<PAGE>
Pursuant to Rule 424(b)5
File No. 333-39649
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 15, 1997)
$209,850,000
LEHMAN HOME EQUITY LOAN TRUST 1998-2
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES,
SERIES 1998-2
------------------
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------
The Home Equity Loan Asset-Backed Certificates, Series 1998-2 (the
'Certificates'), will consist of the following Classes (each, a 'Class') of
Certificates, the Class A-1 and Class A-2 Certificates (the 'Senior
Certificates'), the Class M-1 and Class M-2 Certificates (together, the 'Class M
Certificates'), and the Class B-1 Certificates (together with the Class M
Certificates, the 'Offered Subordinate Certificates'), the Class X Certificate
(the 'Class X Certificate') and the Class R Certificate (the 'Residual
Certificate'). The Class M Certificates, the Class B-1 Certificates and the
Class X Certificate are referred to together herein as the 'Subordinate
Certificates.' Only the Senior Certificates and the Offered Subordinate
Certificates (collectively, the 'Offered Certificates') are being offered
hereby.
The Certificates will evidence in the aggregate the entire beneficial
interest in a pool (the 'Mortgage Pool') of sub-prime closed-end adjustable rate
(having initial fixed rate periods of six months, two years, three years or five
years) and fixed rate, fully amortizing and balloon, mortgage loans (the
'Mortgage Loans') held by Lehman Home Equity Loan Trust 1998-2 (the 'Trust Fund'
or the 'Trust') to be formed pursuant to a pooling and servicing agreement among
Lehman ABS Corporation, as depositor (the 'Depositor'), Norwest Bank Minnesota,
National Association, as master servicer (the 'Master Servicer'), Aurora Loan
Services Inc., as servicer (the 'Servicer'), Ocwen Federal Bank FSB, as special
servicer (the 'Special Servicer'), and First Union National Bank, as trustee
(the 'Trustee'). The assets of the Trust will also include certain other
property. The Mortgage Loans are secured by first lien deeds of trust or
mortgages primarily on one- to four-family residential properties. All of the
Mortgage Loans were acquired by the Depositor from Lehman Capital, a Division of
Lehman Brothers Holdings Inc. (the 'Seller').
(Cover continued on next page)
------------------
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION SET FORTH
UNDER 'RISK FACTORS' BEGINNING ON PAGE S-14 HEREIN AND ON PAGE 11
IN THE ACCOMPANYING PROSPECTUS.
------------------
THE CERTIFICATES REPRESENT INTERESTS IN THE TRUST ONLY AND DO NOT REPRESENT
INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SELLER, THE MASTER
SERVICER, THE SPECIAL SERVICER, THE SERVICER, THE TRUSTEE, THE
TRANSFEROR OR ANY AFFILIATE THEREOF. NEITHER THE CERTIFICATES NOR
THE MORTGAGE LOANS ARE INSURED OR GUARANTEED BY ANY GOVERNMENTAL
AGENCY OR ANY OTHER PERSON.
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.
<TABLE>
<CAPTION>
CLASS CERTIFICATE CERTIFICATE
PRINCIPAL AMOUNT INTEREST RATE
<S> <C> <C>
Class A-1.................................................................. $101,344,000 Variable(1)
Class A-2.................................................................. $ 64,437,000 Variable(2)
Class M-1.................................................................. $ 15,739,000 Variable(3)
Class M-2.................................................................. $ 13,640,000 Variable(4)
Class B-1.................................................................. $ 14,690,000 Variable(5)
</TABLE>
(1) Interest will accrue on the Class A-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR (as
defined herein) plus 0.08% (the 'Class A-1 Spread'), (ii) 9.50% and (iii)
the weighted average (by Scheduled Principal Balance) of the Net Mortgage
Rates (as defined herein) of the Mortgage Loans as of the first day of the
related Collection Period (as defined herein) (the 'Net Funds Cap').
(2) Interest will accrue on the Class A-2 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
0.21% (the 'Class A-2 Spread'), (ii) 9.50% and (iii) the Net Funds Cap. If
the Class X Certificateholder does not exercise its right to terminate the
Trust or purchase the outstanding Offered Certificates when it is first
entitled to do so (as described herein), the Certificate Interest Rate
applicable to the Class A-2 Certificates will be increased as described
herein.
(3) Interest will accrue on the Class M-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
0.40% (the 'Class M-1 Spread'), (ii) 9.50% and (iii) the Net Funds Cap. If
the Class X Certificateholder does not exercise its right to terminate the
Trust or purchase the outstanding Offered Certificates when it is first
entitled to do so (as described herein), the Certificate Interest Rate
applicable to the Class M-1 Certificates will be increased as described
herein.
(4) Interest will accrue on the Class M-2 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
0.60% (the 'Class M-2 Spread'), (ii) 9.50% and (iii) the Net Funds Cap. If
the Class X Certificateholder does not exercise its right to terminate the
Trust or purchase the outstanding Offered Certificates when it is first
entitled to do so (as described herein), the Certificate Interest Rate
applicable to the Class M-2 Certificates will be increased as described
herein.
(5) Interest will accrue on the Class B-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus
1.30% (the 'Class B-1 Spread'), (ii) 9.50% and (iii) the Net Funds Cap. If
the Class X Certificateholder does not exercise its right to terminate the
Trust or purchase the outstanding Offered Certificates when it is first
entitled to do so (as described herein), the Certificate Interest Rate
applicable to the Class B-1 Certificates will be increased as described
herein.
The Offered Certificates are being offered by Lehman Brothers Inc. ('Lehman'
or the 'Underwriter') from time to time in negotiated transactions or otherwise
at varying prices to be determined at the time of sale. Proceeds to the
Depositor are expected to be approximately 100% of the aggregate initial
Certificate Principal Amount thereof, before deducting expenses payable by the
Depositor, estimated to be $385,000.
The Offered Certificates are offered subject to prior sale and subject to
the Underwriter's right to reject orders in whole or in part. It is expected
that delivery of the Offered Certificates will be made in book-entry form only
through the facilities of The Depository Trust Company, Cedel Bank societe
anonyme and the Euroclear System on or about June 18, 1998 (the 'Closing Date').
The Offered Certificates will be offered in Europe and the United States of
America.
------------------
LEHMAN BROTHERS
June 16, 1998
<PAGE>
(Cover continued from previous page)
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such date is not a Business Day, then on the next succeeding
Business Day (each, a 'Distribution Date'), commencing in June 1998. As more
fully described herein, interest on the Offered Certificates will be calculated
on the basis of the Certificate Principal Amounts thereof and the applicable
Certificate Interest Rate. The Offered Certificates are not guaranteed by the
Depositor, the Seller, the Master Servicer, the Servicer, the Special Servicer,
the Trustee or any affiliate thereof.
There is currently no market for the Offered Certificates and there can be
no assurance that such a market will develop or if it does develop that it will
continue. See 'RISK FACTORS' herein.
For federal income tax purposes, the Trust will comprise multiple real
estate mortgage investment conduits (each, a 'REMIC'), organized in a tiered
REMIC structure. The Offered Certificates will represent ownership of 'regular
interests' in the Upper Tier REMIC (as defined herein). See 'CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS' herein and in the Prospectus.
THE YIELDS TO MATURITY OF OFFERED CERTIFICATES PURCHASED AT A PREMIUM OR
DISCOUNT WILL BE ESPECIALLY SENSITIVE TO THE RATE AND TIMING OF PRINCIPAL
PAYMENTS (INCLUDING PREPAYMENTS). INVESTORS SHOULD CONSIDER THE RISK THAT IN THE
CASE OF OFFERED CERTIFICATES PURCHASED AT A DISCOUNT, A SLOWER THAN ANTICIPATED
RATE OF PRINCIPAL PAYMENTS COULD RESULT IN AN ACTUAL YIELD THAT IS LOWER THAN
THE ANTICIPATED YIELD, AND THAT IN THE CASE OF OFFERED CERTIFICATES PURCHASED AT
A PREMIUM, A FASTER THAN ANTICIPATED RATE OF PRINCIPAL PAYMENTS COULD RESULT IN
AN ACTUAL YIELD THAT IS LOWER THAN THE ANTICIPATED YIELD. SEE 'PREPAYMENT AND
YIELD CONSIDERATIONS' HEREIN.
The Class A-1 Certificates and Class A-2 Certificates will evidence
approximate initial 48.29% and 30.71% undivided interests in the Trust,
respectively. The Class M-1 Certificates, Class M-2 Certificates and Class B-1
Certificates will evidence approximate initial 7.50%, 6.50% and 7.00% undivided
interests in the Trust, respectively.
The yields on the Senior Certificates will be sensitive and the yields on
the Subordinate Certificates, in inverse order of priority of distribution, will
be extremely sensitive, to the rate, timing and severity of delinquencies and
losses on the Mortgage Loans. The assets of the Trust are the sole source of
payments on the Offered Certificates. The Offered Certificates are not covered
by any financial guaranty insurance policy.
------------------------------------
UNTIL NINETY DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS ACTING AS
UNDERWRITERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WITH RESPECT TO
THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by the
Underwriter, an affiliate of the Depositor, the Seller and the Servicer, in
connection with market making transactions in the Offered Certificates. The
Underwriter may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale. Certain information in this Prospectus Supplement will be updated from
time to time as described herein under 'INCORPORATION OF CERTAIN DOCUMENTS BY
REFERENCE.'
------------------------------------
The Offered Certificates constitute part of a separate series of
Asset-Backed Certificates being offered by Lehman ABS Corporation 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
Offered 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 Offered Certificates may not be consummated unless the
purchaser has received both this Prospectus Supplement and the Prospectus.
The information set forth herein under 'THE MASTER SERVICER' has been
provided by the Master Servicer, the information set forth herein under 'THE
SERVICER' has been provided by the Servicer, and the information set forth
herein under 'THE SPECIAL SERVICER' has been provided by Ocwen Federal Bank FSB
('Ocwen' or the 'Special Servicer'). No representation is made by the Depositor,
the Underwriter or any of their respective affiliates as to the accuracy or
completeness of the information provided by the Master Servicer, the Servicer or
the Special Servicer.
S-2
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All reports and other documents filed by the Trustee or the Master
Servicer, on behalf of the Trust, 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
the Prospectus dated December 15, 1997 shall be deemed incorporated by reference
into this Prospectus and Prospectus Supplement and to be a part hereof. After
the initial distribution of the Offered Certificates by the Underwriter and in
connection with any market making transactions by the Underwriter, this
Prospectus and Prospectus Supplement will be distributed to prospective
investors. Any statement contained herein or in a document deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus and Prospectus Supplement to the extent that a
statement contained in any other subsequently filed document which is also
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as modified or superseded, to constitute part of this Prospectus and
Prospectus Supplement.
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 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....................... Lehman Home Equity Loan Trust 1998-2 (the 'Trust Fund' or the 'Trust') will be
formed pursuant to a pooling and servicing agreement (the 'Agreement'), to be dated
as of May 1, 1998, among Lehman ABS Corporation, as depositor (the 'Depositor'),
Norwest Bank Minnesota, National Association, as master servicer (the 'Master
Servicer'), Aurora Loan Services Inc. as servicer (the 'Servicer'), Ocwen Federal
Bank FSB, as special servicer (the 'Special Servicer'), and First Union National
Bank, as trustee (the 'Trustee'). The property of the Trust will include: a pool
(the 'Mortgage Pool') of sub-prime closed-end adjustable rate (having initial fixed
rate periods of six months, two years, three years or five years) and fixed rate,
fully amortizing and balloon, mortgage loans (the 'Mortgage Loans'), secured by
first lien deeds of trust or mortgages on residential properties that are primarily
one- to four-family properties (the 'Mortgaged Properties'); payments in respect of
interest and principal on the Mortgage Loans received 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 certain of the Depositor's rights under the
Purchase Agreement (as defined herein); rights under certain hazard insurance
policies covering the Mortgaged Properties; and certain other property, as described
more fully herein. The 'Cut-Off Date' for any Mortgage Loan is the close of business
on April 30, 1998.
The Trust property initially will include the unpaid principal balance of each
Mortgage Loan as of the Cut-Off 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. The 'Principal Balance' of a Mortgage Loan (other than a Liquidated
Mortgage Loan) on any day is equal to its Cut-Off Date Principal Balance, minus all
collections applied in reduction of the Cut-Off Date Principal Balance of such
Mortgage Loan. The Principal Balance of a Liquidated Mortgage Loan (as defined
herein) after the Due Period in which such Mortgage Loan becomes a Liquidated
Mortgage Loan shall be zero.
Securities.................. The Home Equity Loan Asset-Backed Certificates, Series 1998-2 (the 'Certificates')
will consist of the following Classes of Certificates, the Class A-1 Certificates
and Class A-2 Certificates (the 'Senior Certificates'), the Class M-1 Certificates
and Class M-2 Certificates (together, the 'Class M Certificates'), the Class B-1
Certificates (together with the Class M Certificates, the 'Offered Subordinate
Certificates'), the Class X Certificate (the 'Class X Certificate') and the Class R
Certificate (the 'Residual Certificate'). The Senior Certificates and the Offered
Subordinate Certificates are collectively referred to herein as the 'Offered
Certificates.' Only the Offered Certificates are offered hereby. Each Class of
Offered Certificates represents 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
Offered Certificates as of the Closing Date will equal $209,850,000 of principal,
which represents approximately 100% of the Aggregate Cut-Off Date Principal Balance
of the Mortgage Loans. The principal amount of a Class of Offered Certificates
(each, a 'Class Certificate Principal Amount') on any date is equal to the
applicable Class Certificate Principal Amount on the Closing Date minus the sum of
(a) the aggregate of amounts actually distributed as principal to the holders of
such Class of Certificates and (b) in the case of a Class of Offered Subordinate
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Certificates, the Applied Loss Amount, if any, allocated to such Class in reduction
of the principal amount thereof as described herein under 'DESCRIPTION OF THE
CERTIFICATES--Application of Realized Losses.' On any date, the 'Aggregate Class
Certificate Principal Amount' is the aggregate of the Class Certificate Principal
Amounts of all Classes of Offered Certificates on such date.
The Mortgage Pool........... The Mortgage Pool will consist of approximately 2,432 conventional, adjustable and
fixed rate, fully amortizing and balloon, first lien residential Mortgage Loans with
original terms to maturity from the first due date of the scheduled monthly payment
(a 'Scheduled Payment') of not more than 361 months, having an aggregate principal
balance as of the Cut-Off Date of approximately $209,850,337.79 (the 'Aggregate
Cut-Off Date Principal Balance'). The Mortgage Loans were originated or acquired by
Aames Capital Corporation generally in accordance with the Underwriting Guidelines
described herein. Because such Underwriting Guidelines do not conform to FNMA or
FHLMC guidelines, the Mortgage Loans are likely to experience higher rates of
delinquency, foreclosure and bankruptcy than if they had been underwritten to a
higher standard.
The Mortgage Pool will include fixed rate Mortgage Loans (the 'Fixed Rate Mortgage
Loans'), which will consist of approximately 1,221 Mortgage Loans having an
aggregate Principal Balance as of the Cut-Off Date of approximately $83,638,892.99
(39.86% of the Aggregate Cut-Off Date Principal Balance), and adjustable rate
Mortgage Loans (the 'Adjustable Rate Mortgage Loans'), which will consist of
approximately 1,211 Mortgage Loans having an aggregate Principal Balance as of the
Cut-Off Date of approximately $126,211,444.80 (60.14% of the Aggregate Cut-Off Date
Principal Balance). Each Adjustable Rate Mortgage Loan provides for semi-annual
adjustment of the applicable Mortgage Rate, as specified in the related Mortgage
Note, based on six-month London interbank offered rates for the United States dollar
deposits (the 'Index,' as more fully described herein) and for corresponding
adjustments to the monthly payment amount due thereon, in each case as specified in
the related Mortgage Note and subject to the limitations described under
'--Adjustable Rate Mortgage Loans' herein, except that with respect to approximately
75.17% of the Adjustable Rate Mortgage Loans (the 'Delayed Adjustment Mortgage
Loans'), the first Mortgage Rate adjustment for such Mortgage Loan will occur after
an initial period ranging from two to five years as described herein. Such Delayed
Adjustment Mortgage Loans constitute approximately 45.21% of the Aggregate Cut-Off
Date Principal Balance.
Approximately 72.91% of the Mortgage Loans provide for payment by the mortgagor of a
prepayment premium in connection with certain full or partial prepayments of
principal. Generally, each such Mortgage Loan provides for payment of a prepayment
premium in connection with certain partial prepayments and prepayments in full made
within the period of time specified in the related Mortgage Note, ranging from one
to five years from the date of origination of such Mortgage Loan, as described
herein. The amount of the applicable prepayment premium, to the extent permitted
under applicable state law, is as provided in the related Mortgage Note; generally,
such amount is equal to six months' interest on any amounts prepaid in excess of 20%
of the original principal balance of the related Mortgage Loan during any 12 month
period.
Each of the Mortgage Loans is secured by a first lien on a one- to four-family
residential real property (each, a 'Mortgaged Property') and bears interest at a
fixed or adjustable rate (each, a 'Mortgage Rate').
See 'DESCRIPTION OF THE MORTGAGE LOANS' herein.
Denominations............... The Offered Certificates will be offered for purchase in denominations of $1,000 and
multiples of $1 in excess thereof.
Registration of Offered
Certificates................ The Offered Certificates will initially be issued in book-entry form. Persons
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
acquiring beneficial ownership interests in the Offered Certificates ('Certificate
Owners') will hold their Offered 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 Offered 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 that Definitive Certificates (as defined herein) are issued
under the limited circumstances described herein. All references in this Prospectus
Supplement to any Offered 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 Offered Certificates are held by DTC. See 'RISK FACTORS--Book-Entry
Certificates', 'DESCRIPTION OF THE CERTIFICATES--Book-Entry Registration' herein and
'ANNEX I' hereto.
Depositor................... Lehman ABS Corporation, a Delaware corporation (the 'Depositor'). The principal
executive offices of the Depositor are located at Three World Financial Center, New
York, New York 10285 (Telephone: (212) 526-7000). See 'THE DEPOSITOR' in the
Prospectus. The Depositor is an affiliate of the Seller, the Servicer, and the
Underwriter.
Seller of the Mortgage
Loans....................... Lehman Capital, a Division of Lehman Brothers Holdings Inc. (the 'Seller'). The
Seller's principal offices are located at Three World Financial Center, New York,
New York 10285 and its telephone number is (212) 526-3305. The Seller is an
affiliate of the Depositor, the Servicer, and the Underwriter.
Master Servicer............. Norwest Bank Minnesota, National Association, a national banking association (the
'Master Servicer'). The executive offices of the Master Servicer are located at
Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its master
servicing offices are located at 11000 Broken Land Parkway, Columbia, Maryland
21044. See 'THE MASTER SERVICER' herein.
Servicers................... Aurora Loan Services Inc. (the 'Servicer' or 'Aurora'), an affiliate of Lehman
Brothers Holdings Inc., with its executive offices at 2530 South Parker Road, Suite
601, Aurora, Colorado 80014 and its centralized real estate loan servicing facility
located at 601 Fifth Avenue, Scottsbluff, Nebraska 69363. The Servicer is an
affiliate of the Seller, the Depositor, and the Underwriter. In addition, special
servicing of certain delinquent Mortgage Loans, and ongoing servicing of such loans
to the extent not liquidated, will initially be performed by Ocwen Federal Bank FSB
(the 'Special Servicer'), a federally chartered savings bank, with its home office
in Fort Lee, New Jersey and its servicing operations and corporate offices at 1675
Palm Beach Lakes Blvd., West Palm Beach, Florida 33401. The Servicer and the Special
Servicer are referred to together herein, unless the context requires otherwise, as
the 'Servicers.' See 'THE SERVICER' and 'THE SPECIAL SERVICER' herein.
Certificate Interest Rate... The Certificate Interest Rate for any Distribution Date and any Class of Offered
Certificates will be as follows:
</TABLE>
S-6
<PAGE>
<TABLE>
<S> <C>
(1) Interest will accrue on the Class A-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR (as defined
herein) plus 0.08% (the 'Class A-1 Spread'), (ii) 9.50% and (iii) the weighted
average (by Scheduled Principal Balance, as defined herein) of the Net Mortgage
Rates (as defined herein) of the Mortgage Loans as of the first day of the related
Collection Period (as defined herein) (the 'Net Funds Cap');
(2) Interest will accrue on the Class A-2 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus 0.21%
(the 'Class A-2 Spread'), (ii) 9.50% and (iii) the Net Funds Cap;
(3) Interest will accrue on the Class M-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus 0.40%
(the 'Class M-1 Spread'), (ii) 9.50% and (iii) the Net Funds Cap;
(4) Interest will accrue on the Class M-2 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus 0.60%
(the 'Class M-2 Spread'), (ii) 9.50% and (iii) the Net Funds Cap;
(5) Interest will accrue on the Class B-1 Certificates with respect to each
Distribution Date at a per annum rate equal to the least of (i) LIBOR plus 1.30%
(the 'Class B-1 Spread'), (ii) 9.50% and (iii) the Net Funds Cap;
provided, that if the Class X Certificateholder does not exercise its option to
terminate the Trust Fund or repurchase the Offered Certificates when it is first
entitled to do so, as described under 'DESCRIPTION OF THE CERTIFICATES--Special
Termination' herein, then with respect to each succeeding Distribution Date the
Class A-2 Spread will be increased to 0.42%, the Class M-1 Spread will be increased
to 0.60%, the Class M-2 Spread will be increased to 0.90% and the Class B-1 Spread
will be increased to 1.95%.
See 'DESCRIPTION OF THE CERTIFICATES--Distributions of Interest.'
Record Date................. With respect to the Offered Certificates and any Distribution Date, the 'Record
Date' will be the day immediately preceding such Distribution Date; provided,
however, that if any Offered Certificate becomes a Definitive Certificate, the
Record Date for such Offered Certificate will be the last day of the calendar month
immediately preceding the calendar month in which the related Distribution Date
occurs.
Distributions............... On the 25th day of each month, or if such day is not a Business Day, then the next
succeeding Business Day, commencing in June 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 Offered
Certificates on the related Record Date, in the priorities described below, an
aggregate amount equal to the sum of (a) the Interest Remittance Amount for each
Class of Offered Certificates, and (b) the Principal Distribution Amount.
Interest
Interest accrued during the applicable Accrual Period (as defined herein) on each
Class of Offered Certificates at the applicable Certificate Interest Rate in the
priority described herein will be distributable on each Distribution Date, in the
aggregate to the extent of the Interest Remittance Amount (as defined herein) for
such date. See 'DESCRIPTION OF THE CERTIFICATES--Distributions of Interest.'
The 'Accrual Period' means, with respect to each Distribution Date and Class of
Offered 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 Offered Certificates in respect of any Distribution Date will accrue during the
</TABLE>
S-7
<PAGE>
<TABLE>
<S> <C>
related Accrual Period on the basis of a 360-day year and the actual number of days
elapsed.
Principal
On each Distribution Date, the Principal Distribution Amount (as defined herein)
will be distributed as principal to the Certificateholders in the amounts and the
priority described herein under 'DESCRIPTION OF THE CERTIFICATES-- Distributions of
Principal.'
'Principal Distribution Amount' for any Distribution Date will be equal to the sum
of (i) the Principal Remittance Amount (as defined herein) for such date minus, with
respect to each Distribution Date, the Overcollateralization Release Amount, if any,
for such date and (ii) the Extra Principal Distribution Amount, if any, for such
date.
'Overcollateralization Amount' means, as of any Distribution Date, the positive
difference, if any, between (x) the Aggregate Loan Balance as of the last day of the
related Collection Period and (y) the Aggregate Class Certificate Principal Amount
of the Offered Certificates (after taking into account all distributions of
principal on such Distribution Date).
'Overcollateralization Deficiency' with respect to any Distribution Date, will be
equal to the amount, if any, by which (x) the Targeted Overcollateralization Amount
for such Distribution Date exceeds (y) the Overcollateralization Amount for such
Distribution Date, calculated for this purpose after taking into account the
reduction on such Distribution Date of the Class Certificate Principal Amounts of
the Offered Certificates resulting from the distribution of the Principal Remittance
Amount (but not the Extra Principal Distribution Amount) on such Distribution Date,
but prior to taking into account any Applied Loss Amount on such Distribution Date.
'Overcollateralization Release Amount' with respect to any Distribution Date will be
equal to the lesser of (x) the Principal Remittance Amount for such Distribution
Date and (y) the excess, if any, of (i) the Overcollateralization Amount for such
Distribution Date, assuming that 100% of the Principal Remittance Amount is applied
as a principal payment on the Offered Certificates on such Distribution Date over
(ii) the Targeted Overcollateralization Amount for such Distribution Date.
The 'Targeted Overcollateralization Amount' with respect to any Distribution Date
will be equal to (x) prior to the Stepdown Date, the product of 3.75% and the
Aggregate Cut-Off Date Principal Balance and (y) on and after the Stepdown Date, the
greater of (i) the product of 7.50% and the Aggregate Loan Balance as of the last
day of the related Collection Period and (ii) $1,049,251.69.
'Collection Period' means, for the first Distribution Date, with respect to
principal collections the period from May 1, 1998 through June 1, 1998 and with
respect to interest collections the period from May 2, 1998 through June 1, 1998,
and for each Distribution Date thereafter, the one-month period beginning on the
second day of the calendar month immediately 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 last scheduled Distribution Date for the Offered Certificates is as follows:
Class A-1 Certificates, October 25, 2020; Class A-2, Class M-1, Class M-2 and Class
B-1 Certificates, April 25, 2028. It is expected that the actual last Distribution
Date for each Class of Offered Certificates will occur significantly earlier than
such scheduled Distribution Date. See 'PREPAYMENT AND YIELD CONSIDERATIONS.'
Credit Enhancement.......... The credit enhancement consists of the subordination of the Subordinate Certificates
to the Senior Certificates, the further subordination of each other Class of the
Subordinate Certificates that is junior in priority of distribution and the
</TABLE>
S-8
<PAGE>
<TABLE>
<S> <C>
priority of the application of Applied Loss Amounts and the overcollateralization
provisions of the Trust as described herein.
Subordination of Subordinate Certificates. The rights of the Subordinate
Certificateholders to receive distributions with respect to the Mortgage Loans will
be subordinated, to the extent described herein, to such rights of the Senior
Certificateholders. This subordination is intended to enhance the likelihood of
regular receipt by the Senior Certificateholders of the full amount of their
scheduled monthly payment of interest and principal and to afford such
Certificateholders protection against Realized Losses.
The protection afforded to the Senior Certificateholders by means of the
subordination of the Subordinate Certificates will be accomplished by the
preferential right of the Senior Certificateholders to receive, prior to any
distribution being made on a Distribution Date in respect of such Subordinate
Certificates, the amounts available for distribution on such Distribution Date up to
the maximum amount to be distributed on the Senior Certificates on such Distribution
Date and, if necessary, by the right of the Senior Certificateholders to receive
future distributions of amounts that would otherwise be payable to such Subordinate
Certificateholders.
In addition, the rights of the Class M-2 and Class B-1 Certificateholders to receive
distributions will be subordinated, to the extent described herein, to such rights
of the Senior Certificateholders and the Class M-1 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Senior Certificates and the Class M-1 Certificates of the amount of
interest due them and principal available for distribution to such Classes to the
extent described herein and to afford such Certificateholders with protection
against losses.
The rights of the Class B-1 Certificateholders to receive distributions will be
subordinated in the same manner to such rights of the Senior Certificateholders, the
Class M-1 Certificateholders and the Class M-2 Certificateholders. This
subordination is intended to enhance the likelihood of regular receipt by the
holders of the Senior Certificates, the Class M-1 Certificates and the Class M-2
Certificates of the amount of interest due them and principal available for
distribution and to afford such Certificateholders with protection against losses.
Overcollateralization. The cashflow provisions are expected to result initially in
an increased rate of amortization of the Offered Certificates relative to the
amortization of the Mortgage Loans through the application of excess interest
received on the Mortgage Loans to the payment of the principal of Offered
Certificates. As a result the Aggregate Class Certificate Principal Amount will be
less than the Aggregate Loan Balance of the Mortgage Loans (such difference, the
'overcollateralization') and the application of such excess interest will continue
until a required level of overcollateralization is achieved. Once the required level
of overcollateralization is reached, and subject to the provisions described in the
next paragraph, the increased rate of amortization of the Offered Certificates will
cease, unless necessary to maintain the required level of overcollateralization.
Allocation of Losses. If on any Distribution Date, the Aggregate Class Certificate
Principal Amount of the Offered Certificates exceeds the Aggregate Loan Balance of
the Mortgage Loans on the last day of the related Collection Period, the Class
Certificate Principal Amount of the Subordinate Certificates will be reduced, in
reverse order of seniority (first Class B-1 Certificates, second Class M-2
Certificates and third Class M-1 Certificates) by the amount of the excess; any such
excess is referred to as an 'Applied Loss Amount.' Thereafter, such Subordinate
Certificates will only be entitled to distributions of interest and principal with
respect to their Class Certificate Principal Amounts as so reduced, and the amount
of any Applied Loss Amount will be payable to the applicable Class of Subordinate
Certificates only to the extent of future excess cashflow as described herein.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Servicing................... The Servicer will be responsible for servicing, managing and making collections on
the Mortgage Loans. The Servicer will remit collections on the Mortgage Loans to the
Master Servicer and the Master Servicer shall deposit all collections in respect of
the Mortgage Loans into the Collection Account as described herein. The Master
Servicer will be responsible for enforcing the obligations of the Servicer under the
Agreement. However, the Master Servicer will not be ultimately responsible for the
performance of the servicing activities of the Servicer, except to the limited
extent described herein under 'POOLING AND SERVICING AGREEMENT--Advances,'
'--Prepayment Interest Shortfalls' and '--Servicing Compensation and Payment of
Expenses.' 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 the next Distribution Date. See 'POOLING AND
SERVICING AGREEMENT--Payments on Mortgage Loans; Deposits to Collection Account and
Distribution Account.' With respect to each Collection Period, the Servicer will
receive from payments in respect of interest on the Mortgage Loans, on behalf of
itself, a portion of such payments as a monthly servicing fee (the 'Servicing Fee')
in the amount of 0.50% per annum (the 'Servicing Fee Rate') and the Master Servicer
will receive from payments in respect of interest on the Mortgage Loans, a portion
of such payments as a monthly servicing fee (the 'Master Servicing Fee') in the
amount of 0.0075% per annum (the 'Master Servicing Fee Rate'), each on the
outstanding principal balance of each Mortgage Loan as of the first day of each such
Collection Period. The Special Servicer will be paid a monthly fee (the 'Basic Fee')
with respect to each Transferred Mortgage Loan (as defined herein) calculated as
0.50% per annum (the 'Basic Fee Rate') on the outstanding principal balance of each
such Mortgage Loan. The Special Servicer is also entitled to additional fees
described herein under 'POOLING AND SERVICING AGREEMENT--Servicing Compensation and
Payment of Expenses.' See 'POOLING AND SERVICING AGREEMENT.' In certain limited
circumstances, the Servicer may resign or be removed, in which event a third-party
servicer will be appointed as a successor Servicer.
Trustee..................... First Union National Bank, a national banking association, will act as Trustee.
Trustee Fee................. The Trustee is entitled to a monthly fee (the 'Trustee Fee') equal to 0.0035% per
annum (the 'Trustee Fee Rate') (subject to certain limitations described in the
Agreement), on the Aggregate Class Certificate Principal Amount (as defined herein).
