquisition
and holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met.
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.
LEGAL INVESTMENT
The Class A Certificates will constitute 'mortgage related securities' for
purposes of the Secondary Mortgage Market Enhancement Act of 1934 ('SMMEA') so
long as they are treated in at least the second highest rating category by
either Standard & Poor's or Moody's, and, as such, are legal investments for
certain entities to the extent provided in SMMEA. SMMEA provided that states
could override its provisions on legal investment and restrict or condition
investment in mortgage related securities by taking statutory action on or prior
to October 3, 1991. Certain states have enacted legislation which overrides the
preemption provisions of SMMEA.
The Depositor makes no representations as to the proper characterization of
the Class A Certificates for legal investment or other purposes, or as to the
ability of particular investors to purchase the Class A Certificates under
applicable legal investment restrictions. These uncertainties may adversely
affect the liquidity of the Class A Certificates. Accordingly, all institutions
whose investment activities are subject to legal investment laws and
regulations, regulatory capital requirements or review by regulatory authorities
should consult with their own legal advisors in determining whether and to what
extent the Class A Certificates constitute legal investment under SMMEA or is
subject to investment, capital or other restrictions. See 'LEGAL INVESTMENT' in
the Prospectus.
EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc. and
Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor by Brown & Wood LLP, New York, New York and for
the Underwriter by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the Seller by Manatt, Phelps & Phillips, LLP, Los
Angeles, California.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement, dated December 19, 1997 (the 'Underwriting Agreement'), among the
Depositor and Lehman Brothers Inc. (the 'Underwriter'), the Depositor has agreed
to sell to the Underwriter and the Underwriter has agreed to purchase from the
Depositor the Class A Certificates.
The Depositor has been advised that the Underwriter proposes to offer the
Class A Certificates to the public at the price on the cover hereof and to
certain dealers at such prices less a selling concession not to exceed 0.200% of
the Certificate denomination, and that the Underwriter may allow and such
dealers may reallow a reallowance discount not to exceed 0.100% of the
Certificate denomination.
Until the distribution of the Class A Certificates is completed, rules of
the Commission may limit the ability of the Underwriter and certain selling
group members to bid for and purchase such Class A Certificates. As an exception
to these rules, the Underwriter is permitted to engage in certain transactions
that stabilize the price of the Class A Certificates. Such transactions consist
of bids of purchase for the purpose of pegging, fixing or maintaining the price
of the Class A Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the Underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the prices of the Class A Certificates. In addition,
neither the Depositor nor the Underwriter makes any representation that the
Underwriter will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Depositor has been advised by the Underwriter that it presently intends
to make a market in the Class A Certificates; 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 Class A Certificates will
develop.
The Depositor is an affiliate of Lehman Brothers Inc.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriter against certain civil liabilities, including liabilities under the
Act.
Immediately prior to the sale of the Initial Mortgage Loans to the
Depositor, a portion of the Initial Mortgage Loans were subject to financing
provided by an affiliate of the Underwriter. A portion of the proceeds received
from the sale of the Initial Mortgage Loans will be used to repay such
financing.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of 'AAA' by Standard & Poor's and 'Aaa' by Moody's. A securities
rating addresses the likelihood of the receipt by Class A Certificateholders of
distributions on the Mortgage Loans. The rating takes into consideration the
characteristics of the Mortgage Loans and the structural and legal aspects
associated with the Class A Certificates. The ratings on the Class A
Certificates do not, however, constitute statements regarding the likelihood or
frequency of prepayments on the Mortgage Loans or the possibility that Class A
Certificateholders might realize a lower than anticipated yield. The ratings
assigned to the Class A 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 Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A 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.
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INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
1997 Act............................................................................ S-14, S-64
Adjustment Date..................................................................... S-6, S-21
Aggregate Class A Principal Balance................................................. S-5
Aggregate Expense Rate.............................................................. S-8, S-49
Aggregate Principal Balance......................................................... S-4
Agreement........................................................................... S-2, S-4
Available Distribution Amount....................................................... S-51
Bankruptcy Amount................................................................... S-56
Bankruptcy Loss..................................................................... S-57
Basis Risk Reserve Fund............................................................. S-8, S-49
Basis Risk Shortfall................................................................ S-8, S-49
BCD Mortgage Loan................................................................... S-39
BIF................................................................................. S-59
Book-Entry Certificates............................................................. S-45
Business Day........................................................................ S-54
Cap Premium......................................................................... S-66
Cede................................................................................ S-7, S-45
Cedel............................................................................... S-7
Cedel Participants.................................................................. S-47
Certificate Insurer................................................................. cover, S-11, S-61
Certificate Owners.................................................................. S-7, S-45
Certificate Rate.................................................................... S-8
Certificateholder................................................................... S-46
Certificates........................................................................ cover, S-4, S-5
Chase............................................................................... S-7
Citibank............................................................................ S-7
Class A Certificates................................................................ cover, S-5, S-45
Class A Principal Balance........................................................... S-5
Class A Regular Interest............................................................ S-13, S-64
Class Principal Balance............................................................. S-49
Class R Certificates................................................................ cover, S-5, S-45
Class X Certificates................................................................ cover, S-5, S-45
Class X Regular Interest............................................................ S-13, S-64
Clearing Agency..................................................................... S-45
Code................................................................................ S-13, S-64
Collection Account.................................................................. S-59
Collection Period................................................................... S-9
Commission.......................................................................... S-3
Compensating Interest............................................................... S-60
Cooperative......................................................................... S-47
CPR................................................................................. S-42
Cumulative Insurance Payments....................................................... S-51
Cut-off Date........................................................................ S-4
Cut-off Date Principal Balance...................................................... S-4
Debt Service Reduction.............................................................. S-57
Defective Mortgage Loans............................................................ S-59
Deficient Valuation................................................................. S-57
Definitive Certificate.............................................................. S-46
</TABLE>
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<TABLE>
<S> <C>
Delayed First Adjustment Mortgage Loan.............................................. S-6
Depositor........................................................................... S-4, S-5
Determination Date.................................................................. S-12
Distribution Account................................................................ S-59
Distribution Date................................................................... cover, S-9
DTC................................................................................. S-2, S-7, S-45
Due Date............................................................................ S-21
Due Period.......................................................................... S-10
Eligible Account.................................................................... S-59
Eligible Substitute Mortgage Loan................................................... S-58
ERISA............................................................................... S-16, S-67
Euroclear........................................................................... S-7
Euroclear Operator.................................................................. S-47
Euroclear Participants.............................................................. S-47
European Depositaries............................................................... S-7, S-45
Excess Bankruptcy Losses............................................................ S-57
Excess Fraud Losses................................................................. S-57
Excess Special Hazard Losses........................................................ S-57
Excess Subordinated Amount.......................................................... S-52
Exemption........................................................................... S-67
Extraordinary Loss.................................................................. S-57
Financial Intermediary.............................................................. S-46
First Tier REMIC.................................................................... S-3
Fraud Loss.......................................................................... S-57
Fraud Loss Amount................................................................... S-56
Funding Account..................................................................... S-4, S-7, S-53
Global Securities................................................................... A-I-1
Gross Margin........................................................................ S-6, S-21, S-22
Holdings............................................................................ S-3, S-62
HUD................................................................................. S-39
Index............................................................................... S-2
Initial Interest Coverage Account................................................... S-4, S-6, S-52
Initial Mortgage Loans.............................................................. S-2
Interest Distribution Amount........................................................ S-9
Interest Period..................................................................... S-9
Interest Rate Cap Agreement......................................................... S-8, S-49
Insurance Agreement................................................................. S-55
Insurance Premium Rate.............................................................. S-60
Insured Payment..................................................................... S-11
Insured Payments.................................................................... S-53
