<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 333-76627
Prospectus Supplement
To Prospectus dated September 20, 1999
$350,000,000
CHAMPION HOME EQUITY LOAN TRUST 1999-3
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1999-3
Champion Mortgage Co., Inc. Lehman ABS Corporation
as Seller and Servicer as Depositor
<TABLE>
<CAPTION>
NOTE PROCEEDS
PRINCIPAL NOTE PRICE TO UNDERWRITING TO THE
BALANCE RATE PUBLIC DISCOUNT DEPOSITOR
------------ ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Class I-A Notes $200,000,000 Variable 100.00% 0.30% 99.70%
Class II-A Notes $ 50,000,000 Variable 100.00% 0.30% 99.70%
Class III-A
Notes............. $100,000,000 Variable 100.00% 0.30% 99.70%
</TABLE>
The notes represent non-recourse obligations of the trust only and do not
represent an interest in or obligation of Lehman ABS Corporation, Champion
Mortgage Co., Inc., the indenture trustee, the owner trustee or any of their
affiliates.
The trust:
o is a Delaware business trust formed pursuant to a trust agreement between
Lehman ABS Corporation and Chase Manhattan Bank Delaware;
o will issue three classes of notes, which are offered hereby; and
o will issue Senior Interest Participations and a Transferor Interest, which
are not offered hereby.
The notes:
o are principally secured by the assets of the trust, which consist of one
group of closed-end, fixed-rate and adjustable-rate home equity loans with
conforming balances and two groups of closed-end, fixed-rate and
adjustable-rate home equity loans with conforming and non-conforming
balances;
o currently have no trading market; and
o are not insured or guaranteed by any governmental agency.
Credit enhancement will be provided in the form of overcollateralization,
limited crosscollateralization and an irrevocable and unconditional financial
guaranty insurance policy issued by MBIA Insurance Corporation.
REVIEW THE INFORMATION IN "RISK FACTORS" ON PAGE S-13 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 IN THE PROSPECTUS.
After the initial distribution of the offered notes, this prospectus and
prospectus supplement may be used by McDonald Investments Inc., a wholly-owned
subsidiary of KeyCorp and an affiliate of the seller and servicer, in connection
with market making transactions in the offered notes. In connection with any
such market making transactions, certain information in this prospectus
supplement will be updated from time to time.
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OF THESE NOTES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The underwriters named below will purchase the offered notes from the depositor.
See "Underwriting" in this prospectus supplement. The offered notes will be
issued in book-entry form only on or about September 23, 1999.
---------------------------
LEHMAN BROTHERS MCDONALD INVESTMENTS
A KEYCORP COMPANY
September 20, 1999
<PAGE>
For 90 days following the date of this prospectus supplement, all dealers
selling the offered notes will deliver a prospectus supplement and prospectus.
This is in addition to the dealers' obligation to deliver a prospectus when
acting as underwriters of the offered notes and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained or incorporated by reference
in this prospectus supplement and the accompanying prospectus. We have not
authorized anyone to provide you with different information.
We are not offering the offered notes in any state where the offer is not
permitted.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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PROSPECTUS SUPPLEMENT
<S> <C>
Summary................................................................................................ S-3
Risk Factors........................................................................................... S-13
The Note Insurer....................................................................................... S-18
The Trust.............................................................................................. S-20
The Seller and the Servicer............................................................................ S-22
Champion's Home Equity Loan Program.................................................................... S-24
Description of the Mortgage Loans...................................................................... S-30
Description of the Notes............................................................................... S-52
Prepayment and Yield Considerations.................................................................... S-69
Description of the Agreements.......................................................................... S-77
Description of the Purchase Agreement.................................................................. S-90
Use of Proceeds........................................................................................ S-90
Federal Income Tax Consequences........................................................................ S-90
State Taxes............................................................................................ S-94
ERISA Considerations................................................................................... S-94
Legal Investment Considerations........................................................................ S-97
Underwriting........................................................................................... S-97
Legal Matters.......................................................................................... S-98
Experts................................................................................................ S-98
Ratings................................................................................................ S-99
Schedule I--Global Clearance, Settlement and Tax Documentation Procedures.............................. I-1
<CAPTION>
PROSPECTUS
<S> <C>
Risk Factors........................................................................................... 2
Description of the Securities.......................................................................... 6
The Trust Funds........................................................................................ 10
Enhancement............................................................................................ 18
Servicing of Loans..................................................................................... 21
The Agreements......................................................................................... 29
Custody Receipts; Custody Agreements................................................................... 39
Legal Aspects of Loans................................................................................. 43
The Depositor.......................................................................................... 54
Use of Proceeds........................................................................................ 55
Federal Income Tax Considerations...................................................................... 56
State Tax Considerations............................................................................... 84
ERISA Considerations................................................................................... 84
Legal Investment....................................................................................... 88
Ratings................................................................................................ 88
Plan of Distribution................................................................................... 89
Legal Matters.......................................................................................... 89
Available Information.................................................................................. 89
Index of Defined Terms................................................................................. 90
</TABLE>
S-2
<PAGE>
SUMMARY
This summary highlights selected information from this document and does
not contain all of the information that you need to consider in making your
investment decision. Please read this entire prospectus supplement and the
accompanying prospectus for additional information about the offered notes.