Monthly Advances............ The Servicer or Special Servicer, as applicable, is required to remit to the Master
Servicer for deposit in the Collection Account, an amount equal to the Scheduled
Payment, net of the related Servicing Fee or Basic Fee due on each Mortgage Loan but
not received by the Servicer or Special Servicer during the related Collection
Period (an 'Advance'), subject to the limitations described herein. The Master
Servicer is required to remit to the Trustee for deposit in the Distribution
Account, the amount of any Advance required to be made by the Servicer or Special
Servicer during the related Collection Period, if the Servicer or Special Servicer
does not do so, subject to the limitations described herein. Such obligation of the
Servicer, the Special Servicer and the Master Servicer continues with respect to
each Mortgage Loan until such Mortgage Loan becomes a Liquidated Mortgage Loan. None
of the Servicer, the Special Servicer or the Master Servicer is required to make any
Advances which it determines would be nonrecoverable. Advances are reimbursable to
the Servicer, the Special Servicer and the Master Servicer subject to certain
conditions and restrictions, and are intended to maintain a regular cash flow to
Certificateholders, rather than to guarantee or insure against losses. See 'POOLING
AND SERVICING AGREEMENT--Advances' herein.
</TABLE>
S-10
<PAGE>
<TABLE>
<S> <C>
Special Termination......... On any Distribution Date on which the Aggregate Loan Balance of the Mortgage Loans
is less than 35% of the Aggregate Cut-Off Date Principal Balance, the holder of the
Class X Certificate will (subject to the terms of the Agreement) have the option to
purchase the assets of the Trust Fund, consisting of the Mortgage Loans, any REO
Property and any other property remaining in the Trust Fund for the Repurchase Price
described herein, and thereby effect the termination of the Trust Fund. See
'DESCRIPTION OF THE CERTIFICATES--Special Termination of the Trust' herein.
If the Class X Certificateholder does not exercise its option as described above
when it is first entitled to do so, the Certificate Interest Rates of the Offered
Certificates will be increased as described under 'DESCRIPTION OF THE
CERTIFICATES--Distributions of Interest' herein.
Optional Termination........ On any Distribution Date on which the Aggregate Loan Balance of the Mortgage Loans
is less than 10% of the Aggregate Cut-Off Date Principal Balance, the Servicer will
(subject to the terms of the Agreement) have the option to cause the sale of or to
purchase the assets of the Trust Fund, consisting of the Mortgage Loans, any REO
Property, and any other property remaining in the Trust Fund, and thereby effect the
termination of the Trust Fund. See 'DESCRIPTION OF THE CERTIFICATES--Optional
Termination of the Trust' herein.
Use of Proceeds............. The Depositor will apply the net proceeds from the sale of the Offered Certificates
toward the purchase of the Mortgage Loans. See 'USE OF PROCEEDS' herein.
Prepayment Considerations... The rate of principal payments on the Offered Certificates will depend on, among
other things, the rate and timing of principal payments (including prepayments,
repurchases, defaults and liquidations) on the Mortgage Loans. As is the case with
mortgage-backed securities generally, the Offered Certificates are subject to
substantial inherent cash flow uncertainties because the Mortgage Loans may be
prepaid at any time. However, the majority of the Mortgage Loans are subject to
prepayment premiums to the extent described herein. Generally, when prevailing
interest rates increase, prepayment rates on mortgage loans tend to decrease in
subsequent periods, resulting in a reduced rate of return of principal to investors
at a time when reinvestment at such higher prevailing rates would be desirable.
Conversely, when prevailing interest rates decline, prepayment rates on mortgage
loans tend to increase in subsequent periods, resulting in an accelerated rate of
return of principal to investors at a time when reinvestment at comparable yields
may not be possible. See 'PREPAYMENT AND YIELD CONSIDERATIONS' herein.
Approximately 72.91% of the Mortgage Loans are subject to prepayment premiums during
intervals ranging from one to five years following origination, as described under
'DESCRIPTION OF THE MORTGAGE LOANS' herein. Such prepayment premiums may have the
effect of reducing the amount or the likelihood of prepayment of such Mortgage Loans
during such intervals. See 'DESCRIPTION OF THE MORTGAGE LOANS--General' herein.
Yield Considerations........ The yields to maturity on the Offered Certificates will depend on, among other
things, the rate and timing of principal payments (including prepayments, purchases,
defaults and liquidations) on the Mortgage Loans and the allocation thereof to
reduce the Class Certificate Principal Amounts of such Certificates. The yields to
maturity on the Offered Certificates will also depend on other factors, such as the
applicable Certificate Interest Rate and the purchase price for such Certificates.
The yields on the Offered Certificates may be adversely affected by Net Prepayment
Interest Shortfalls (as defined herein) on the Mortgage Loans.
In general, in the case of any Offered Certificates purchased at a premium, if
principal payments on the related Mortgage Loans occur at a rate faster than
anticipated at the time of purchase, the investor's actual yield to maturity may be
lower than that originally anticipated. Conversely, in the case of any Offered
Certificates purchased at a discount, if principal payments on the related Mortgage
</TABLE>
S-11
<PAGE>
<TABLE>
<S> <C>
Loans occur at a rate slower than that assumed at the time of purchase, the
investor's actual yield to maturity may be lower than that originally anticipated.
The yields to maturity of the Offered Certificates will be affected by (i) the
application of Monthly Excess Cashflow as described herein and by the amount of
overcollateralization and (ii) since the first Collection Period includes both May
1st and June 1st, by the distributions of principal collections that will be larger
than would otherwise be the case.
The yields of the Offered Certificates will also be affected by the exercise by the
holder of the Class X Certificate of its right to cause the sale of the assets of
the Trust Fund or the exercise by the Servicer of its right to purchase the
outstanding Offered Certificates, as described under 'DESCRIPTION OF THE
CERTIFICATES-- Special Termination of the Trust' and '--Optional Termination of the
Trust' herein, or the failure of such parties to exercise such rights.
The Certificate Interest Rates applicable to the Offered Certificates will be
affected by the level of LIBOR from time to time, and by the Mortgage Rates of the
Mortgage Loans from time to time as described under 'RISK FACTORS--Risk of Mortgage
Loan Rates Reducing the Certificate Interest Rate on the Offered Certificates.'
See 'PREPAYMENT AND YIELD CONSIDERATIONS' herein.
Federal Income Tax
Considerations.............. An election will be made to treat each of the REMICs created pursuant to the
Agreement as a REMIC for federal income tax purposes. Each Class of Offered
Certificates and the Class X Certificate will represent ownership of 'regular
interests' in the Upper Tier REMIC. In addition, the Offered Certificates will
represent beneficial interests in the right to receive payments from the Basis Risk
Reserve Fund (as defined herein). See 'DESCRIPTION OF THE
CERTIFICATES--Distributions of Interest' herein. For federal income tax purposes,
that right will be treated as the right to receive payments under an interest rate
cap contract.
The holders of the Offered Certificates must include interest income derived
therefrom in income as it accrues, regardless of such holders' usual methods of
accounting. The Offered Certificates may be issued with original issue discount for
federal income tax purposes. Original issue discount must be included in income as
it accrues on a constant yield method, regardless of whether a holder receives
concurrently the cash attributable to such original issue discount.
For further information regarding the federal income tax consequences of investing
in the Offered Certificates, see 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS' herein
and in the Prospectus.
ERISA Considerations........ The acquisition of an Offered Certificate by a pension or other employee benefit
plan (a 'Plan') subject to the Employee Retirement Income Security Act of 1974, as
amended ('ERISA'), could, in some instances, result in a 'prohibited transaction' or
other violation of the fiduciary responsibility provisions of ERISA and Code Section
4975. Certain exemptions from the prohibited transaction rules could be applicable
to the acquisition of such Offered Certificates. Any Plan fiduciary considering
whether to purchase any Offered Certificate on behalf of a Plan should consult with
its counsel regarding the applicability of the provisions of ERISA and the Code.
Subject to the considerations and conditions described under 'ERISA CONSIDERATIONS'
herein, it is expected that the Senior Certificates may be purchased by or with the
assets of a Plan. The Subordinate Certificates may not be purchased by or with the
assets of a Plan, except upon satisfaction of certain conditions. See 'ERISA
CONSIDERATIONS' herein.
Legal Investment
Considerations.............. The Class M-2 Certificates and Class B-1 Certificates will not constitute 'mortgage
related securities' for purposes of the Secondary Mortgage Market Enhancement Act of
1984 ('SMMEA'). The appropriate characterization of the
</TABLE>
S-12
<PAGE>
<TABLE>
<S> <C>
Class M-2 Certificates and the Class B-1 Certificates under various legal investment
restrictions applicable to the investment activities of certain institutions, and
thus the ability of investors subject to these restrictions to purchase the Class
M-2 Certificates and the Class B-1 Certificates, may be subject to significant
interpretive uncertainties.
The Class A-1, Class A-2 and Class M-1 Certificates will constitute 'mortgage
related securities' for purposes of SMMEA for so long as they are rated in one of
the two highest rating categories by one or more nationally recognized statistical
rating organizations. As such, the Class A-1, Class A-2 and Class M-1 Certificates
will be legal investments for certain entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA. In addition,
institutions whose activities are subject to review by federal or state regulatory
authorities may be or may become subject to restrictions, which may be retroactively
imposed by such regulatory authorities, on the investment by such institutions in
certain forms of mortgage related securities.
All investors whose investment authority is subject to legal restrictions should
consult their own legal advisors to determine whether, and to what extent, the
Offered Certificates will constitute legal investments for them. See 'LEGAL
INVESTMENT CONSIDERATIONS' herein and 'LEGAL INVESTMENT' in the Prospectus.
Certificate Rating.......... It is a condition to the issuance of the Offered Certificates that they receive the
following ratings by Moody's Investors Service, Inc. ('Moody's') and Fitch IBCA,
Inc. ('Fitch' and together with Moody's, the 'Rating Agencies'):
CLASS MOODY'S FITCH
------ --------- ----
A-1 Aaa AAA
A-2 Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B-1 Baa3 BBB
In general, ratings address credit risk and do not address the likelihood of
prepayments on Mortgage Loans or the possibility that Offered Certificateholders
might realize a lower than anticipated yield. The ratings do not address the
likelihood of the payment of any Basis Risk Shortfall. See 'RATINGS' herein and
'RISK FACTORS--Rating of the Securities' in the Prospectus.
</TABLE>
S-13
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Offered Certificates.
Subordination. On any Distribution Date, distributions of the Interest
Remittance Amount will be made to each Class of Offered Certificates before any
distributions of the Principal Distribution Amount. The rights of the Class M
Certificateholders and the Class B-1 Certificateholders to receive distributions
will be subordinated to such rights of the Class A-1 and Class A-2
Certificateholders. The rights of the Class M-2 Certificateholders and Class B-1
Certificateholders to receive distributions will be subordinated to such rights
of the Class M-1 Certificateholders. The rights of the Class B-1
Certificateholders to receive distributions will be subordinated to such rights
of the Class M-2 Certificateholders. The subordination described above is
intended to increase the likelihood of regular receipt by the holders of
Certificates with a higher priority, of the full amount of monthly distributions
allocable to them and to afford such holders protection against losses. As a
result, the yield on each Class of Offered Certificates in order of payment
priority will be progressively more sensitive to the rate, timing and severity
of delinquencies and losses on the Mortgage Loans. Investors in the Offered
Certificates, and particularly the Subordinate Certificates, should carefully
consider the related risks, including the risk that such investors may suffer a
loss in their investments.
Risk of Mortgage Loan Rates Reducing the Certificate Interest Rates on the
Offered Certificates. The calculation of the Certificate Interest Rate on the
Offered Certificates is based upon (i) the value of an index (the London
interbank offered rate for one-month deposits of U.S. dollars, 'LIBOR') which is
different from the rate applicable to the Mortgage Loans as described under
'DESCRIPTION OF THE MORTGAGE LOANS' (either as a result of a fixed rate for the
term of the loan, a fixed rate for an initial period of six months, two years,
three years or five years or a different index, rate determination date or rate
adjustment date on the Mortgage Loans) and (ii) the weighted average of the
Mortgage Rates, which are either fixed, in the case of the Fixed Rate Mortgage
Loans, or subject to periodic adjustment caps, lifetime rate caps and minimum
rate floors, in the case of the Adjustable Rate Mortgage Loans. Approximately
39.86% of the Mortgage Loans by Aggregate Cut-Off Date Principal Balance are
Fixed Rate Mortgage Loans. Approximately 60.14% of the Mortgage Loans by
Aggregate Cut-Off Date Principal Balance are Adjustable Rate Mortgage Loans.
Approximately 24.83% of the Adjustable Rate Mortgage Loans adjust semi-annually
based upon the London interbank offered rate for six-month United States dollar
deposits ('Six-Month LIBOR'). Approximately 60.40% of the Adjustable Rate
Mortgage Loans are 2/28 Loans that provide for a fixed interest rate for a
period of approximately two years following origination, approximately 0.10% of
the Adjustable Rate Mortgage Loans are 3/27 Loans that provide for a fixed
interest rate for a period of approximately three years following origination
and approximately 14.68% of the Adjustable Rate Mortgage Loans are 5/25 Loans
that provide for a fixed interest rate for a period of approximately five years
following origination, and in each case, adjust thereafter based on Six-Month
LIBOR subject to the limitations described herein. However, the Certificate
Interest Rates on the Offered Certificates adjust monthly based upon LIBOR as
described under 'DESCRIPTION OF THE CERTIFICATES--Distributions of Interest'
herein, subject to the Net Funds Cap. Consequently, the interest that becomes
due on the Mortgage Loans (net of the Master Servicing Fee, the Servicing Fee
(or Basic Fee, Special Servicer Fee or Special Servicer Incentive Fee) and the
Trustee Fee) during any Collection Period may not equal the amount of interest
that would accrue on the Offered Certificates at the applicable Certificate
Interest Rate without regard to the Net Funds Cap during the related Accrual
Period.
In particular, the Certificate Interest Rates on the Offered Certificates
adjust monthly, while the Mortgage Rates of the Adjustable Rate Mortgage Loans
adjust less frequently (and the Mortgage Rates of the Fixed Rate Mortgage Loans
do not adjust at all) with the result that in a rising interest rate
environment, (i) collections on the Mortgage Loans in respect of interest may be
less than would be the case if the interest rates on the Mortgage Loans were
adjusted monthly and (ii) the Net Funds Cap may limit increases in the
Certificate Interest Rate on the Offered Certificates for extended periods. In
addition, LIBOR and Six-Month LIBOR may respond to different economic and market
factors, and there is not necessarily a correlation between them. Thus, it is
possible, for example, that LIBOR may rise during periods in which Six-Month
LIBOR is stable or is falling or that, even if both LIBOR and Six-Month LIBOR
rise during the same period, LIBOR may rise more rapidly than Six-Month LIBOR.
Futhermore, if the Net Funds Cap determines the Certificate Interest Rate on the
Offered Certificates for a Distribution Date, the value of the Offered
Certificates may be temporarily or permanently
S-14
<PAGE>
reduced. The Mortgage Rates on approximately 75.17% of the Adjustable Rate
Mortgage Loans will not adjust for a period of time ranging from two to five
years following origination.
If, with respect to any Distribution Date, the amount of interest that
would accrue during the related Accrual Period on any Class of Offered
Certificates based on the applicable level of LIBOR plus the applicable Spread
(as defined herein), or based on the applicable Certificate Interest Rate Cap
(as defined herein), is greater than the weighted average (calculated as
described herein) of the Net Mortgage Rates (as defined herein) on the Mortgage
Loans as of the first day of the related Collection Period, then the applicable
Certificate Interest Rate will be based on the Net Funds Cap, and Basis Risk
Shortfall (as defined herein) will, except as described below, occur. No
assurance can be given that there will be sufficient Monthly Excess Cashflow
generated from the Mortgage Loans to pay the related Unpaid Basis Risk Shortfall
(as defined herein) on any subsequent Distribution Date.
Yield Considerations with respect to Adjustable Rate Mortgage Loans. The
yields to maturity on the Offered Certificates may be affected by the adjustment
of the Mortgage Rates of the Adjustable Rate Mortgage Loans on the related
Adjustment Dates (as defined herein). In addition, because the Mortgage Rate for
each Adjustable Rate Mortgage Loan is based on Six-Month LIBOR plus the related
Gross Margin, such rate could be higher than prevailing market interest rates,
which may cause the related borrower to prepay such Mortgage Loan. Finally,
because the Mortgage Rates on the Adjustable Rate Mortgage Loans are based on
Six-Month LIBOR while the Certificate Interest Rates are based on LIBOR, and a
substantial number of the Mortgage Loans are Delayed Adjustment Mortgage Loans
and Fixed Rate Mortgage Loans, any resulting Basis Risk Shortfalls, to the
extent not covered by amounts otherwise distributable on the Offered
Certificates as described herein, will adversely affect the yields to maturity
on the Offered Certificates.
Adequacy of Credit Enhancement. The primary sources of credit enhancement
for the Offered Certificates are overcollateralization, to the extent created
and maintained as described herein, and the subordination of Certificates having
a lower priority of distribution. There can be no assurance as to the rate at
which overcollateralization will be created, or whether such
overcollateralization will be maintained at the levels described herein.
Lack of Primary Mortgage Insurance. Approximately 34.33% of the Mortgage
Loans have current Loan-to-Value Ratios (as defined herein) in excess of 80%.
None of such Mortgage Loans are covered by primary mortgage insurance policies.
In the event of default by the related borrowers, liquidation of the related
Mortgaged Properties is more likely to result in a Realized Loss than if such
insurance coverage had been provided.
Book-Entry Certificates. Issuance of the Offered Certificates in
book-entry form may reduce the liquidity of such Certificates in the secondary
trading market since investors may be unwilling to purchase Offered Certificates
for which they cannot obtain physical certificates. Since transactions in the
Offered Certificates can be effected only through DTC, Cedel, Euroclear,
participating organizations, indirect participants and certain banks, the
ability of a Certificate Owner to pledge an Offered 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 Offered Certificates.
Certificate Owners may experience some delay in their receipt of distributions
of interest and principal on the Offered 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
Registration' herein.
Risk of Early Defaults. Approximately 95.33% of the Mortgage Loans were
originated within 6 months prior to the Cut-Off Date. The weighted average
remaining term to stated maturity of the Mortgage Loans (by Aggregate Cut-Off
Date Principal Balance) is approximately 338 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. Where permitted by law and the related loan
origination program, the borrower will be required to pay a prepayment charge in
connection with any voluntary prepayment. Approximately 72.91% of the Mortgage
Loans are subject to prepayment premiums during intervals ranging for one to
five years following origination. Mortgage loans, such as the Mortgage Loans,
have been originated in significant volume only during the past few years and
neither the Depositor nor the Seller is aware of any publicly available studies
or statistics on the rate of prepayment of such loans. Generally, mortgage
loans, such as the Mortgage Loans, are not viewed by borrowers
S-15
<PAGE>
as permanent financing. Accordingly, the Mortgage Loans may experience a higher
rate of prepayment than traditional loans. 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 Servicer will be required by the Agreement to enforce such provisions
unless (i) such enforcement is not permitted by applicable law or (ii) the
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.
The rate of prepayments on the Mortgage Loans is sensitive to the credit
standing of the borrower, which may improve and thereby allow the borrower to
refinance on more favorable terms, or may decline and thereby limit the
borrower's ability to refinance. The rate of prepayments on mortgage loans that
are 2/28 Loans, 3/27 Loans or 5/25 Loans and are in the initial fixed rate
period, is sensitive to prevailing interest rates. The prepayment behavior of
the 2/28 Loans, 3/27 Loans and 5/25 Loans may differ from that of the other
Mortgage Loans. As a 2/28 Loan, 3/27 Loan or 5/25 Loan approaches its initial
adjustment date, the borrower may become more likely to refinance such loan to
avoid an increase in the Mortgage Rate, even if fixed rate loans are only
available at rates that are slightly lower or higher than the Mortgage Rate
before adjustment. The existence of the applicable periodic rate cap, lifetime
cap and lifetime floor also may affect the likelihood of prepayments resulting
from refinancings. Generally, if prevailing interest rates fall significantly
below the interest rates on the Mortgage Loans, the Mortgage Loans are likely to
be subject to higher prepayment rates than if prevailing rates remain at or
above the interest rates on the Mortgage Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Mortgage
Loans, the rate of prepayments is likely to decrease. The average life of the
Offered Certificates and, if purchased at other than par, the yields realized by
holders of the Offered Certificates will be sensitive to levels of payment
(including prepayments relating to the Mortgage Loans (the 'Prepayments')) on
the Mortgage Loans. In general, the yield on an Offered Certificate that is
purchased at a premium from the outstanding principal amount thereof may be
adversely affected by a higher than anticipated level of Prepayments of the
Mortgage Loans. Conversely, the yield on an Offered Certificate that is
purchased at a discount from the outstanding principal amount thereof may be
adversely affected by a lower than anticipated level of Prepayments. See
'PREPAYMENT AND YIELD CONSIDERATIONS' herein.
Certificate Rating. The rating by the Rating Agencies of the Offered
Certificates is not a recommendation to purchase, hold or sell the Offered
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 Offered Certificateholders might realize a lower than
anticipated yield. The ratings of the Offered Certificates do not address the
possibility of the imposition of United States withholding tax with respect to
non-U.S. persons.
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 Offered
Certificateholders could occur. 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 fails to
provide adequate security for the related Mortgage Loans, Offered
Certificateholders could experience a loss.
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 Offered Certificates.
S-16
<PAGE>
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. The Servicer, and if the Servicer fails to pay,
the Master Servicer, is generally obligated to pay, without any right of
reimbursement, those shortfalls in interest collections payable on the Offered
Certificates that are attributable to Prepayment Interest Shortfalls, but only
to the extent of the Servicing Fee or the Aggregate Master Servicing
Compensation received by the Servicer or the Master Servicer, as the case may
be, for the related Collection Period.
Underwriting Standards. As described herein, the Originator's underwriting
standards generally are less stringent than those of FNMA or FHLMC with respect
to a borrower's credit history and in certain other respects. The Mortgage Loans
originated or acquired by the Originator will have been made to borrowers that
typically have limited access to traditional mortgage financing for a variety of
reasons, such as the need for specialized loan products or credit histories that
may limit such borrowers' access to credit. As a result of this approach to
underwriting, the Mortgage Loans in the Mortgage Pool may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in a more traditional manner. Furthermore, changes in the values of
Mortgaged Properties may have a greater effect on the delinquency, foreclosure,
bankruptcy and loss experience of the Mortgage Loans than on mortgage loans
originated under stricter guidelines. No assurance can be given that the values
of the Mortgaged Properties have remained or will remain at the levels in effect
on the dates of origination of the related Mortgage Loans.
Geographic Concentration May Affect Performance. Approximately 18.77%,
12.93% and 5.96% (by Aggregate Cut-Off Date Principal Balance) of the Mortgage
Loans are secured by Mortgaged Properties in California, Florida and Washington,
respectively. To the extent that the related region has experienced or may
experience in the future weaker economic conditions or greater rates of decline
in real estate 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.
For additional information regarding the geographic distribution of the
Mortgage Loans, see 'DESCRIPTION OF THE MORTGAGE LOANS' herein.
Risks Associated with Certain Origination Fees. Fees earned on the
origination of loans, placement of related insurance and other services provided
by the Originators and certain of its affiliates are often paid by the borrower
out of related loan proceeds. From time to time, in the ordinary course of their
businesses, originators of mortgage loans have been named in legal actions
brought by mortgagors challenging the amount or method of imposing or disclosing
such fees. To date, no such action has been decided against the Originator or
any of its affiliates. If such an action against the Originator with respect to
any Mortgage Loan were successful, a court might require that the Principal
Balances of the related Mortgage Loans be reduced by the amount of contested
fees or charges. Any such reductions could result in substantial delinquencies
and losses during one or more Due Periods, and may result in losses on one or
more Classes of the Offered Certificates.
THE MASTER SERVICER
The information set forth in this section has been provided by Norwest Bank
Minnesota, National Association ('Norwest' or the 'Master Servicer'), and
neither the Depositor, the Trustee nor the Underwriter makes any representations
or warranties as to the accuracy or completeness of such information.
Norwest is a national banking association, with executive offices located
at Sixth Street and Marquette Avenue, Minneapolis, Minnesota 55479 and its
master servicing offices located at 11000 Broken Land Parkway, Columbia,
Maryland 21044.
The Servicer will directly service the Mortgage Loans. The Master Servicer
will be required to enforce the obligations of the Servicer under the Agreement.
The Master Servicer will not be ultimately responsible for the servicing of the
Mortgage Loans except to the extent described herein with respect to Advances
and Prepayment Interest Shortfalls. Norwest will assume the duties of Master
Servicer under the Agreement on July 1, 1998.
The Master Servicer is engaged in the business of master servicing single
family residential mortgage loans secured by properties in all 50 states and the
District of Columbia. As of December 31, 1997, the Master Servicer master
serviced more than 250,000 mortgage loans with an aggregate outstanding
principal balance of approximately $30 billion.
S-17
<PAGE>
THE SERVICER
The Mortgage Loans will be serviced by Aurora Loan Services Inc. (the
'Servicer' or 'Aurora') pursuant to the terms of the Agreement. Aurora will be
primarily responsible for the servicing of the Mortgage Loans. Aurora, an
affiliate of Lehman Brothers Holdings Inc. and an affiliate of the Seller, the
Depositor, and the Underwriter, began operations as a servicer of residential
mortgage loans in August 1997 following the acquisition of substantially all of
the assets and a majority of the management and employees of Harbourton
Financial Services L.P. ('Harbourton'). Prior to such acquisition, Harbourton
sold a substantial portion of its servicing portfolio, generally retaining loans
with higher rates of delinquency. Aurora's executive offices are located at 2530
South Parker Road, Suite 601, Aurora, Colorado 80014 and its centralized real
estate loan servicing facility is located at 601 Fifth Avenue, Scottsbluff,
Nebraska 69361. Aurora has been approved to service mortgage loans for GNMA,
FNMA, and FHLMC.
As of March 31, 1998, Aurora's total loan servicing and subservicing
portfolio included loans with an aggregate outstanding principal balance of
approximately $4.30 billion, of which the substantial majority are subserviced
for Lehman Brothers Holdings Inc. The following table sets forth certain
information regarding the delinquency and foreclosure experience of Aurora and
Harbourton with respect to conventional mortgage loans. The indicated periods of
delinquency are based on the number of days past due on a contractual basis.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------- MARCH 31,
1994 1995 1996 1997(3) 1998(3)
------ ------ ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Total mortgage loans........................................... $1,061 $1,625 $1,765 $ 1,203 $ 1,195
Percentage of mortgage loans delinquent by period of
delinquency(l)(2)
30 to 59 days................................................ 1.93% 2.26% 1.92% 3.21% 3.04%
60 to 89 days................................................ 0.40 0.46 0.45 0.73 0.66
90 days or more.............................................. 0.35 0.24 0.25 0.28 0.24
------ ------ ------ ------- ---------
Total percentage of mortgage loans delinquent(l)(2)............ 2.68% 2.96% 2.62% 4.22% 3.94%
In foreclosure (excluding bankruptcies)...................... 0.50 0.99 1.16 1.99 1.93
In bankruptcy................................................ 0.57 0.36 0.47 0.78 0.87
------ ------ ------ ------- ---------
Total(2)....................................................... 3.75% 4.31% 4.25% 6.99% 6.74%
</TABLE>
- - ------------------
(1) Delinquency information is for conventional loans only, excluding
bankruptcies.
(2) Percentages are based on the number of mortgage loans.
(3) Excludes information related to the servicing of certain sub-prime loans
acquired in 1997 and 1998.
The above delinquency and foreclosure data represent the recent experience
of Aurora. The loans in Aurora's servicing portfolio may differ significantly
from the Mortgage Loans. The actual loss and delinquency experience on the
Mortgage Loans will depend, among other things, on the value of the Mortgaged
Properties securing such Mortgage Loans and the ability of mortgagors to make
required payments. There can be no assurance, and no representation is made,
that the delinquency experience with respect to the Mortgage Loans will be
similar to that reflected in the tables above, nor is any representation made as
to the rate at which losses may be experienced on liquidation of defaulted
Mortgage Loans.
The likelihood that mortgagors will become delinquent in the payment of
their mortgage loans and the rate of any subsequent foreclosures may be affected
by a number of factors related to borrowers' personal circumstances, including,
for example, unemployment or change in employment (or in the case of
self-employed mortgagors or mortgagors relying on commission income,
fluctuations in income), marital separation and a mortgagors' equity in the
related mortgaged property. In addition, delinquency and foreclosure experience
may be sensitive to adverse economic conditions, either nationally or
regionally, may exhibit seasonal variations and may be influenced by the level
of interest rates and servicing decisions on the applicable mortgage loans.
Regional economic conditions (including declining real estate values) may
particularly affect delinquency and foreclosure experience on mortgage loans to
the extent that mortgaged properties are concentrated in certain geographic
areas.
S-18
<PAGE>
THE SPECIAL SERVICER
The information set forth in this section has been provided by the Special
Servicer, and none of the Depositor, the Trustee or the Underwriter makes any
representations or warranties as to the accuracy or completeness of such
information.
Ocwen Federal Bank FSB ('Ocwen' or the 'Special Servicer') is 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. Ocwen is
a wholly-owned subsidiary of Ocwen Financial Corporation, a public financial
services holding company. At March 31, 1998, Ocwen had approximately $2.488
billion in assets, approximately $2.234 billion in liabilities and approximately
$254 million in equity. At March 31, 1998, Ocwen's tangible and leverage capital
ratio was approximately 10.24% and its risk-based capital ratio was
approximately 12.82%. For the three months ended March 31, 1998, Ocwen's income
from continuing operations was approximately $19 million.
The primary business of the Special Servicer 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 tables set forth, for the non-conforming credit mortgage loan
('BCD Mortgage Loan') servicing portfolio serviced by the Special Servicer,
certain information relating to the delinquency, foreclosure, REO and loss
experience with respect to such mortgage loans (including loans in foreclosure
included in the Special Servicer'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 that will be
sent to investors will be compiled, to the extent relating to Mortgage Loans
serviced by the Special Servicer, using the same methodology as that used to
compile the information contained in the tables below.
DELINQUENCIES AND FORECLOSURES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
-------------------------------------- ------------------------------------------
PERCENT PERCENT
BY NO. BY PERCENT BY BY NO. PERCENT BY
OF DOLLAR BY NO. DOLLAR OF BY DOLLAR BY NO. DOLLAR
LOANS AMOUNT OF LOANS AMOUNT LOANS AMOUNT OF LOANS AMOUNT
------ -------- -------- ------- ------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Portfolio......... 2,834 $305,085 100.00% 100.00% 21,827 $2,318,261 100.00% 100.00%
Period of Delinquency:
30-59 Days............ 107 10,554 3.78% 3.46% 437 41,429 2.00% 1.79%
60-89 Days............ 38 4,321 1.34% 1.42% 171 17,803 0.78% 0.77%
90 Days or more....... 138 17,969 4.87% 5.89% 302 36,878 1.38% 1.59%
Total Delinquent
Loans................. 283 32,844 9.99% 10.77% 910 96,110 4.17% 4.15%
Loans in
Foreclosure(1)........ 136 17,805 4.80% 5.84% 281 34,663 1.29% 1.50%
<CAPTION>
AS OF
MARCH 31, 1998
--------------------------------------------
PERCENT PERCENT
BY NO. BY DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Total Portfolio................................................... 34,425 $3,494,243 100.00% 100.00%
Period of Delinquency:
30-59 Days...................................................... 527 49,571 1.53% 1.42%
60-89 Days...................................................... 416 40,327 1.21% 1.15%
90 Days or more................................................. 643 65,543 1.87% 1.88%
Total Delinquent Loans............................................ 1,586 155,441 4.61% 4.45%
Loans in Foreclosure(1)........................................... 498 56,884 1.45% 1.63%
</TABLE>
- - ------------------
(1) Loans in foreclosure are also included under the heading 'Total Delinquent
Loans.'