Insurer Default..................................................................... S-60
Interest Period..................................................................... S-9
IRS................................................................................. S-65
Lehman Brothers..................................................................... S-67
LIBOR Business Day.................................................................. S-50
LIBOR Determination Date............................................................ S-50
Liquidated Mortgage Loan............................................................ S-5
Loan Rate........................................................................... S-6
Master REMIC........................................................................ S-3
</TABLE>
S-71
<PAGE>
<TABLE>
<S> <C>
Master REMIC Regular Interests...................................................... S-13, S-64
Master Servicer..................................................................... S-4, S-5, S-21
Maximum Class A Certificate Rate.................................................... S-8, S-49
Maximum Collateral Amount........................................................... S-5
Maximum Loan Rate................................................................... S-21
Minimum Loan Rate................................................................... S-21
Monthly Advance..................................................................... S-55
Moody's............................................................................. S-2
Mortgaged Properties................................................................ S-4, S-6, S-21
Mortgage Loans...................................................................... S-2, S-4, S-45
Mortgage Loan Schedule.............................................................. S-58
Mortgage Pool....................................................................... S-2, S-45
Net Funds Cap....................................................................... S-8, S-49
Net Monthly Excess Cashflow......................................................... S-51
Ocwen............................................................................... S-39
Offered Certificates................................................................ S-5
OID Regulations..................................................................... S-65
Order............................................................................... S-53
overcollateralization............................................................... S-10
Periodic Rate Cap................................................................... S-21
Policy.............................................................................. cover, S-4, S-11
Pool Principal Balance.............................................................. S-4
Prepayment Assumption............................................................... S-42
Prepayment Interest Shortfalls...................................................... S-9
Prepayment Period................................................................... S-10
Principal Balance................................................................... S-4
Principal Distribution Amount....................................................... S-50, 56
Purchase Agreement.................................................................. S-2, S-63
Purchase Price...................................................................... S-58
Qualifying Rate..................................................................... S-34
Realized Losses..................................................................... S-56
Receipt............................................................................. S-54
Received............................................................................ S-54
Reference Bank Rate................................................................. S-50
Related Documents................................................................... S-58
Relevant Depositary................................................................. S-45
REMIC............................................................................... S-3
REMICs.............................................................................. S-13, S-64
Required Subordinated Amount........................................................ S-52
Restricted Group.................................................................... S-68
Rules............................................................................... S-46
SAIF................................................................................ S-59
Second Tier REMIC................................................................... S-3
Seller.............................................................................. S-2, S-4, S-5, S-33, S-63
SMMEA............................................................................... S-15, S-68
Special Hazard Amount............................................................... S-56
Special Hazard Loss................................................................. S-56
Standard & Poor's................................................................... S-2
Subordinated Amount................................................................. S-52
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Subordinated Certificates........................................................... S-44
Subordination Increase Amount....................................................... S-52
Subordination Reduction Amount...................................................... S-52
Subsequent Mortgage Loans........................................................... S-2
Subservicer......................................................................... S-5, S-39
Substitution Adjustment............................................................. S-58
Swap Regulations.................................................................... S-66
Telerate Page 3750.................................................................. S-50
Term of the Policy.................................................................. S-54
Terms and Conditions................................................................ S-47
Trust............................................................................... S-4
Trust Fund.......................................................................... S-2, S-45
Trustee............................................................................. S-4, S-5
Underwriter......................................................................... S-69
Underwriting Agreement.............................................................. S-69
Unpaid Basis Risk Shortfall......................................................... S-8, S-49
U.S. Person......................................................................... A-I-3
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered United PanAm
Mortgage Loan Asset Backed Certificates, Series 1997-1 (the 'Global Securities')
will be available only in book-entry form. Investors in the Global Securities
may hold such Global Securities through any of 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 Mortgage 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 Mortgage 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 Mortgage
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 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 either the actual number of days
in such accrual period and a year assumed to consist of 360 days or a 360-day
year of 12 30-day months as applicable to the related class of Global
Securities. For transactions settling on the
A-I-1
<PAGE>
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
credited to the respective clearing 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 either the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of 12 30-day months as applicable to the related
class of Global Securities. 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 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;
A-I-2
<PAGE>
(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 (other than a partnership
that is not treated as a United States person under any applicable Treasury
regulations), (iii) an estate the income of which is includible in gross income
for United States tax purposes, regardless of its source, or (iv) a trust if a
court within the United States is able to exercise primary supervision over the
administration of the trust and one or more United States persons have authority
to control all substantial decisions of the trust. Notwithstanding the preceding
sentence, to the extent provided in regulations, certain trusts in existence on
August 20, 1996 and treated as United States persons prior to such date that
elect to continue to be so treated also shall be considered U.S. Persons. 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
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<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) closed-end and/or revolving home equity loans or certain
balances thereof and/or loans of which the proceeds have been applied to the
purchase of the related Mortgaged Property (collectively, the 'Mortgage Loans'),
secured by mortgages primarily on one- to four-family residential properties,
unless otherwise specified in the related Prospectus Supplement, (ii) 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 (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 Mortgage Loans and/or Home Improvement Contracts
(collectively, the 'Loans'), 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.
Purchases of Private Securities for a Series by the Seller or the Depositor
will be made in secondary market transactions, not from the issuer of such
Private Securities or any affiliate thereof. See 'The Trust Funds--Private
Securities' herein.
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 Loans or Underlying Loans 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 11.
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
'SPECIAL CONSIDERATIONS'
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
December 15, 1997
<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: Midwest Regional Office, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661; and Northeast Regional Office, 7 World
Trade Center, Suite 1300, New York, New York 10048. 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. In
addition, the Securities and Exchange Commission (the 'Commission') maintains a
Web site at http://www.sec.gov containing reports, proxy and information
statements and other information regarding registrants, including the Depositor,
that file electonically with the Commission.
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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each 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 any Prospectus Supplement and prior to the termination
of any offering of Securities shall be deemed to be incorporated by reference
into such Prospectus Supplement and this Prospectus. Any statement contained in
a document incorporated or deemed to be incorporated by reference in any
Prospectus Supplement or in this Prospectus shall be deemed to be modified or
superseded for purposes of such Prospectus Supplement and this Prospectus to the
extent that a statement contained in any Prospectus Supplement or 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 any Prospectus Supplement.
The Depositor on behalf of any Trust Fund will provide, without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to Corporate
Secretary, Lehman ABS Corporation, Three World Financial Center, New York, New
York 10285 (telephone: 212-526-7000).
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.
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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 Loans or Underlying Loans relating to the Private
Securities, as applicable and/or as prepayments occur with respect
to such Loans or Underlying Loans, 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 Supplement. See 'DESCRIPTION OF THE SECURITIES-- Payments
of Interest.'
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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 Loans or Underlying Loans
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 Loans or Underlying
Loans 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 Loans or Underlying Loans,
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 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 Purchase or Termination.'
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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.
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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 secondary market
transactions, not from the issuer of such Private Securities or an
affiliate thereof, or, in the case of Loans, in privately negotiated
transactions, including transactions with entities affiliated with
the Depositor.