HOME EQUITY LOAN ASSET-BACKED NOTES, SERIES 1999-3
<TABLE>
<CAPTION>
ORIGINAL NOTE
CLASS/INTEREST NOTE RATE PRINCIPAL BALANCE MATURITY DATE
- ------------------------ -------------------- ----------------- ------------------
<S> <C> <C> <C>
Class I-A Notes Variable $200,000,000 September 2029
Class II-A Notes Variable $50,000,000 September 2029
Class III-A Notes Variable $100,000,000 September 2029
</TABLE>
Additional Information:
o The original note principal balances are subject to a variance of 5%.
o We expect the final payment date for the offered notes to be
significantly earlier than the maturity date stated above.
o The note rate for the Class I-A Notes will be a per annum rate equal to
the lesser of (a) one month LIBOR plus 0.33% (or 0.66% for each payment
date after the first payment date on which the servicer has the option
to transfer the mortgage loans) and (b) 13.00%.
o The note rate for the Class II-A Notes will be a per annum rate equal
to the lesser of (a) one month LIBOR plus 0.40% (or 0.80% for each
payment date after the first payment date on which the servicer has the
option to transfer the mortgage loans) and (b) 13.00%.
o The note rate for the Class III-A Notes will be a per annum rate equal
to the lesser of (a) one month LIBOR plus 0.34% (or 0.68% for each
payment date after the first payment date on which the servicer has the
option to transfer the mortgage loans) and (b) 13.00%.
We refer you to "Description of the Notes--Calculation of the Note
Rate and the Senior Interest Participation Rate" and "Description of
the Agreements--Termination; Retirement of the Notes" in this
prospectus supplement for more information.
The Class I-A notes will receive distributions only in respect of the group 1
mortgage loans, the Class II-A notes will receive distributions only in respect
of the group 2 mortgage loans and the Class III-A notes will receive
distributions only in respect of the group 3 mortgage loans, in each case
subject to the crosscollateralization provisions described in this prospectus
supplement.
THE SENIOR INTEREST PARTICIPATIONS AND TRANSFEROR INTEREST
In addition to the notes, the trust will also issue three Senior Interest
Participations and the Transferor Interest which will not be offered pursuant to
this prospectus supplement and prospectus. Each Senior Interest Participation
will be associated with one mortgage loan group.
S-3
<PAGE>
The Senior Interest Participations will be interest-only participation interests
that will accrue interest on their notional principal balances. The interest
rate applicable to the payment of interest to each Senior Interest Participation
will be as follows:
o a per annum rate of 1.50% (or 1.00% for the Senior Interest Participation
related to group 2), for the first payment date through and including the
payment date in September 2000,
o a per annum rate of 0.60% (or 0.50% for the Senior Interest Participation
related to group 2), for the payment date in October 2000 through and
including the payment date in March 2001, and
o a per annum rate of 0.10%, for each payment date thereafter.
The notional principal balance of each Senior Interest Participation on any
payment date will be an amount equal to the sum of the aggregate principal
balance of the mortgage loans in the related group and any remaining pre-funded
amount allocated to that group as of the end of the second preceding due period.
As of the closing date, the notional principal balance of each Senior Interest
Participation is equal to the sum of the aggregate principal balance of the
mortgage loans in the related group as of the close of business on August 31,
1999 and the pre-funded amount allocated to that group on September 23, 1999.