S-19
<PAGE>
REAL ESTATE OWNED
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997 MARCH 31, 1998
-------------------- --------------------- ---------------------
BY NO. BY DOLLAR BY NO. DOLLAR BY NO. BY DOLLAR
OF LOANS AMOUNT OF LOANS AMOUNT OF LOANS AMOUNT
-------- --------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Total Portfolio............................ 2,834 $ 305,085 21,827 $2,318,261 34,425 $3,494,243
Foreclosed Loans(1)........................ 34 3,329 66 7,387 92 11,185
Foreclosure Ratio(2)....................... 1.20% 1.09% 0.30% 0.32% 0.27% 0.32%
</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 principal balance or
number of Foreclosed Loans divided by the aggregate principal balance, or
number, as applicable, of mortgage loans in the total Portfolio at the end
of the indicated period.
LOAN GAIN/(LOSS) EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER AS OF DECEMBER AS OF MARCH
31, 1996 31, 1997 31, 1998
----------------- ----------------- --------------
<S> <C> <C> <C>
Total Portfolio(1)......................................... $ 305,085 $ 2,318,261 $3,494,243
Net Gains/(Losses)(2)...................................... 24 (1,209) (387)
Net Gains/(Losses) as a Percentage of Total Portfolio...... 0.01% (0.05)% (0.01)%
</TABLE>
- - ------------------
(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.
The above delinquency, foreclosure, real estate owned and loss statistics
represent the recent experience of Ocwen. The loans in Ocwen's servicing
portfolio may differ significantly from the Mortgage Loans. The actual loss and
delinquency experience on the Mortgage Loans will depend, among other things, on
the value of the Mortgaged Properties securing such Mortgage Loans and the
ability of mortgagors to make required payments. There can be no assurance, and
no representation is made, that the delinquency experience with respect to the
Mortgage Loans will be similar to that reflected in the tables above, nor is any
representation made as to the rate at which losses may be experienced on
liquidation of defaulted Mortgage Loans.
AAMES CAPITAL CORPORATION'S LOAN PROGRAM
All of the Mortgage Loans were acquired by the Seller from Aames Capital
Corporation ('Aames' or the 'Transferor').
The information set forth below concerning Aames has been provided by
Aames. None of the Depositor, the Trustee or the Underwriter makes any
representation as to the accuracy or completeness of such information.
Aames was incorporated in the State of California on August 13, 1993 and is
a wholly owned subsidiary of Aames Financial Corporation ('AFC'). Aames is
primarily engaged in acquiring, owning, transferring and servicing Mortgage
Loans. Aames maintains its principal offices in Los Angeles, California.
Approximately 25.56% of the Mortgage Loans acquired by Aames were
originated by one or more subsidiaries of AFC ('Affiliated Originators'). The
remaining 74.44% of the Mortgage Loans were acquired by Aames, directly, or
indirectly through one of the Affiliated Originators, and were originated by
entities unaffiliated with AFC ('Unaffiliated Originators') (together with
Affiliated Originators, the 'Originators').
S-20
<PAGE>
UNDERWRITING GUIDELINES
All Mortgage Loans originated by Affiliated Originators have been
underwritten in accordance with standard guidelines (the 'Aames Guidelines')
developed by Aames and the related Affiliated Originator for customary
application in the Affiliated Originator's loan origination activities, as
described below. Mortgage Loans originated by Unaffiliated Originators generally
are reunderwritten in accordance with the applicable Aames Guidelines. In
connection with certain purchases of Mortgage Loans from Unaffiliated
Originators, Aames may decide, after evaluating a number of factors, including
Aames' previous experiences with a particular seller, the size of the loan
portfolio and other relevant information to complete such purchase without
reunderwriting the entire loan portfolio. In such cases, Aames generally will
reunderwrite a statistically significant sample of the loans in that portfolio
to confirm compliance with the Aames Guidelines.
The Aames Guidelines generally are applied to evaluate the value and
adequacy of the Mortgaged Property as collateral and to evaluate the Mortgagor's
credit standing and repayment ability. In determining the adequacy of the
Mortgaged Property as collateral, the related Originator obtains an appraisal of
property considered for financing. The appraiser is required to inspect the
property and verify that it is in acceptable condition and that construction, if
new, has been completed. The appraisal is based on the market value of
comparable homes and is conducted substantially in accordance with mortgage
banking industry appraisal standards. In connection with Aames reunderwriting of
the Mortgage Loans originated by Unaffiliated Originators, Aames or an
Affiliated Originator will have reviewed the appraisal values for all of the
Mortgaged Properties securing such Mortgage Loans; however, Aames or an
Affiliated Originator generally has not reappraised any such Mortgage Loans.
There can be no assurance that if such Mortgage Loans were reappraised by Aames
in accordance with the applicable Aames Guidelines that the appraised value of
such Mortgaged Properties would not be lower than the appraised value determined
at origination by or on behalf of the related Unaffiliated Originators.
In general, a prospective borrower applying for a Mortgage Loan is required
to fill out a detailed application designed to provide the Originator pertinent
information. As part of the description of the borrower's financial condition,
the borrower generally is required to provide a current list of assets and
liabilities and a statement of income and expenses, as well as an authorization
to apply for a credit report that summarizes the borrower's credit history. The
Originator obtains credit information from credit reporting agencies. In many
cases, the credit information obtained will include major derogatory credit
items such as credit write-offs, outstanding judgments and prior bankruptcies.
The Originator generally verifies the borrower's employment but in many cases
does not verify the borrower's income.
Once all the signed loan documents, including the promissory note and a
security instrument (i.e., mortgage, deed of trust or security deed), and all
applicable employment, credit and property information are received, a
determination is made as to whether to make the loan. The primary (but not the
only) factor considered by the Originator in making this determination is the
combined Loan-to-Value Ratio of the related Mortgaged Property, taking into
account any existing Senior Liens and the principal amount of the loan made with
respect to the related Mortgaged Property. Generally, a Mortgaged Property with
a lower combined Loan-to-Value Ratio provides greater Security than a Mortgaged
Property with a higher combined Loan-to-Value Ratio.
After expiration of any three business day rescission period that is
required by the federal Truth in Lending Act and the security instrument is
ready for recordation, the loan is fully funded. Repayment of principal and
interest is generally scheduled to begin approximately one month after funding
and, in many cases, the Originator, solely at the direction of the related
borrower, will withhold out of the related loan proceeds at origination the
first monthly payment to become due on such loan. The Aames Guidelines generally
require title insurance coverage issued at origination by an approved title
insurance company issuing a standard form title insurance policy. Such title
policy is required to be in an amount at least equal to the original principal
amount of the related Mortgage Loan.
Notwithstanding the foregoing, in circumstances deemed appropriate by
Aames, certain of the Aames Guidelines may be modified or waived with respect to
some or all of the Mortgage Loans included in the Mortgage Pool.
S-21
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The Mortgage Loans were originated in accordance with the policies set
forth under 'AAMES CAPITAL CORPORATION'S LOAN PROGRAM.' All of the Mortgage
Loans are mortgage loans bearing either adjustable interest rates (having
initial fixed rate periods of six months, two years, three years or five years)
or fixed interest rates (the 'Mortgage Rates' or the 'Loan Rates') and evidenced
by promissory notes (the 'Mortgage Notes') secured by deeds of trust or
mortgages on Mortgaged Properties.
The Mortgage Pool will consist of approximately 2,432 conventional,
adjustable and fixed rate, fully amortizing and balloon, Mortgage Loans with
original terms to maturity from the first due date of the scheduled monthly
payment (a 'Scheduled Payment') of not more than 361 months, having an aggregate
principal balance as of the Cut-Off Date of approximately $209,850,337.79 (the
'Aggregate Cut-Off Date Principal Balance'). Because the Aames Guidelines do not
conform to FNMA or FHLMC guidelines, the Mortgage Loans are likely to experience
higher rates of delinquency, foreclosure and bankruptcy than if they had been
underwritten to a higher standard. Interest on the Mortgage Loans accrues on the
basis of a 360-day year consisting of twelve 30-day months.
Wherever reference is made herein to a percentage of some or all of the
Mortgage Loans, such percentage is determined (unless otherwise specified) on
the basis of the Aggregate Cut-Off Date Principal Balance of such Mortgage
Loans.
The Mortgage Pool will include fixed rate Mortgage Loans (the 'Fixed Rate
Mortgage Loans'), which will consist of approximately 1,221 Mortgage Loans
having an aggregate Principal Balance as of the Cut-Off Date of approximately
$83,638,892.99, and adjustable rate Mortgage Loans (the 'Adjustable Rate
Mortgage Loans'), which will consist of approximately 1,211 Mortgage Loans
having an aggregate Principal Balance as of the Cut-Off Date of approximately
$126,211,444.80. Each Adjustable Rate Mortgage Loan provides for semi-annual
adjustment of the applicable Mortgage Rate, as specified in the related Mortgage
Note, based on the Six-Month LIBOR Index (the 'Index,' as defined under '--The
Index' below) and for corresponding adjustments to the monthly payment amount
due thereon, in each case as specified in the related Mortgage Note and subject
to the limitations described under '--Adjustable Rate Mortgage Loans' herein,
except that with respect to approximately 75.17% of such Mortgage Loans (the
'Delayed Adjustment Mortgage Loans'), the first Mortgage Rate adjustment for
such Mortgage Loan will occur after an initial period ranging from two to five
years as described herein.
All of the Mortgage Loans are secured by first mortgages or deeds of trust
or other similar security instruments creating first liens on one- to
four-family residential properties consisting of one- to four-family dwelling
units, individual condominium units, manufactured housing or 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, which acquired the
Mortgage Loans from Aames.
Pursuant to its terms, each Mortgage Loan, other than a loan secured by a
condominium unit, is required to be covered by a standard hazard insurance
policy in an amount equal to the lower of the unpaid principal amount thereof or
the replacement value of the improvements on the Mortgaged Property. Generally,
a condominium association is responsible for maintaining hazard insurance
covering the entire building. See 'SERVICING OF LOANS--Maintenance of Insurance
Policies and Other Servicing Procedures' in the Prospectus.
Approximately 34.33% of the Mortgage Loans have current Loan-to-Value
Ratios in excess of 80%. None of such Mortgage Loans are covered by primary
mortgage insurance policies. The 'Loan-to-Value Ratio' of a Mortgage Loan at any
time is the ratio of the principal balance of such Mortgage Loan at the date of
determination to (a) in the case of a purchase, the lesser of the sale price of
the Mortgaged Property and its appraised value at the time of sale, or (b) in
the case of a refinance or modification, the appraised value of the Mortgaged
Property at the time of such refinance or modification.
As of the Cut-Off Date, approximately 0.88% of the Mortgage Loans were not
more than one Scheduled Payment delinquent, and approximately 0.05% of the
Mortgage Loans were not more than two Scheduled Payments delinquent.
S-22
<PAGE>
Approximately 72.91% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment premium in connection with certain full or partial
prepayments of principal. Generally, each such Mortgage Loan provides for
payment of a prepayment premium in connection with certain partial prepayments
and prepayments in full made within the period of time specified in the related
Mortgage Note, ranging from one to five years from the date of origination of
such Mortgage Loan, as described herein. The amount of the applicable prepayment
premium, to the extent permitted under applicable state law, is as provided in
the related Mortgage Note; generally, such amount is equal to six months'
interest on any amounts prepaid in excess of 20% of the then original principal
balance of the related Mortgage Loan during any 12 month period.
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the Cut-Off Date. Prior to the issuance of the
Certificates, Mortgage Loans may be removed from the Trust Fund as a result of
incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. In addition, a limited number of other mortgage loans
may be included in the Trust Fund prior to the issuance of the Certificates.
<TABLE>
<CAPTION>
AGGREGATE FIXED RATE ADJUSTABLE RATE
------------------ ----------------- ----------------
<S> <C> <C> <C>
Number of Mortgage Loans......................... 2,432 1,221 1,211
Aggregate Principal Balance...................... $209,850,337.79 $83,638,892.99 $126,211,444.80
Mortgage Rates:
Weighted Average............................... 9.905% 10.34% 9.62%
Range.......................................... 5.69% to 17.50% 7.68% to 17.50% 5.69% to 16.20%
Weighted Average Remaining Term to Maturity (in
months)........................................ 338 311 355
</TABLE>
The Principal Balances of the Mortgage Loans range from approximately
$1,991.01 to $498,895.21. The Mortgage Loans had an average Principal Balance of
approximately $86,287.15.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately 76.50%, and no Mortgage has a Loan-to-Value Ratio at
origination exceeding 92.86%.
No more than approximately 0.40% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-Off Date the number, aggregate
Principal Balance and percentage of the Mortgage Loans having the stated
characteristics shown in the tables in each range. (The sum of the amounts of
the aggregate Principal Balances and the percentages in the following tables may
not equal the totals due to rounding.)
S-23
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF ORIGINAL LOAN-TO-VALUE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
5.001 to 10.000...................................... 4 $ 43,248.77 0.02%
10.001 to 15.000...................................... 8 108,519.69 0.05
15.001 to 20.000...................................... 15 319,057.01 0.15
20.001 to 25.000...................................... 29 907,002.14 0.43
25.001 to 30.000...................................... 29 1,115,746.44 0.53
30.001 to 35.000...................................... 38 1,880,647.17 0.90
35.001 to 40.000...................................... 26 1,034,810.35 0.49
40.001 to 45.000...................................... 44 2,042,002.47 0.97
45.001 to 50.000...................................... 74 3,680,677.24 1.75
50.001 to 55.000...................................... 44 2,542,874.02 1.21
55.001 to 60.000...................................... 105 6,371,186.16 3.04
60.001 to 65.000...................................... 249 15,718,060.51 7.49
65.001 to 70.000...................................... 227 17,907,798.72 8.53
70.001 to 75.000...................................... 351 28,897,520.57 13.77
75.001 to 80.000...................................... 553 55,238,430.82 26.32
80.001 to 85.000...................................... 197 19,599,821.76 9.34
85.001 to 90.000...................................... 433 51,591,503.20 24.58
90.001 to 95.000...................................... 6 851,430.75 0.41
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average original loan-to-value ratio is approximately 76.50%.
S-24
<PAGE>
MORTGAGE RATE(1)
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF MORTGAGE RATIOS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
5.501 to 6.000...................................... 1 $ 45,163.78 0.02%
6.001 to 6.500...................................... 1 159,449.84 0.08
6.501 to 7.000...................................... 5 738,432.88 0.35
7.001 to 7.500...................................... 20 2,761,990.24 1.32
7.501 to 8.000...................................... 55 6,767,271.10 3.22
8.001 to 8.500...................................... 153 17,318,539.24 8.25
8.501 to 9.000...................................... 259 30,439,085.21 14.51
9.001 to 9.500...................................... 334 30,099,513.32 14.34
9.501 to 10.000...................................... 412 40,734,668.58 19.41
10.001 to 10.500...................................... 274 21,626,148.72 10.31
10.501 to 11.000...................................... 348 27,835,398.19 13.26
11.001 to 11.500...................................... 159 9,583,706.16 4.57
11.501 to 12.000...................................... 127 7,807,564.11 3.72
12.001 to 12.500...................................... 83 4,274,748.88 2.04
12.501 to 13.000...................................... 89 4,552,178.62 2.17
13.001 to 13.500...................................... 44 2,088,933.58 1.00
13.501 to 14.000...................................... 33 1,491,478.54 0.71
14.001 to 14.500...................................... 23 1,051,203.18 0.50
14.501 to 15.000...................................... 8 282,029.60 0.13
15.501 to 16.000...................................... 2 78,464.34 0.04
16.001 to 16.500...................................... 1 47,975.13 0.02
17.001 to 17.500...................................... 1 66,394.55 0.03
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
- - ------------------
(1) Reflects current Mortgage Rates of Adjustable Rate Mortgage Loans.
The weighted average Mortgage Rate is approximately 9.905% per annum.
LOAN TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
Level-Paying.......................................... 2,415 $ 208,633,491.20 99.42%
Balloon............................................... 17 1,216,846.59 0.58
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-25
<PAGE>
ORIGINAL TERMS TO MATURITY
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
49 to 60............................................ 16 $ 233,559.67 0.11%
61 to 72............................................ 1 23,969.09 0.01
73 to 84............................................ 2 27,675.56 0.01
85 to 96............................................ 2 73,801.06 0.04
109 to 120............................................ 40 1,148,048.67 0.55
133 to 144............................................ 1 34,780.92 0.02
169 to 180............................................ 382 19,203,553.78 9.15
181 to 192............................................ 2 337,069.83 0.16
229 to 240............................................ 20 1,308,068.53 0.62
265 to 276............................................ 1 97,841.80 0.05
289 to 300............................................ 1 31,456.22 0.01
349 to 360............................................ 1,963 186,921,097.33 89.07
361 to 372............................................ 1 409,415.33 0.20
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average original term to maturity is approximately 341 months.
REMAINING TERMS TO MATURITY FOR THE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF MATURITIES (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ----------------------------------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
25 to 36................................................. 1 $ 1,991.01 0.00%
37 to 48................................................. 1 10,755.80 0.01
49 to 60................................................. 16 240,801.07 0.11
61 to 72................................................. 1 23,969.09 0.01
73 to 84................................................. 2 27,675.56 0.01
85 to 96................................................. 2 73,801.06 0.04
109 to 120................................................. 40 1,148,048.67 0.55
133 to 144................................................. 2 44,675.48 0.02
157 to 168................................................. 2 89,167.72 0.04
169 to 180................................................. 379 19,421,573.12 9.25
229 to 240................................................. 20 1,308,068.53 0.62
265 to 276................................................. 1 97,841.80 0.05
289 to 300................................................. 1 31,456.22 0.01
337 to 348................................................. 1 47,028.09 0.02
349 to 360................................................. 1,963 187,283,484.57 89.25
------ ----------------- -------
Total................................................. 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average remaining term to maturity of the Mortgage Loans is
approximately 338 months.
S-26
<PAGE>
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
Alaska................................................ 1 $ 199,322.76 0.09%
Arizona............................................... 105 8,311,647.18 3.96
Arkansas.............................................. 2 147,445.07 0.07
California............................................ 332 39,381,432.28 18.77
Colorado.............................................. 85 6,966,422.13 3.32
Connecticut........................................... 34 3,019,116.21 1.44
Delaware.............................................. 4 337,537.68 0.16
District of Columbia.................................. 13 1,524,464.83 0.73
Florida............................................... 322 27,123,238.12 12.93
Georgia............................................... 49 4,399,599.92 2.10
Hawaii................................................ 24 4,611,309.88 2.20
Idaho................................................. 6 564,568.28 0.27
Illinois.............................................. 110 7,919,740.37 3.77
Indiana............................................... 65 3,380,345.72 1.61
Iowa.................................................. 5 296,245.09 0.14
Kansas................................................ 11 802,402.18 0.38
Kentucky.............................................. 19 845,914.24 0.40
Louisiana............................................. 22 1,665,542.84 0.79
Maine................................................. 1 65,504.97 0.03
Maryland.............................................. 73 6,212,005.92 2.96
Massachusetts......................................... 14 1,628,545.20 0.78
Michigan.............................................. 77 4,447,819.13 2.12
Minnesota............................................. 39 3,290,683.87 1.57
Mississippi........................................... 5 513,537.91 0.24
Missouri.............................................. 50 2,823,469.84 1.35
Montana............................................... 2 136,859.24 0.07
Nebraska.............................................. 23 1,791,183.81 0.85
Nevada................................................ 17 1,580,937.79 0.75
New Hampshire......................................... 5 344,416.90 0.16
New Jersey............................................ 56 4,420,145.25 2.11
New Mexico............................................ 13 1,145,406.50 0.55
New York.............................................. 88 7,656,987.03 3.65
North Carolina........................................ 44 2,550,376.32 1.22
Ohio.................................................. 127 8,576,700.22 4.09
Oklahoma.............................................. 4 209,863.50 0.10
Oregon................................................ 80 8,083,347.98 3.85
Pennsylvania.......................................... 107 6,155,276.32 2.93
Rhode Island.......................................... 5 444,160.93 0.21
South Carolina........................................ 40 2,287,968.36 1.09
Tennessee............................................. 40 2,543,947.50 1.21
Texas................................................. 74 7,222,409.24 3.44
Utah.................................................. 77 8,318,499.55 3.96
Vermont............................................... 1 122,993.00 0.06
Virginia.............................................. 24 2,189,668.07 1.04
Washington............................................ 115 12,503,550.90 5.96
West Virginia......................................... 2 126,278.04 0.06
Wisconsin............................................. 20 961,499.72 0.46
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
S-27
<PAGE>
CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF PRINCIPAL BALANCES ($) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
0.01 to 5,000.00.............................. 1 1,991.01 0.00%
5,000.01 to 10,000.00.............................. 14 137,342.88 0.07
10,000.01 to 15,000.00.............................. 29 376,147.82 0.18
15,000.01 to 20,000.00.............................. 55 1,000,580.96 0.48
20,000.01 to 25,000.00.............................. 76 1,750,164.04 0.83
25,000.01 to 30,000.00.............................. 110 3,093,718.48 1.47
30,000.01 to 35,000.00.............................. 103 3,377,488.71 1.61
35,000.01 to 40,000.00.............................. 112 4,252,588.54 2.03
40,000.01 to 45,000.00.............................. 107 4,606,301.09 2.20
45,000.01 to 50,000.00.............................. 124 5,934,672.42 2.83
50,000.01 to 55,000.00.............................. 116 6,101,833.41 2.91
55,000.01 to 60,000.00.............................. 122 7,072,731.45 3.37
60,000.01 to 65,000.00.............................. 105 6,591,645.95 3.14
65,000.01 to 70,000.00.............................. 124 8,362,680.19 3.99
70,000.01 to 75,000.00.............................. 110 7,998,425.92 3.81
75,000.01 to 80,000.00.............................. 93 7,247,236.46 3.45
80,000.01 to 85,000.00.............................. 70 5,791,699.27 2.76
85,000.01 to 90,000.00.............................. 88 7,716,260.54 3.68
90,000.01 to 95,000.00.............................. 78 7,227,817.29 3.44
95,000.01 to 100,000.00.............................. 87 8,499,593.61 4.05
100,000.01 to 105,000.00.............................. 59 6,064,912.63 2.89
105,000.01 to 110,000.00.............................. 74 7,966,338.99 3.80
110,000.01 to 115,000.00.............................. 43 4,835,305.18 2.30
115,000.01 to 120,000.00.............................. 56 6,590,504.05 3.14
120,000.01 to 125,000.00.............................. 47 5,759,115.11 2.74
125,000.01 to 130,000.00.............................. 48 6,117,940.20 2.92
130,000.01 to 135,000.00.............................. 27 3,578,342.17 1.71
135,000.01 to 140,000.00.............................. 24 3,300,943.30 1.57
140,000.01 to 145,000.00.............................. 27 3,860,994.47 1.84
145,000.01 to 150,000.00.............................. 21 3,103,211.21 1.48
150,000.01 to 200,000.00.............................. 142 24,365,161.48 11.61
200,000.01 to 250,000.00.............................. 75 16,708,982.01 7.96
250,000.01 to 300,000.00.............................. 31 8,624,406.20 4.11
300,000.01 to 350,000.00.............................. 24 7,838,973.95 3.74
350,000.01 to 400,000.00.............................. 7 2,615,070.08 1.25
400,000.01 to 450,000.00.............................. 1 409,415.33 0.20
450,000.01 to 500,000.00.............................. 2 969,801.39 0.46
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The average Cut-off Date Principal Balance is approximately $86,287.15.
S-28
<PAGE>
PROPERTY TYPE
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
Single Family......................................... 2,157 $ 187,567,718.99 89.38%
Multi-Family.......................................... 102 9,598,110.89 4.57
Multiple Dwelling..................................... 8 344,639.41 0.16
Condominium........................................... 161 11,961,597.62 5.70
Manufactured Housing.................................. 2 110,932.43 0.05
PUD................................................... 2 267,338.45 0.13
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
OCCUPANCY STATUS
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
OCCUPANCY STATUS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
Primary Home.......................................... 2,404 $ 208,221,174.01 99.22%
Investment............................................ 28 1,629,163.78 0.78
------ ----------------- -------
Total............................................ 2,432 $ 209,850,337.79 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
ADJUSTABLE RATE MORTGAGE LOANS
Each Adjustable Rate Mortgage Loan provides for semi-annual adjustment of
the related Mortgage Rate, as specified in the related Mortgage Note, and for
corresponding adjustments to the monthly payment amount due thereon, in each
case on each adjustment date applicable thereto (each such date, an 'Adjustment
Date'); provided that the first such adjustment for the Delayed Adjustment
Mortgage Loans will occur after an initial period of two years following
origination, in the case of approximately 60.40% of the Adjustable Rate Mortgage
Loans, three years, in the case of approximately 0.10% of the Adjustable Rate
Mortgage Loans and five years, in the case of approximately 14.68% of the
Adjustable Rate of Mortgage Loans. On each Adjustment Date for each Adjustable
Rate Mortgage Loan, the Mortgage Rate thereon will be adjusted to equal the sum,
rounded generally to the nearest multiple of 0.125%, of the Index (as described
below) and a fixed percentage amount (the 'Gross Margin'), provided that in the
substantial majority of cases the Mortgage Rate on each such Mortgage Loan
generally will not increase or decrease by more than a fixed percentage
specified in the related Mortgage Note (the 'Periodic Cap') on any related
Adjustment Date, except in the case of the first such adjustment with respect to
a Delayed Adjustment Mortgage Loan, and will not exceed a specified maximum
Mortgage Rate over the life of such Mortgage Loan (the 'Maximum Rate') or be
less than a specified minimum Mortgage Rate over the life of such Mortgage Loan
(the 'Minimum Rate'). The Mortgage Rate on a Delayed Adjustment Mortgage Loan
generally will not increase or decrease on the first Adjustment Date by more
than a fixed percentage specified in the related Mortgage Note (the 'Initial
Cap'); the weighted average of the Initial Caps is approximately 2.55% per
annum. Effective with the first monthly payment due on each Adjustable Rate
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 Mortgage Rate as so adjusted. Due to the application of the Initial Caps,
Periodic Caps and Maximum Rates, the Mortgage Rate on each such Mortgage Loan,
as adjusted on any related Adjustment Date, may be less than the sum of the
Index and the related Gross Margin, rounded as described herein. See '--The
Index' herein. The Adjustable Rate Mortgage Loans generally do not permit the
related mortgagor to convert the adjustable Mortgage Rate thereon to a fixed
Mortgage Rate.
The following tables set forth as of the Cut-Off Date the number, aggregate
Principal Balance and percentage of the Adjustable Rate Mortgage Loans having
the stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Principal Balances and the percentages in the following
tables may not equal the totals due to rounding.)
S-29
<PAGE>
MAXIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF MAXIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
12.501-13.000......................................... 4 $ 609,672.91 0.48%
13.001-13.500......................................... 4 544,485.95 0.43
13.501-14.000......................................... 17 2,518,713.15 2.00
14.001-14.500......................................... 46 6,064,033.41 4.80
14.501-15.000......................................... 105 13,579,475.61 10.76
15.001-15.500......................................... 135 17,551,526.05 13.91
15.501-16.000......................................... 194 23,592,369.31 18.69
16.001-16.500......................................... 131 14,165,568.11 11.22
16.501-17.000......................................... 187 18,001,136.70 14.26
17.001-17.500......................................... 112 9,401,339.42 7.45
17.501-18.000......................................... 118 10,174,679.40 8.06
18.001-18.500......................................... 52 3,453,685.04 2.74
18.501-19.000......................................... 49 3,385,268.23 2.68
19.001-19.500......................................... 16 907,131.70 0.72
19.501-20.000......................................... 25 1,458,305.93 1.16
20.001-20.500......................................... 9 459,074.34 0.36
20.501-21.000......................................... 5 243,733.73 0.19
21.001-21.500......................................... 1 53,270.68 0.04
22.001-22.500......................................... 1 47,975.13 0.04
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average Maximum Rate of the Adjustable Rate Mortgage Loans is
approximately 16.21% per annum.
MINIMUM RATES OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF MINIMUM RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
5.001- 5.500......................................... 1 $ 133,267.05 0.11%
5.501- 6.000......................................... 1 45,163.78 0.04
6.001- 6.500......................................... 2 299,669.36 0.24
6.501- 7.000......................................... 4 550,767.94 0.44
7.001- 7.500......................................... 17 2,376,954.13 1.88
7.501- 8.000......................................... 41 5,388,306.63 4.27
8.001- 8.500......................................... 79 10,600,605.90 8.40
8.501- 9.000......................................... 156 19,476,641.95 15.43
9.001- 9.500......................................... 159 18,697,357.11 14.81
9.501-10.000......................................... 228 24,286,931.84 19.24
10.001-10.500......................................... 130 12,418,795.30 9.84
10.501-11.000......................................... 150 14,052,639.72 11.13
11.001-11.500......................................... 75 5,297,360.72 4.20
11.501-12.000......................................... 68 5,785,911.39 4.58
12.001-12.500......................................... 30 2,348,956.88 1.86
12.501-13.000......................................... 37 2,550,245.08 2.02
13.001-13.500......................................... 16 932,919.33 0.74
13.501-14.000......................................... 11 684,145.98 0.54
14.001-14.500......................................... 3 183,204.02 0.15
14.501-15.000......................................... 2 53,625.56 0.04
16.001 and above...................................... 1 47,975,13 0.04
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average Minimum Rate of the Adjustable Rate Mortgage Loans is
approximately 9.77% per annum.
S-30
<PAGE>
GROSS MARGINS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
RANGE OF GROSS MARGINS (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
3.501- 4.000......................................... 2 $ 304,591.39 0.24%
4.001- 4.500......................................... 8 1,132,805.91 0.90
4.501- 5.000......................................... 285 31,646,812.50 25.07
5.001- 5.500......................................... 230 24,067,928.76 19.07
5.501- 6.000......................................... 266 27,108,402.32 21.48
6.001- 6.500......................................... 99 12,625,240.22 10.00
6.501- 7.000......................................... 180 16,564,072.47 13.12
7.001- 7.500......................................... 51 5,507,922.53 4.36
7.501- 8.000......................................... 40 3,680,564.07 2.92
8.001- 8.500......................................... 19 1,301,748.52 1.03
8.501- 9.000......................................... 13 968,545.49 0.77
9.001- 9.500......................................... 7 528,696.74 0.42
9.501-10.000......................................... 8 550,083.73 0.44
10.001-10.500......................................... 3 224,030.15 0.18
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average Gross Margin of the Adjustable Rate Mortgage Loans is
approximately 5.92% per annum.