(1) LOANS................ Primary Assets for a Series will consist, in whole or in part, of
Loans. Some Loans may be delinquent or non-performing as specified in
the related Prospectus Supplement. Loans 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 Loan. To the
extent provided in the related Prospectus Supplement, additional
Loans 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 'Loans' for a Series will consist of (i) closed-end and/or
revolving home equity loans or certain balances thereof and/or loans
of which the proceeds have been applied to the purchase of the
related Mortgaged Property (collectively, 'Mortgage Loans') and (ii)
home improvement installment sales contracts and installment loan
agreements (the 'Home Improvement Contracts'). The Mortgage Loans
and the Home Improvement Contracts are collectively referred to
herein as the 'Loans.' Loans 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 Loans will and
the Home Improvement Contracts may be secured by mortgages or deeds
of trust or other similar security instruments creating a lien on 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, Home Improvement Contracts may be unsecured or secured
by purchase money security interests in the Home Improvements
financed thereby. The Mortgaged Properties and the Home Improvements
are collectively referred to herein as the 'Properties.'
The related Prospectus Supplement will describe certain
characteristics of the Loans for a Series, including, without
limitation, and to the extent relevant: (a) the aggregate unpaid
principal balance of the Loans (or the aggregate unpaid principal
balance included in the Trust Fund for the related Series) and the
average outstanding principal balance of the Loans; (b) the weighted
average Loan Rate on the Loans as of the Cut-off Date; (c) the
Combined Loan-to-Value Ratios or Loan-to-Value Ratios, as
applicable, of the Loans, computed in the manner described in the
related Prospectus Supplement; (d) the percentage (by principal
balance as of the Cut-off Date) of Loans that accrue interest at
adjustable
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or fixed interest rates; (e) any enhancement relating to the Loans;
(f) the percentage (by principal balance as of the Cut-off Date) of
Loans that are secured by Mortgaged Properties, Home Improvement
Loans or are unsecured; (g) the geographic distribution of any
Mortgaged Properties securing the Loans; (h) the use and type of
each Mortgaged Property securing a Loan; (i) the lien priority of
the Loans; (j) the credit limit utilization rates of any Revolving
Credit Line Loans; and (k) the delinquency status and year of
origination of the Loans.
(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 Loans (the 'Underlying Loans') or (b)
collateralized obligations secured by Underlying Loans. 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 Loans
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 Loans including (A) the
payment features of such Underlying Loans (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
Loans which are insured or guaranteed by a governmental entity, (C)
the servicing fee or range of servicing fees with respect to such
Underlying Loans, (D) the minimum and maximum stated maturities of
such Underlying Loans at origination, (E) the lien priority and the
credit utilization rates, if any, of such Underlying Loans, and (F)
the delinquency status and year of origination of such Underlying
Loans; (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
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Loans underlying the Private Securities, or to such Private
Securities themselves; (viii) the terms on which the Underlying
Loans may, or are required to, be repurchased prior to stated
maturity; and (ix) the terms on which substitute Underlying Loans
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 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.
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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 Loans 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
Loans and related documentation on behalf of the Trustee. Advances
with respect to delinquent payments of principal or interest on a
Loan 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 Loans or from other
recoveries relating to such Loans (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 Loans 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
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certain additional compensation. See 'SERVICING OF LOANS-- 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 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,
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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.'
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 Loans or Underlying Loans 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.'
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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 Loans or Underlying Loans 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 Loans or Underlying Loans 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 Loans or Underlying Loans, as
applicable, due to material breaches of the Seller's or the Depositor's
warranties.
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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 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 Loan, together with
any senior financing on the Properties, 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 Loans 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 the Mortgaged Property.
Certain Other Legal Considerations Regarding the Loans. 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 Loans. Depending on the provisions of the applicable law
and the specific facts and circumstances involved, violations of these laws,
policies and principles may limit the ability of the Servicer to collect all or
part of the principal of or interest on the Loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the owner of
the Loan to damages and administrative enforcement.
The Loans 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 Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
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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 Fund 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 Home Improvement Contracts are also subject to the Preservation of
Consumers' Claims and Defenses regulations of the Federal Trade Commission and
other similar federal and state statutes and regulations (collectively, the
'Holder in Due Course Rules'), which protect the homeowner from defective
craftsmanship or incomplete work by a contractor. These laws permit the obligor
to withhold payment if the work does not meet the quality and durability
standards agreed to by the homeowner and the contractor. The Holder in Due
Course Rules have the effect of subjecting any assignee of the seller in a
consumer credit transaction to all claims and defenses which the obligor in the
credit sale transaction could assert against the seller of the goods.
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.
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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.'
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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 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 Loans
or Underlying Loans relating to the Private Securities, as applicable included
in the related Trust Fund and/or as prepayments occur with respect to such Loans
or Underlying Loans, 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.
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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.
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 Loans or Underlying
Loans, 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
Loans or Underlying Loans 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 Loans
or Underlying Loans relating to the Private
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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 Loans or Underlying
Loans 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.
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 Loans or
Underlying Loans relating to the Private Securities, as applicable, for a
Series, such loans 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 Loans or Underlying Loans, 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 Loans or Underlying Loans relating to the Private Securities,
as applicable. If any Loans or Underlying Loans 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 Loan 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 secondary market transactions, not from the
issuer of such Private Securities or an affiliate thereof, or, in the case of
the Loans, in privately negotiated transactions, which may include transactions
with affiliates and will be transferred by the Depositor to the Trust Fund.
Loans 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.
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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 Loans and Private Securities, to the extent and as specified in
the related Prospectus Supplement.
THE LOANS
Mortgage Loans. The Primary Assets for a Series may consist, in whole or
in part, of closed-end and/or revolving home equity loans or certain balances
thereof (the 'Closed-End Loans' and 'Revolving Credit Line Loans' and
collectively, the 'Mortgage Loans') secured by mortgages primarily on Single
Family Properties which may be subordinated to other mortgages on the same
Mortgaged Property. The Mortgage Loans 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.
As more fully described in the related Prospectus Supplement, interest on
each Revolving Credit Line Loan, excluding introductory rates offered from time
to time during promotional periods, may be computed and payable monthly on the
average daily outstanding principal balance of such loan. Principal amounts on
the Revolving Credit Line Loans may be drawn down (up to a maximum amount as set
forth in the related Prospectus Supplement) or repaid under each Revolving
Credit Line Loan from time to time. If specified in the related Prospectus
Supplement, new draws by borrowers under the Revolving Credit Line Loans will
automatically become part of the Trust Fund for a Series. As a result, the
aggregate balance of the Revolving Credit Line Loans will fluctuate from day to
day as new draws by borrowers are added to the Trust Fund and principal payments
are applied to such balances and such amounts will usually differ each day, as
more specifically described in the related Prospectus Supplement. Unless
otherwise described in the related Prospectus Supplement, the full principal
amount of a Closed-End Loan is advanced at origination of the loan and generally
is repayable in equal (or substantially equal) installments of an amount
sufficient to fully amortize such loan at its stated maturity. As more fully
described in the related Prospectus Supplement, interest on each Closed-End Loan
is calculated on the basis of the outstanding principal balance of such loan
multiplied by the Loan Rate thereon and further multiplied by a fraction, the
numerator of which is the number of days in the period elapsed since the
preceding payment of interest was made and the denominator is the number of days
in the annual period for which interest accrues on such loan. Unless otherwise
described in the related Prospectus Supplement, the original terms to stated
maturity of Closed-End Loans will not exceed 360 months. Under certain
circumstances, under either a Revolving Credit Line Loan or a Closed-End Loan, a
borrower may choose an interest only payment option and is obligated to pay only
the amount of interest which accrues on the loan during the billing cycle. An
interest only payment option may be available for a specified period before the
borrower must begin paying at least the minimum monthly payment of a specified
percentage of the average outstanding balance of the loan.