The Senior Interest Participations and the Transferor Interest will be held,
together, by the transferor.
THE SELLER AND SERVICER
o Champion Mortgage Co., Inc.
o Champion Mortgage Co., Inc. maintains its corporate headquarters at 20
Waterview Blvd., Parsippany, New Jersey 07054. Its telephone number is
(973) 402-7700.
o The servicer will receive a monthly fee from the interest payments on the
mortgage loans equal to 0.40% per annum (or, if Champion Mortgage Co., Inc. is
no longer the servicer, 0.50% per annum) on the principal balance of each
mortgage loan.
We refer you to "The Seller and Servicer" And "Champion's Home Equity Loan
Program" in this prospectus supplement for additional information.
THE TRANSFEROR
o The holder of the Senior Interest Participations and the Transferor Interest;
which will initially be Champion, or an affiliate thereof.
TRUST
o Champion Home Equity Loan Trust 1999-3.
DEPOSITOR
o Lehman ABS Corporation.
We refer you to "The Depositor" in the prospectus for additional information.
INDENTURE TRUSTEE
o Harris Trust and Savings Bank.
OWNER TRUSTEE
o Chase Manhattan Bank Delaware.
NOTE INSURER
o MBIA Insurance Corporation.
We refer you to "The Note Insurer" in this prospectus supplement for additional
information.
CUT-OFF DATE
o The close of business on August 31, 1999.
CLOSING DATE
o September 23, 1999.
PAYMENT DATE
o The 25th day of each month, or if such day is not a business day, the next
business day. The first payment date is October 25, 1999.
S-4
<PAGE>
DUE PERIOD
o The calendar month preceding the month of a payment date.
REGISTRATION OF NOTES
We will issue the offered notes in book-entry form. You will hold your interests
in the offered notes either through a depository in the United States or through
one of two depositories in Europe. While the offered notes are book-entry, they
will be registered in the name of the applicable depository, or in the name of
the depository's nominee.
Transfers within any depository system will be made in accordance with the usual
rules and operating procedures of that system. Cross-market transfers between
two different depository systems may be made through a third-party bank and/or
the related depositories. The limited circumstances under which definitive notes
will replace the book-entry notes are described in this prospectus supplement.
We refer you to "Risk Factors--Consequences on Liquidity and Payment Delay
Because of Owning Book-Entry Notes," "Description Of The Notes--Book-Entry
Notes" and "Schedule I" in this prospectus supplement for additional
information.
ASSETS OF THE TRUST
The trust's assets include:
o a group of closed-end, fixed-rate and adjustable-rate home equity loans with
conforming balances, or the group 1 mortgage loans, secured by either first or
second deeds of trust or mortgages primarily on one- to four-family
residential properties;
o a group of closed-end, fixed-rate and adjustable-rate home equity loans with
primarily non-conforming balances, or the group 2 mortgage loans, secured by
either first or second deeds of trust or mortgages primarily on one- to four-
family residential properties;
o a group of closed-end, fixed-rate and adjustable-rate home equity loans with
primarily conforming balances, or the group 3 mortgage loans, secured by
either first or second deeds of trust or mortgages primarily on one-to four-
family residential properties;
o payments on the mortgage loans received after the cut-off date;
o property that secured a mortgage loan which has been acquired by foreclosure
or deed in lieu of foreclosure and the net proceeds from the sale of a
mortgage loan;
o rights under certain hazard insurance policies covering the mortgaged
properties;
o amounts on deposit in certain accounts described in this prospectus
supplement; and
o the note insurance policy for the benefit of the holders of the offered notes
and of the Senior Interest Participations.
We refer you to "The Trust" in this prospectus supplement for additional
information.
S-5
<PAGE>
THE MORTGAGE LOANS
The statistical information presented in this prospectus supplement reflects the
pool of initial mortgage loans as of the cut-off date. It is expected that the
trust will purchase subsequent mortgage loans with funds on deposit in the
pre-funding account. The subsequent mortgage loans will have generally the same
characteristics as the initial mortgage loans.