NEXT ADJUSTMENT DATE OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
NEXT ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
May 1998.............................................. 11 $ 1,370,775.90 1.09%
June 1998............................................. 19 2,527,759.60 2.00
July 1998............................................. 134 15,965,704.76 12.65
August 1998........................................... 100 9,616,297.37 7.62
September 1998........................................ 16 1,709,152.52 1.35
October 1998.......................................... 2 148,543.53 0.12
August 1999........................................... 1 89,718.77 0.07
September 1999........................................ 4 769,736.73 0.61
October 1999.......................................... 11 1,200,777.54 0.95
November 1999......................................... 31 3,458,426.35 2.74
December 1999......................................... 79 10,356,192.33 8.21
January 2000.......................................... 338 35,343,632.64 28.00
February 2000......................................... 262 24,050,343.67 19.06
March 2000............................................ 9 957,365.32 0.76
February 2001......................................... 1 19,581.24 0.02
March 2001............................................ 1 103,940.16 0.08
January 2003.......................................... 96 9,417,660.74 7.46
February 2003......................................... 93 8,816,486.58 6.99
March 2003............................................ 3 289,349.05 0.23
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
The weighted average Next Adjustment Date of the Adjustable Rate Mortgage
Loans is approximately February 2000.
S-31
<PAGE>
INITIAL FIXED TERM/SUBSEQUENT ADJUSTABLE RATE TERM
OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
INITIAL FIXED TERM/SUBSEQUENT NUMBER OF AGGREGATE BY AGGREGATE
ADJUSTABLE RATE TERM MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
No Delayed Adjustment................................. 282 $ 31,338,233.68 24.83%
Two Years/Twenty-Eight Years.......................... 735 76,226,193.35 60.40
Three Years/Twenty-Seven Years........................ 2 123,521.40 0.10
Five Years/Twenty-Five Years.......................... 192 18,523,496.37 14.68
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
PERIODIC CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
1.00.................................................. 505 $ 58,507,416.61 46.36%
1.50.................................................. 706 67,704,028.19 53.64
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
INITIAL PERIODIC CAPS OF THE ADJUSTABLE RATE MORTGAGE LOANS
<TABLE>
<CAPTION>
PERCENTAGE OF
MORTGAGE LOANS
NUMBER OF AGGREGATE BY AGGREGATE
INITIAL CAP (%) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- - ------------------------------------------------------ -------------- ----------------- ----------------------
<S> <C> <C> <C>
1.00.................................................. 179 $ 19,117,560.26 15.15%
1.50.................................................. 107 12,536,752.28 9.93
2.00.................................................. 2 431,861.39 0.34
3.00.................................................. 923 94,125,270.87 74.58
------ ----------------- -------
Total............................................ 1,211 $ 126,211,444.80 100.00%
------ ----------------- -------
------ ----------------- -------
</TABLE>
THE INDEX
The Six-Month LIBOR Index. The Index applicable to the determination of
the Mortgage Rates for the Adjustable Rate Mortgage Loans will be the average of
the interbank offered rates for six-month United States dollar deposits in the
London market, calculated as provided in the related Mortgage Note (the
'Six-Month LIBOR Index') and as most recently available either (i) as of the
first business day a specified period of time prior to such Adjustment Date,
(ii) as of the first business day of the month preceding the month of such
Adjustment Date or (iii) the last business day of the second month preceding the
month in which such Adjustment Date occurs, as specified in the related Mortgage
Note.
The Six-Month LIBOR Index is referred to herein as the 'Index.' 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.
S-32
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yields to maturity on the Offered Certificates will be affected by the
rate of principal payments on the Mortgage Loans (including prepayments, which
may include amounts received by virtue of purchase, condemnation, insurance or
foreclosure), the extent to which Mortgage Loans bearing higher Mortgage Rates
prepay at a more rapid rate than Mortgage Loans with lower Mortgage Rates, the
amount and timing of mortgagor delinquencies and defaults resulting in Realized
Losses, the application of Monthly Excess Cash Flow, the purchase price for the
Certificates and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on such Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on such
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include such factors as
changes in borrowers' housing needs, job transfers, unemployment, mortgagors'
net equity in the mortgaged properties, changes in the value of the mortgaged
properties, mortgage market interest rates and servicing decisions. The Mortgage
Loans generally have due-on-sale clauses.
Approximately 72.91% of the Mortgage Loans are subject to prepayment
premiums during intervals ranging from one to five years following origination,
as described under 'DESCRIPTION OF THE MORTGAGE LOANS' herein. Such prepayment
premiums may have the effect of reducing the amount or the likelihood of
prepayment of such Mortgage Loans during such intervals.
The rate of prepayments on the Mortgage Loans is sensitive to the credit
standing of the borrower, which may improve and thereby allow the borrower to
refinance on more favorable terms, or may decline and thereby limit the
borrower's ability to refinance. The rate of prepayments on mortgage loans that
are 2/28 Loans, 3/27 Loans or 5/25 Loans and are in the initial fixed rate
period, is sensitive to prevailing interest rates. The prepayment behavior of
the 2/28 Loans, 3/27 Loans and 5/25 Loans may differ from that of the other
Mortgage Loans. As a 2/28 Loan, 3/27 Loan or 5/25 Loan approaches its initial
adjustment date, the borrower may become more likely to refinance such loan to
avoid an increase in the Mortgage Rate, even if fixed rate loans are only
available at rates that are slightly lower or higher than the Mortgage Rate
before adjustment. The existence of the applicable periodic rate cap, lifetime
cap and lifetime floor also may affect the likelihood of prepayments resulting
fromrefinancings. Generally, if prevailing interest rates fall significantly
below the interest rates on the Mortgage Loans, the Mortgage Loans are likely to
be subject to higher prepayment rates than if prevailing rates remain at or
above the interest rates on the Mortgage Loans. Conversely, if prevailing
interest rates rise significantly above the interest rates on the Mortgage
Loans, the rate of prepayments is likely to decrease.
The rate of principal payments on the Offered Certificates will be affected
by the amortization schedules of the Mortgage Loans, the rate and timing of
prepayments thereon by the mortgagors, liquidations of defaulted Mortgage Loans,
repurchases of Mortgage Loans due to certain breaches of representations and
warranties or defective documentation and purchases of defaulted Mortgage Loans
by the Special Servicer or the Directing Holder as described under 'POOLING AND
SERVICING AGREEMENT--Purchase of Certain Defaulted Mortgage Loans' and
'--Certain Rights Related to Foreclosure and the Special Servicer' herein. The
timing of changes in the rate of prepayments, liquidations and purchases of the
related Mortgage Loans may, and the timing of Realized Losses will,
significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. Because the rate and timing of principal payments on the Mortgage
Loans will depend on future events and on a variety of factors (as described
more fully herein and in the Prospectus under 'DESCRIPTION OF THE
SECURITIES--Weighted Average Life of the Securities'), no assurance can be given
as to such rate or the timing of principal payments on the Offered Certificates.
In general, the earlier a prepayment of principal of the related Mortgage Loans,
the greater the effect on an investor's yield to maturity. The effect on an
investor's yield of principal payments occurring at a rate higher (or lower)
than the rate anticipated by the investor during the period immediately
following the issuance of the Certificates may not be offset by a subsequent
like decrease (or increase) in the rate of principal payments.
S-33
<PAGE>
Prepayments, liquidations and purchases of the Mortgage Loans will result
in distributions to holders of the related Certificates of principal amounts
that would otherwise be distributed over the remaining terms of such Mortgage
Loans. The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years.
The yields on the Offered Certificates will be adversely affected by Net
Prepayment Interest Shortfalls on the Mortgage Loans.
Since the first Collection Period includes both May 1st and June 1st the
amount of principal distributed on the first Distribution Date will be larger
than otherwise would be the case and the yields on the Certificates will be
correspondingly effected.
The yields to investors in the Offered Certificates will be affected by the
exercise by the holder of the Class X Certificate of its right to cause the sale
of the assets of the Trust Fund or the exercise by the Servicer of its right to
cause the sale of the assets of the Trust Funds, as described under 'DESCRIPTION
OF THE CERTIFICATES--Special Termination of the Trust' and '--Optional
Termination of the Trust' herein, or the failure of such parties to exercise
such rights.
If the purchaser of a Certificate offered at a discount from its initial
principal amount calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is faster than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated. Conversely, if the purchaser of a Certificate
offered at a premium calculates its anticipated yield to maturity based on an
assumed rate of payment of principal that is slower than that actually
experienced on the related Mortgage Loans, the actual yield to maturity may be
lower than that so calculated.
The Certificate Interest Rates applicable to the Offered Certificates will
be affected by the level of LIBOR from time to time, and by the Mortgage Rates
of the Mortgage Loans from time to time as described under 'RISK FACTORS--Risk
of Mortgage Loan Rates Reducing Certificate Interest Rates on the Offered
Certificates.'
OVERCOLLATERALIZATION
The yield to maturity of the Offered Certificates will be affected by the
application of Monthly Excess Cashflow as described herein and by the amount of
overcollateralization. The amount of Monthly Excess Cashflow will be affected by
the delinquency, default and prepayment experience of the Mortgage Loans.
Prepayment premiums paid by borrowers will be included in the Interest
Remittance Amount for each applicable Distribution Date and, to the extent not
required for distribution of interest on the Certificates on such date, will be
included in the Monthly Excess Cashflow for such date. There can be no assurance
as to the rate at which overcollateralization will be created, or whether such
overcollateralization will be maintained at the levels described herein.
SUBORDINATION OF THE SUBORDINATE CERTIFICATES
As described herein, holders of Certificates having a relatively higher
priority of distribution will have a preferential right to receive amounts in
respect of interest to the extent of the Interest Remittance Amount and amounts
in respect of principal to the extent of the Principal Distribution Amount. In
addition, Applied Loss Amounts will be allocated in reduction of the Certificate
Principal Amounts of the Class B-1, Class M-2 and Class M-1 Certificates in
inverse order of priority of distribution. As a result, the yields to maturity
of the Subordinate Certificates will be more sensitive, in varying degrees, to
delinquencies and losses on the Mortgage Loans than the yields of Classes of
Certificates having a relatively higher priority of distribution.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will elapse
from the date of issuance of a security to the date of distribution to the
investor of each dollar distributed in net reduction of principal of such
security (assuming no losses). The weighted average lives of the Offered
Certificates will be influenced by,
S-34
<PAGE>
among other things, the rate at which principal of the related Mortgage Loans is
paid, which may be in the form of scheduled amortizations, prepayments or
liquidations.
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, 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 (the
'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 an additional 1.45% (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, 50% Prepayment
Assumption assumes a conditional prepayment rate equal to 50% of the Prepayment
Assumption. Correspondingly, 120% Prepayment Assumption assumes prepayment rates
equal to 120% of the Prepayment Assumption, and so forth. 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
Offered Certificates to predict the amount or the timing of receipt of
prepayments on the Mortgage Loans.
Since the tables were 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 Principal Balances outstanding and the weighted average lives
of the Offered 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 Offered Certificates may be made earlier or later than as indicated in
the tables.
The tables on page S-38 were prepared based on the following assumptions
(collectively, the 'Modeling Assumptions'): (i) the initial Class Certificate
Principal Amounts and the Certificate Interest Rates are as set forth or
described in 'DESCRIPTION OF THE CERTIFICATES;' (ii) each Scheduled Payment of
principal and interest is timely received on the first day of each month
commencing in June 1998; (iii) principal prepayments are received in full on the
last day of each month commencing in May 1998 and there are no Net Prepayment
Interest Shortfalls; (iv) there are no defaults or delinquencies on the Mortgage
Loans; (v) all Mortgage Loans amortize on the basis of a monthly, level payment
schedule; (vi) Distribution Dates occur on the 25th day of each month,
commencing June 25, 1998; (vii) there are no purchases or substitutions of the
Mortgage Loans; (viii) the Mortgage Rate of each Adjustable Rate Mortgage Loan
is adjusted on the next applicable Adjustment Date to equal the value of the
applicable Index set forth below plus the related Gross Margin, subject to any
applicable Initial Cap, Periodic Cap, Minimum Rate and Maximum Rate; (ix) the
value of LIBOR is 5.6562%;(x) the value of the Six-Month LIBOR Index is
5.7812%;(xi) there is no optional termination of the Trust Fund; (xii) there is
no special termination of the Trust Fund, except in the case of the weighted
average lives with special termination; (xiii) the Certificates are issued on
June 18, 1998; (xiv) no prepayment penalties have been collected on the Mortgage
Loans; (xv) the Fixed Rate Mortgage Loans and the Adjustable Rate Mortgage Loans
prepay at the indicated Prepayment Assumption levels; and (xvi) the Mortgage
Pool consists of 14 Mortgage Loans having the following characteristics:
S-35
<PAGE>
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
ORIGINAL REMAINING
CURRENT NEXT RATE TERM TO TERM TO
PRINCIPAL MORTGAGE ADJUSTMENT INITIAL PERIODIC MAXIMUM MINIMUM MATURITY MATURITY
BALANCE($) RATE(%) DATE MARGIN(%) CAP(%) CAP(%) RATE(%) RATE(%) (MONTHS) (MONTHS)
- - ------------- -------- ---------- --------- ------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
3,898,535.50 9.603 6/1/98 6.24701 1.15600 1.07182 15.714 9.488 360 355
15,965,704.76 9.108 7/1/98 5.77264 1.21400 1.21425 15.645 9.860 355 352
9,616,297.37 8.986 8/1/98 5.63408 1.22600 1.22584 15.581 10.015 355 353
1,857,696.05 9.584 9/1/98 5.74566 1.18157 1.18157 16.362 9.410 360 358
5,518,659.39 10.183 10/1/99 6.77250 2.93700 1.05989 16.287 10.119 360 354
10,356,192.33 9.900 12/1/99 6.59975 2.95100 1.01309 16.022 9.8000 360 356
35,343,632.64 9.826 1/1/00 6.13286 2.99300 1.22968 16.358 9.826 359 356
25,131,230.39 9.878 2/1/00 5.76788 2.99100 1.38983 16.672 9.878 359 357
9,417,660.74 9.340 1/1/03 5.28228 3.00000 1.50000 16.340 9.340 358 355
9,105,835.63 9.278 2/1/03 5.26481 3.00000 1.50000 16.278 9.278 354 353
1,541,834.97 10.143 N/A N/A N/A N/A N/A N/A 109 106
18,236,188.49 10.475 N/A N/A N/A N/A N/A N/A 180 177
1,437,366.55 10.475 N/A N/A N/A N/A N/A N/A 244 241
62,423,502.98 10.303 N/A N/A N/A N/A N/A N/A 360 357
<CAPTION>
PRINCIPAL ARM RESET
BALANCE($) INDEX FREQUENCY
- - ------------- ---------- ------------
<S> <C> <C>
3,898,535.50 6 mo LIBOR Semi-annual
15,965,704.76 6 mo LIBOR Semi-annual
9,616,297.37 6 mo LIBOR Semi-annual
1,857,696.05 6 mo LIBOR Semi-annual
5,518,659.39 6 mo LIBOR Semi-annual
10,356,192.33 6 mo LIBOR Semi-annual
35,343,632.64 6 mo LIBOR Semi-annual
25,131,230.39 6 mo LIBOR Semi-annual
9,417,660.74 6 mo LIBOR Semi-annual
9,105,835.63 6 mo LIBOR Semi-annual
1,541,834.97 N/A N/A
18,236,188.49 N/A N/A
1,437,366.55 N/A N/A
62,423,502.98 N/A N/A
</TABLE>
S-36
<PAGE>
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment scenarios.
For example, it is not expected that the Mortgage Loans will prepay at a
constant rate until maturity, that all of the Mortgage Loans will prepay at the
same rate or that there will be no default or delinquencies on the Mortgage
Loans. Moreover, the diverse remaining terms to maturity of the Mortgage Loans
could produce slower or faster principal distributions than indicated in the
tables at the various percentages of the Prepayment Assumption specified, even
if the weighted average remaining term to maturity of the Mortgage Loans is as
assumed. Any difference between such assumptions and the actual characteristics
and performance of the Mortgage Loans, or actual prepayment or loss experience,
will cause the percentages of initial Class Certificate Principal Amounts
outstanding over time and the weighted average lives of the Offered Certificates
to differ (which difference could be material) from the corresponding
information in the tables for each indicated percentage of the Prepayment
Assumption.
Subect to the foregoing discussion and assumptions, the following tables
indicate the weighted average lives of the Offered Certificates with and without
special termination of the Trust Fund as described under 'DESCRIPTION OF THE
CERTIFICATES--Special Termination of the Trust' herein and set forth the
percentages of the initial Class Certificate Principal Amounts of the Offered
Certificates that would be outstanding after each of the Distribution Dates
shown at various percentages of the Prepayment Assumption.
S-37
<PAGE>
PERCENTAGE OF INITIAL CLASS CERTIFICATE PRINCIPAL AMOUNT OF THE
OFFERED CERTIFICATES OUTSTANDING AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT
ASSUMPTION
<TABLE>
<CAPTION>
FIXED RATE MORTGAGE LOANS
ADJUSTABLE RATE MORTGAGE
LOANS CLASS A-1 CERTIFICATES CLASS A-2 CERTIFICATES CLASS M-1 CERTIFICATES
- - ---------------------------- ---------------------------- ---------------------------- ----------------------------
50% 100% 120% 175% 200% 50% 100% 120% 175% 200% 50% 100% 120% 175% 200%
DISTRIBUTION DATE 50% 100% 140% 175% 200% 50% 100% 140% 175% 200% 50% 100% 140% 175% 200%
- - ---------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.......... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100%
May 1999.................... 75 58 48 34 26 100 100 100 100 100 100 100 100 100 100
May 2000.................... 54 23 4 0 0 100 100 100 70 51 100 100 100 100 100
May 2001.................... 36 0 0 0 0 100 91 56 17 0 100 100 100 100 90
May 2002.................... 19 0 0 0 0 100 68 50 17 0 100 83 61 100 90
May 2003.................... 4 0 0 0 0 100 54 37 17 0 100 66 44 40 74
May 2004.................... 0 0 0 0 0 86 43 27 13 0 100 52 32 16 44
May 2005.................... 0 0 0 0 0 75 34 19 8 0 91 41 23 10 26
May 2006.................... 0 0 0 0 0 66 26 14 5 0 80 32 17 6 15
May 2007.................... 0 0 0 0 0 58 21 10 3 0 71 25 12 4 7
May 2008.................... 0 0 0 0 0 51 16 7 2 0 63 20 9 2 1
May 2009.................... 0 0 0 0 0 45 13 5 1 0 55 15 6 0 0
May 2010.................... 0 0 0 0 0 40 10 4 0 0 48 12 5 0 0
May 2011.................... 0 0 0 0 0 35 8 3 0 0 42 9 3 0 0
May 2012.................... 0 0 0 0 0 30 6 2 0 0 37 7 1 0 0
May 2013.................... 0 0 0 0 0 26 5 1 0 0 32 6 0 0 0
May 2014.................... 0 0 0 0 0 23 4 0 0 0 28 4 0 0 0
May 2015.................... 0 0 0 0 0 20 3 0 0 0 24 3 0 0 0
May 2016.................... 0 0 0 0 0 17 2 0 0 0 21 2 0 0 0
May 2017.................... 0 0 0 0 0 15 2 0 0 0 18 0 0 0 0
May 2018.................... 0 0 0 0 0 13 1 0 0 0 15 0 0 0 0
May 2019.................... 0 0 0 0 0 11 0 0 0 0 13 0 0 0 0
May 2020.................... 0 0 0 0 0 9 0 0 0 0 11 0 0 0 0
May 2021.................... 0 0 0 0 0 7 0 0 0 0 9 0 0 0 0
May 2022.................... 0 0 0 0 0 6 0 0 0 0 7 0 0 0 0
May 2023.................... 0 0 0 0 0 5 0 0 0 0 6 0 0 0 0
May 2024.................... 0 0 0 0 0 3 0 0 0 0 4 0 0 0 0
May 2025.................... 0 0 0 0 0 2 0 0 0 0 3 0 0 0 0
May 2026.................... 0 0 0 0 0 1 0 0 0 0 0 0 0 0 0
May 2027.................... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
May 2028.................... 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years*
Without Special
Termination............... 2.3 1.3 1.0 0.8 0.7 11.9 6.5 4.8 3.1 2.0 13.2 7.3 5.6 5.2 6.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
With Special
Termination............... 2.3 1.3 1.0 0.8 0.7 8.1 4.2 3.1 2.2 1.9 8.6 4.5 3.5 2.6 2.3
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<CAPTION>
FIXED RATE MORTGAGE LOANS
ADJUSTABLE RATE MORTGAGE
LOANS CLASS M-2 CERTIFICATES CLASS B-1 CERTIFICATES
- - ---------------------------- ---------------------------- ----------------------------
50% 100% 120% 175% 200% 50% 100% 120% 175% 200%
DISTRIBUTION DATE 50% 100% 140% 175% 200% 50% 100% 140% 175% 200%
- - ---------------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage.......... 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
May 1999.................... 100 100 100 100 100 100 100 100 100 100
May 2000.................... 100 100 100 100 100 100 100 100 100 100
May 2001.................... 100 100 100 100 100 100 100 100 100 100
May 2002.................... 100 83 61 38 68 100 83 61 38 29
May 2003.................... 100 66 44 25 17 100 66 44 25 17
May 2004.................... 100 52 32 16 10 100 52 32 16 8
May 2005.................... 91 41 23 10 6 91 41 23 8 2
May 2006.................... 80 32 17 6 2 80 32 17 3 0
May 2007.................... 71 25 12 3 0 71 25 12 0 0
May 2008.................... 63 20 9 0 0 63 20 7 0 0
May 2009.................... 55 15 6 0 0 55 15 3 0 0
May 2010.................... 48 12 5 0 0 48 11 0 0 0
May 2011.................... 42 9 1 0 0 42 7 0 0 0
May 2012.................... 37 7 0 0 0 37 4 0 0 0
May 2013.................... 32 6 0 0 0 32 1 0 0 0
May 2014.................... 28 4 0 0 0 28 0 0 0 0
May 2015.................... 24 1 0 0 0 24 0 0 0 0
May 2016.................... 21 0 0 0 0 21 0 0 0 0
May 2017.................... 18 0 0 0 0 18 0 0 0 0
May 2018.................... 15 0 0 0 0 15 0 0 0 0
May 2019.................... 13 0 0 0 0 13 0 0 0 0
May 2020.................... 11 0 0 0 0 9 0 0 0 0
May 2021.................... 9 0 0 0 0 6 0 0 0 0
May 2022.................... 7 0 0 0 0 4 0 0 0 0
May 2023.................... 6 0 0 0 0 1 0 0 0 0
May 2024.................... 3 0 0 0 0 0 0 0 0 0
May 2025.................... 0 0 0 0 0 0 0 0 0 0
May 2026.................... 0 0 0 0 0 0 0 0 0 0
May 2027.................... 0 0 0 0 0 0 0 0 0 0
May 2028.................... 0 0 0 0 0 0 0 0 0 0
Weighted Average
Life in Years*
Without Special
Termination............... 13.2 7.2 5.5 4.6 4.5 13.1 7.1 5.4 4.3 4.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
With Special
Termination............... 8.6 4.5 3.4 2.6 2.3 8.6 4.5 3.4 2.6 2.3
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
</TABLE>
- - ------------------
* The weighted average life of an Offered Certificate is determined by (i)
multiplying the net reduction, if any, of the applicable Class Certificate
Principal Amount by the number of years from the date of issuance of the
Offered Certificates to the related Distribution Date, (ii) adding the results
and (iii) dividing the sum by the aggregate of the net reductions of Class
Certificate Principal Amount described in (i) above.
S-38
<PAGE>
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Home Equity Loan Asset-Backed Certificates, Series 1998-2 will consist
of the following Classes: Class A-1, Class A-2, Class M-1, Class M-2, Class B-1,
Class X and Class R. (The Class A-1, Class A-2, Class M-1, Class M-2, and Class
B-1 Certificates collectively referred to as the 'Offered Certificates.') Only
the Offered Certificates are offered hereby.
Each Class of Offered Certificates will have the respective approximate
initial aggregate Certificate Principal Amount (a 'Class Certificate Principal
Amount') set forth or described on the cover page hereof. The aggregate
Certificate Principal Amount of the Certificates, and the initial Class
Certificate Principal Amount of each Class of Offered Certificates, may be
increased or decreased by up to five percent to the extent that the Aggregate
Cut-Off Date Principal Balance of the Mortgage Loans is increased or decreased
as described under 'DESCRIPTION OF THE MORTGAGE LOANS' herein.
The Certificates will evidence the entire beneficial ownership interest in
the Trust Fund. The Trust Fund will generally consist of (i) the Mortgage Loans,
(ii) such assets as from time to time are identified as deposited in respect of
the Mortgage Loans in the Distribution Amount, (iii) property acquired by
foreclosure of such Mortgage Loans or deed in lieu of foreclosure and (iv) any
applicable insurance policies and all proceeds thereof.
Distributions on the Offered Certificates will be made on each Distribution
Date, commencing in June 1998, to Certificateholders of record on the applicable
Record Date. The 'Record Date' for each Distribution Date will be the close of
business on the Business Day immediately preceding such Distribution Date. A
'Business Day' is generally any day other than a Saturday or Sunday or a day on
which banks in New York, Maryland, Minnesota or North Carolina (or, as to the
Servicer or the Special Servicer, such other states as are specified in the
Agreement) are closed.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee, or (ii) at the
request, submitted to the Trustee in writing at least five Business Days prior
to the related Record Date, of any holder of an Offered Certificate having an
initial Certificate Principal Amount of not less than $2,500,000 by wire
transfer (at the expense of such holder) in immediately available funds;
provided, that the final distribution in respect of any Offered Certificate will
be made only upon presentation and surrender of such Certificate at the
Corporate Trust Office of the Trustee. See 'POOLING AND SERVICING AGREEMENT--The
Trustee' herein.
The Offered Certificates (the 'Book-Entry Certificates') will be issued,
maintained and transferred on the book-entry records of The Depository Trust
Company ('DTC') and its Participants (as defined herein). The Book-Entry
Certificates will be issued in minimum denominations of: $1,000 and integral
multiples of $1 in excess thereof. The Class X Certificate will be issued as a
single certificate and maintained in definitive, fully registered form,
representing the entire Percentage Interest in such Class.
Each Class of Book-Entry Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. No person acquiring
an interest in a Book-Entry Certificate (each, a 'beneficial owner') will be
entitled to receive a certificate representing such person's interest (a
'Definitive Certificate'), except as set forth below under '--Book-Entry
Registration--Definitive Certificates.' Unless and until Definitive Certificates
are issued for the Book-Entry Certificates under the limited circumstances
described herein, all references to actions by Certificateholders with respect
to the Book-Entry Certificates shall refer to actions taken by DTC upon
instructions from its Participants, and all references herein to distributions,
notices, reports and statements to Certificateholders with respect to the
Book-Entry Certificates shall refer to distributions, notices, reports and
statements to DTC or Cede & Co., as the registered holder of the Book-Entry
Certificates, for distribution to Beneficial Owners by DTC in accordance with
DTC procedures.
BOOK-ENTRY REGISTRATION
General. Persons acquiring beneficial ownership interests in the
Book-Entry Certificates ('Certificate Owners') will hold their Certificates
through 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. Each Class of Book-Entry Certificates will be
issued in one or more certificates that equal the initial Class Certificate
Principal Amount of the related Class of Offered Certificates and will initially
be registered in the name of Cede
S-39
<PAGE>
& 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'). Unless and until Definitive Certificates are issued, it is
anticipated that the only 'Certificateholder' of the Offered 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 (a 'Participant') 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 Offered Certificate from the Trustee through DTC and DTC
participants. While the Offered 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 Offered Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Offered Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Offered 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 Offered Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Offered 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 Offered 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
CONSIDERATIONS--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
S-40
<PAGE>
in accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Cedel Participants and Euroclear Participants may not deliver instructions
directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Cedel 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
S-41
<PAGE>
participants in accordance with DTC's normal procedures. Each DTC participant
will be responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--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 Offered Certificates which
conflict with actions taken with respect to other Offered Certificates.
Definitive 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 Default (as defined herein), beneficial owners having
Percentage Interests aggregating not less than 51% of the aggregate Class
Certificate Principal Amount 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 Offered 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, the Servicer, the
Special 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.
S-42
<PAGE>
DISTRIBUTION DATES
On each Distribution Date, the holders of the Offered Certificates will be
entitled to receive, from amounts then on deposit in the Distribution Account,
to the extent of funds available therefor in accordance with the priorities and
in the amounts described above, an aggregate amount equal to the sum of (a) the
Interest Remittance Amount for each Class of Offered Certificates and (b) the
Principal Distribution Amount.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than one Business Day prior to each Distribution Date, the
Interest Remittance Amount and the Principal Remittance Amount in respect of the
previous Collection Period shall be deposited into the Distribution Account and
shall constitute the 'Available Funds' for such Distribution Date.
The amount to be distributed on each Class of Offered Certificates in
respect of interest and principal in accordance with the terms of the Agreement
will be calculated by the Servicer for the first Distribution Date and for each
Distribution Date thereafter by the Master Servicer.
DISTRIBUTIONS OF INTEREST
The amount of interest distributable on each Distribution Date in respect
of each Class of Certificates will equal the sum of Current Interest and, in the
case of the Senior Certificates, any Carryforward Interest (each as defined
herein) for such date, to the extent of the Interest Remittance Amount on such
Distribution Date. Interest will accrue on the Offered Certificates on the basis
of a 360-day year and the actual number of days elapsed in each Accrual Period.
The 'Certificate Interest Rate' for each Class of Offered Certificates will
be as follows:
(1) Interest will accrue on the Class A-1 Certificates with respect to
each Distribution Date at a per annum rate equal to the least of (i) LIBOR
(as defined herein) plus 0.08% (the 'Class A-1 Spread'), (ii) 9.50% and
(iii) the weighted average (by Scheduled Principal Balance) of the Net
Mortgage Rates (as defined herein) of the Mortgage Loans as of the first
day of the related Collection Period (as defined herein) (the 'Net Funds
Cap').
(2) Interest will accrue on the Class A-2 Certificates with respect to
each Distribution Date at a per annum rate equal to the least of (i) LIBOR
plus 0.21% (the 'Class A-2 Spread'), (ii) 9.50% and (iii) the Net Funds
Cap.
(3) Interest will accrue on the Class M-1 Certificates with respect to
each Distribution Date at a per annum rate equal to the least of (i) LIBOR
plus 0.40% (the 'Class M-1 Spread'), (ii) 9.50% and (iii) the Net Funds
Cap.
(4) Interest will accrue on the Class M-2 Certificates with respect to
each Distribution Date at a per annum rate equal to the least of (i) LIBOR
plus 0.60% (the 'Class M-2 Spread'), (ii) 9.50% and (iii) the Net Funds
Cap.
(5) Interest will accrue on the Class B-1 Certificates with respect to
each Distribution Date at a per annum rate equal to the least of (i) LIBOR
plus 1.30% (the 'Class B-1 Spread'), (ii) 9.50% and (iii) the Net Funds
Cap;
provided, that if the Class X Certificateholder does not exercise its option to
terminate the Trust Fund or repurchase the Offered Certificates when it is first
entitled to do so, as described under '--Special Termination of the Trust'
herein, then with respect to each succeeding Distribution Date the Class A-2
Spread will be increased to 0.42%, the Class M-1 Spread will be increased to
0.60%, the Class M-2 Spread will be increased to 0.90% and the Class B-1 Spread
will be increased to 1.95%. Each of the Class A-1 Spread, the Class A-2 Spread,
the Class M-1 Spread, the Class M-2 Spread and the Class B-1 Spread is referred
to herein as the 'Spread' applicable to such Class. The 'Net Mortgage Rate' for
any Mortgage Loan at any time equals the Mortgage Rate thereof minus the
Aggregate Expense Rate. The 'Aggregate Expense Rate' equals the sum of the
Master Servicing Fee Rate, the Servicing Fee Rate (or Basic Fee Rate, as
applicable) and the Trustee Fee Rate (each as defined herein). The 'Certificate
Principal Amount' of any Offered Certificate will equal such Certificate
Principal Amount as of the Closing Date as reduced by all amounts previously
distributed on such Certificate in respect of principal and any Applied Loss
Amount previously allocated thereto.