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 Loan. 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.
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The aggregate principal balance of Loans secured by Mortgaged 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 Loans 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 Loan 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 Combined Loan-to-Value Ratio of a Loan is computed in the manner
described in the related Prospectus Supplement, taking into account the amounts
of any related senior mortgage loans.
Home Improvement Contracts. The Primary Assets for a Series may consist,
in whole or part, of home improvement installment sales contracts and
installment loan agreements (the 'Home Improvement Contracts') originated by a
home improvement contractor in the ordinary course of business. As specified in
the related Prospectus Supplement, the Home Improvement Contracts will either be
unsecured or secured by the 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. Unless otherwise specified in the applicable Prospectus
Supplement, the Home Improvement 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
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 Loans, 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 Loans for a Series may include Loans 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 Loans for a Series may include Loans that do
not have a specified stated maturity.
The related Prospectus Supplement for each Series will provide information
with respect to the Loans 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 Loans (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 Loans, and, in the case of adjustable rate Loans, 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 Loans;
(d) the weighted average original and remaining term-to-stated maturity of the
Loans 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 Loans, as applicable; (f) the percentage (by
outstanding principal balance as of the Cut-off Date) of Loans that accrue
interest at adjustable or fixed interest rates; (g) any special hazard insurance
policy or bankruptcy bond or other enhancement relating to the Loans; (h) the
percentage (by principal balance as of the Cut-off Date) of Loans that are
secured by Mortgaged Properties, Home Improvements or are unsecured; (i) the
geographic distribution of any Mortgaged Properties securing the Loans; (j) the
percentage of Loans (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 Loans; (l) the credit limit utilization rate of any
Revolving Credit Line Loans; and (m) the delinquency status and year of
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origination of the Loans. The related Prospectus Supplement will also specify
any other limitations on the types or characteristics of Loans for a Series.
If information of the nature described above respecting the Loans 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
Loans (the 'Underlying Loans') or (b) collateralized obligations secured by
Underlying Loans. 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 Loans 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.
All purchases of Private Securities for a Series by the Seller or the
Depositor will be made in secondary market transactions, not from the issuer of
such Private Securities or any affiliate thereof. As a result, no such purchases
of Private Securities offered and distributed to the public pursuant to an
effective registration statement will be made by the Seller or Depositor for at
least ninety days after the initial issuance of such Private Securities.
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 Loans will have entered into 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 Loans.
Underlying Loans 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.
Additionally, although the Underlying Loans may be guaranteed by an agency or
instrumentality of the United States, the Private Securities themselves will not
be so guaranteed.
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 Loans after a certain date or under other circumstances specified in
the related Prospectus Supplement.
The Underlying Loans may be fixed rate, level payment, fully amortizing
loans or adjustable rate loans or loans having balloon or other irregular
payment features. Such Underlying Loans will be secured by mortgages on
Mortgaged Properties.
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 Loans or with
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respect to the Private Securities themselves. The type, characteristics and
amount of credit support will be a function of certain characteristics of the
Underlying Loans 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 Loans including (A) the payment features of such Underlying Loans
(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 Loans insured or
guaranteed by a governmental entity, (C) the servicing fee or range of servicing
fees with respect to the Underlying Loans, and (D) the minimum and maximum
stated maturities of such Underlying Loans 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 Loans underlying the Private Securities or to such Private
Securities themselves; (viii) the terms on which Underlying Loans 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 Loans 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 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.
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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 Loans 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 Loan 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 Loan (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 Loan 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 Loan secured by such Property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan 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 Loan plus accrued interest and certain
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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.
Bankruptcy Bond. In the event of a bankruptcy of a borrower, the
bankruptcy court may establish the value of the Property securing the related
Loan at an amount less than the then outstanding principal balance of such Loan.
The amount of the secured debt could be reduced to such value, and the holder of
such Loan thus would become an unsecured creditor to the extent the outstanding
principal balance of such Loan exceeds the value so assigned to the Property by
the bankruptcy court. In addition, certain other modifications of the terms of a
Loan can result from a bankruptcy proceeding. See 'CERTAIN LEGAL ASPECTS OF
LOANS.' 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
Loan or a reduction by such court of the principal amount of a Loan 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 Loans in the Trust Fund for such
Series. Such amount will be reduced by payments made under such bankruptcy bond
in respect of such Loans, 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.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans 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 Loans 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 Loan 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 Loan.
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 Loans in which payments by obligors to pay
taxes, assessments, mortgage and hazard insurance premiums, and other comparable
items will be deposited. Loans 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 Loans. 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 Loan 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;
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(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
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 Loans
(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 Loan, together with accrued and unpaid
interest thereon to the Due Date for such Loan 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 Loan;
(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 Loan 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
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(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.
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 Loans. 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 Loans 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 Loan, 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 Loan 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 Loans. 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 Loans
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 Property securing a Loan 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 Loans
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 Loans 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.
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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 Loan. Unless otherwise
specified in the related Prospectus Supplement, the Servicer will also maintain
on REO Property that secured a defaulted Loan 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 Loan, 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 Loans, 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 Loan 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 Loans as come into and continue in default and as to which
no satisfactory arrangements can be made for collection of delinquent payments.
In connection with 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 Loan 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 Loan, a
modification of such Loan (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 Loan 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 Loan and
pursuant to which the original obligor is released from liability and such
person is substituted as the obligor and becomes liable under the Loan. Any fee
collected in connection with an assumption will be retained by the Servicer as
additional servicing compensation. The terms of a Loan may not be changed in
connection with an assumption.
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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 Loans.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer will pay certain expenses incurred in connection with the servicing of
the Loans, 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 Loan, 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 Loan
(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 Loans. 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 Loan 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 Loan, 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 Loans 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.
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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.
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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 Loans. Unless otherwise specified in the related Prospectus
Supplement, the Depositor will, as to each Loan, deliver or cause to be
delivered to the Trustee, or, as specified in the related Prospectus Supplement,
a custodian on behalf of the Trustee (the 'Custodian'), the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such Mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Holders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will as to each Home Improvement Contract, deliver or cause to be
delivered to the Trustee (or the Custodian) the original Home Improvement
Contract and copies of documents and instruments related to each Home
Improvement Contract and, other than in the case of unsecured Home Improvement
Contracts, the security interest in the property securing such Home Improvement
Contract. In order to give notice of the right, title and interest of
Securityholders to the Home Improvement 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 Home
Improvement Contracts as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Home Improvement 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 Home Improvement Contracts without notice of such
assignment, the interest of Securityholders in the Home Improvement Contracts
could be defeated. See 'CERTAIN LEGAL ASPECTS OF THE LOANS--The Home Improvement
Contracts.'
With respect to Loans 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
Loans 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 Loans. 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 Loan 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 Loan will be identified in a schedule appearing as an exhibit to the
related Agreement (the 'Loan Schedule'). Such Loan Schedule will specify with
respect to each Loan: 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 Loan is an adjustable rate Loan, the Lifetime Rate Cap, if any, and
the current index.