The initial mortgage loans in each group will have the following characteristics
as of the cut-off date:
<TABLE>
<CAPTION>
GROUP 1
-------
<S> <C>
o number of mortgage loans:...................................... 1,906
o aggregate principal balance:................................... $154,780,215.79
o number of fixed-rate mortgage loans:........................... 1,731
o aggregate principal balance of fixed-rate mortgage loans:...... $138,027,744.77
o number of adjustable-rate mortgage loans:...................... 175
o aggregate principal balance of adjustable-rate mortgage
loans:........................................................ $16,752,471.02
omortgage loans with conforming principal balances:.............. 100.00%
o mortgaged property location:................................... 15 states and the District of Columbia
o average principal balance:..................................... $81,206.83
o range of principal balances:................................... $7,946.32 to $284,530.79
o loan rate range:............................................... 7.750% to 16.625%
o weighted average loan rate (approx.):.......................... 10.408%
o original term to stated maturity range (months):............... 60-360
o weighted average original term to stated maturity (months)
(approx.):.................................................... 219
o remaining term to stated maturity range (months):.............. 39-360
o weighted average remaining term to stated maturity (months)
(approx.):.................................................... 216
o latest maturity date:.......................................... August 30, 2029
o combined loan-to-value ratio range (approx.):.................. 8.670% to 85.000%
o weighted average combined loan-to-value ratio (approx.):....... 74.595%
o mortgage loans secured by first liens (approx.):............... 85.41%
o mortgage loans secured by second liens (approx.):.............. 14.59%
o balloon loans; loans with amortization schedules that extend
beyond their maturity date (approx.):......................... 33.85%
o with respect to the adjustable-rate loans:
o range of margins:........................................... 4.850% to 8.100%
o weighted average margin (approx.):.......................... 5.526%
o range of maximum rates:..................................... 14.500% to 19.125%
o weighted average maximum rate (approx.):.................... 15.493%
o range of minimum rates:..................................... 8.500% to 13.125%
o weighted average minimum rate (approx.):.................... 9.493%
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
GROUP 2
-------
<S> <C>
o number of mortgage loans:...................................... 390
o aggregate principal balance:................................... $38,664,762.73
o number of fixed-rate mortgage loans:........................... 367
o aggregate principal balance of fixed-rate mortgage loans:...... $34,856,172.54
o number of adjustable-rate mortgage loans:...................... 23
o aggregate principal balance of adjustable-rate mortgage
loans:........................................................ $3,808,590.19
omortgage loans with conforming principal balances (approx):..... 16.13%
o mortgaged property location:................................... 12 states and the District of Columbia
o average principal balance:..................................... $99,140.42
o range of principal balances:................................... $5,841.92 to $540,000.00
o loan rate range:............................................... 7.625% to 16.250%
o weighted average loan rate (approx.):.......................... 10.222%
o original term to stated maturity range (months):............... 60-360
o weighted average original term to stated maturity (months)
(approx.):.................................................... 211
o remaining term to stated maturity range (months):.............. 49-360
o weighted average remaining term to stated maturity (months)
(approx.):.................................................... 207
o latest maturity date:.......................................... August 27, 2029
o combined loan-to-value ratio range (approx.):.................. 2.270% to 85.000%
o weighted average combined loan-to-value ratio (approx.):....... 71.888%
o mortgage loans secured by first liens (approx.):............... 77.85%
o mortgage loans secured by second liens (approx.):.............. 22.15%
o balloon loans; loans with amortization schedules that extend
beyond their maturity date (approx.):......................... 41.66%
o with respect to the adjustable-rate loans:
o range of margins:........................................... 4.850% to 9.225%
o weighted average margin (approx.):.......................... 5.298%
o range of maximum rates:..................................... 14.500% to 19.750%
o weighted average maximum rate (approx.):.................... 15.050%
o range of minimum rates:..................................... 8.500% to 13.750%
o weighted average minimum rate (approx.):.................... 9.050%
</TABLE>
S-7
<PAGE>
<TABLE>
<CAPTION>
GROUP 3
-------
<S> <C>
o number of mortgage loans:...................................... 913
o aggregate principal balance:................................... $77,387,378.02