With respect to each Distribution Date, the 'Accrual Period' applicable to
each Class of Offered Certificates will be the period beginning on the
immediately preceding Distribution Date (or on the Closing Date,
S-43
<PAGE>
in the case of the first Accrual Period) and ending on the day immediately
preceding the related Distribution Date.
With respect to any Distribution Date, to the extent that (a) the amount
payable if clause (i) or (ii) of the definition of Certificate Interest Rate
applicable to any Class of Offered Certificates is used to calculate interest
exceeds (b) the Net Funds Cap (such excess, a 'Basis Risk Shortfall'), the
holders of Certificates of such Class will be entitled to the amount of such
Basis Risk Shortfall or Unpaid Basis Risk Shortfall with interest thereon at the
applicable Certificate Interest Rate before the Class X and Class R Certificates
are entitled to any distributions. Holders of such Class of Offered Certificates
will be entitled to receive the amount of such Basis Risk Shortfall from Monthly
Excess Cashflow, 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'). The
source of funds on deposit in the Basis Risk Reserve Fund will be limited to
amounts that would otherwise be distributed on the Class X Certificate.
Notwithstanding the foregoing, the amount of Basis Risk Shortfall for any Class
in respect of any Distribution Date may not exceed the excess of (x) the amount
payable at the applicable Maximum Certificate Interest Rate over (y) the amount
payable at the Net Funds Cap. The 'Unpaid Basis Risk Shortfall' for any Class of
Offered Certificates on any Distribution Date will equal the aggregate of all
Basis Risk Shortfalls for such Class for all previous Distribution Dates,
together with interest thereon at the applicable Certificate Interest Rate, less
all payments made to the holders of such Class of Certificates in respect of
such Basis Risk Shortfalls on or prior to such Distribution Date.
The 'Maximum Certificate Interest Rate' for any Class of Offered
Certificates and any Distribution Date will be a per annum rate equal to 9.50%
per annum.
'Current Interest' with respect to each Class of Offered Certificates will
equal, with respect to any Distribution Date, the aggregate amount of interest
accrued at the applicable Certificate Interest Rate during the related Accrual
Period on the Class Certificate Principal Amount of such Class immediately prior
to such Distribution Date. 'Carryforward Interest' with respect to each Class of
Offered Certificates will equal, with respect to any Distribution Date, the sum
of (i) the amount, if any, by which (x) the sum of (A) Current Interest for such
Class for the immediately preceding Distribution Date and (B) any unpaid
Carryforward Interest from previous Distribution Dates exceeds (y) the amount
distributed in respect of interest on such Class on such immediately preceding
Distribution Date, and (ii) interest on such amount for the related Accrual
Period at the applicable Certificate Interest Rate.
The 'Interest Remittance Amount' with respect to any Distribution Date will
equal the sum of (i) all interest collected (other than Payaheads) or advanced
in respect of Scheduled Payments on the Mortgage Loans, (other than any
prepayment premiums), during the related Collection Period (less (x) the Master
Servicing Fee and the Servicing Fee, Basic Fee and the Special Servicer Fee
(provided that a Basis Risk Trigger is not occurring and subject to certain
other limitations specified below under 'POOLING AND SERVICING
AGREEMENT--Servicing Compensation and Payment of Expenses'), (y) unreimbursed
Advances and other amounts due to the Master Servicer or the Servicers, to the
extent allocable to interest and (z) other reimburseable expenses under the
Agreement), (ii) all Compensating Interest (as defined herein) paid by the
Master Servicer or any Servicer with respect to the related Collection Period,
(iii) the portion of any Substitution Amount (as defined herein) paid during the
related Collection Period (as defined herein) allocable to interest, and (iv)
all Net Liquidation Proceeds and any other recoveries collected during the
related Collection Period, to the extent allocable to interest, as reduced in
each case by unreimbursed Advances and other amounts due to the the Master
Servicer or the Servicers, to the extent allocable to interest.
A 'Payahead' is generally any Scheduled Payment intended by the related
borrower to be applied in a Collection Period subsequent to the Collection
Period in which such payment was received.
The 'Substitution Amount' will be generally equal to the amount, if any, by
which the Scheduled Principal Balance of a Mortgage Loan required to be removed
from the Mortgage Pool due to a breach of representation or warranty or
defective documentation exceeds the principal balance of the related substitute
Mortgage Loan, plus unpaid interest accrued thereon at the applicable Remittance
Rate through the end of the Collection Period during which such substitution
occurs. The 'Remittance Rate' for any Mortgage Loan at any time equals the
Mortgage Rate thereof minus the Master Servicing Fee Rate, and the Servicing Fee
Rate (or Basic Fee Rate, as applicable).
On each Distribution Date, the Interest Remittance Amount for such date
will be distributed in the following order of priority:
(i) to the Trustee, the Trustee Fee for such Distribution Date;
S-44
<PAGE>
(ii) pro rata, to the Class A-1 and Class A-2 Certificates, Current
Interest for each such Class and such Distribution Date and any
Carryforward Interest for each such Class and such Distribution Date;
(iii) to the Class M-1 Certificates, Current Interest for such Class
and such Distribution Date;
(iv) to the Class M-2 Certificates, Current Interest for such Class
and such Distribution date;
(v) to the Class B-1 Certificates, Current Interest for such Class and
such Distribution Date; and
(vi) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under '--Credit Enhancement' below, any
Interest Remittance Amount remaining after application pursuant to clauses
(i) through (v) above (such amount, 'Monthly Excess Interest') for such
Distribution Date.
When a principal prepayment in full is made on a Mortgage Loan, the
borrower is charged interest only to the date of such prepayment, instead of for
a full month, with a resulting reduction in interest payable for the month
during which the prepayment is made. Prepayments in part may be applied,
depending upon the practices of the Servicer, as of the date of receipt or as of
the first day of the related Collection Period. Full or partial prepayments (or
proceeds of other liquidations) received in any calendar month will be
distributed to Offered Certificateholders on the Distribution Date following the
applicable Collection Period. To the extent that, as a result of a full or
partial prepayment, a mortgagor is not required to pay a full month's interest
on the amount prepaid, a shortfall in the amount available to make distributions
of interest on the related Certificates could result. The difference between one
month's interest at the Mortgage Rate, as reduced by the Master Servicing Fee
Rate and the Servicing Fee Rate (or Basic Fee Rate), on a Mortgage Loan as to
which a voluntary prepayment has been made and the amount of interest actually
received in connection with such prepayment is a 'Prepayment Interest
Shortfall.' With respect to prepayments in full, but not in part, the applicable
Servicer is generally obligated to fund any resulting Prepayment Interest
Shortfalls (such payment obligation being limited to the applicable Servicer's
Servicing Fee or Basic Fee, as applicable). The Master Servicer is obligated to
reduce its Aggregate Master Servicing Compensation (as defined herein) for the
related Distribution Date to the extent necessary to fund any Prepayment
Interest Shortfalls required to be paid and not paid by the applicable Servicer.
See 'POOLING AND SERVICING AGREEMENT--Prepayment Interest Shortfalls' herein.
Any such payment by a Servicer or the Master Servicer is referred to herein as
'Compensating Interest.' Any Prepayment Interest Shortfalls not funded by the
Servicers or the Master Servicer ('Net Prepayment Interest Shortfalls') will
reduce the Interest Remittance Amount available for distribution on the related
Distribution Date.
DETERMINATION OF LIBOR
LIBOR will be determined by the Master Servicer in accordance with the
following provisions:
On the second London Banking Day (as defined below) immediately preceding
the first day of each Accrual Period (each, a 'LIBOR Determination Date'), the
Master Servicer will determine the arithmetic mean of the LIBOR quotations for
one month Eurodollar deposits ('LIBOR') for the succeeding Accrual Period on the
basis of the offered LIBOR quotations provided to the Master Servicer as of
11:00 a.m. (London time) on such LIBOR Determination Date. As used herein with
respect to a LIBOR Determination Date, 'London Banking Day' means any day on
which commercial banks and foreign exchange markets settle payments in London
and New York City; 'Reference Banks' means four leading banks engaged in
transactions in Eurodollar deposits in the international Eurocurrency market (i)
with an established place of business in London, (ii) whose quotations appear on
the Bloomberg Screen LIUS01M Index Page on the LIBOR Determination Date in
question and (iii) which have been designated as such by the Master Servicer and
are able and willing to provide such quotations to the Master Servicer on each
LIBOR Determination Date; and 'Bloomberg Screen LIUS01M Index Page' means the
display designated as page 'LIUS01M' on the Bloomberg Financial Markets
Commodities News (or such other pages as may replace such page on that service
for the purpose of displaying LIBOR quotations of major banks). If any Reference
Bank is removed from the Bloomberg Screen LIUS01M Index Page or in any other way
fails to meet the qualifications of a Reference Bank, the Master Servicer may,
in its sole discretion, designate an alternative Reference Bank.
On each LIBOR Determination Date, LIBOR for the next succeeding Accrual
Period will be established by the Master Servicer as follows:
(i) If on any LIBOR Determination Date two or more of the Reference
Banks provide offered LIBOR quotations on the Bloomberg Screen LIUS01M
Index Page, LIBOR for the next applicable Accrual Period will be the
arithmetic mean of such offered quotations (rounding such arithmetic mean
if necessary to the nearest five decimal places).
S-45
<PAGE>
(ii) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next
applicable Accrual Period will be the higher of (x) LIBOR as determined on
the previous LIBOR Determination Date and (y) the Reserve Interest Rate.
The 'Reserve Interest Rate' will be the rate per annum that the Master
Servicer determines to be either (A) the arithmetic mean (rounding such
arithmetic mean if necessary to the nearest five decimal places) of the
one-month Eurodollar lending rate that New York City banks selected by the
Master Servicer are quoting, on the relevant LIBOR Determination Date, to
the principal London offices of at least two leading banks in the London
interbank market or (B) in the event that the Master Servicer can determine
no such arithmetic mean, the lowest one-month Eurodollar lending rate that
the New York City banks selected by the Master Servicer are quoting on such
LIBOR Determination Date to leading European banks.
(iii) If on any LIBOR Determination Date the Master Servicer is
required but is unable to determine the Reserve Interest Rate in the manner
provided in paragraph (ii) above, LIBOR for the next applicable Accrual
Period will be LIBOR as determined on the previous LIBOR Determination
Date.
Notwithstanding the foregoing, LIBOR for the next succeeding Accrual Period
shall not be based on LIBOR for the previous Accrual Period for two consecutive
LIBOR Determination Dates. If, under the priorities described above, LIBOR for
the next succeeding Accrual Period would be based on LIBOR for the previous
LIBOR Determination Date for the second consecutive LIBOR Determination Date,
the Master Servicer shall select an alternative index (over which the Master
Servicer has no control) used for determining Eurodollar lending rates that is
calculated and published (or otherwise made available) by an independent third
party.
The establishment of LIBOR by the Master Servicer and the Master Servicer's
subsequent calculation of the rate of interest applicable to the applicable
Classes of Offered Certificates for the relevant Accrual Period, in the absence
of manifest error, will be final and binding.
DISTRIBUTIONS OF PRINCIPAL
Distributions of principal on the Offered Certificates will be made on each
Distribution Date in an aggregate amount equal to the Principal Distribution
Amount for such Distribution Date.
The 'Principal Distribution Amount' for any Distribution Date will be equal
to the sum of (i) the Principal
Remittance Amount for such date minus, with respect to each Distribution Date,
the Overcollateralization Release Amount, if any, for such date and (ii) the
Extra Principal Distribution Amount, if any, for such date. The 'Principal
Remittance Amount' for any Distribution Date will be equal to the sum of (i) all
principal collected (other than Payaheads) or advanced in respect of Scheduled
Payments on the Mortgage Loans during the related Collection Period (less
unreimbursed Advances and other amounts due to the Master Servicer or the
Servicers, to the extent allocable to principal), (ii) the outstanding principal
balance of each Mortgage Loan that was purchased from the Trust Fund during the
related Collection Period, (iii) the portion of any Substitution Amount paid
during the related Collection Period allocable to principal, and (iv) all Net
Liquidation Proceeds and any other recoveries collected during the related
Collection Period, to the extent allocable to principal, as reduced in each case
by unreimbursed Advances and other amounts due to the Master Servicer or the
Servicers, to the extent allocable to principal.
The 'Collection Period' for the first Distribution Date with respect to
principal collections is the period from May 1, 1998 through June 1, 1998, and
with respect to interest collections is the period from May 2, 1998 through June
1, 1998, and for each Distribution Date thereafter, is the one-month period
beginning on the second day of the calendar month immediately 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 Principal Distribution Amount will be distributed on each Distribution
Date as follows:
On each Distribution Date (a) prior to the Stepdown Date or (b) with
respect to which a Trigger Event
has occurred, the Principal Distribution Amount for such date will be
distributed in the following order of priority:
(i) to the Class A-1 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(ii) to the Class A-2 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(iii) to the Class M-1 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
S-46
<PAGE>
(iv) to the Class M-2 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero;
(v) to the Class B-1 Certificates, until the Class Certificate
Principal Amount of such Class has been reduced to zero; and
(vi) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under '--Credit Enhancement' below, any
Principal Distribution Amount remaining after application pursuant to
clauses (i) through (v) above.
On each Distribution Date (a) on or after the Stepdown Date and (b) with
respect to which a Trigger Event has not occurred, the Principal
Distribution Amount for such date will be distributed in the following
order of priority:
(i) to the Class A-1 and Class A-2 Certificates, an amount equal to
the lesser of (x) the Principal Distribution Amount for such
Distribution Date and (y) the Senior Principal Distribution Amount for
such date, in the following order of priority:
first, to the Class A-1 Certificates, until the Class
Certificate Principal Amount of such Class has been reduced to zero,
and
second, to the Class A-2 Certificates, until the Class
Certificate Principal Amount of such Class has been reduced to zero;
(ii) to the Class M-1 Certificates, an amount equal to the lesser
of (x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1 and
Class A-2 Certificates on such date pursuant to clause (i) above and (y)
the Class M-1 Principal Distribution Amount for such date, until the
Class Certificate Principal Amount of such Class has been reduced to
zero;
(iii) to the Class M-2 Certificates, an amount equal to the lesser
of (x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1,
Class A-2 and Class M-1 Certificates on such date pursuant to clauses
(i) and (ii) above and (y) the Class M-2 Principal Distribution Amount
for such date, until the Class Certificate Principal Amount of such
Class has been reduced to zero;
(iv) to the Class B-1 Certificates, an amount equal to the lesser
of (x) the excess of (1) the Principal Distribution Amount for such
Distribution Date over (2) the amount distributed to the Class A-1,
Class A-2, Class M-1 and Class M-2 Certificates on such date pursuant to
clauses (i), (ii) and (iii) above and (y) the Class B-1 Principal
Distribution Amount for such date, until the Class Certificate Principal
Amount of such Class has been reduced to zero; and
(v) for application as part of Monthly Excess Cashflow for such
Distribution Date, as described under '--Credit Enhancement' below, any
Principal Distribution Amount remaining after application pursuant to
clauses (i) through (iv) above.
Notwithstanding the foregoing, on any Distribution Date on which the Class
Certificate Principal Amount of each Class of Certificates having a higher
priority of distribution has been reduced to zero, any remaining Principal
Distribution Amount will be distributed to the remaining Classes of Offered
Certificates, in the order of priority set forth above, until the Class
Certificate Principal Amount of each such Class has been reduced to zero.
A 'Trigger Event' has occurred with respect to any Distribution Date if the
Rolling Three Month Delinquency Rate as of the last day of the immediately
preceding Collection Period equals or exceeds 43.48%of (i) the Senior
Enhancement Percentage for such Distribution Date or (ii) with respect to any
Distribution Date after the Class A Certificates are no longer outstanding, the
fraction expressed as a percentage obtained by dividing (a) the sum of (x) the
Aggregate Class Certificate Principal Amount of the Offered Subordinate
Certificates minus the Class Certificate Principal Amount of the then most
senior Class of Offered Subordinate Certificates and (y) the
Overcollateralization Amount, in each case after giving effect to distributions
on such Distribution Date by (b) the Aggregate Loan Balance as of the last day
of the related Collection Period.
The 'Rolling Three Month Delinquency Rate' with respect to any Distribution
Date will be the fraction, expressed as a percentage, equal to the average of
the Pool Delinquency Rates for each of the three (or one and two, in the case of
the first and second Distribution Dates) immediately preceding Collection
Periods. The 'Pool Delinquency Rate' for any Collection Period will be the
fraction, expressed as a percentage, the numerator of which is the aggregate
outstanding principal balance of all Mortgage Loans 60 or more days delinquent
S-47
<PAGE>
(including all foreclosures and REO Properties) as of the close of business on
the last day of such Collection Period, and the denominator of which is the
Aggregate Loan Balance as of the close of business on the last day of such
Collection Period.
The 'Stepdown Date' is the later to occur of (x) the Distribution Date in
June 2001 and (y) the first Distribution Date on which the Senior Enhancement
Percentage (calculated for this purpose after giving effect to payments or other
recoveries in respect of the Mortgage Loans during the related Collection Period
but before giving effect to distributions on the Certificates on such
Distribution Date) is greater than or equal to 49.50%.
The 'Senior Principal Distribution Amount' for any Distribution Date will
be equal to (a) prior to the Stepdown Date or if a Trigger Event has occurred
with respect to such Distribution Date, 100% of the Principal Distribution
Amount and (b) on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, the amount, if any, by
which (x) the aggregate Certificate Principal Amount of the Senior Certificates
immediately prior to such Distribution Date exceeds (y) the lesser of (A) the
product of (i) 50.50% and (ii) the Aggregate Loan Balance as of the last day of
the related Collection Period and (B) the amount, if any, by which (i) the
Aggregate Loan Balance as of the last day of the related Collection Period
exceeds (ii) $1,049,251.69.
The 'Class M-1 Principal Distribution Amount' for any Distribution Date
will be equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if any, by
which (x) the sum of (i) the Class Certificate Principal Amounts of the Class
A-1 and Class A-2 Certificates after giving effect to distributions on such
Distribution Date and (ii) the Class Certificate Principal Amount of the Class
M-1 Certificates immediately prior to such Distribution Date exceeds (y) the
lesser of (A) the product of (i) 65.50% and (ii) the Aggregate Loan Balance as
of the last day of the related Collection Period and (B) the amount, if any, by
which (i) the Aggregate Loan Balance as of the last day of the related
Collection Period exceeds (ii) $1,049,251.69.
The 'Class M-2 Principal Distribution Amount' for any Distribution Date
will be equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if any, by
which (x) the sum of (i) the Class Certificate Principal Amounts of the Class
A-1, Class A-2 and Class M-1 Certificates after giving effect to distributions
on such Distribution Date and (ii) the Class Certificate Principal Amount of the
Class M-2 Certificates immediately prior to such Distribution Date exceeds (y)
the lesser of (A) the product of (i) 78.50% and (ii) the Aggregate Loan Balance
as of the last day of the related Collection Period and (B) the amount, if any,
by which (i) the Aggregate Loan Balance as of the last day of the related
Collection Period exceeds (ii) $1,049,251.69.
The 'Class B-1 Principal Distribution Amount' for any Distribution Date
will be equal, on or after the Stepdown Date and as long as a Trigger Event has
not occurred with respect to such Distribution Date, to the amount, if any, by
which (x) the sum of (i) the Class Certificate Principal Amounts of the Class
A-1, Class A-2, Class M-1 and Class M-2 Certificates after giving effect to
distributions on such Distribution Date and (ii) the Class Certificate Principal
Amount of the Class B-1 Certificates immediately prior to such Distribution Date
exceeds (y) the lesser of (A) the product of (i) 92.50% and (ii) the Aggregate
Loan Balance as of the last day of the related Collection Period and (B) the
amount, if any, by which (i) Aggregate Loan Balance as of the last day of the
related Collection Period exceeds (ii) $1,049,251.69.
The 'Senior Enhancement Percentage' with respect to any Distribution Date
will be the fraction, expressed as a percentage, the numerator of which is the
sum of the aggregate Class Certificate Principal Amount of the Offered
Subordinate Certificates and the Overcollateralization Amount, in each case
after giving effect to distributions on such Distribution Date, and the
denominator of which is the Aggregate Loan Balance as of the last day of the
related Collection Period.
The 'Extra Principal Distribution Amount' with respect to any Distribution
Date will be equal to the lesser of (i) Monthly Excess Interest for such
Distribution Date and (ii) the Overcollateralization Deficiency for such date.
The 'Overcollateralization Amount' with respect to any Distribution Date
will be equal to the amount, if any, by which (x) the Aggregate Loan Balance as
of the last day of the related Collection Period exceeds (y) the aggregate Class
Certificate Principal Amount of the Offered Certificates after giving effect to
distributions on such Distribution Date.
The 'Overcollateralization Deficiency' with respect to any Distribution
Date will be equal to the amount, if any, by which (x) the Targeted
Overcollateralization Amount for such Distribution Date exceeds (y) the
S-48
<PAGE>
Overcollateralization Amount for such Distribution Date, calculated for this
purpose after giving effect to the reduction on such Payment Date of the Class
Certificate Principal Amounts of the Offered Certificates resulting from the
distribution of the Principal Remittance Amount (but not the Extra Principal
Distribution Amount) on such Distribution Date, but prior to allocation of any
Applied Loss Amount on such Distribution Date.
The 'Overcollateralization Release Amount' with respect to any Distribution
Date on which an Overcollateralization Stepdown Trigger Event is not in effect
will be equal to the lesser of (x) the Principal Remittance Amount for such
Distribution Date and (y) the amount, if any, by which (i) the
Overcollateralization Amount for such date, assuming that 100% of the Principal
Remittance Amount for such date is applied on such date to distribution of
principal on the Offered Certificates, exceeds (ii) the Targeted
Overcollateralization Amount for such date.
'Overcollateralization Stepdown Trigger Event' has occurred with respect to
a Distribution Date if both (i) a Delinquency Event has occurred and (ii) a Loss
Trigger Event has occurred.
A 'Loss Trigger Event' has occurred on a Distribution Date if cumulative
Realized Losses as of such Distribution Date exceed the percentages of the
Aggregate Cut-Off Date Principal Balance set forth below with respect to such
Distribution Date:
<TABLE>
<CAPTION>
PERCENTAGE OF THE
AGGREGATE CUT-OFF
DATE PRINCIPAL
DISTRIBUTION DATE BALANCE
- - --------------------------------------------------------------------------- ------------------
<S> <C>
June 2001 to May 2002...................................................... 3.6%
June 2002 to May 2003...................................................... 4.5%
June 2003 to May 2004...................................................... 5.1%
June 2004 to May 2005...................................................... 5.5%
June 2005 and thereafter................................................... 5.8%
</TABLE>
A 'Delinquency Event' has occurred with respect to each Distribution Date
if the Rolling Three Month Delinquency Rate as of the last day of the
immediately preceding Collection Period equals or exceeds the percentages of the
Aggregate Loan Balance set forth below with respect to such Distribution Date.
<TABLE>
<CAPTION>
PERCENTAGE OF
AGGREGATE LOAN
DISTRIBUTION DATE BALANCE
- - --------------------------------------------------------------------------- ------------------
<S> <C>
June 2001 to May 2002...................................................... 11.25%
June 2002 and thereafter................................................... 15.50%
</TABLE>
The 'Targeted Overcollateralization Amount' with respect to any
Distribution Date will be equal to (x) prior to the Stepdown Date, the product
of 3.75% and the Aggregate Cut-Off Date Principal Balance (as defined herein)
and (y) on and after the Stepdown Date, the greater of (i) the product of 7.50%
and the Aggregate Loan Balance as of the last day of the related Collection
Period and (ii) $1,049,251.69.
A 'Basis Risk Trigger' has occurred with respect to any Distribution Date
if the amount of Monthly Excess Interest for such Distribution Date is less than
0.75% of the Aggregate Loan Balance as of the first day of the related
Collection Period.
The 'Scheduled Principal Balance' of any Mortgage Loan as of any date of
determination will be generally equal to its outstanding principal balance as of
the Cut-Off Date, after giving effect to Scheduled Payments due on or before
such date, whether or not received, reduced by (i) the principal portion of all
Scheduled Payments due on or before the due date in the Collection Period
immediately preceding such date of determination, whether or not received, and
(ii) all amounts allocable to unscheduled principal payments received on or
before the last day of the Collection Period immediately preceding such date of
determination. The 'Aggregate Loan Balance' as of any date of determination will
be equal to the aggregate of the Scheduled Principal Balance of the Mortgage
Loans as of such date.
'Net Liquidation Proceeds' means all amounts, net of the Special Servicer
Incentive Fee and other servicing fees and net of unreimbursed expenses incurred
in connection with liquidation or foreclosure and unreimbursed Advances, if any,
received and retained in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise, together with any net proceeds received on a
monthly basis with respect to any properties acquired on behalf of the
Certificateholders by foreclosure or deed in lieu of foreclosure.
S-49
<PAGE>
CREDIT ENHANCEMENT
Credit enhancement for the Offered Certificates consists of the
subordination of the Subordinate Certificates, the priority of application of
Realized Losses and Overcollateralization, in each case as described herein.
Subordination. The rights of holders of the Subordinate Certificates to
receive distributions with respect to the Mortgage Loans will be subordinated,
to the extent described herein, to such rights of holders of each Class of
Offered Certificates having a higher priority of distribution, as described
under 'DESCRIPTION OF THE CERTIFICATES--Distributions of Interest' and
'--Distributions of Principal.' This subordination is intended to enhance the
likelihood of regular receipt by holders of Offered Certificates having a higher
priority of distribution of the full amount of interest and principal
distributable thereon, and to afford such Certificate holders limited protection
against Realized Losses incurred with respect to the Mortgage Loans.
The limited protection afforded to holders of Class A-1, Class A-2, Class
M-1, Class M-2 and Class B-1 Certificates by means of the subordination of
Subordinate Certificates having a lower priority of distribution will be
accomplished by the preferential right of holders of Offered Certificates to
receive, prior to any distribution in respect of interest or principal,
respectively, being made on any Distribution Date in respect of Certificates
having a lower priority of distribution, the amounts of interest due them and
principal available for distribution, respectively, on such Distribution Date,
and, if necessary, by the right of such Certificateholders to receive future
distributions of amounts that would otherwise be distributable to holders of
lower ranking Certificates.
Application of Realized Losses. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during any Collection Period, the related Net Liquidation
Proceeds, to the extent allocable to principal, may be less than the outstanding
principal balance of such Mortgage Loan. The amount of such insufficiency is a
'Realized Loss.' Realized Losses will have the effect of reducing amounts
distributable in respect of, first, the Class X Certificate (both through the
application of Monthly Excess Interest to fund such deficiency and through a
reduction in the Overcollateralization Amount for the related Distribution
Date); second, the Class B-1 Certificates; third, the Class M-2 Certificates;
and fourth, the Class M-1 Certificates, before reducing amounts distributable in
respect of the Senior Certificates. A 'Liquidated Mortgage Loan' is, in general,
a defaulted Mortgage Loan as to which the applicable Servicer has determined
that all amounts that it expects to recover in respect of such Mortgage Loan
have been recovered (exclusive of any possibility of a deficiency judgment).
To the extent that the Mortgage Pool experiences Realized Losses, such
Realized Losses will reduce the aggregate Scheduled Principal Balance of the
Mortgage Loans, and thus may reduce the Overcollateralization Amount. As
described herein, the Overcollateralization Amount is created, increased and
maintained by application of Monthly Excess Cashflow to the funding of the Extra
Principal Distribution Amount.
If on any Distribution Date after giving effect to all Realized Losses
incurred during the related Collection Period and distributions of principal
(including the Extra Principal Distribution Amount) on such Distribution Date,
the aggregate Class Certificate Principal Amount exceeds the Aggregate Loan
Balance as of the end of such Collection Period (such excess, an 'Applied Loss
Amount'), the Class Certificate Principal Amounts of the Offered Subordinate
Certificates will be reduced in inverse order of priority of distribution.
Applied Loss Amounts will be allocated in reduction of the Class Certificate
Principal Amount of first, the Class B-1 Certificates, until the Class
Certificate Principal Amount thereof has been reduced to zero; second, the Class
M-2 Certificates, until the Class Certificate Principal Amount thereof has been
reduced to zero; and third, the Class M-1 Certificates, until the Class
Certificate Principal Amount thereof has been reduced to zero. The Class
Certificate Principal Amounts of the Senior Certificates will not be reduced by
allocation of Applied Loss Amounts.
Holders of Offered Subordinate Certificates will not receive any
distributions in respect of Applied Loss Amounts, except to the extent of
available Monthly Excess Cashflow as described below.
Overcollateralization. The weighted average Net Mortgage Rate is generally
expected to be higher than the weighted average of the Certificate Interest
Rates, thus generating certain excess interest collections which, in the absence
of delinquencies or losses, will not be necessary to fund interest distributions
on the Offered Certificates. To the extent described above, Monthly Excess
Interest will be applied (as part of the Extra Principal Distribution Amount) on
any Distribution Date in reduction of the Class Certificate Principal Amounts of
the Offered Certificates. Such application of interest collections as
distributions of principal will cause the aggregate Class Certificate Principal
Amount to amortize more rapidly than the Aggregate Loan Balance, creating
S-50
<PAGE>
additional overcollateralization. In addition, Realized Losses will reduce
overcollateralization, and could result in an Overcollateralization Deficiency.
As described herein, for any Distribution Date when an
Overcollateralization Release Amount exists, a portion of the Principal
Remittance Amount will not be applied in reduction of the Certificate Principal
Amounts of the Offered Certificates, but will instead be applied as described
below.
The sum of Monthly Excess Interest for any Distribution Date and the
Overcollateralization Release Amount for such date will be the 'Monthly Excess
Cashflow' for such date, which will be distributed in the following order of
priority:
(i) to the extent of Monthly Excess Interest for such Distribution
Date, to fund the Extra Principal Distribution Amount for such date;
(ii) to the Class M-1 Certificates, any Carryforward Interest for such
Class and such date;
(iii) to the Class M-1 Certificates, any Deferred Amount for such
Class and such date;
(iv) to the Class M-2 Certificates, any Carryforward Interest for such
Class and such date;
(v) to the Class M-2 Certificates, any Deferred Amount for such Class
and such date;
(vi) to the Class B-1 Certificates, any Carryforward Interest for such
Class and such date;
(vii) to the Class B-1 Certificates, any Deferred Amount for such
Class and such date;
(viii) pro rata, to the Class A-1 and Class A-2 Certificates, and then
to the Class M-1, Class M-2 and Class B-1 Certificates, in that order, any
applicable Basis Risk Shortfall and Unpaid Basis Risk Shortfall for such
Distribution Date;
(ix) to the Special Servicer, any unpaid Special Servicer Fees;
(x) to the Basis Risk Reserve Fund, any amounts required under the
Agreement to be deposited therein;
(xi) to the Class X Certificate, the amount distributable thereon
under the Agreement;
(xii) to the Directing Holder (as defined herein), any fee payable
thereto under the Agreement; and
(xiii) to the Class R Certificate, any remaining amount.