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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 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
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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.
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 Loans. See 'SERVICING OF LOANS--Evidence as to
Compliance' herein.
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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
Loans 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 Loans, 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 given in accordance with
the procedures described in the related Prospectus Supplement; (iv) certain
events of
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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.
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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 Loans), 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
requirements imposed by the Code; provided that any such amendment except
pursuant to clause (vi) above will
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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 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
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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 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.
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CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
mortgage loans, home improvement installment sales contracts and home
improvement 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 Loans are situated. The summaries are
qualified in their entirety by reference to the applicable federal and state
laws governing the Loans.
MORTGAGES
The Loans for a Series will and certain Home Improvement Contracts for a
Series may be secured by either mortgages or deeds of trust or deeds to secure
debt (such Mortgage Loans and Home Improvement 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
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reinstatement period, cure the default by paying the entire amount in arrears
plus the costs and expenses incurred 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.
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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
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between the net amount realized upon the public sale of the real property and
the amount due to the lender. Other statutes require the beneficiary or
mortgagee to exhaust the security afforded under a deed of trust or mortgage by
foreclosure in an attempt to satisfy the full debt before bringing a personal
action against the borrower. In certain other states, the lender has the option
of bringing a personal action against the borrower on the debt without first
exhausting such security; however, in some of these states, the lender,
following judgment on such personal action, may be deemed to have elected a
remedy and may be precluded from exercising remedies with respect to the
security. Consequently, the practical effect of the election requirement, 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 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.
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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
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 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
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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 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.
THE HOME IMPROVEMENT CONTRACTS
General
The Home Improvement Contracts, other than those Home Improvement Contracts
that are unsecured or secured by mortgages on real estate (such Home Improvement
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.
Enforcement of Security Interest in Home Improvements
So long as the Home Improvement has not become subject to the real estate
law, a creditor can repossess a 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,
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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.
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 CONTRACTS
The Loans may also consist of installment contracts. Under an installment
contract ('Installment Contract') 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 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.
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The method of enforcing the rights of the lender under an Installment
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 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 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 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 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 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 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 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 Loans) 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 Loan
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 Loans or
Underlying Loans 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 respect of such Loans or
Underlying Loans in proportion to the interest that each such Class of
Securities would have otherwise been entitled to receive in respect of such
Loans or Underlying Loans had such interest shortfall not occurred.
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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.
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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 LLP, 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.
As used herein, the term 'U.S. Person' means a citizen or resident of the
United States, a corporation or partnership (including an entity treated as a
partnership or corporation for federal income tax purposes) created or organized
in or under the laws of the United States, any State thereof or the District of
Columbia (other than a partnership that is not treated as a United States,
person under any applicable Treasury regulations), an estate whose income is
subject to U.S. federal income tax regardless of its source of income, or a
trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
Notwithstanding the preceding sentence, to the extent provided in regulations,
certain trusts in existence on August 20, 1996 and treated as United States
persons prior to such date that elect to continue to be treated as United States
persons shall be considered U.S. persons as well.
TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent provided otherwise in
a Supplement as to each Series of Securities Brown & Wood LLP will have advised
the Depositor that: (i) 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); and (ii)
Securities held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code section 856(c) 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).
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
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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 and
specifically state that the calculation of OID accrual provided for does not
apply to instruments subject to Code Section 1272(a)(6) such as REMIC regular
interests.
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, 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
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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 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 Loans, 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 Loans 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 Loans 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
Loans 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 Loans, 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.
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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 Loans, 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 Loan 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 mortgages held by the REMIC or on Loans underlying Pass-Through
Securities ('Interest Weighted Securities'). The Depositor 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
Loans 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 Loans underlying such Security) originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
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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 Loans),
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 Loans)
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 Loan). 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. Regulations concerning the amortization of premium have
been proposed, but those proposed regulations excluded Pay-Through Securities
from their application and no regulations addressing the computation of premium
accrual on securities similar to the Securities have been issued or proposed.
However, 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 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 LLP, special counsel to the
Depositor, if one or more REMIC elections are made with respect to a Series of
Securities, then for each REMIC created under 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 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 (ii)
Securities held by a real estate investment trust will constitute 'real estate
assets' within the meaning of Code Section 856(c), and income with respect to
the Securities will be considered 'interest on obligations secured by mortgages
on real
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property or on interests in real property' within the meaning of Code Section
856(c) (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) or (ii) above, then a Security will qualify for the tax
treatment described in (i) or (ii) in the proportion that such REMIC assets are
qualifying assets. If multiple REMIC elections are made, the REMICs, in general,
will be treated as one REMIC for purposes of applying the foregoing tests.
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,
the amount of itemized deductions otherwise allowable for the taxable year for
an individual whose adjusted gross income exceeds an applicable amount (which
amount is adjusted annually for inflation) 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.
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 Loans, 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
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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.
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
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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 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. 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.'
The Small Business Job Protection Act of 1996 has eliminated the special
rule permitting Section 593 institutions ('thrift institutions') to use net
operating losses and other allowable deductions to offset their excess inclusion
income from REMIC residual certificates that have 'significant value' within the
meaning of the REMIC Regulations, effective for taxable years beginning after
December 31, 1995, except with respect to residual certificates continuously
held by a thrift institution since November 1, 1995.
In addition, the Small Business Job Protection Act of 1996 provides three
rules for determining the effect on excess inclusions on the alternative minimum
taxable income of a residual holder. First, alternative minimum taxable income
for such residual holder is determined without regard to the special rule that
taxable income cannot be less than excess inclusions. Second, a residual
holder's alternative minimum taxable income for a tax year cannot be less than
the excess inclusions for the year. Third, the amount of any alternative minimum
tax net operating loss deductions must be computed without regard to any excess
inclusions. These rules are effective for tax years beginning after December 31,
1986, unless a residual holder elects to have such rules apply only to tax years
beginning after August 20, 1996.
Furthermore, the Small Business Job Protection Act of 1996, as part of the
repeal of the bad debt reserve method for thrift savings associations, repealed
the application of Code section 593 (d) to any taxable year beginning after
December 31, 1995.
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 Day 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
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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
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 the Internal Revenue Service recently finalized
regulations which provide that a Residual Interest acquired after January 3,
1995 cannot be marked-to-market.
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.
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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 LLP, 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
Loans. In such circumstances, a Holder will be considered to have purchased a
pro rata undivided interest in each of the Loans. 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 Loans.
Each Holder must report on its federal income tax return its share of the
gross income derived from the Loans (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 Loans directly, received directly its share of the amounts received with
respect to the Loans, 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 Loans
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, the amount of itemized
deductions otherwise allowable for the taxable year for an individual whose
adjusted gross income exceeds an applicable amount (which amount is adjusted
annually for inflation) 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 Loans 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 Loan as having a fair market
value proportional to the share of the aggregate principal balances of all of
the Loans 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 Loan (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 Loan allocable to the Security, the interest in the Loan 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 Loan 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 Loan 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 Loan in an amount greater than a statutory de minimi
exception, in circumstances under which the points are not currently deductible
pursuant to applicable Code provisions. Any market discount or premium on a Loan
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 Loans underlying the Certificate, rather than with respect to the
Security. A Holder that acquires an interest in a Loan originated after July 18,
1984 with more than a de minimis amount of market discount (generally, the
excess of the principal amount of the Loan over the purchaser's allocable
purchase price) will be required to include accrued market discount in income in
the manner set forth above. See '--Taxation of Debt Securities; Market Discount'
and '--Premium' above.