o number of fixed-rate mortgage loans:........................... 833
o aggregate principal balance of fixed-rate mortgage loans:...... $68,270,173.73
o number of adjustable-rate mortgage loans:...................... 80
o aggregate principal balance of adjustable-rate mortgage
loans:........................................................ $9,117,204.29
omortgage loans with conforming principal balances (approx.):.... 88.08%
o mortgaged property location:................................... 15 states and the District of Columbia
o average principal balance:..................................... $84,761.64
o range of principal balances:................................... $8,562.16 to $548,391.99
o loan rate range:............................................... 7.625% to 16.500%
o weighted average loan rate (approx.):.......................... 10.398%
o original term to stated maturity range (months):............... 60-360
o weighted average original term to stated maturity (months)
(approx.):.................................................... 217
o remaining term to stated maturity range (months):.............. 49-360
o weighted average remaining term to stated maturity (months)
(approx.):.................................................... 214
o latest maturity date:.......................................... August 30, 2029
o combined loan-to-value ratio range (approx.):.................. 4.620% to 85.000%
o weighted average combined loan-to-value ratio (approx.):....... 74.184%
o mortgage loans secured by first liens (approx.):............... 84.86%
o mortgage loans secured by second liens (approx.):.............. 15.14%
o balloon loans; loans with amortization schedules that extend
beyond their maturity date (approx.):......................... 37.05%
o with respect to the adjustable-rate loans:
o range of margins:........................................... 4.725% to 8.850%
o weighted average margin (approx.):.......................... 5.569%
o range of maximum rates:..................................... 13.990% to 18.990%
o weighted average maximum rate (approx.):.................... 15.506%
o range of minimum rates:..................................... 7.990% to 12.990%
o weighted average minimum rate (approx.):.................... 9.506%
</TABLE>
S-8
<PAGE>
All of the fixed-rate mortgage loans compute interest based on a simple interest
method. All of the adjustable-rate mortgage loans compute interest based on the
actuarial method.
We refer you to "Risk Factors--Interest Payments on the Mortgage Loans May Be
Reduced" for more information on the simple interest method.
We refer you to "Description of the Mortgage Loans" in this prospectus
supplement for additional information.
MONTHLY ADVANCES
The servicer will make cash advances to the trust to cover delinquent mortgage
loan interest payments through the date on which the related mortgage loan is
liquidated. The servicer will make advances only to maintain a regular flow of
scheduled interest payments on the notes, not to guarantee or insure against
losses.
We refer you to "Description of the Notes--Monthly Advances; Servicing Advances"
in this prospectus supplement for additional information.
THE NOTES
General
You will be entitled to receive payments of interest each month. The amount of
principal you will be entitled to receive will vary depending on a number of
factors, including the payments received on the mortgage loans. Each month, the
indenture trustee will calculate the amounts to be paid to the noteholders. If
you hold a note on the business day immediately preceding the related payment
date, you will be entitled to receive payments on that payment date.
We refer you to "Description of the Notes--Payments on the Notes" and
"--Priority of Distributions" in this prospectus supplement for additional
information.
Interest Payments
Interest on the notes accrues during the period beginning on the prior payment
date (or in the case of the first payment date, beginning on the closing date)
and ending on the day before the applicable payment date. The indenture trustee
will calculate interest based on the actual number of days in the interest
period and a year assumed to consist of 360 days. On each payment date, you will
be entitled to the following amounts:
o interest that accrued during the interest period on your note balance at the
related note rate; and
o any interest that was due on a prior payment date that was not paid, together
with interest on that previously unpaid amount.
Interest on the Senior Interest Participations accrues from the first day of
each calendar month through the last day of that calendar month, on the basis of
a 360-day year consisting of twelve 30-day months. On each payment date, the
holder of each Senior Interest Participation will be entitled to the following
amounts:
o interest that accrued during the interest period on the notional principal
balance of the Senior Interest Participation at the applicable interest rate;
and
o any interest that was due on a prior payment date that was not paid, together
with interest on that unpaid amount.
Interest payments are made on the notes and the Senior Interest Participation in
the same group pro rata, as more fully described in this prospectus supplement.