With respect to each Distribution Date, the 'Deferred Amount' for each
Class of Offered Certificates will be equal to the amount by which (x) the
aggregate of Applied Loss Amounts previously applied in reduction of the Class
Certificate Principal Amount thereof exceeds (y) the aggregate of amounts
previously distributed in reimbursement thereof.
FINAL SCHEDULED DISTRIBUTION DATE
Scheduled distributions on the Mortgage Loans, assuming no defaults or
losses that are not covered by the limited credit support described herein, will
be sufficient to make timely distributions of interest on the Offered
Certificates and to reduce the aggregate Certificate Principal Amount of the
Offered Certificates to zero not later than as follows: Class A-1 Certificates,
October 25, 2020; Class A-2, Class M-1, Class M-2 and Class B-1 Certificates,
April 25, 2028. The actual final Distribution Date for the Offered Certificates
may be earlier or later, and could be substantially earlier, than the Final
Scheduled Distribution Date.
The Final Scheduled Distribution Date for the Class A-1 Certificates was
determined based on the Modeling Assumptions, outlined above, and the assumption
that (i) no prepayments on the Mortgage Loans occur, and (ii) no Monthly Excess
Cashflow is used to accelerate payments of principal on the Certificates. The
Final Scheduled Distribution Date for the Class A-2, Class M-1, Class M-2 and
Class B-1 Certificates has been determined by adding one month to the month of
scheduled maturity of the latest maturing Mortgage Loan.
SPECIAL TERMINATION OF THE TRUST
On any Distribution Date on which the Aggregate Loan Balance of the
Mortgage Loans is less than 35% of the Aggregate Cut-Off Date Principal Balance,
the holder of the Class X Certificate will (subject to the terms of the
Agreement) have the option to purchase the Mortgage Loans, any REO Property and
any other property remaining in the Trust Fund and thereby effect the
termination of the Trust Fund and the retirement of the Certificates. The
purchase price of the Mortgage Loans must be equal to the sum of (a) 100% of the
aggregate outstanding principal balance of such Mortgage Loans plus accrued
interest thereon at the applicable Mortgage Rate and (b) the fair market value
of all other property remaining in the Trust Fund (the 'Repurchase Price'). The
proceeds of such sale will be treated as a prepayment of the Mortgage Loans for
purposes of distributions to
S-51
<PAGE>
Certificateholders. Upon such payment in full to Certificateholders of such
amounts, the Trust Fund will be terminated.
If the Class X Certificateholder does not exercise its option as described
above when it is first entitled to do so, the Certificate Interest Rates of the
Offered Certificates will be increased as described under 'DESCRIPTION OF THE
CERTIFICATES--Distributions of Interest' herein.
OPTIONAL TERMINATION OF THE TRUST
On any Distribution Date on which the Aggregate Loan Balance is less than
10% of the Aggregate Cut-Off Date Principal Balance, the Servicer (subject to
the terms of the Agreement) will have the option to cause the sale of the
Mortgage Loans, any REO Property and any other property remaining in the Trust
Fund for the Repurchase Price. Such liquidation will be treated as a prepayment
of the Mortgage Loans for purposes of distributions to Certificateholders. Upon
such payment in full to Certificateholders of such amounts, the Trust Fund will
be terminated.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Trustee
will forward each Certificateholder a statement (based solely on information
calculated by and received from the Master Servicer or the Servicer) setting
forth among other items with respect to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Carryforward
Interest, and the amount of any Carryforward Interest remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal;
(iv) the Master Servicing Fee, the Servicing Fee and the Basic Fee and
Special Servicer Fee, if any;
(v) the Scheduled Principal Balance, as of the close of business on
the last day of the preceding Collection Period;
(vi) the Aggregate Class Certificate Principal Amount and the
Certificate Principal Amount of each Class of Certificates, in each case
after giving effect to payments allocated to principal above;
(vii) the Overcollateralization Amount as of the close of business on
the Distribution Date, after giving effect to distributions of principal on
such Distribution Date;
(viii) the number and aggregate Principal Balances of the Mortgage
Loans as to which the minimum monthly payment is delinquent for 30-59 days,
60-89 days and 90 or more days, respectively, as of the end of the
preceding Collection Period;
(ix) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(x) the aggregate amount of Prepayments received on the Mortgage Loans
during the previous Collection Period;
(xi) the weighted average Mortgage Rate on the Mortgage Loans as of
the first day of the month prior to the Distribution Date;
(xii) the Applied Loss Amount, if any, for each Class of Subordinate
Certificates;
(xiii) whether a Trigger Event has occurred or is continuing;
(xiv) the amount of any Extra Principal Distribution Amount;
(xv) the Certificate Interest Rates on the Offered Certificates for
such Distribution Date;
(xvi) the number and the dollar amount of repurchased loans; and
(xvii) whether a Basis Risk Trigger has occurred or is continuing.
In the case of information furnished pursuant to clauses (ii) and (iii)
above, the amounts shall be expressed as a dollar amount per Certificate with a
$1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will
forward to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
S-52
<PAGE>
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Agreement dated as of May
1, 1998 among the Depositor, the Master Servicer, the Servicer, the Special
Servicer and the Trustee. Reference is made to the Prospectus for important
information in addition to that set forth herein regarding the terms and
conditions of the Agreement and the Offered Certificates. Offered Certificates
in certificated form will be transferable and exchangeable at the Corporate
Trust Office of the Trustee, which will serve as Certificate Registrar and
Paying Agent. The Trustee will provide to a prospective or actual
Certificateholder, without charge, on written request, a copy (without exhibits)
of the Agreement. Requests should be addressed to First Union National Bank, 230
South Tryon Street, NC 1179, Charlotte, North Carolina 28288, Attention:
Structured Finance Trust Services.
The Mortgage Loans will be serviced by the Servicer and, to the extent
applicable as described herein, the Special Servicer, under the supervision of
the Master Servicer, in accordance with the provisions of the Agreement. Norwest
will assume the duties of Master Servicer under the Agreement on July 1, 1998.
The Servicer and the Special Servicer are referred to together herein, unless
the context requires otherwise, as the 'Servicers.'
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not be ultimately responsible for the performance of the servicing
activities by the Servicers, except as described under '--Prepayment Interest
Shortfalls' and '--Advances' below. If a Servicer fails to fulfill its
obligation under the Agreement and such failure results in a material breach,
the Master Servicer will terminate such Servicer and appoint a successor
servicer as provided in the Agreement.
Lehman Capital will retain ownership of the servicing rights with respect
to the Mortgage Loans serviced by Aurora and may transfer such servicing to one
or more successor servicers at any time, subject to the conditions set forth in
the Agreement including the requirements that any such successor servicer be
qualified to service mortgage loans for FNMA or FHLMC and that each Rating
Agency confirm in writing that such transfer of servicing will not result in a
qualification, withdrawal or downgrade of the then-current ratings of any of the
Certificates.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned to the Trustee, together with all
principal and interest received with respect to the Mortgage Loans after the
Cut-Off Date. The Trustee will, concurrently with such assignment, authenticate
and deliver the Certificates in accordance with the Agreement. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement
which will specify with respect to each Mortgage Loan, among other things, the
original principal balance and Principal Balance as of the close of business on
the Cut-Off Date, the Scheduled Payment, and the maturity date.
As to each Mortgage Loan, the following documents are generally required to
be delivered to the Trustee (or its custodian) in accordance with the Agreement
(i) the related original Mortgage Note endorsed without recourse to the Trustee
or in blank, (ii) the original Mortgage with evidence of recording indicated
thereon (or, if such original recorded Mortgage has not yet been returned by the
recording office, a copy thereof certified to be a true and complete copy of
such Mortgage sent for recording), (iii) an original assignment of the Mortgage
to the Trustee or in blank in recordable form, (iv) the policies of title
insurance issued with respect to each Mortgage Loan and (v) the originals of any
assumption, modification, extension or guaranty agreements. Where necessary to
protect the interest of the Trustee in the Mortgage Loans, the assignments to
the Trustee in connection with the Mortgage Loans are required to be submitted
for recording promptly after the Closing Date.
Pursuant to the terms of the agreement (the 'Sale Agreement') whereby the
Loans were purchased by the Seller, the Transferor of Mortgage Loans has made,
as of the closing date of the Sale Agreement (the 'Sale Date'), to the Seller
certain representations and warranties as to the accuracy in all material
respects of certain information furnished as of the date specified in the Sale
Agreement with respect to each Mortgage Loan (e.g., Principal Balance and the
Mortgage Rate). The Seller's rights under the Sale Agreement will be assigned to
the Trustee for the benefit of Certificateholders. Within the period of time
specified in the Sale Agreement following
S-53
<PAGE>
its discovery of a breach of any representation or warranty that materially or
adversely affects the interests of Certificateholders in a Mortgage Loan, or
receipt of notice of such breach, the Transferor will be obligated to cure such
breach or purchase the affected Mortgage Loan from the Trust Fund for a price
equal to the unpaid principal balance thereof plus accrued interest thereon (or,
in certain circumstances, to substitute another mortgage loan.)
Pursuant to the terms of a Mortgage Loan Purchase Agreement (the 'Purchase
Agreement') whereby the Mortgage Loans will be purchased by the Depositor, the
Seller will make to the Depositor (and the Depositor will assign its rights
thereunder to the Trustee for the benefit of Certificateholders) only certain
limited representations and warranties intended to address certain material
conditions that may arise with respect to the Mortgage Loans between the Sale
Date and the Cut-Off Date. In the event of a breach of any such representation
or warranty that does not constitute a breach of any representation or warranty
made by the Transferor as described above, the Seller will be obligated in the
same manner as the Transferor, as described above.
To the extent that any such Mortgage Loan is not repurchased by the
Transferor or the Seller and a Realized Loss occurs with respect to such
Mortgage Loan, holders of Offered Certificates, in particular the Offered
Subordinate Certificates, may incur a loss.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain in the name of the Trustee
a separate account (the 'Collection Account') for the benefit of the holders of
the Certificates. The Collection Account will be an Eligible Account (as defined
herein). Subject to the investment provision described in the following
paragraphs, upon receipt by the Master Servicer from the Servicer (or Special
Servicer) of amounts in respect of the Mortgage Loans (excluding amounts
representing the Master Servicing Fee and the Servicing Fee (or Basic Fee,
Special Servicer Fee or Special Servicer Incentive Fee), reimbursement for
Advances and Servicing Advances and insurance proceeds to be applied to the
restoration or repair of a Mortgaged Property and other amounts as permitted by
the Agreement), 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 certain conditions set
forth in the Agreement are met.
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 or on such Distribution Date if certain conditions set
forth in the Agreement are met.
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 highest short-term debt rating by the Rating Agencies and whose
accounts are fully insured 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 'BBB' by Fitch, 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, (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, (iii) fully insured by the
FDIC or (iv) otherwise acceptable to each Rating Agency as evidenced by a letter
from each Rating Agency 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.
S-54
<PAGE>
ADVANCES
The Servicer (or Special Servicer, if applicable) will generally be
obligated to make Advances with respect to delinquent payments of principal of
and interest on the Mortgage Loans, adjusted to the related Mortgage Rate less
the applicable Servicing Fee Rate (or Basic Fee Rate), to the extent that such
Advances, in its judgment, are reasonably recoverable from future payments and
collections, insurance payments or proceeds of liquidation of a Mortgage Loan.
The Master Servicer will be obligated to make any such Advances if the Servicer
(or Special Servicer) fails to do so, to the extent provided in the Agreement.
The Master Servicer, the Servicer or the Special Servicer, as applicable, will
be entitled to recover any Advances made by it with respect to a Mortgage Loan
as described herein. The purpose of making such Advances is to maintain a
regular cash flow to the Certificateholders, rather than to guarantee or insure
against losses. Such obligation of the Servicer continues with respect to each
Mortgage Loan until such Mortgage Loan becomes a Liquidated Mortgage Loan.
In the course of performing its servicing obligations, the applicable
Servicer will pay all reasonable and customary 'out-of-pocket' costs and
expenses incurred in the performance of its servicing obligations, including,
but not limited to, the cost of (i) the preservation, restoration and protection
of the Mortgaged Properties, (ii) any enforcement or judicial proceedings,
including foreclosures, and (iii) the management and liquidation of Mortgaged
Properties acquired in satisfaction of the related Mortgage. Each such
expenditure will constitute a 'Servicing Advance'. The Master Servicer has no
obligation to make Servicing Advances.
The applicable Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, released mortgaged property proceeds, Insurance Proceeds and such
other amounts as may be collected by the applicable Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed. The Master Servicer's and the applicable
Servicer's right to reimbursement for Advances shall be limited to late
collections of interest on any Mortgage Loan and to Liquidation Proceeds and
Insurance Proceeds on the related Mortgage Loan. The Master Servicer's and the
applicable Servicer's right to such reimbursements is prior to the rights of
Certificateholders.
Notwithstanding the foregoing, the Master Servicer and the Servicer
(including the Special Servicer) are not required to make any Advance and the
Servicer is not required to make any Servicing Advance if in the good faith
judgment and sole discretion of the Master Servicer or the Servicer, as
applicable the Master Servicer or the Servicer determines that such advance will
not be ultimately recoverable from collections received from the Mortgagor in
respect of the related Mortgage Loan or other recoveries in respect of such
Mortgage Loan (a 'Nonrecoverable Advance'). However, if any Servicing Advance or
Advance is determined by the Master Servicer or the Servicer to be
nonrecoverable from such sources, the amount of such Nonrecoverable Advance may
be reimbursed to the Master Servicer or the Servicer from other amounts on
deposit in the Collection Account.
SPECIAL SERVICING OF DELINQUENT MORTGAGE LOANS
If a Mortgage Loan becomes more than 60 days delinquent, the responsibility
for servicing such Mortgage Loan (a 'Transferred Mortgage Loan') will be
transferred to the Special Servicer. The Special Servicer will be required under
the Agreement to diligently attempt to collect all amounts due under each
Transferred Mortgage Loan. The Special Servicer will be authorized under the
Agreement to foreclose on any Transferred Mortgage Loan or to pursue
alternatives to foreclosure such as modification of the terms of such loan,
negotiation of a repayment plan and forbearance of foreclosure, or acceptance of
a discounted payoff. If the borrower resumes payment on a Transferred Mortgage
Loan, such loan will continue to be serviced by the Special Servicer pursuant to
the provisions of the Agreement.
CERTAIN RIGHTS RELATED TO FORECLOSURE AND THE SPECIAL SERVICER
Certain rights in connection with foreclosure of defaulted Mortgage Loans
will be granted to the holder of the Class X Certificate (the 'Directing
Holder'). Such rights will include (i) the right to recommend foreclosure or
alternatives to foreclosure, which recommendation the Special Servicer shall
follow to the extent consistent with applicable servicing standards set forth in
the Agreement, and (ii) the right to purchase such Mortgage Loan from the Trust
Fund. Any such purchase may affect the yields to maturity of the Offered
Certificates.
S-55
<PAGE>
The Directing Holder will also have the right to terminate the rights and
obligations of the Special Servicer under the Agreement at any time, without
cause, and to appoint a successor special servicer, provided that (i) such
successor is reasonably acceptable to the Master Servicer and (ii) a letter is
provided to the Trustee from each Rating Agency to the effect that such
termination and appointment will not result in the qualification, reduction or
withdrawal of the ratings then applicable to the Certificates.
The rights of the Directing Holder may be transferred to any future holder
of the Class X Certificate if, prior to such transfer, (i) the Special Servicer
consents thereto and (ii) a letter is provided to the Trustee from each Rating
Agency to the effect that the transfer of such rights to the proposed transferee
will not result in the qualification, reduction or withdrawal of the ratings
then applicable to the Certificates.
PURCHASE OF CERTAIN DEFAULTED MORTGAGE LOANS
Pursuant to the terms of the Agreement, the Special Servicer (and in
certain circumstances, the Directing Holder) will have the option to purchase
certain seriously delinquent Mortgage Loans. Any such purchase may affect the
yields to maturity of the Offered Certificates. The aggregate of such purchases
may not exceed five percent of the Aggregate Cut-Off Date Principal Balance.
The Directing Holder will also have the right to purchase any defaulted
Mortgage Loan serviced by the Special Servicer under the circumstances described
under '--Certain Rights Related to Foreclosure and the Special Servicer' above.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will be paid a monthly fee (the 'Master Servicing Fee')
with respect to each Mortgage Loan calculated as a fixed percentage equal to
0.0075% per annum (the 'Master Servicing Fee Rate') on the outstanding principal
balance of each Mortgage Loan. The Servicer will be paid a monthly fee (a
'Servicing Fee') with respect to each Mortgage Loan serviced by it calculated as
0.50% per annum (the 'Servicing Fee Rate') on the outstanding principal balance
of each such Mortgage Loan.
The Servicer will also be entitled to receive, to the extent provided in
the Agreement, additional compensation, in the form of any interest or other
income earned on funds it has deposited in a custodial account pending
remittance to the Master Servicer, as well as certain customary fees and charges
paid by borrowers. The Master Servicer will be entitled to receive, as
additional compensation, any interest or other income earned on funds in the
Collection Account prior to deposit into the Distribution Account. The aggregate
of the Master Servicing Fees and such additional compensation to the Master
Servicer is referred to herein as the Master Servicer's 'Aggregate Master
Servicing Compensation.'
The Special Servicer will be paid a monthly fee (the 'Basic Fee') with
respect to each Transferred Mortgage Loan calculated as 0.50% per annum (the
'Basic Fee Rate') on the outstanding principal balance of each such Mortgage
Loan. In addition, the Special Servicer is entitled to a fee in connection with
the liquidation of Transferred Mortgage Loans (the 'Special Servicer Incentive
Fee') and to additional compensation (the 'Special Servicer Fee') with respect
to each Transferred Mortgage Loan.
The Special Servicer Fee will equal the sum of (a) $332 per Transferred
Mortgage Loan payable immediately upon such Mortgage Loan becoming a Transferred
Mortgage Loan, and (b) $166 per month per Specially Serviced Mortgage Loan that
has not been cured prior to the date on which such Mortgage Loan becomes 150 or
more days delinquent; provided that the aggregate amounts paid to the Special
Servicer with respect to any Transferred Mortgage Loan pursuant to (a) and (b)
shall not exceed $2,324 and provided further that in the event such Mortgage
Loan becomes a Liquidated Mortgage Loan the Special Servicer shall be entitled
to the amount by which $2,324 exceeds the sum of the amounts described in
clauses (a) and (b) previously paid to the Special Servicer with respect to such
Transferred Mortgage Loan. The payment of the Special Servicer Fee will reduce
Available Funds prior to distributions to Certificateholders on any Distribution
Date on which a Basis Risk Trigger has not occurred; provided, however, the
payment of the Special Servicer Fee will not reduce Available Funds prior to
distributions to Certificateholders by an amount in excess of the amount of
interest due on the Mortgage Loans during the related Collection Period over the
amount of interest due on the Offered Certificates in connection with such
Distribution Date. With respect to any Distribution Date on which a Basis
S-56
<PAGE>
Risk Trigger is occurring or, to the extent the Special Servicer Fee for such
Distribution Date exceeds the amount calculated in the proviso in the previous
sentence, the Special Servicer Fee will be paid to the extent of Available
Funds, if any, remaining after distribution to Certificateholders of all amounts
required to be distributed on the Offered Certificates on such Distribution Date
and the payment of other amounts due.
The Special Servicer Incentive Fee will be paid with respect to each
Mortgage Loan liquidated by the Special Servicer and will equal 50% of the
excess, if any, of (x) the principal portion of liquidation proceeds with
respect to such Mortgage Loan over (y) the percentage specified in the Agreement
of the outstanding principal balance of such Mortgage Loan immediately prior to
receipt of such liquidation proceeds. The payment of the Special Servicer
Incentive Fee will reduce the amount of Net Liquidation Proceeds available to
the Trust.
The aggregate compensation of the Master Servicer and the Servicer and the
Basic Fee of the Special Servicer are subject to reduction as described below
under '--Prepayment Interest Shortfalls.' See 'SERVICING OF LOANS--Servicing
Compensation and Payment of Expenses' in the Prospectus for information
regarding expenses payable by the Master Servicer and the Servicers (including
the Special Servicer). The Master Servicer and the Servicer (and the Special
Servicer) will be entitled to reimbursement for certain expenses prior to
distribution of any amounts to Certificateholders. See 'SERVICING OF LOANS--
Servicing Compensation and Payment of Expenses' in the Prospectus.
PREPAYMENT INTEREST SHORTFALLS
When a borrower prepays a Mortgage Loan in full or in part between
Scheduled Payment dates, the borrower pays interest on the amount prepaid only
from the last Scheduled Payment date to the date of
prepayment (or to the first day of the applicable month, in the case of certain
prepayments in part), with a resulting reduction in interest payable for the
month during which the prepayment is made. Any Prepayment Interest Shortfall
resulting from a prepayment in full, but not in part, is generally required to
be paid by the Servicer, but only to the extent that such amount does not exceed
the Servicing Fee or, in the case of the Special Servicer, the Basic Fee, on the
Mortgage Loans serviced by it for the applicable Distribution Date.
Any Prepayment Interest Shortfall required to be funded but not funded by
the Servicer, or the Special Servicer, if applicable, is required to be paid by
the Master Servicer, to the extent that such amount does not exceed the
Aggregate Master Servicing Compensation for the applicable Distribution Date,
through a reduction in the amount of such compensation.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Servicer (or Special Servicer) will make reasonable efforts to collect
all payments called for under the Mortgage Loans and will, consistent with the
Agreement, follow such collection procedures as it follows from time to time
with respect to the mortgage loans in its servicing portfolio comparable to the
Mortgage Loans. Consistent with the above, the Servicer (or Special Servicer)
may in its discretion waive any late payment charge or any assumption or other
fee or charge that may be collected in the ordinary course of servicing the
Mortgage Loans.
With respect to the Mortgage Loans, the Servicer (or Special Servicer) may
arrange with a borrower a schedule for the payment of scheduled payments due and
unpaid for a period, provided that any such arrangement is consistent with the
Servicer's (or Special Servicer's) policies with respect to the mortgage loans
it owns or services.
HAZARD INSURANCE
The Servicer (or Special Servicer) will cause to be maintained fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located, in an amount which is at least equal to the least
of (i) the outstanding Principal Balance on the Mortgage Loan, (ii) the full
insurable value of the premises securing the Mortgage Loan and (iii) the minimum
amount required to compensate for damage or loss on a replacement cost basis in
each case in an amount not less than such amount as is necessary to avoid the
application of any co-insurance clause contained in the related hazard insurance
policy. Generally, if the Mortgaged Property is in an area identified in the
Federal Register by the Flood Emergency Management Agency
S-57
<PAGE>
as FLOOD ZONE 'A', such flood insurance has been made available and the Servicer
(or Special Servicer) determines that such insurance is necessary in accordance
with accepted mortgage servicing practices of prudent lending institutions, the
Servicer (or Special Servicer) will cause to be purchased a flood insurance
policy with a generally acceptable insurance carrier, in an amount representing
coverage not less than the least of (a) the outstanding Principal Balance of the
Mortgage Loan, (b) the full insurable value of the Mortgaged Property, (c) the
minimum amount required to compensate for damage or loss on a replacement cost
basis or (d) the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended; provided, however, that to the extent that
the National Flood Insurance Reform Act of 1994 (the '1994 Flood Act') is deemed
to apply to the Seller with respect to required flood insurance covering any
Mortgaged Property, then the Servicer (or Special Servicer) shall comply with
the 1994 Flood Act with respect to such Mortgaged Property. The Servicer (or
Special Servicer) will also maintain on REO Property, to the extent such
insurance is available, fire and hazard insurance in the applicable amounts
described above, liability insurance and, to the extent required and available
under the National Flood Insurance Act of 1968, as amended, and the Servicer (or
Special Servicer) determines that such insurance is necessary in accordance with
the servicing standard set forth in the Agreement, flood insurance in an amount
equal to that required above. Any amounts collected by the Servicer (or Special
Servicer) under any such policies (other than amounts to be applied to the
restoration or repair of the Mortgaged Property, or to be released to the
Mortgagor in accordance with customary mortgage servicing procedures) will be
deposited in the Collection Account, subject to retention by the Servicer (or
Special Servicer) to the extent such amounts constitute servicing compensation
or to withdrawal pursuant to the Agreement.
In the event that the Servicer (or Special Servicer) obtains and maintains
a blanket policy as provided in the Agreement insuring against fire and hazards
of extended coverage on all of the Mortgage Loans, then, to the extent such
policy names the Servicer (or Special Servicer) as loss payee and provides
coverage in an amount equal to the aggregate unpaid principal balance of the
Mortgage Loans without coinsurance, and otherwise complies with the requirements
of the first paragraph of this subsection, the Servicer (or Special Servicer)
will be deemed conclusively to have satisfied its obligations with respect to
fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Servicer (or Special Servicer) will foreclose upon or otherwise
comparably convert to ownership Mortgaged Properties securing such of the
Mortgage Loans as come into default when, in accordance with applicable
servicing procedures under the Agreement, no satisfactory arrangements can be
made for the collection of delinquent payments. In connection with such
foreclosure or other conversion, the Servicer (or Special Servicer) will follow
such practices as it deems necessary or advisable and as are in keeping with its
general mortgage servicing activities, provided the Servicer (or Special
Servicer) will not be required to expend its own funds in connection with
foreclosure or other conversion, correction of default on a related senior
mortgage loan or restoration of any property unless, in its sole judgment, such
foreclosure, correction or restoration will increase Net Liquidation Proceeds.
The Servicer (or Special Servicer) will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders. See '--Certain
Rights Related to Foreclosure and the Special Servicer.'
CERTAIN MATTERS REGARDING THE DEPOSITOR, SELLER, SERVICER AND SPECIAL SERVICER
The Agreement provides that the Servicer (or Special Servicer) may not
resign from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (i) such duties and obligations are no
longer permissible under applicable law as evidenced by an opinion of counsel
delivered to the Trustee or (ii) upon the satisfaction of the following
conditions: (a) the Servicer (or Special Servicer) has proposed a successor
servicer to the Trustee in writing and such proposed successor servicer is
reasonably acceptable to the Trustee; and (b) the Rating Agencies have confirmed
to the Trustee that the appointment of such proposed successor servicer as the
Servicer will not result in the reduction or withdrawal of the then current
rating of the Offered Certificates. No such resignation will become effective
until a successor servicer has assumed the Servicer's (or Special Servicer's)
obligations and duties under the Agreement.
The Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Servicer. Notwithstanding any such arrangement, the Servicer will remain
liable and obligated to the Trustee and the Certificateholders for the
Servicer's duties and
S-58
<PAGE>
obligations under the Agreement, without any diminution of such duties and
obligations and as if the Servicer itself were performing such duties and
obligations.
The Agreement provides that the Servicer (or Special Servicer) will
indemnify the Trust and the Trustee from and against any loss, liability,
expense, damage or injury suffered or sustained as a result of the applicable
Servicer's willful misconduct, bad faith or gross negligence in connection with
the servicing and administration of the Mortgage Loans. The Agreement provides
that none of the Depositor, the Seller, the Servicer or the Special Servicer or
their directors, officers, employees or agents will be under any other liability
to the Trust, the Trustee, the Certificateholders or any other person for any
action taken or for refraining from taking any action pursuant to the Agreement.
However, none of the Depositor, the Seller, the Servicer or the Special Servicer
will be protected against any liability which would otherwise be imposed by
reason of willful misconduct, bad faith or gross negligence of the Depositor,
the Seller, the Servicer or the Special Servicer, as the case may be, in the
performance of its duties under the Agreement or by reason of reckless disregard
of its obligations thereunder. In addition, the Agreement provides that the
Servicer (or Special Servicer) will not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its servicing
responsibilities under the Agreement. The Servicer (or Special Servicer) may, in
its sole discretion, undertake any such legal action which it may deem necessary
or desirable with respect to the Agreement and the rights and duties of the
parties thereto and the interest of the Certificateholders thereunder.
Any corporation into which the Servicer (or Special Servicer) may be merged
or consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Servicer (or Special Servicer) shall be a party, or
any corporation succeeding to the business of the Servicer (or Special Servicer)
shall be the successor of the Servicer (or Special Servicer) under the
Agreement, without the execution or filing of any paper or any further act on
the part of any of the parties to the Agreement, anything in the Agreement to
the contrary notwithstanding.
EVENTS OF DEFAULT
'Events of Default' will consist of: (i) (A) any failure by the Servicer
(or Special Servicer) to make any required Advance or (B) any other failure of
the Servicer (or Special Servicer) to deposit in the Collection Account any
deposit required to be made under the Agreement, which failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Servicer (or Special Servicer) by the Trustee, or to the Servicer
(or Special Servicer) and the Trustee by Certificateholders holding Certificates
evidencing a Percentage Interest in the Trust of at least 25%; (ii) any failure
by the Servicer (or Special Servicer) duly to observe or perform in any material
respect any other of its covenants or agreements in the Agreement which
continues unremedied for 30 days after the giving of written notice of such
failure to the Servicer (or Special Servicer) by the Trustee, or to the Servicer
(or Special Servicer) and the Trustee by any Certificateholders holding
Certificates evidencing a Percentage Interest in the Trust of at least 25%;
(iii) any failure by the Servicer (or Special Servicer) to make any required
Servicing Advance, which failure continues unremedied for a period of 30 days
after the giving of written notice of such failure to the Servicer (or Special
Servicer) by the Trustee, or to the Servicer (or Special Servicer) and the
Trustee by any Certificateholders holding Certificates evidencing a Percentage
Interest in the Trust of at least 25%; (iv) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Servicer (or Special Servicer) and certain actions
by the Servicer (or Special Servicer) indicating insolvency, reorganization or
inability to pay its obligations (an 'Insolvency Event'); and (v) certain loss
or delinquency tests specified in the Agreement are not met.
RIGHTS UPON AN EVENT OF DEFAULT
So long as a Event of Default remains unremedied, either the Trustee or
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, may subject to the limitations set forth in
the Agreement terminate all of the rights and obligations of the Servicer (or
Special Servicer) under the Agreement and in and to the Mortgage Loans,
whereupon the Master Servicer will appoint a successor Servicer (or Special
Servicer) or the Master Servicer will succeed to all the responsibilities,
duties and liabilities of the Servicer (or Special Servicer) under the Agreement
and will be entitled to similar compensation arrangements. In the event that the
Master Servicer would be obligated to succeed the Servicer (or Special Servicer)
but is
S-59
<PAGE>
unwilling or unable so to act, it may appoint, or petition a court of competent
jurisdiction for the appointment of, a housing and home finance institution or
other mortgage loan or home equity loan servicer with all licenses and permits
required to perform its obligations under the Agreement and having a net worth
of at least $50,000,000. Pending such appointment, the Master Servicer will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Servicer (or Special
Servicer) would otherwise have received (or such lesser compensation as the
Trustee and such successor may agree). A receiver or conservator for the
Servicer (or Special Servicer) may be empowered to prevent the termination and
replacement of the Servicer (or Special Servicer) if the only Event of Default
that has occurred is an Insolvency Event.