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In the case of market discount on a Pass-Through Security attributable to
Loans 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 Loan 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 Loans, a right to receive only
principal payments on the Loans, 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 Loan. 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 Loan 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 Loan by
Loan basis, which could result in some Loans 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, it is unclear whether the Code specifically covers
instruments such as the Stripped Securities which technically represent
ownership interests in the underlying Loans, rather than being debt instruments
'secured by' those loans but the Taxpayer Relief Act of 1997 provides that for
tax years beginning after August 5, 1997, a prepayment assumption should be used
for a pool of debt instruments the yield on which may be effected by reason of
prepayments. 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 Mortgage Loans as payments on a single installment
obligation. The Internal Revenue Service could, however, assert that original
issue discount must be calculated separately for each Loan underlying a
Security.
Under certain circumstances, if the Loans 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 Mortgage Loans 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. The Taxpayer Relief Act
of 1997 also extended the rule that payments received in retirement of a debt
instrument are treated as amounts received in exchange therefor, to debt
instruments issued by natural persons. It is unclear whether this rule would
cause losses on Pay-Through Securities resulting from prepayments to be treated
as capital losses.
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
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unstripped undivided ownership interest in Mortgage Loans and an installment
obligation consisting of stripped principal payments; (ii) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Proposed Regulations; or (iii) each Interest Weighted Stripped Security is
composed of an unstripped undivided ownership interest in Loans 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 Loans. 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 Loans. The
IRS could take the position that the Loans' 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 may be considered to
represent 'real estate assets' within the meaning of Section 856(c) 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) 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. The Taxpayer Relief Act of 1997 reduces the maximum rates on long-term
capital gains recognized on capital assets held by individual taxpayers for more
than eighteen months as of the date of disposition (and would further reduce the
maximum rates on such gains in the year 2001 and therafter for certain
individual taxpayers who meet specified conditions). Prospective investors
should consult their own tax advisor concerning these tax law changes.
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). On October 6,
1997, the Treasury Department issued new regulations (the 'New Withholding
Regulations') which make certain modifications to the backup withholding and
information reporting rules described above. The New Withholding Regulations
will generally be effective for payments made after December 31, 1998, subject
to
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certain transition rules. Holders should consult their tax advisers as to their
current qualification for exemption from backup withholding and the procedure
for obtaining the exemption, as well as any future changes as a result of the
New Withholding Regulations.
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.
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 Loans
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.'
In addition, prospective Foreign Investors are strongly urged to consult
their own tax advisors with respect to the New Withholding Regulations. See
'Miscellaneous Tax Aspects--Backup Withholding'.
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TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood LLP, 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.
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., 1/4% 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.
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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 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. In addition, prospective
Foreign Holders are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations. See 'Miscellaneous Tax
Aspects--Backup Withholding'.
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.
In addition, prospective investors are strongly urged to consult their own
tax advisors with respect to the New Withholding Regulations. See 'Miscellaneous
Tax Aspects--Backup Withholding'.
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, certain tax-exempt entities (including pension funds)
would earn 'unrelated business taxable income' if the instrument they purchased
was subordinated to an instrument properly treated as debt, income to foreign
holders generally would be subject to U.S. tax and U.S. tax
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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 Loans (including
appropriate adjustments for market discount, OID and bond premium) and any gain
upon collection or disposition of Loans. 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 Loans.
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 Loans 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 Loans 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.
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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 Loan, 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 Loans 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 Loans may be greater or less than the
remaining principal balance of the Loans at the time of purchase. If so, the
Loan 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 Loan by Loan basis.)
If the Trust Fund acquires the Loans 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 Loans or to offset any such premium against
interest income on the Loans. As indicated above, a portion of such market
discount income or premium deduction may be allocated to Certificateholders.
Section 708 Termination. Pursuant to final Treasury regulations issued May
9, 1997 under Section 708 of the Code, a sale or exchange of 50 percent or more
of the capital and profits in the Trust Fund within a 12-month period would
cause a deemed contribution of assets of the Trust Fund (the 'old partnership')
to a new partnership (the 'new partnership') in exchange for interests in the
new partnership. Such interests would be deemed distributed to the partners of
the old partnership in liquidation thereof, which would not constitute a sale or
exchange.
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 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
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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 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
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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. In addition, prospective investors are strongly urged to consult their
own tax advisors with respect to the New Withholding Regulations. See
'Miscellaneous Tax Aspects-- Backup Withholding'.
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. In addition, prospective investors are
strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations. See 'Miscellaneous Tax Aspects--Back Withholding'.
FASIT SECURITIES
General
The FASIT provisions of the Code were enacted by the Small Business Job
Protection Act of 1996 and create a new elective statutory vehicle for the
issuance of mortgage-backed and asset-backed securities. Although the FASIT
provisions of the Code became effective on September 1, 1997, no Treasury
regulations or other administrative guidance has been issued with respect to
those provisions. Accordingly, definitive guidance cannot be provided with
respect to many aspects of the tax treatment of FASIT Securityholders. Investors
also should note that the FASIT discussion contained herein constitutes only a
summary of the federal income tax consequences to holders of FASIT Securities.
With respect to each Series of FASIT Securities, the related Prospectus
Supplement will provide a detailed discussion regarding the federal income tax
consequences associated with the particular transaction.
FASIT Securities will be classified as either FASIT Regular Securities,
which generally will be treated as debt for federal income tax purposes, or
FASIT Ownership Securities, which generally are not treated as debt for such
purposes, but rather as representing rights and responsibilities with respect to
the taxable income or loss of the related Series FASIT. The Prospectus
Supplement for each Series of Securities will indicate whether one or more FASIT
elections will be made for that Series and which Securities of such Series will
be designated as Regular Securities, and which, if any, will be designated as
Ownership Securities.
Qualification as a FASIT
The Trust Fund underlying a Series (or one or more designated pools of
assets held in the Trust Fund) will qualify under the Code as a FASIT in which
the FASIT Regular Securities and the FASIT Ownership Securities will constitute
the 'regular interests' and the 'ownership interests,' respectively, if (i) a
FASIT election is in
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effect, (ii) certain tests concerning (A) the composition of the FASIT's assets
and (B) the nature of the Securityholders' interests in the FASIT are met on a
continuing basis, and (iii) the Trust Fund is not a regulated investment company
as defined in Section 851(a) of the Code.
Asset Composition
In order for a Trust Fund (or one or more designated pools of assets held
by a Trust Fund) to be eligible for FASIT status, substantially all of the
assets of the Trust Fund (or the designated pool) must consist of 'permitted
assets' as of the close of the third month beginning after the closing date and
at all times thereafter (the 'FASIT Qualification Test'). Permitted assets
include (i) cash or cash equivalents, (ii) debt instruments with fixed terms
that would qualify as REMIC regular interests if issued by a REMIC (generally,
instruments that provide for interest at a fixed rate, a qualifying variable
rate, or a qualifying interest-only ('IO') type rate, (iii) foreclosure
property, (iv) certain hedging instruments (generally, interest and currency
rate swaps and credit enhancement contracts) that are reasonably required to
guarantee or hedge against the FASIT's risks associated with being the obligor
on FASIT interests, (v) contract rights to acquire qualifying debt instruments
or qualifying hedging instruments, (vi) FASIT regular interests, and (vii) REMIC
regular interests. Permitted assets do not include any debt instruments issued
by the holder of the FASIT's ownership interest or by any person related to such
holder.