S-9
<PAGE>
Principal Payments
On each payment date, to the extent funds are available, you will be entitled to
distributions of principal as described in this prospectus supplement. The
maximum amount for distribution as principal payments to all noteholders of a
class on any distribution date will be the sum of the following with respect to
the mortgage loans in the related group:
o payments of principal on the mortgage loans, and all other amounts in respect
of principal on the mortgage loans, received during the related due period;
o plus, the amount of any principal losses realized on the mortgage loans during
the prior calendar month;
o plus, the amount of any excess receipts of interest required to be distributed
to satisfy the required level of overcollateralization. This will increase the
difference between the principal balance of the notes and the principal
balance of such mortgage loans, thereby increasing the level of
overcollateralization;
o minus, the amount, if any, necessary to reduce overcollateralization to the
required level of overcollateralization. This will reduce the difference
between the principal balance of the notes and the principal balance of such
mortgage loans, thereby decreasing the level of overcollateralization.
Shortfalls in collections on the mortgage loans and failure of the insurer to
perform its obligations under the insurance policy may result in losses to you.
We refer you to "Description of the Notes--Priority of Distributions" in this
prospectus supplement for additional information.
CREDIT ENHANCEMENT
Overcollateralization
With respect to each class of notes and the corresponding group of mortgage
loans:
o The distribution of payments on the mortgage loans to the holders of the notes
has been structured to create overcollateralization during the first few
months after the notes have been issued.
o The sum of the aggregate principal balance of the mortgage loans as of the
cut-off date and the amount deposited to the pre-funding account on the
closing date will generally equal the aggregate principal balance of the notes
to be issued on the closing date. The interest payments on the mortgage loans
are expected to exceed the amount of interest due and payable on the notes and
the Senior Interest Participations. A portion of this excess, if any, will be
applied as principal payments to the notes on each payment date. This will
result in a limited acceleration of principal payments on the notes relative
to the amortization of the mortgage loans, thereby reducing the note principal
balance below the sum of the aggregate principal balance of the mortgage loans
and the pre-funded amount and creating "overcollateralization" for the notes.
Overcollateralization of the notes is intended to increase the likelihood that
you will be repaid amounts owed to you from your investment in the notes. Once
the required level of overcollateralization is reached, the application of
excess interest payments to principal on the notes will stop, until such
application is again needed to maintain the required level of
overcollateralization.
o The required amount of overcollateralization is based on certain minimum and
maximum levels of overcollateralization and on the performance of the mortgage
loans. As a result, the level of required
S-10
<PAGE>
overcollateralization will increase and decrease over time.
We refer you to "Prepayment and Yield Considerations" and "Description of the
Notes--Overcollateralization Provisions" in this prospectus supplement for
additional information.
Crosscollateralization
Excess funds generated by one loan group may be used to fund:
o shortfalls of interest on the notes in another loan group as a result of
defaults;
o principal losses on the mortgage loans in another loan group to the extent not
covered by excess interest or overcollateralization in the other loan group;
and
o amounts owing to the insurer for reimbursement for draws on the note policy
including interest thereon.
We refer you to "Description of the Notes--Crosscollateralization" in this
prospectus supplement for additional information.
The Insurance Policy
MBIA Insurance Corporation will issue a note policy which unconditionally
guarantees the payment, to the extent not covered by principal and interest
collections, of:
o accrued and unpaid interest due on the notes and the Senior Interest
Participations to the extent not covered by cross collateralization;
o principal losses on the mortgage loans, to the extent not covered by
overcollateralization and crosscollateralization;
o any principal amounts owed to noteholders on the maturity date to the extent
not covered by cross collateralization; and
o any amounts distributed on the notes that are recoverable and sought to be
recovered as a voidable preference payment.
We refer you to "Description of the Notes--The Note Policy" in this prospectus
supplement for additional information.
PRE-FUNDING ACCOUNT
On the closing date, $79,167,643.46 will be deposited to the pre-funding
account. $45,219,784.21 of the pre-funded amount will be allocated only to group
1, $11,335,237.27 of the pre-funded amount will be allocated only to group 2 and
$22,612,621.98 of the pre-funded amount will be allocated only to group 3. With
this pre-funded amount, the trust will purchase subsequent mortgage loans from
the seller until the earlier of:
o the date on which the amount on deposit is less than $100,000;
o October 29, 1999; and
o the occurrence of an event of default under the sale and servicing agreement.
After one of the listed events occurs, any remaining amount on deposit in the
pre-funding account will be distributed on the notes as a prepayment of
principal.
CAPITALIZED INTEREST ACCOUNT
On the closing date, cash will be deposited to the capitalized interest account.