MASTER SERVICER EVENTS OF DEFAULT
'Master Servicer Events of Default' will consist of, among other things:
(i) (A) any failure by the Master Servicer to make any required Advance or (B)
any other failure of the Master Servicer to deposit in the Collection Account
any deposit required to be made under the Agreement, which failure continues
unremedied for one Business Day after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by Certificateholders holding Certificates evidencing a Percentage
Interest in the Trust of at least 25%; (ii) any failure on the part of the
Master Servicer duly to observe or perform in any material respect any of the
covenants or agreements on the part of the Master Servicer contained in the
Agreement, which failure continues unremedied for a period of 30 days, after the
giving of written notice of such failure to the Master Servicer by the Trustee,
or to the Master Servicer and the Trustee by Certificateholders holding
Certificates evidencing a Percentage Interest in the Trust of at least 25%;
provided, however, if such failure stated in the notice cannot be corrected
within the applicable period, the Trustee may consent, in its sole discretion,
to a reasonable extension of time if corrective action is instituted by the
Master Servicer within the applicable time period and the Master Servicer
actively pursues it until fully corrected; (iii) certain events of insolvency,
readjustment of debt, marshalling of assets and liabilities or similar
proceedings relating to the Master Servicer and certain actions by the Master
Servicer indicating insolvency, reorganization or inability to pay its
obligations; and (iv) any failure by the Master Servicer to remit to the
Distribution Account any amount to be remitted by the Master Servicer therein,
in accordance with the terms of the Agreement.
RIGHTS UPON MASTER SERVICER EVENTS OF DEFAULT
So long as certain Master Servicer Events of Default described in the
Agreement remain unremedied, either the Trustee or Certificateholders holding
Certificates evidencing at least 51% of the Percentage Interests in the Trust,
may terminate all of the rights and obligations of the Master Servicer under the
Agreement and in and to the Mortgage Loans. If certain other Master Servicer
Events of Default described in the Agreement relating to the failure by the
Master Servicer to make required Advances or remit funds to the Distribution
Account remain unremedied, the Trustee shall terminate all of the rights and
obligations of the Master Servicer under the Agreement and in and to the
Mortgage Loans. Upon such termination, the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Agreement and will be entitled to similar compensation arrangements.
AMENDMENT
The Agreement may be amended from time to time by the Master Servicer, the
Servicer, the Special Servicer, the Depositor and the Trustee, without the
consent of the Certificateholders, to cure any ambiguity, to correct or
supplement any provisions therein which may be inconsistent with any other
provisions of the Agreement, to add to the duties of the Depositor, the
Servicer, the Special Servicer or the Master Servicer to comply with any
requirements imposed by the Internal Revenue Code or any regulation thereunder,
or to add or amend any provisions of the Agreement as required by the Rating
Agencies in order to maintain or improve any rating of the Offered Certificates
(it being understood that, after obtaining the ratings in effect on the Closing
Date, neither the Depositor, the Trustee, the Master Servicer, the Servicer nor
the Special Servicer is obligated to obtain, maintain, or improve any such
rating) or to add any other provisions with respect to matters or questions
arising under the Agreement which shall not be inconsistent with the provisions
of the Agreement, provided that such action will not, as evidenced by an opinion
of counsel, materially and adversely affect the interests of any
S-60
<PAGE>
Certificateholder; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion will
be required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result in
a downgrading of the then current rating of any Class of the Offered
Certificates. The Agreement may also be amended from time to time by the Master
Servicer, the Servicer, the Special Servicer, the Depositor, and the Trustee,
with the consent of Certificateholders evidencing at least 51% of the Percentage
Interests of each Class affected thereby (or 51% of the Percentage Interests of
all Classes if all Classes are affected) for the purpose of adding any
provisions to or changing in any manner or eliminating any of the provisions of
the Agreement or of modifying in any manner the rights of the
Certificateholders, provided that no such amendment will (i) reduce in any
manner the amount of, or delay the timing of, collections of payments on the
Certificates or distributions which are required to be made on any Certificate
without the consent of the Certificateholder or (ii) reduce the aforesaid
percentage required to consent to any such amendment, without the consent of the
holders of all Offered Certificates then outstanding.
COLLECTION OF TAXES, ASSESSMENTS AND SIMILAR ITEMS
The Servicer or Special Servicer will, to the extent required by the
related loan documents, maintain escrow accounts for the collection of hazard
insurance premiums and real estate taxes with respect to the Mortgage Loans, and
will make advances with respect to delinquencies in required escrow payments by
the related mortgagors.
INSURANCE COVERAGE
The Master Servicer, the Servicer and the Special Servicer are required to
obtain and thereafter maintain in effect a bond, corporate guaranty or similar
form of insurance coverage (which may provide blanket coverage), or any
combination thereof, insuring against loss occasioned by the errors and
omissions of their respective officers and employees.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the fifth
month following the end of the Servicer's fiscal year, beginning in 1999, to the
Trustee, the Depositor and the Rating Agencies of an annual statement signed by
an officer of the Servicer (or Special Servicer) to the effect that the Servicer
(or Special Servicer) has fulfilled its material obligations under the Agreement
throughout the preceding fiscal year, except as specified in such statement.
On or before the last day of the fifth month following the end of the
Servicer's fiscal year, beginning in 1999, the Servicer will furnish a report
prepared by a firm of nationally recognized independent public accountants (who
may also render other services to the Servicer or the Depositor) to the Trustee,
the Depositor and the Rating Agencies to the effect that such firm has examined
certain documents and the records relating to servicing of the Mortgage Loans
under the Uniform Single Attestation Program for Mortgage Bankers and such
firm's conclusion with respect thereto.
The Servicer's fiscal year ends on November 30.
VOTING RIGHTS
Voting rights under the Agreement will be allocated among the Offered
Certificates in proportion to their respective Class Certificate Principal
Amounts, and among all Certificates as provided in the Agreement.
THE TRUSTEE
First Union National Bank, a national banking association, will be the
Trustee under the Agreement. The Trustee will be paid a monthly fee (the
'Trustee Fee') calculated as a fixed percentage equal to 0.0035% per annum (the
'Trustee Fee Rate') on the Aggregate Class Certificate Principal Amount, and
will also be entitled to retain, as additional compensation, any interest or
other income earned on funds on deposit in the Distribution Account pending
distribution to Certificateholders. The Trustee will be entitled to
reimbursement for certain expenses prior to distribution of any amounts to
Certificateholders. The Trustee's 'Corporate Trust Office' for
S-61
<PAGE>
purposes of presentment and surrender of the Offered Certificates for the final
distribution thereon and for all other purposes is located at 230 South Tryon
Street NC 1179, Charlotte, North Carolina 28288, Attention: Structured Finance
Trust Services, or such address as the Trustee may designate from time to time
by notice to the Certificateholders, the Depositor and the Master Servicer.
The Trustee may have normal banking relationships with the Depositor and
the Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Master Servicer.
The Depositor may also remove the Trustee if the Trustee ceases to be eligible
to continue as such under the Agreement or if the Trustee becomes insolvent.
Upon becoming aware of such circumstances, the Depositor will be obligated to
appoint a successor Trustee, as approved by the Master Servicer (such Master
Servicer approval not to be unreasonably withheld). 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.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, have made written requests 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. The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
DESCRIPTION OF THE MORTGAGE LOAN PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from the Seller pursuant to the Mortgage Loan
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.
Pursuant to the terms of the Sale Agreement whereby the Mortgage Loans were
purchased by the Seller, the Transferor has made certain representations and
warranties as of the date specified in the Sale Agreement with respect to the
accuracy in all material respects of certain information with respect to each
Mortgage Loan (e.g., Principal Balance and the Mortgage Rate). In the Purchase
Agreement, the Seller will represent, among other things, (a) that at the time
of the transfer of the Mortgage Loans 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 (b) that with respect to
each Mortgage Loan no event has occurred that would cause the representations
made by the Transferor as of the date specified in the Sale Agreement to be
incorrect as of the Cut-Off Date. In the Agreement, the Depositor will assign to
the Trustee its rights with respect to the representations and warranties made
by the Transferor in the Sale Agreement and by the Seller in the Purchase
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,
the representing party will repurchase or substitute for the Mortgage Loans as
described above under 'POOLING AND SERVICING AGREEMENT--Assignment of 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.
S-62
<PAGE>
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 CONSIDERATIONS
GENERAL
The Agreement provides that the Trust Fund, exclusive of the assets held in
the Basis Risk Reserve Fund, will comprise several 'Lower Tier REMICs' and an
'Upper Tier REMIC' organized in a tiered REMIC structure. Each Lower Tier REMIC
will issue uncertificated regular interests and those interests will be held
entirely by the REMIC immediately above it in the tiered structure. Each of the
Lower Tier REMICs and the Upper Tier REMIC will designate a single class of
interests as the residual interest in that REMIC. The Class R Certificate will
represent ownership of the residual interests in each of the REMICs. Elections
will be made to treat each Lower Tier REMIC and the Upper Tier REMIC as a REMIC
for federal income tax purposes.
Each class of Offered Certificates and the Class X Certificate will
represent beneficial ownership of a corresponding class of regular interests
issued by the Upper Tier REMIC. In addition, each of the Offered Certificates
will represent a beneficial interest in the right to receive payments from the
Basis Risk Reserve Fund.
Upon the issuance of the Offered Certificates, Brown & Wood LLP ('Tax
Counsel') will deliver its opinion to the effect that, assuming compliance with
the Trust Agreement, for federal income tax purposes, each Lower Tier REMIC and
the Upper Tier REMIC will qualify as a REMIC within the meaning of Section 860D
of the Internal Revenue Code of 1986, as amended (the 'Code'). In addition, Tax
Counsel will deliver an opinion to the effect that the Basis Risk Reserve Fund
is an 'outside reserve fund' that is beneficially owned by the holder of the
Class X Certificate. Moreover, Tax Counsel will deliver an opinion to the effect
that, although the matter is not entirely clear, the rights of the holders of
the Offered Certificates to receive payments from the Basis Risk Reserve Fund
should represent, for federal income tax purposes, interests in an interest rate
cap contract.
TAXATION OF REGULAR INTERESTS
A holder of a Class of Offered Certificates will be treated for federal
income tax purposes as owning an interest in the corresponding Class of Regular
Interests in the Upper Tier REMIC and an interest in a limited recourse interest
rate cap contract (the 'Cap Contract'). A holder of an Offered Certificate must
allocate its purchase price for the Offered Certificate between its two
components--the REMIC Regular Interest component and the Cap Contract component.
For information reporting purposes, the Trustee will assume that, with respect
to any Offered Certificate, the Cap Contract component will have only nominal
value relative to the value of the Regular Interest component. The IRS could,
however, argue that the Cap Contract component has significant value, and if
that argument were to be sustained, the Regular Interest component could be
viewed as having been issued with an additional amount of original issue
discount ('OID') (which could cause the total amount of OID to exceed a
statutorily defined de minimis amount). See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of Debt Securities--Interest and Acquisition Discount'
in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Certificate,
the holder must allocate the amount realized between the two components of the
Offered Certificate based on the relative fair market values of those components
at the time of sale. Assuming that an Offered Certificate is held as a 'capital
asset' within the meaning of section 1221 of the Code, gain or loss on the
disposition of an interest in the Cap Contract component should be capital gain
or loss, and gain or loss on the disposition of the Regular Interest component
should, subject to the limitation described below, be capital gain or loss. Gain
attributable to the Regular Interest component of an Offered Certificate will be
treated as ordinary income, however, to the extent such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the
holder's gross income with respect to the Regular Interest component had income
thereon accrued 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 Offered Certificate over (ii) the amount actually included in such holder's
income.
S-63
<PAGE>
The maximum tax rate on a noncorporate taxpayer's capital gain realized
upon the disposition of an Offered Certificate is 20% if the Offered Certificate
is held for at least 18 months, and 28% if the Offered Certificate is held for
more than one year but not more than 18 months.
Interest on the Regular Interest component of an Offered Certificate must
be included in income by a holder under the accrual method of accounting,
regardless of the holder's regular method of accounting. In addition, the
Regular Interest component of an Offered Certificate could be considered to have
been issued with OID. See 'CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation
of Debt Securities--Interest and Acquisition Discount' in the Prospectus. The
prepayment assumption that will be used in determining the accrual of any OID,
market discount, or bond premium, if any, will be a rate equal to 120% of the
Prepayment Assumption for the Fixed Rate Mortgage Loans and 140% of the
Prepayment Assumption for the Adjustable Rate Mortgage Loans and assuming that
the Class X Certificateholder exercises its special termination option when it
is first entitled to do so. No representation is made that the Mortgage Loans
will prepay at such a rate or at any other rate. OID must be included in income
as it accrues on a constant yield method, regardless of whether the holder
receives currently the cash attributable to such OID.
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 Offered 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 Offered Certificates. 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 Offered 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 manner not yet set forth in
regulations. Prospective purchasers of the Offered 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 Offered 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 CONSIDERATIONS-- Taxation of Debt
Securities--Interest and Acquisition Discount' in the Prospectus.
S-64
<PAGE>
STATUS OF THE OFFERED CERTIFICATES
The Regular Interest components of the Offered Certificates will be treated
as assets described in Section 7701 (a) (19) (C) of the Code, and as 'real
estate assets' under Section 856(c) (5) (B) of the Code, generally, in the same
proportion that the assets of the Trust Fund, exclusive of the Basis Risk
Reserve Fund, would be so treated. In addition, to the extent the Regular
Interest component of an Offered Certificate represents real estate assets under
section 856 (c) (5) (B) of the Code, the interest derived from that component
would be interest on obligations secured by interests in real property for
purposes of section 856(c) (3) of the Code. The Cap Contract component of an
Offered Certificate will not, however, qualify as an asset described in Section
7701(a)(19)(C) of the Code or as a real estate asset under Section 856 (c) (5)
(B) of the Code. The Offered Certificates also will not be treated as 'qualified
mortgages' under Section 860G(a)(3) of the Code in their entirety and may not be
appropriate investments for REMICs. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the REMIC and its Holders--General' in the
Prospectus.
THE BASIS RISK RESERVE FUND
As indicated above, a portion of the purchase price paid by a holder to
acquire an Offered Certificate will be attributable to the Cap Contract
component of such Offered Certificate. The portion of the overall purchase price
attributable to the Cap Contract component must be amortized over the life of an
Offered Certificate, taking into account the declining balance of the related
Regular Interest component. Treasury regulations concerning notional principal
contracts provide alternative methods for amortizing the purchase price of an
interest rate cap contract. Under one method--the level yield constant interest
method--the price paid for an interest rate cap is amortized over the life of
the cap as though it were the principal amount of a loan bearing interest at a
reasonable rate. Holders are urged to consult their tax advisors concerning the
methods that can be employed to amortize the portion of the purchase price paid
for the Cap Contract component of an Offered Certificate.
Any payments made to a holder from the Basis Risk Reserve Fund will be
treated as periodic payments on an interest rate cap contract. To the extent the
sum of such periodic payments for any year exceeds that year's amortized cost of
the Cap Contract component, such excess is ordinary income. If for any year the
amount of that year's amortized cost exceeds the sum of the periodic payments,
such excess is allowable as an ordinary deduction.
Gain or loss realized upon the termination of the Cap Contract 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.
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,
(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 Offered Certificates. See 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS-- Taxation of the REMIC--Prohibited Transactions and
Contributions Tax' in the Prospectus.
The responsibility for filing annual federal information returns and other
reports will be borne by the Trustee and/or the Master Servicer. See 'CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS--Administrative Matters' in the Prospectus.
For further information regarding the federal income tax consequences of
investing in the Offered Certificates, see 'CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS' in the Prospectus.
BACKUP WITHHOLDING
Certain Certificateholders may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Offered Certificates if the
Certificateholders, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fails to report interest, dividends, or other 'reportable
payments' (as defined in the Code) properly, or, under certain
S-65
<PAGE>
circumstances, fails to provide the Trustee or their broker with a certified
statement, under penalty of perjury, that they are not subject to backup
withholding.
The Trustee will be required to report annually to the IRS, and to each
Offered Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Offered Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only 'Offered Certificateholder' of record is
Cede, as nominee for DTC, Certificateholders and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
owned from Participants and Indirect Participants rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to complete
their reports.) Each non-exempt Certificateholder will be required to provide,
under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificateholder fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the holder, and remit the
withheld amount to the IRS as a credit against the holder's federal income tax
liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the Certificates and the Agreement.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ('Foreign Investors').
The term 'Foreign Investor' means any person other than (i) a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
organized in or under the laws of the United States, 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), (iii) an estate the
income of which is includible in gross income for United States federal income
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 clause (iv), 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 United States persons.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain 'portfolio debt investments' issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Offered
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Offered Certificates.
For the Offered Certificates to constitute portfolio debt investments
exempt from the United States withholding tax, the withholding agent must
receive from the Certificateholder an executed IRS Form W-8 signed under penalty
of perjury by the Certificateholder stating that the Certificateholder is a
Foreign Investor and providing such Certificateholder's name and address. The
statement must be received by the withholding agent in the calendar year in
which the interest payment is made, or in either of the two preceding calendar
years.
A Certificateholder that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Offered Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificateholder in the United States, (ii) in the case of a Certificateholder
that is an individual, such Certificateholder is not present in the United
States for 183 days or more during the taxable year in which such sale, exchange
or redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in the immediately preceding paragraph are
satisfied.
S-66
<PAGE>
NEW WITHHOLDING REGULATIONS
On October 6, 1997, the Treasury Department issued new regulations (the
'New Regulations') which make certain modifications to the withholding, backup
withholding and information reporting rules described above. The New Regulations
attempt to unify certification requirements and modify reliance standards. The
New Regulations will generally be effective for payments made after December 31,
1999, subject to certain transition rules. Prospective investors are urged to
consult their own tax advisors regarding the New Regulations.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Offered Certificates under the tax
laws of any state. Investors considering an investment in the Offered
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
Offered 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 Senior 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 Senior 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 Senior Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust;
(3) The Senior 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 Investors
Service, Inc., Duff & Phelps Credit Rating Co. or Fitch IBCA, Inc.;
(4) The sum of all payments made to and retained by the Underwriter in
connection with the distribution of the Senior 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 Servicer represent not more than reasonable compensation for the
Servicer's services under the Agreement and reimbursement of the Servicer's
reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of the Underwriter, the Seller,
the Servicer, 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
S-67
<PAGE>
(6) The Plan investing in the Senior 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 Senior 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 Senior 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 Senior
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.
The Exemption does not apply to the initial purchase, the holding or the
subsequent resale of the Subordinate Certificates because the Subordinate
Certificates are subordinate to certain other Classes of Certificates.
CONSEQUENTLY, TRANSFERS OF THE SUBORDINATE CERTIFICATES WILL NOT BE REGISTERED
BY THE TRUSTEE UNLESS THE TRUSTEE RECEIVES: (I) A REPRESENTATION FROM THE
TRANSFEREE OF SUCH CERTIFICATES, ACCEPTABLE TO AND IN FORM AND SUBSTANCE
SATISFACTORY TO THE TRUSTEE, TO THE EFFECT THAT SUCH TRANSFEREE IS NOT AN
EMPLOYEE BENEFIT PLAN SUBJECT TO SECTION 406 OF ERISA OR A PLAN OR ARRANGEMENT
SUBJECT TO SECTION 4975 OF THE CODE, NOR A PERSON ACTING ON BEHALF OF ANY SUCH
PLAN OR ARRANGEMENT NOR USING THE ASSETS OF ANY SUCH PLAN OR ARRANGEMENT TO
EFFECT THE TRANSFER; (II) IF THE PURCHASER IS AN INSURANCE COMPANY, A
REPRESENTATION THAT THE PURCHASER IS AN INSURANCE COMPANY WHICH IS PURCHASING
SUCH CERTIFICATES WITH FUNDS CONTAINED IN AN 'INSURANCE COMPANY GENERAL ACCOUNT'
(AS SUCH TERM IS DEFINED IN SECTION V(E) OF PROHIBITED TRANSACTION CLASS
EXEMPTION 95-60 ('PTCE 95-60')) AND THAT THE PURCHASE AND HOLDING OF SUCH
CERTIFICATES ARE COVERED UNDER SECTIONS I AND III OF PTCE 95-60; OR (III) AN
OPINION OF COUNSEL SATISFACTORY TO THE TRUSTEE THAT THE PURCHASE OR HOLDING OF
SUCH CERTIFICATES BY A PLAN, ANY PERSON ACTING ON BEHALF OF A PLAN OR USING SUCH
PLAN'S ASSETS, WILL NOT RESULT IN THE ASSETS OF THE TRUST BEING DEEMED TO BE
'PLAN ASSETS' AND SUBJECT TO THE PROHIBITED TRANSACTION REQUIREMENTS OF ERISA
AND THE CODE AND WILL NOT SUBJECT THE TRUSTEE TO ANY OBLIGATION IN ADDITION TO
THOSE UNDERTAKEN IN THE AGREEMENT. SUCH REPRESENTATION AS DESCRIBED ABOVE SHALL
BE DEEMED TO HAVE BEEN MADE TO THE TRUSTEE BY THE TRANSFEREE'S ACCEPTANCE OF A
BOOK-ENTRY CERTIFICATE THAT IS A SUBORDINATE CERTIFICATE. IN THE EVENT THAT SUCH
REPRESENTATION IS VIOLATED, OR ANY ATTEMPT TO TRANSFER TO A PLAN OR PERSON
ACTING ON BEHALF OF A PLAN OR USING SUCH PLAN'S ASSETS IS ATTEMPTED WITHOUT SUCH
OPINION OF COUNSEL, SUCH ATTEMPTED TRANSFER OR ACQUISITION SHALL BE VOID AND OF
NO EFFECT.
Because the ultimate holder of the Class X Certificate could be a party in
interest with respect to a Plan investor, any Plan investor (including an
insurance company general account investing the assets of Plans) that is
considering acquiring Certificates should consult with its legal advisors
concerning whether the direct acquisition by the holder of the Class X
Certificate from such Plan of an option to purchase the Certificates held by
such Plan, or the exercise by the holder of the Class X Cetificate of such an
option could constitute a prohibited transaction, and whether such transaction
would be covered by the Exemption or another statutory, regulatory or
administrative exemption.
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the Exemption,
and the potential consequences in their specific circumstances, prior to making
an investment in the Senior Certificates. Moreover, each Plan fiduciary should
determine whether, under the general fiduciary standards of investment prudence
and diversification, an investment in the Certificates 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 CONSIDERATIONS
The Class M-2 Certificates and Class B-1 Certificates will not constitute
'mortgage related securities' for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ('SMMEA'). The appropriate characterization of the Class
M-2 Certificates and the Class B-1 Certificates under various legal investment
restrictions applicable to the investment activities of certain institutions,
and thus the ability of investors subject
S-68
<PAGE>
to these restrictions to purchase the Class M-2 Certificates and the Class B-1
Certificates, may be subject to significant intepretive uncertainties.
The Class A-1, Class A-2 and Class M-1 Certificates will constitute
'mortgage related securities' for purposes of SMMEA for so long as they are
rated in one of the two highest rating categories by one or more nationally
recognized statistical rating organizations. As such, the Class A-1
Certificates, the Class A-2 Certificates and the Class M-1 Certificates will be
legal investments for certain entities to the extent provided in SMMEA, subject
to state laws overriding SMMEA. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of SMMEA. In addition,
institutions whose activities are subject to review by federal or state
regulatory authorities may be or may become subject to restrictions, which may
be retroactively imposed by such regulatory authorities, on the investment by
such institutions in certain forms of mortgage related securities.
All investors whose investment authority is subject to legal restrictions
should consult their own legal advisors to determine whether, and to what
extent, the Offered Certificates will constitute legal investments for them. See
'Legal Investment' in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
and in a terms agreement (collectively, the 'Underwriting Agreement') between
the Depositor and the Underwriter, the Depositor has agreed to sell to the
Underwriter, and the Underwriter has agreed to purchase from the Depositor, all
of the Offered Certificates.
The distribution of the Offered Certificates by the Underwriter will be
effected in each case from time to time in one or more negotiated transactions,
or otherwise, at varying prices to be determined, in each case, at the time of
sale. The Underwriter may effect such transactions by selling the Certificates
to or through dealers, and such dealers may receive from the Underwriter, for
whom they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Certificates may be deemed to be
an underwriter, and any discounts, commissions or concessions received by them,
and any profit on the resale of the Certificates purchased by them, may be
deemed to be underwriting discounts and commissions under the Securities Act of
1933, as amended (the 'Act'). The Underwriting Agreement provides that the
Depositor will indemnify the Underwriter against certain civil liabilities,
including liabilities under the Act.
Lehman Brothers Inc. has entered into an agreement with the Depositor to
purchase the Class X Certificate and the Residual Certificate simultaneously
with the purchase of the Offered Certificates, subject to certain conditions.
Lehman Brothers Inc. is an affiliate of the Depositor, the Seller and
Aurora.
After the initial distribution of the Offered Certificates by the
Underwriter, the Prospectus and Prospectus Supplement may be used by Lehman
Brothers Inc., an affiliate of the Seller, the Depositor and the Servicer, in
connection with market making transactions in the Offered Certificates. Lehman
Brothers Inc. may act as principal or agent in such transactions. Such
transactions will be at prices related to prevailing market prices at the time
of sale.
LEGAL MATTERS
Certain legal matters with respect to the Offered 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.
S-69
<PAGE>
RATINGS
It is a condition to the issuance of the Offered Certificates that they
receive at least the following ratings:
CLASS MOODY'S FITCH
----- ------- ------
A-1 Aaa AAA
A-2 Aaa AAA
M-1 Aa2 AA
M-2 A2 A
B-1 Baa3 BBB
A securities rating addresses the likelihood of the receipt by Offered
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Offered Certificates. The ratings on
the Offered Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that Offered Certificateholders might realize a lower than anticipated yield.
The ratings do not address the likelihood of the payment of any Basis Risk
Shortfall.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
S-70
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
- - ----- ----
<S> <C>
1994 Flood Act................................................................ S-58
Aames......................................................................... S-20
Aames Guidelines.............................................................. S-21
Accrual Period................................................................ S-7, S-43
Act........................................................................... S-69
Adjustable Rate Mortgage Loans................................................ S-5, S-22
Adjustment Date............................................................... S-29
Advance....................................................................... S-20
AFC........................................................................... S-20
Affiliated Originators........................................................ S-4
Agreement..................................................................... S-4
Aggregate Class Certificate Principal Amount.................................. S-5
Aggregate Cut-Off Date Principal Balance...................................... S-5, S-22
Aggregate Expense Rate........................................................ S-43
Aggregate Loan Balance........................................................ S-49
Applied Loss Amount........................................................... S-9, S-50
Aurora........................................................................ S-6, S-18
Available Funds............................................................... S-43
Basic Fee..................................................................... S-10, S-56
Basic Fee Rate................................................................ S-10, S-56
Basis Risk Reserve Fund....................................................... S-44
Basis Risk Shortfall.......................................................... S-44
Basis Risk Trigger............................................................ S-49
BCD Mortgage Loan............................................................. S-19
BIF........................................................................... S-54
Book-Entry Certificates....................................................... S-39
Cap Contract.................................................................. S-63
Carryforward Interest......................................................... S-44
Cede.......................................................................... S-6
Cedel......................................................................... S-6
Cedel Participants............................................................ S-41
Certificate Interest Rate..................................................... S-43
Certificate Principal Amount.................................................. S-43
Certificate Owners............................................................ S-6, S-39
Certificateholder............................................................. S-40
Certificates.................................................................. Cover, S-4
Chase......................................................................... S-6
Citibank...................................................................... S-6
Class......................................................................... Cover
Class A-1 Spread.............................................................. Cover, S-7, S-43
Class A-2 Spread.............................................................. Cover, S-7, S-43
Class B-1 Principal Distribution Amount....................................... S-48
Class B-1 Spread.............................................................. S-7, S-43
Class Certificate Principal Amount............................................ S-4, S-39
Class M Certificates.......................................................... Cover, S-4
Class M-1 Principal Distribution Amount....................................... S-48
Class M-1 Spread.............................................................. Cover, S-4, S-43
Class M-2 Principal Distribution Amount....................................... S-48
Class M-2 Spread.............................................................. Cover, S-7, S-43
Class X Certificate........................................................... Cover, S-4
Closing Date.................................................................. Cover
Code.......................................................................... S-63
Collection Account............................................................ S-54
Collection Period............................................................. S-8, S-46
Compensating Interest......................................................... S-45
Cooperative................................................................... S-41
</TABLE>
S-71
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- - ----- ----
<S> <C>
CPR........................................................................... S-35
Current Interest.............................................................. S-44
Cut-Off Date.................................................................. S-4
Cut-Off Date Principal Balance................................................ S-4
Deferred Amount............................................................... S-51
Definitive Certificate........................................................ S-39
Delayed Adjustment Mortgage Loans............................................. S-5, S-22
Delinquency Event............................................................. S-49
Depositor..................................................................... Cover, S-4, S-6
Directing Holder.............................................................. S-55
Distribution Account.......................................................... S-10, S-54
Distribution Date............................................................. S-2, S-39
DTC........................................................................... S-6, S-42
Eligible Account.............................................................. S-54
ERISA......................................................................... S-12, S-67
Euroclear..................................................................... S-6
Euroclear Operator............................................................ S-41
Euroclear Participants........................................................ S-41
European Depositaries......................................................... S-6, S-40
Events of Default............................................................. S-59
Exemption..................................................................... S-67
Extra Principal Distribution Amount........................................... S-48
Financial Intermediary........................................................ S-40
Fitch......................................................................... S-13
Fixed Rate Mortgage Loans..................................................... S-5, S-22
Foreclosed Loans.............................................................. S-20
Foreclosure Ratio............................................................. S-20
Foreign Investor.............................................................. S-66
Global Securities............................................................. A-I-1
Gross Margin.................................................................. S-29
Harbourton.................................................................... S-18
HUD........................................................................... S-19
Index......................................................................... S-5, S-22, S-32
Initial Cap................................................................... S-29
Insolvency Event.............................................................. S-59
Interest Remittance Amount.................................................... S-44
IRS........................................................................... S-64
Lehman........................................................................ Cover
Lehman Brothers............................................................... S-67
LIBOR......................................................................... S-14, S-45
LIBOR Determination Date...................................................... S-45
Liquidated Mortgage Loan...................................................... S-50
Loan Rates.................................................................... S-22
Loan-to-Value Ratio........................................................... S-22
London Banking Day............................................................ S-45
Loss Trigger Event............................................................ S-49
Lower Tier REMICs............................................................. S-63
Master Servicer............................................................... Cover, S-4, S-6, S-17
Master Servicer Events of Default............................................. S-60
Master Servicing Fee.......................................................... S-10, S-56
Master Servicing Fee Rate..................................................... S-10, S-56
Maximum Certificate Interest Rate............................................. S-44
Maximum Rate.................................................................. S-29
Minimum Rate.................................................................. S-29
Modeling Assumptions.......................................................... S-35
Monthly Excess Cashflow....................................................... S-51
Monthly Excess Interest....................................................... S-45
Moody's....................................................................... S-13
</TABLE>
S-72
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- - ----- ----
<S> <C>
Mortgage Loans................................................................ Cover, S-4
Mortgage Notes................................................................ S-22
Mortgage Pool................................................................. Cover, S-4
Mortgaged Property............................................................ S-5
Mortgaged Properties.......................................................... S-4
Mortgage Rate................................................................. S-5
Mortgage Rates................................................................ S-22
Net Funds Cap................................................................. Cover, S-7, S-43
Net Gains/(Losses)............................................................ S-20
Net Liquidation Proceeds...................................................... S-49
Net Mortgage Rate............................................................. S-43
Net Prepayment Interest Shortfall............................................. S-45
New Regulations............................................................... S-67
Nonrecoverable Advance........................................................ S-55
Norwest....................................................................... S-17
Ocwen......................................................................... S-2, S-19
Offered Certificates.......................................................... Cover, S-4, S-39
Offered Certificateholder..................................................... S-66
Offered Subordinate Certificates.............................................. Cover, S-4
OID........................................................................... S-63
OID Regulations............................................................... S-64
Originators................................................................... S-20
Overcollateralization Amount.................................................. S-8, S-48
Overcollateralization Deficiency.............................................. S-8, S-48
Overcollateralization Release Amount.......................................... S-8, S-49
Overcollateralization Stepdown Trigger Event.................................. S-49
Participant................................................................... S-40
Payahead...................................................................... S-44
Periodic Cap.................................................................. S-29
Plan.......................................................................... S-12
Pool Delinquency Rate......................................................... S-47
Prepayment Assumption......................................................... S-35
Prepayment Interest Shortfall................................................. S-45
Prepayments................................................................... S-16
Principal Balance............................................................. S-4
Principal Distribution Amount................................................. S-7, S-8, S-46
Principal Remittance Amount................................................... S-46
PTCE 95-60.................................................................... S-68
Purchase Agreement............................................................ S-54, S-62
Rating Agencies............................................................... S-13
Realized Loss................................................................. S-50
Record Date................................................................... S-39
Reference Banks............................................................... S-45
Relevant Depositary........................................................... S-40
REMIC......................................................................... S-2
Remittance Rate............................................................... S-44
Repurchase Price.............................................................. S-51
Reserve Interest Rate......................................................... S-49
Residual Certificate.......................................................... Cover, S-4
Restricted Group.............................................................. S-67
Rolling Three Month Delinquency Rate.......................................... S-47
Rules......................................................................... S-40
SAIF.......................................................................... S-54
Sale Agreement................................................................ S-53
Sale Date..................................................................... S-53
Scheduled Payment............................................................. S-5, S-22
Scheduled Principal Balance................................................... S-49
Seller........................................................................ Cover, S-6
</TABLE>
S-73
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
- - ----- ----
<S> <C>
Senior Certificates........................................................... Cover, S-4
Senior Enhancement Percentage................................................. S-48
Senior Principal Distribution Amount.......................................... S-48
Servicer...................................................................... Cover, S-4, S-6, S-18
Servicers..................................................................... S-53
Servicing Advance............................................................. S-55
Servicing Fee................................................................. S-10, S-56
Servicing Fee Rate............................................................ S-10, S-56
Six-Month LIBOR............................................................... S-14
Six Month LIBOR Index......................................................... S-32
SMMEA......................................................................... S-12, S-68
Special Servicer.............................................................. Cover, S-2, S-4, S-6, S-19
Special Servicer Fee.......................................................... S-56
Special Servicer Incentive Fee................................................ S-56
Spread........................................................................ S-43
Stepdown Date................................................................. S-48
Subordinate Certificates...................................................... Cover
Substitution Amount........................................................... S-44
Targeted Overcollateralization Amount......................................... S-8, S-49, S-53
Tax Counsel................................................................... S-63
Terms and Conditions.......................................................... S-41
Total Portfolio............................................................... S-20
Transferor.................................................................... S-20
Transferred Mortgage Loans.................................................... S-55
Trigger Event................................................................. S-47
Trust......................................................................... Cover, S-4
Trust Fund.................................................................... Cover, S-4
Trustee....................................................................... Cover, S-4
Trustee Fee................................................................... S-10, S-61
Trustee Fee Rate.............................................................. S-10, S-61
Unaffiliated Originators...................................................... S-20
Underwriter................................................................... Cover
Underwriting Agreement........................................................ S-69
Unpaid Basis Risk Shortfall................................................... S-44
Upper Tier REMICs............................................................. S-63
U.S. Person................................................................... A-I-3
</TABLE>
S-74
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Certificates, Series 1998-2 (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 twelve 30-day months as applicable to the related class of Global
Securities. For transactions settling on
A-I-1
<PAGE>
the 31st of the month, payment will include interest accrued to and excluding
the first day of the following month. Payment will then be made by the
respective Depositary of the DTC Participant's account against delivery of the
Global Securities. After settlement has been completed, the Global Securities
will be 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 to finance the 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 twelve 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 (including an entity treated as a
corporation or partnership for United States federal income tax purposes)
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), (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
<PAGE>
[This page intentionally left blank]
<PAGE>
PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation (the 'Depositor') may offer from time to time under
this Prospectus and related Prospectus Supplements the Asset-Backed Notes (the
'Notes') and the Asset-Backed Certificates (the 'Certificates' and, together
with the Notes, the 'Securities') which may be sold from time to time in one or
more series (each, a 'Series').