Interests in a FASIT
In addition to the foregoing asset qualification requirements, the
interests in a FASIT also must meet certain requirements. All of the interests
in a FASIT must belong to either of the following: (i) one or more classes of
regular interests or (ii) a single class of ownership interest that is held by a
fully taxable domestic C corporation. In the case of Series that include FASIT
Ownership Securities, the ownership interest will be represented by the FASIT
Ownership Securities.
A FASIT interest generally qualifies as a regular interest if (i) it is
designated as a regular interest, (ii) it has a stated maturity no greater than
thirty years, (iii) it entitles its holder to a specified principal amount, (iv)
the issue price of the interest does not exceed 125% of its stated principal
amount, (v) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and (vi) if it pays interest,
such interest is payable at either (a) a fixed rate with respect to the
principal amount of the regular interest or (b) a permissible variable rate with
respect to such principal amount. Permissible variable rates for FASIT regular
interests are the same as those for REMIC regular interests (i.e., certain
qualified floating rates and weighted average rates). See 'Certain Federal
Income Tax Consequences--Taxation of Debt Securities--Variable Rate Debt
Securities.'
If a FASIT Security fails to meet one or more of the requirements set out
in clauses (iii), (iv), or (v), but otherwise meets the above requirements, it
may still qualify as a type of regular interest known as a 'High-Yield
Interest.' In addition, if a FASIT Security fails to meet the requirement of
clause (vi), but the interest payable on the Security consists of a specified
portion of the interest payments on permitted assets and that portion does not
vary over the life of the Security, the Security also will qualify as a
High-Yield Interest. A High-Yield Interest may be held only by domestic C
corporations that are fully subject to corporate income tax ('Eligible
Corporations'), other FASITs, and dealers in securities who acquire such
interests as inventory, rather than for investment. In addition, holders of
High-Yield Interests are subject to limitations on offset of income derived from
such interest. See 'Federal Income Tax Consequences--FASIT Securities--Tax
Treatment of FASIT Regular Securities--Treatment of High-Yield Interests.'
Consequences of Disqualification
If a Series FASIT fails to comply with one or more of the Code's ongoing
requirements for FASIT status during any taxable year, the Code provides that
its FASIT status may be lost for that year and thereafter. If FASIT status is
lost, the treatment of the former FASIT and the interests therein for federal
income tax purposes is uncertain. The former FASIT might be treated as a grantor
trust, as a separate association taxation as a corporation, or as a partnership.
The FASIT Regular Securities could be treated as debt instruments for federal
income tax purposes or as equity interests. Although the Code authorizes the
Treasury to issue regulations that address situations where a failure to meet
the requirements for FASIT status occurs inadvertently and in good
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faith, such regulations have not yet been issued. It is possible that
disqualification relief might be accompanied by sanctions, such as the
imposition of a corporate tax on all or a portion of the FASIT's income for the
period of time in which the requirements for FASIT status are not satisfied.
Tax Treatment of FASIT Regular Securities
General. Payments received by holders of FASIT Regular Securities
generally should be accorded the same tax treatment under the Code as payments
received on other taxable corporate debt instruments and on REMIC Regular
Securities. As in the case of holders of REMIC Regular Securities, holders of
FASIT Regular Securities must report income from such Securities under an
accrual method of accounting, even if they otherwise would have used the cash
receipts and disbursements method. Except in the case of FASIT Regular
Securities issued with original issue discount or acquired with market discount
or premium, interest paid or accrued on a FASIT Regular Security generally will
be treated as ordinary income to the Securityholder and a principal payment on
such Security will be treated as a return of capital to the extent that the
Securityholder's basis is allocable to that payment. FASIT Regular Securities
issued with original issue discount or acquired with market discount or premium
generally will treat interest and principal payments on such Securities in the
same manner described for REMIC Regular Securities. See 'Federal Income Tax
Consequences--Taxation of Debt Securities,' '--Market Discount,' and '--Premium'
above. High-Yield Securities may be held only by fully taxable domestic C
corporations, other FASITs, and certain securities dealers. Holders of
High-Yield Securities are subject to limitations on their ability to use current
losses or net operating loss carryforwards or carrybacks to offset any income
derived from those Securities.
If a FASIT Regular Security is sold or exchanged, the Securityholder
generally will recognize gain or loss upon the sale in the manner described
above for REMIC Regular Securities. See 'Certain Federal Income Tax
Consequences--Sale or Exchange.' In addition, if a FASIT Regular Security
becomes wholly or partially worthless as a result of Default and Delinquencies
on the underlying Assets, the holder of such Security should be allowed to
deduct the loss sustained (or alternatively be able to report a lesser amount of
income). However, the timing and character of such losses in income are
uncertain. See 'Federal Income Tax Consequences-- Taxation of Debt
Instruments--Effects of Default and Delinquencies.'
FASIT Regular Securities held by a REIT will qualify as 'real estate
assets' within the meaning of section 856(c)(5) of the Code, and interest on
such Securities will be considered Qualifying REIT Interest to the same extent
that REMIC Securities would be so considered. FASIT Regular Securities held by a
Thrift Institution taxed as a 'domestic building and loan association' will
represent qualifying assets for purposes of the qualification requirements set
forth in Code Section 7701(a)(19) to the same extent that REMIC Securities would
be so considered. See 'Certain Federal Income Tax Consequences--Taxation of Debt
Securities--Status as Real Property Loans.' In addition, FASIT Regular
Securities held by a financial institution to which Section 585 of the Code
applies will be treated as evidences of indebtedness for purposes of Section
582(c)(1) of the Code. FASIT Securities will not qualify as 'Government
securities' for either REIT or RIC qualification purposes.
Treatment of High-Yield Interests
High-Yield Interests are subject to special rules regarding the eligibility
of holders of such interests, and the ability of such holders to offset income
derived from their FASIT Security with losses. High-Yield Interests may be held
only by Eligible Corporations, other FASITs, and dealers in securities who
acquire such interests as inventory. If a securities dealer (other than an
Eligible Corporation) initially acquires a High-Yield Interest as inventory, but
later begins to hold it for investment, the dealer will be subject to an excise
tax equal to the income from the High-Yield Interest multiplied by the highest
corporate income tax rate. In addition, transfers of High-Yield Interests to
disqualified holders will be disregarded for federal income tax purposes, and
the transferor still will be treated as the holder of the High-Yield Interest.
The holder of a High-Yield Interest may not use non-FASIT current losses or
net operating loss carryforwards or carrybacks to offset any income derived from
the High-Yield Interest, for either regular federal income tax purposes or for
alternative minimum tax purposes. In addition, the FASIT provisions contain an
anti-abuse rule that imposes corporate income tax on income derived from a FASIT
Regular Security that is held by a
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pass-through entity (other than another FASIT) that issues debt or equity
securities backed by the FASIT Regular Security and that have the same features
as High-Yield Interests.