This amount will be used to cover any interest shortfalls on the notes that may
arise because money on deposit in the pre-funding account will not be expected
to generate as much interest as would an equivalent amount of mortgage loans.
S-11
<PAGE>
OPTIONAL TERMINATION
The mortgage loans will be subject to an optional transfer to the servicer on
any payment date on or after:
o the aggregate principal balance of the mortgage loans is reduced to an amount
5% or less of the sum of the aggregate principal balance of the mortgage loans
as of the cut-off date and the amount on deposit in the pre-funding account on
the closing date; and
o all amounts due and owing to the note insurer with respect to each class of
notes, including unreimbursed draws on the insurance policy, with interest
thereon have been paid.
The exercise of the option will result in an early payment of the note balance
of each class of notes.
We refer you to "Description of the Agreements--Termination; Retirement of the
Notes" in this prospectus supplement for additional information.
FEDERAL TAX CONSIDERATIONS
For federal income tax purposes:
o tax counsel is of the opinion that the notes will be treated as debt
instruments; and
o you must agree to treat your notes as indebtedness for federal, state and
local income and franchise tax purposes.
We refer you to "Federal Income Tax Consequences" in this prospectus supplement
and "Federal Income Considerations" in the prospectus for additional
information.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of ERISA and the prohibited transaction
provisions of ERISA and Section 4975 of the Internal Revenue Code can limit
investments by certain pension and other employee benefit plans. Subject to
these considerations, pension and other employee benefit plans should be able to
purchase the notes so long as they are treated as debt under applicable state
law and have no substantial equity features. Any plan fiduciary considering
whether to purchase the notes on behalf of a plan should consult with its
counsel regarding the applicability of the provisions of ERISA and the Internal
Revenue Code and the availability of any exemptions.
We refer you to "ERISA Considerations" in this prospectus supplement and the
prospectus for additional information.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage related
securities" to include only securities backed by first mortgages, and not second
mortgages. Because each group of mortgage loans includes second mortgage loans,
the notes will not constitute mortgage related securities. Some institutions may
be limited in their legal investment authority to only first mortgages or
mortgage related securities and will be unable to invest in the notes.
We refer you to "Legal Investment Considerations" in this prospectus supplement
and "Legal Investment" in the prospectus for additional information.
NOTE RATINGS
The trust will not issue the notes unless they receive the following ratings:
o "AAA" by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.; and
o "Aaa" by Moody's Investors Service, Inc.
A rating is not a recommendation to buy, sell or hold securities and may be
subject to revision or withdrawal by either rating agency.
We refer you to "Ratings" and "Risk Factors--Note Ratings Based Primarily on the
Financial Strength of the Note Insurer" in this prospectus supplement for
additional information.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO ANY
PURCHASE OF THE OFFERED NOTES. YOU SHOULD ALSO CAREFULLY CONSIDER THE
INFORMATION SET FORTH UNDER "RISK FACTORS" IN THE PROSPECTUS.
BORROWERS UNDER BALLOON LOANS MAY BE UNABLE TO MAKE FINAL PAYMENT OF PRINCIPAL
Balloon loans pose a risk because the borrower must pay a large lump sum
payment of principal at the end of the loan term. If the borrower is unable to
pay the lump sum or refinance such amount, you will suffer a loss if the
collateral for such loan is insufficient, the other forms of credit enhancement
are insufficient to cover the loss and the insurer fails to perform its
obligations under the insurance policy. Approximately 33.85% of the group 1
mortgage loans, 41.66% of the group 2 mortgage loans and 37.05% of the group 3
mortgage loans (by aggregate principal balance of each group as of the close of
business on August 31, 1999) are balloon loans.
RECENTLY ORIGINATED MORTGAGE LOANS MORE LIKELY TO EXPERIENCE EARLY DEFAULTS
Although little data is available, defaults on mortgage loans are generally
expected to occur with greater frequency in the early years of the terms of
mortgage loans. If there is a higher rate of defaults than anticipated and the
insurer fails to perform its obligations under the insurance policy, then you
may experience a loss.
Approximately 98.71% of the group 1 mortgage loans, 92.88% of the group 2
mortgage loans and 96.28% of the group 3 mortgage loans (by aggregate principal
balance of each group as of the close of business on August 31, 1999) were
originated within twelve months prior to the cut-off date.