As specified in the related Prospectus Supplement, the Certificates of a
Series will evidence undivided interests in certain assets deposited into a
trust (each, a 'Trust Fund') by the Depositor pursuant to a Pooling and
Servicing Agreement or a Trust Agreement, as described herein. As specified in
the related Prospectus Supplement, the Notes of a Series will be issued and
secured pursuant to an Indenture and will represent indebtedness of the related
Trust Fund. The Trust Fund for a Series of Securities will include assets
purchased from the seller or sellers specified in the related Prospectus
Supplement (the 'Seller') composed of (a) Primary Assets, which may include one
or more pools of (i) 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.
<TABLE>
<S> <C>
SECURITIES OFFERED................. Asset-Backed Certificates (the 'Certificates') and Asset-Backed Notes
(the 'Notes'). Certificates are issuable from time to time in Series
pursuant to a Pooling and Servicing Agreement or Trust Agreement.
Each Certificate of a Series will evidence an interest in the Trust
Fund for such Series, or in an Asset Group specified in the related
Prospectus Supplement. Notes are issuable from time to time in
Series pursuant to an Indenture. Each Series of Securities will
consist of one or more Classes, one or more of which may be Classes
of Compound Interest Securities, Planned Amortization Class ('PAC')
Securities, Variable Interest Securities, Zero Coupon Securities,
Principal Only Securities, Interest Only Securities, Participating
Securities, Senior Securities or Subordinate Securities. Each Class
may differ in, among other things, the amounts allocated to and the
priority of principal and interest payments, Final Scheduled
Distribution Dates, Distribution Dates and interest rates. The
Securities of each Class will be issued in fully registered form in
the denominations specified in the related Prospectus Supplement. If
so specified in the related Prospectus Supplement, the Securities or
certain Classes of such Securities offered thereby may be available
in book-entry form only.
DEPOSITOR.......................... Lehman ABS Corporation (the 'Depositor') was incorporated in the State
of Delaware on January 29, 1988, and is a wholly-owned, special
purpose subsidiary of Lehman Commercial Paper Inc. ('LCPI'), which
itself is a wholly-owned subsidiary of Lehman Brothers Inc. ('Lehman
Brothers'), which is a wholly-owned subsidiary of Lehman Brothers
Holdings Inc. ('Holdings'). None of Lehman Brothers, LCPI, Holdings
nor any other affiliate of the Depositor, the Servicer, the Trustee
or the Seller has guaranteed or is otherwise obligated with respect
to the Securities of any Series. See 'THE DEPOSITOR.'
INTEREST PAYMENTS.................. Interest payments on the Securities of a Series entitled by their
terms to receive interest will be made on each Distribution Date, to
the extent set forth in, and at the applicable rate specified in (or
determined in the manner set forth in), the related Prospectus
Supplement. The interest rate on Securities of a Series may be
variable or change with changes in the rates of interest on the
related 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.'
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
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.'
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
In addition, the Prospectus Supplement may provide other circumstances
under which Holders of Securities of a Series could be fully paid
significantly earlier than would otherwise be the case if payments
or distributions were solely based on the activity of the related
Primary Assets.
THE TRUST FUND..................... The Trust Fund for a Series of Securities will consist of one or more
of the assets described below, as described in the related Prospectus
Supplement.
A. PRIMARY ASSETS............. The Primary Assets for a Series may consist of any combination of the
following assets, to the extent and as specified in the related
Prospectus Supplement. The Primary Assets will be purchased from the
Seller or may be purchased by the Depositor in 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
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
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.
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
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
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
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,
</TABLE>
9
<PAGE>
<TABLE>
<S> <C>
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.'
</TABLE>
10
<PAGE>
RISK FACTORS
Investors should consider, among other things, the following factors in
connection with the purchase of the Securities.
Limited Liquidity. There will be no market for the Securities of any
Series prior to the issuance thereof, and there can be no assurance that a
secondary market will develop or, if it does develop, that it will provide
Holders with liquidity of investment or will continue for the life of the
Securities of such Series. Lehman Brothers, through one or more of its
affiliates, and the other underwriters, if any, specified in the related
Prospectus Supplement, presently expect to make a secondary market in the
Securities, but have no obligation to do so.
Limited Assets. The Depositor does not have, nor is it expected to have,
any significant assets. The Securities of a Series will be payable solely from
the assets of the Trust Fund for such Securities. There will be no recourse to
the Depositor or any other person for any default on the Notes or any failure to
receive distributions on the Certificates. Further, unless otherwise stated in
the related Prospectus Supplement, at the times set forth in the related
Prospectus Supplement, certain Primary Assets and/or any balance remaining in
the Collection Account or Distribution Account immediately after making all
payments due on the Securities of such Series and other payments specified in
the related Prospectus Supplement, may be promptly released or remitted to the
Depositor, the Servicer, the Enhancer or any other person entitled thereto and
will no longer be available for making payments to Holders. Consequently,
holders of Securities of each Series must rely solely upon payments with respect
to the Primary Assets and the other assets constituting the Trust Fund for a
Series of Securities, including, if applicable, any amounts available pursuant
to any Enhancement for such Series, for the payment of principal of and interest
on the Securities of such Series.
Holders of Notes will be required under the Indenture to proceed only
against the Primary Assets and other assets constituting the related Trust Fund
in the case of a default with respect to such Notes and may not proceed against
any assets of the Depositor. If payments with respect to the Primary Assets and
such other assets securing a Series of Notes, including any Enhancement, were to
become insufficient to make payments on such Notes, no other assets would be
available for payment of the deficiency.
The only obligations, if any, of the Depositor with respect to the
Securities of any Series will be pursuant to certain representations and
warranties. See 'THE AGREEMENTS--Assignment of Primary Assets' herein. The
Depositor does not have, and is not expected in the future to have, any
significant assets with which to meet any obligation to repurchase Primary
Assets with respect to which there has been a breach of any representation or
warranty. If, for example, the Depositor were required to repurchase a Primary
Asset, its only sources of funds to make such repurchase would be from funds
obtained from the enforcement of a corresponding obligation, if any, on the part
of the originator of the Primary Assets, the Servicer or the Seller, as the case
may be, or from a Reserve Fund established to provide funds for such
repurchases.
Enhancement. Although such Enhancement is intended to reduce the risk of
delinquent payments or losses to holders of Securities entitled to the benefit
thereof, the amount of such Enhancement will be limited, as set forth in the
related Prospectus Supplement, and will decline and could be depleted under
certain circumstances prior to the payment in full of the related Series of
Securities, and as a result Holders may suffer losses. See 'ENHANCEMENT.'
Prepayment and Yield Considerations. The yield to maturity experienced by
a holder of Securities may be affected by the rate of payment of principal of
the 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.
11
<PAGE>
Interest payable on the Securities of a Series on a Distribution Date will
include all interest accrued during the period specified in the related
Prospectus Supplement. In the event interest accrues during the calendar month
prior to a Distribution Date, the effective yield to Holders will be reduced
from the yield that would otherwise be obtainable if interest payable on the
Security were to accrue through the day immediately preceding each Distribution
Date, and the effective yield (at par) to Holders will be less than the
indicated coupon rate. See 'DESCRIPTION OF THE SECURITIES--Payments of
Interest.'
Nature of Mortgages; Properties. Since the Mortgages are primarily junior
liens subordinate to the rights of the mortgagee under the related senior
mortgage or mortgages, the proceeds from any liquidation, insurance or
condemnation proceedings will be available to satisfy the outstanding balance of
such junior mortgage only to the extent that the claims of such senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the 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.
12
<PAGE>
Violations of certain provisions of these Federal laws may limit the
ability of the Servicer to collect all or part of the principal of or interest
on the Loans and in addition could subject the Trust 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.
13
<PAGE>
DESCRIPTION OF THE SECURITIES
GENERAL
Each Series of Notes will be issued pursuant to an indenture (the
'Indenture') between the related Trust Fund and the entity named in the related
Prospectus Supplement as trustee (the 'Trustee') with respect to such Series. A
form of Indenture has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part. The Certificates will also be issued in
Series pursuant to separate agreements (each, a 'Pooling and Servicing
Agreement' or a 'Trust Agreement') among the Depositor, the Servicer, if the
Series relates to Loans, and the Trustee. A form of Pooling and Servicing
Agreement has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. A Series may consist of both Notes and
Certificates.
The Seller may agree to reimburse the Depositor for certain fees and
expenses of the Depositor incurred in connection with the offering of the
Securities.
The following summaries describe certain provisions in the Agreements
common to each Series of Securities. The summaries do not purport to be complete
and are subject to, and are qualified in their entirety by reference to, the
provisions of the Agreements and the Prospectus Supplement relating to each
Series of Securities. Where particular provisions or terms used in the
Agreements are referred to, the actual provisions (including definitions of
terms) are incorporated herein by reference as part of such summaries.
Each Series of Securities will consist of one or more Classes of
Securities, one or more of which may be Compound Interest Securities, Variable
Interest Securities, PAC Securities, Zero Coupon Securities, Principal Only
Securities, Interest Only Securities or Participating Securities. A Series may
also include one or more Classes of Subordinate Securities. The Securities of
each Series will be issued only in fully registered form, without coupons, in
the authorized denominations for each Class specified in the related Prospectus
Supplement. Upon satisfaction of the conditions, if any, applicable to a Class
of a Series, as described in the related Prospectus Supplement, the transfer of
the Securities may be registered and the Securities may be exchanged at the
office of the Trustee specified in the Prospectus Supplement without the payment
of any service charge other than any tax or governmental charge payable in
connection with such registration of transfer or exchange. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Unless otherwise provided in the related Prospectus Supplement, payments of
principal of and interest on a Series of Securities will be made on the
Distribution Dates specified in the Prospectus Supplement relating to such
Series by check mailed to Holders of such Series, registered as such at the
close of business on the record date specified in the related Prospectus
Supplement applicable to such Distribution Dates at their addresses appearing on
the security register, except that (a) payments may be made by wire transfer (at
the expense of the Holder requesting payment by wire transfer) in certain
circumstances described in the related Prospectus Supplement and (b) final
payments of principal in retirement of each Security will be made only upon
presentation and surrender of such Security at the office of the Trustee
specified in the Prospectus Supplement. Notice of the final payment on a
Security will be mailed to the holder of such Security before the Distribution
Date on which the final principal payment on any Security is expected to be made
to the holder of such Security.
Payments of principal of and interest on the Securities will be made by the
Trustee, or a paying agent on behalf of the Trustee, as specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, all payments with respect to the Primary Assets for a Series,
together with reinvestment income thereon, amounts withdrawn from any Reserve
Fund, and amounts available pursuant to any other Enhancement will be deposited
directly into the Collection Account and, net, if and as provided in the related
Prospectus Supplement, of certain amounts payable to the related Servicer and
any other person specified in the Prospectus Supplement, will thereafter be
deposited into the Distribution Account and will be available to make payments
on Securities of such Series on the next Distribution Date, as the case may be.
See 'THE TRUST FUNDS--Collection and Distribution Accounts.'
14
<PAGE>
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.
15
<PAGE>
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
16
<PAGE>
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.
17
<PAGE>
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.
18
<PAGE>
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
19
<PAGE>
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
20
<PAGE>
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.
21
<PAGE>
ENHANCEMENT
If stated in the Prospectus Supplement relating to a Series of Securities,
simultaneously with the Depositor's assignment of the Primary Assets to the
Trustee, the Depositor will obtain an irrevocable letter of credit, surety bond
or insurance policy, issue Subordinate Securities or obtain any other form of
enhancement or combination thereof (collectively, 'Enhancement') in favor of the
Trustee on behalf of the holders of the related Series or designated Classes of
such Series from an institution or by other means acceptable to the Rating
Agency. The Enhancement will support the payment of principal and interest on
the Securities, and may be applied for certain other purposes to the extent and
under the conditions set forth in such Prospectus Supplement. Enhancement for a
Series may include one or more of the following forms, or such other form as may
be specified in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, any of such Enhancement may be structured so as
to protect against losses relating to more than one Trust Fund, in the manner
described therein.
SUBORDINATE SECURITIES
If specified in the related Prospectus Supplement, Enhancement for a Series
may consist of one or more Classes of Subordinate Securities. The rights of
holders of such Subordinate Securities to receive distributions on any
Distribution Date will be subordinate in right and priority to the rights of
holders of Senior Securities of the Series, but only to the extent described in
the related Prospectus Supplement.
INSURANCE
If stated in the related Prospectus Supplement, Enhancement for a Series
may consist of special hazard insurance policies, bankruptcy bonds and other
types of insurance relating to the Primary Assets, as described below and in the
related Prospectus Supplement.
Pool Insurance Policy. If so specified in the Prospectus Supplement
relating to a Series of Securities, the Depositor will obtain a pool insurance
policy for the 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
22
<PAGE>
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.
23
<PAGE>
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;
24
<PAGE>
(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
25
<PAGE>
(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.
26
<PAGE>
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.
27
<PAGE>
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Servicer will be entitled to a periodic fee as servicing compensation (the
'Servicing Fee') in an amount to be determined as specified in the related
Prospectus Supplement. The Servicing Fee may be fixed or variable, as specified
in the related Prospectus Supplement. In addition, unless otherwise specified in
the related Prospectus Supplement, the Servicer will be entitled to servicing
compensation in the form of assumption fees, late payment charges and similar
items, or excess proceeds following disposition of property in connection with
defaulted 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.
28
<PAGE>
CERTAIN MATTERS REGARDING THE SERVICER
The Servicer for each Series will be identified in the related Prospectus
Supplement. The Servicer may be an affiliate of the Depositor and may have other
business relationships with the Depositor and its affiliates.
In the event of an Event of Default under either a Servicing Agreement or a
Pooling and Servicing Agreement, the Servicer may be replaced by the Trustee or
a successor Servicer. Unless otherwise specified in the related Prospectus
Supplement, such Events of Default and the rights of the Trustee upon such a
default under the Agreement for the related Series will be substantially similar
to those described under 'THE AGREEMENTS--Events of Default; Rights Upon Events
of Default--Pooling and Servicing Agreement; Servicing Agreement' herein.
Unless otherwise specified in the related Prospectus Supplement, the
Servicer does not have the right to assign its rights and delegate its duties
and obligations under the related Agreement for each Series unless the successor
Servicer accepting such assignment or delegation (i) services similar loans in
the ordinary course of its business, (ii) is reasonably satisfactory to the
Trustee for the related Series, (iii) has a net worth of not less than the
amount specified in the related Prospectus Supplement, (iv) would not cause any
Rating Agency's rating of the Securities for such Series in effect immediately
prior to such assignment, sale or transfer to be qualified, downgraded or
withdrawn as a result of such assignment, sale or transfer and (v) executes and
delivers to the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such Servicer of
the due and punctual performance and observance of each covenant and condition
to be performed or observed by the servicer under the related Agreement from and
after the date of such agreement. No such assignment will become effective until
the Trustee or a successor Servicer has assumed the servicer's obligations and
duties under the related Agreement. To the extent that the Servicer transfers
its obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above; however, in such
instance, the assigning Servicer will remain liable for the servicing
obligations under the related Agreement. Any entity into which the Servicer is
merged or consolidated or any successor corporation resulting from any merger,
conversion or consolidation will succeed to the Servicer's obligations under the
related Agreement, provided that such successor or surviving entity meets the
requirements for a successor Servicer set forth above.
Except to the extent otherwise provided therein, each Agreement will
provide that neither the Servicer, nor any director, officer, employee or agent
of the Servicer, will be under any liability to the related Trust Fund, the
Depositor or the Holders for any action taken or for failing to take any action
in good faith pursuant to the related Agreement, or for errors in judgment;
provided, however, that neither the Servicer nor any such person will be
protected against any breach of warranty or representations made under such
Agreement, or the failure to perform its obligations in compliance with any
standard of care set forth in such Agreement, or liability which would otherwise
be imposed by reason of willful misfeasance, bad faith or negligence in the
performance of their duties or by reason of reckless disregard of their
obligations and duties thereunder. Each Agreement will further provide that the
Servicer and any director, officer, employee or agent of the Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Agreement or the Securities, other than any loss,
liability or expense incurred by reason of willful misfeasance, bad faith or
negligence in the performance of duties thereunder or by reason of reckless
disregard of obligations and duties thereunder. In addition, the related
Agreement will provide that the Servicer is not under any obligation to appear
in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under such Agreement which, in its opinion, may
involve it in any expense or liability. The Servicer may, in its discretion,
undertake any such action which it may deem necessary or desirable with respect
to the related Agreement and the rights and duties of the parties thereto and
the interests of the Holders thereunder. In such event, the legal expenses and
costs of such action and any liability resulting therefrom may be expenses,
costs, and liabilities of the Trust Fund and the Servicer may be entitled to be
reimbursed therefor out of the Collection Account.
29
<PAGE>
THE AGREEMENTS
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the related Agreements.
ASSIGNMENT OF PRIMARY ASSETS
General. At the time of issuance of the Securities of a Series, the
Depositor will transfer, convey and assign to the Trust Fund all right, title
and interest of the Depositor in the Primary Assets and other property to be
transferred to the Trust Fund for a Series. Such assignment will include all
principal and interest due on or with respect to the Primary Assets after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interests). The Trustee will, concurrently with such assignment,
execute and deliver the Securities.
Assignment of 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.
30
<PAGE>
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
31
<PAGE>
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.
32
<PAGE>
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, Events of Default under the
Pooling and Servicing Agreement for each Series of Certificates relating to
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
33
<PAGE>
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.
34
<PAGE>
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Securities will be set forth in
the related Prospectus Supplement. The entity serving as Trustee may have normal
banking relationships with the Depositor or the Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Securities. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Agreement relating to such Series will be
conferred or imposed upon the Trustee and each such separate trustee or
co-trustee jointly, or, in any jurisdiction in which the Trustee shall be
incompetent or unqualified to perform certain acts, singly upon such separate
trustee or co-trustee who shall exercise and perform such rights, powers, duties
and obligations solely at the direction of the Trustee. The Trustee may also
appoint agents to perform any of the responsibilities of the Trustee, which
agents shall have any or all of the rights, powers, duties and obligations of
the Trustee conferred on them by such appointment; provided that the Trustee
shall continue to be responsible for its duties and obligations under the
Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Agreement, the Securities or of any Primary Asset or related documents. If
no Event of Default (as defined in the related Agreement) has occurred, the
Trustee is required to perform only those duties specifically required of it
under the Agreement. Upon receipt of the various certificates, statements,
reports or other instruments required to be furnished to it, the Trustee is
required to examine them to determine whether they are in the form required by
the related Agreement; however, the Trustee will not be responsible for the
accuracy or content of any such documents furnished by it or the Holders to the
Servicer under the Agreement.
The Trustee may be held liable for its own negligent action or failure to
act, or for its own misconduct; provided, however, that the Trustee will not be
personally liable with respect to any action taken, suffered or omitted to be
taken by it in good faith in accordance with the direction of the Holders in an
Event of Default. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the Agreement, or in the exercise of any of its rights or powers, if it
has reasonable grounds for believing that repayment of such funds or adequate
indemnity against such risk or liability is not reasonably assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) if the Trustee ceases to be eligible to continue as such under the
Agreement, (ii) if the Trustee becomes insolvent or (iii) by the Holders of
Securities evidencing over 50% of the aggregate voting rights of the Securities
in the Trust Fund upon written notice to the Trustee and to the Depositor. Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
AMENDMENT OF AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Agreement for
each Series of Securities may be amended by the Depositor, the Servicer (with
respect to a Series relating to 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
35
<PAGE>
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
36
<PAGE>
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.
37
<PAGE>
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
38
<PAGE>
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.
39
<PAGE>
JUNIOR MORTGAGES; RIGHTS OF SENIOR MORTGAGES
The mortgage loans comprising or underlying the Primary Assets included in
the Trust Fund for a Series will be secured by mortgages or deeds of trust which
may be second or more junior mortgages to other mortgages held by other lenders
or institutional investors. The rights of the Trust Fund (and therefore the
Holders), as mortgagee under a junior mortgage, are subordinate to those of the
mortgagee under the senior mortgage, including the prior rights of the senior
mortgagee to receive hazard insurance and condemnation proceeds and to cause the
property securing the mortgage loan to be sold upon default of the mortgagor,
thereby extinguishing the junior mortgagee's lien unless the junior mortgagee
asserts its subordinate interest in the property in foreclosure litigation and,
possibly, satisfies the defaulted senior mortgage. A junior mortgagee may
satisfy a defaulted senior loan in full and, in some states, may cure such
default and bring the senior loan current, in either event adding the amounts
expended to the balance due on the junior loan. In most states, absent a
provision in the mortgage or deed of trust, no notice of default is required to
be given to a junior mortgagee.
The standard form of the mortgage used by most institutional lenders
confers on the mortgagee the right both to receive all proceeds collected under
any hazard insurance policy and all awards made in connection with condemnation
proceedings, and to apply such proceeds and awards to any indebtedness secured
by the mortgage, in such order as the mortgagee may determine. Thus, in the
event improvements on the property are damaged or destroyed by fire or other
casualty, or in the event the property is taken by condemnation, the mortgagee
or beneficiary under underlying senior mortgages will have the prior right to
collect any insurance proceeds payable under a hazard insurance policy and any
award of damages in connection with the condemnation and to apply the same to
the indebtedness secured by the senior mortgages. Proceeds in excess of the
amount of senior mortgage indebtedness, in most cases, may be applied to the
indebtedness of a junior mortgage.
Another provision sometimes found in the form of the mortgage or deed of
trust used by institutional lenders obligates the mortgagor to pay before
delinquency all taxes and assessments on the property and, when due, all
encumbrances, charges and liens on the property which appear prior to the
mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee under the mortgage. Upon a
failure of the mortgagor to perform any of these obligations, the mortgagee is
given the right under certain mortgages to perform the obligation itself, at its
election, with the mortgagor agreeing to reimburse the mortgagee for any sums
expended by the mortgagee on behalf of the mortgagor. All sums so expended by
the mortgagee become part of the indebtedness secured by the mortgage.
The form of credit line trust deed or mortgage used by most institutional
lenders which make revolving home equity loans typically contains a 'future
advance' clause, which provides, in essence, that additional amounts advanced to
or on behalf of the borrower by the beneficiary or lender are to be secured by
the deed of trust or mortgage. The priority of the lien securing any advance
made under the clause may depend in most states on whether the deed of trust or
mortgage is called and recorded as a credit line deed of trust or mortgage. If
the beneficiary or lender advances additional amounts, the advance is entitled
to receive the same priority as amounts initially advanced under the trust deed
or mortgage, notwithstanding the fact that there may be junior trust deeds or
mortgages and other liens which intervene between the date of recording of the
trust deed or mortgage and the date of the future advance, and notwithstanding
that the beneficiary or lender had actual knowledge of such intervening junior
trust deeds or mortgages and other liens at the time of the advance. In most
states, the trust deed or mortgage lien securing mortgage loans of the type
which includes revolving home equity credit lines applies retroactively to the
date of the original recording of the trust deed or mortgage, provided that the
total amount of advances under the home equity credit line does not exceed the
maximum specified principal amount of the recorded trust deed or mortgage,
except as to advances made after receipt by the lender of a written notice of
lien from a judgment lien creditor of the trustor.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference
40
<PAGE>
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.
41
<PAGE>
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
42
<PAGE>
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,
43
<PAGE>
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.
44
<PAGE>
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.
45
<PAGE>
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.
46
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of certain anticipated federal income tax
consequences of the purchase, ownership, and disposition of the Securities and
is based on advise of Brown & Wood 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
47
<PAGE>
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
48
<PAGE>
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.
49
<PAGE>
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.
50
<PAGE>
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
51
<PAGE>
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
52
<PAGE>
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
53
<PAGE>
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
54
<PAGE>
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.
55
<PAGE>
TAX STATUS AS A GRANTOR TRUST
General. As specified in the related Prospectus Supplement if a REMIC or
partnership election is not made, in the opinion of Brown & Wood 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.
56
<PAGE>
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
57
<PAGE>
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
58
<PAGE>
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'.
59
<PAGE>
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.
60
<PAGE>
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
61
<PAGE>
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.
62
<PAGE>
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
63
<PAGE>
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
64
<PAGE>
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
65
<PAGE>
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
66
<PAGE>
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
67
<PAGE>
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.
68
<PAGE>
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
69
<PAGE>
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
70
<PAGE>
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
71
<PAGE>
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
72
<PAGE>
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.
73
<PAGE>
'Enhancement' means the enhancement for a Series, if any, specified in the
related Prospectus Supplement.
'Enhancer' means the provider of the Enhancement for a Series specified in
the related Prospectus Supplement.
'ERISA' means the Employee Retirement Income Security Act of 1974, as
amended.
'Escrow Account' means an account, established and maintained by the
Servicer for a 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.
74
<PAGE>
'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.
75
<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
76
<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.
77
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
[This page intentionally left blank]
<PAGE>
===============================================================================
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus
Supplement or the Prospectus and, if given or made, such information or
representation must not be relied upon as having been authorized by the
Depositor or the Underwriter. This Prospectus Supplement and the Prospectus do
not constitute an offer of any securities other than those to which they relate
or an offer to sell, or a solicitation of an offer to buy, to any person in any
jurisdiction where such an offer or solicitation would be unlawful. Neither the
delivery of this Prospectus Supplement and the Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information contained herein is correct as of any time subsequent to their
respective dates.
---------------------
TABLE OF CONTENTS
PAGE
-----
PROSPECTUS SUPPLEMENT
Summary............................................... S-4
Risk Factors.......................................... S-14
The Master Servicer................................... S-17
The Servicer.......................................... S-18
The Special Servicer.................................. S-19
Aames Capital Corporation's Loan Program.............. S-20
Description of the Mortgage Loans..................... S-22
Prepayment and Yield Considerations................... S-33
Description of the Certificates....................... S-39
Pooling and Servicing Agreement....................... S-53
Description of the Mortgage Loan Purchase Agreement... S-62
Use of Proceeds....................................... S-63
Certain Federal Income Tax Considerations............. S-63
State Taxes........................................... S-67
ERISA Considerations.................................. S-67
Legal Investment Considerations....................... S-68
Underwriting.......................................... S-69
Legal Matters......................................... S-69
Ratings............................................... S-70
Index of Defined Terms................................ S-71
Annex 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
===============================================================================
===============================================================================
LEHMAN HOME EQUITY
LOAN TRUST 1998-2
$209,850,000
$101,344,000 CLASS A-1 VARIABLE RATE CERTIFICATES
$64,437,000 CLASS A-2 VARIABLE RATE CERTIFICATES
$15,739,000 CLASS M-1 VARIABLE RATE CERTIFICATES
$13,640,000 CLASS M-2 VARIABLE RATE CERTIFICATES
$14,690,000 CLASS B-1 VARIABLE RATE CERTIFICATES
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES 1998-2
Lehman ABS Corporation,
as Depositor
---------------------------------------
PROSPECTUS SUPPLEMENT
June 16, 1998
---------------------------------------
LEHMAN BROTHERS
==============================================================================