Tax Treatment of FASIT Ownership Securities
A FASIT Ownership Security represents the residual equity interest in a
FASIT. As such, the holder of a FASIT Ownership Security determines its taxable
income by taking into account all assets, liabilities, and items of income,
gain, deduction, loss, and credit of a FASIT. In general, the character of the
income to the holder of a FASIT Ownership Interest will be the same as the
character of such income to the FASIT, except that any tax-exempt interest
income taken into account by the holder of a FASIT Ownership Interest is treated
as ordinary income. In determining that taxable income, the holder of a FASIT
Ownership Security must determine the amount of interest, original issue
discount, market discount, and premium recognized with respect to the FASIT's
assets and the FASIT Regular Securities issued by the FASIT according to a
constant yield methodology and under an accrual method of accounting. In
addition, holders of FASIT Ownership Securities are subject to the same
limitations on their ability to use losses to offset income from their FASIT
Security as are the holders of High-Yield Interests. See 'Federal Income Tax
Consequences--FASIT Securities--Tax Treatment of FASIT Regular
Securities--Treatment of High-Yield Interests.'
Rules similar to the wash sale rules applicable to REMIC Residual
Securities also will apply to FASIT Ownership Securities. Accordingly, losses on
dispositions of a FASIT Ownership Security generally will be disallowed where,
within six months before or after the disposition, the seller of such Security
acquires any other FASIT Ownership Security or, in the case of a FASIT holding
mortgage assets, any interest in a Taxable Mortgage Pool, that is economically
comparable to a FASIT Ownership Security. In addition, if any security that is
sold or contributed to a FASIT by the holder of the related FASIT Ownership
Security was required to be marked-to-market under Code section 475 by such
holder, then section 475 will continue to apply to such securities, except that
the amount realized under the mark-to-market rules will be the greater of the
securities' value under present law or the securities' value after applying
special valuation rules contained in the FASIT provisions. Those special
valuation rules generally require that the value of debt instruments that are
not traded on an established securities market be determined by calculating the
present value of the reasonably expected payments under the instrument using a
discount rate of 120% of the applicable Federal rate, compounded semiannually.
The holder of a FASIT Ownership Security will be subject to a tax equal to
100% of the net income derived by the FASIT from any 'prohibited transactions.'
Prohibited transactions include (i) the receipt of income derived from assets
that are not permitted assets, (ii) certain dispositions of permitted assets,
(iii) the receipt of any income derived from any loan originated by a FASIT, and
(iv) in certain cases, the receipt of income representing a servicing fee or
other compensation. Any Series for which a FASIT election is made generally will
be structured in order to avoid application of the prohibited transaction tax.
Backup Withholding, Reporting and Tax Administration
Holders of FASIT Securities will be subject to backup withholding to the
same extent holders of REMIC Securities would be subject. See 'Certain Federal
Income Tax Consequences--Miscellaneous Tax Aspects-- Backup Withholding.' For
purposes of reporting and tax administration, holders of record of FASIT
Securities generally will be treated in the same manner as holders of REMIC
Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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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.
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
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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. 75414) (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 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
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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').
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.
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
Depositor by Brown & Wood LLP, New York, New York.
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.'
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
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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 Loan, 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 Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan 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 Loan, 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 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
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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 Loan' means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
'Condominium Unit' means an individual housing unit in a Condominium
Building.
'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.
'Cooperative Loan' means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) or
security interest in shares issued by the applicable 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 Loan during a specified period over the
amount of interest required to be paid by an obligor on such Loan 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.
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'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 Loan, 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
contracts and installment loan agreements which may be unsecured or secured by
purchase money security interests in the Home Improvements financed thereby.
'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 Loans.
'Insurance Policies' means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
'Insurance Proceeds' means amounts paid by the insurer under any of the
Insurance Policies covering any Loan 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 Loan.
'Liquidation Proceeds' means amounts received by the Servicer in connection
with the liquidation of a Loan, net of liquidation expenses.
'Loan Rate' means, unless otherwise indicated herein or in the Prospectus
Supplement, the interest rate borne by a Loan.
'Loans' means Mortgage Loans and/or Home Improvement Contracts,
collectively. A Loan refers to a specific Mortgage Loan or Home Improvement
Contract, as the context requires.
'Loan-to-Value Ratio' means, with respect to a Loan, the ratio determined
as set forth in the related Prospectus Supplement.
'Minimum Rate' means the lifetime minimum Loan Rate during the life of each
adjustable rate Loan.
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'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 Loan.
'Mortgage' means the mortgage, deed of trust or other similar security
instrument securing a Mortgage Note.
'Mortgage Loan' means a closed-end and/or revolving home equity loan or
balance thereof and/or loans of which the proceeds have been applied to the
purchase of the related Mortgaged Property, in each case secured by a Mortgaged
Property.
'Mortgage Note' means the note or other evidence of indebtedness of a
Mortgagor under the Loan.
'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 Loans) and the Trustee.
'Primary Assets' means the Private Securities and/or Loans, 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 Loan, 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 Loans or
collateralized obligations secured by Underlying Loans.
'Property' means either a Home Improvement or a Mortgaged Property securing
a Loan, as the context requires.
'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 Loans.
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<PAGE>
'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 Loan,
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 Loans, the Person if
any, designated in the related Prospectus Supplement to service Loans for that
Series, or the successors or assigns of such Person.
'Single Family Property' means property securing a Loan 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.
'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
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<PAGE>
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 Loans' means home equity loans of the type eligible to be Loans
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.
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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
Depositor 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.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Incorporation of Certain Documents by
Reference.................................... S-3
Summary........................................ S-4
Risk Factors................................... S-17
The Mortgage Pool.............................. S-21
The Master Servicer............................ S-39
Ocwen Federal Bank F.S.B....................... S-39
Prepayment and Yield Considerations............ S-41
Description of the Certificates................ S-45
Pooling and Servicing Agreement................ S-57
The Certificate Insurer........................ S-61
Description of the Purchase Agreement.......... S-63
Use of Proceeds................................ S-64
Certain Federal Income Tax Consequences........ S-64
State Taxes.................................... S-67
ERISA Considerations........................... S-67
Legal Investment............................... S-68
Experts........................................ S-68
Legal Matters.................................. S-68
Underwriting................................... S-69
Ratings........................................ S-69
Index of Defined Terms......................... S-70
Appendix I..................................... A-I-1
PROSPECTUS
Prospectus Supplement.......................... 2
Available Information.......................... 2
Reports to Holders............................. 2
Incorporation of Certain Documents by
Reference.................................... 2
Summary of Terms............................... 3
Risk Factors................................... 11
Description of the Securities.................. 14
The Trust Funds................................ 17
Enhancement.................................... 22
Servicing of Loans............................. 24
The Agreements................................. 30
Certain Legal Aspects of Loans................. 38
The Depositor.................................. 46
Use of Proceeds................................ 46
Certain Federal Income Tax
Considerations............................... 47
State Tax Considerations....................... 69
ERISA Considerations........................... 69
Legal Investment............................... 71
Plan of Distribution........................... 71
Legal Matters.................................. 71
Additional Information......................... 71
Glossary of Terms.............................. 71
</TABLE>
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$114,425,000
(APPROXIMATE)
UNITED PANAM MORTGAGE
LOAN ASSET BACKED CERTIFICATES,
SERIES 1997-1
UNITED PANAM MORTGAGE CORPORATION,
AS SELLER
PAN AMERICAN BANK, FSB,
AS MASTER SERVICER
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------------------------------
PROSPECTUS SUPPLEMENT
DECEMBER 22, 1997
------------------------------------------
LEHMAN BROTHERS
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