DELAY IN RECEIPT OF LIQUIDATION PROCEEDS; LIQUIDATION PROCEEDS MAY BE LESS THAN
MORTGAGE LOAN BALANCE
Substantial delays could be encountered in connection with the liquidation
of delinquent mortgage loans. Further, liquidation expenses such as legal fees,
real estate taxes and maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged property is
liquidated for an amount that is less than the sum of the balance of the
mortgage loan and expenses associated with the liquidation and preservation of
the related mortgaged property, you will incur a loss on your investment if the
insurer fails to perform its obligations under the insurance policy and the
other forms of credit enhancement are insufficient to cover the loss.
We refer you to "Legal Aspects of Loans--Foreclosure on Mortgages" in the
prospectus for additional information.
PREPAYMENTS AFFECT TIMING AND RATE OF RETURN ON YOUR INVESTMENT
The yield to maturity on your notes will be directly related to the rate of
principal payments on the mortgage loans. Please consider the following:
o Mortgagors may fully or partially prepay their mortgage loans at any time
without penalty.
o All of the fixed-rate mortgage loans compute interest due on a simple
interest method. This means that the amount of each monthly payment applied to
the payment of principal and interest will vary each month depending on when the
monthly payment is received.
o All the mortgage loans contain due-on-sale provisions. Due-on-sale
provisions require the mortgagor to fully pay the mortgage loan when the
mortgaged property is sold.
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Generally, the servicer will enforce the due-on-sale provision unless prohibited
by applicable law.
o The rate of principal payments on pools of mortgage loans is influenced
by a variety of factors, including general economic conditions, interest rates,
the availability of alternative financing and homeowner mobility.
o Home equity loans generally are not viewed by borrowers as permanent
financing. Accordingly, the mortgage loans may experience a higher rate of
prepayment than purchase money first lien mortgage loans.
o The items listed above will, in turn, affect the amount of principal paid
to you on the related payment date.
o We cannot predict the rate at which borrowers will repay their mortgage
loans.
o If you purchased your note at a premium and you receive your principal
faster than expected, your yield to maturity will be lower than you anticipated.
If you purchased your note at a discount and you receive your principal slower
than expected, your yield to maturity will be lower than you anticipated.
We refer you to "Prepayment and Yield Considerations" in this prospectus
supplement for additional information.
INADEQUATE AMOUNT OF SUBSEQUENT LOANS WILL AFFECT TIMING AND RATE OF RETURN OF
YOUR INVESTMENT
A portion of the amount deposited in the pre-funding account on the closing
date has been allocated to each group for the purchase of subsequent mortgage
loans. If the amount of subsequent mortgage loans purchased for a group is less
than the portion of the pre-funded amount allocated to that group you may
receive a prepayment of principal on the November 1999 payment date if you own
notes related to that group. This may result in one or more classes of notes
receiving a prepayment while others do not.
In addition, the types of loans that can be purchased as subsequent loans
for each group are similar and the designation of any subsequent loan to a loan
group will be made by the seller so that the statistical characteristics of each
group as shown in this prospectus supplement will not be materially changed by
the addition of subsequent loans.
EVENTS OF DEFAULT UNDER THE INDENTURE
So long as the insurer is not in default with respect to its obligations
under the policy, neither the indenture trustee nor the noteholders may declare
an event of default under the indenture and accelerate the maturity of the notes
without the consent of the insurer. Upon the occurrence of an event of default
under the indenture (so long as the insurer is not in default with respect to
its obligations under the policy), the insurer will have the right, but not the
obligation, to cause the liquidation, in whole or in part, of the mortgage pool,
which will result in redemption, in whole or in part, of the notes. The
insurer's decisions with respect to defaults may have a significant impact on
the weighted average life of the notes.
NOTE RATINGS BASED PRIMARILY ON THE FINANCIAL STRENGTH OF THE NOTE INSURER
The ratings on the notes depend primarily on an assessment by the rating
agencies of the mortgage loans and upon the financial strength of the insurer.
Any reduction of the rating assigned to the financial strength of the insurer
may cause a corresponding reduction in the ratings assigned to the notes. A
reduction in the ratings assigned to the notes will reduce the market value of
the notes and may affect your ability to sell them. In general,
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the ratings on your notes address credit risk, but do not address the likelihood
of prepayments.
We refer you to "Ratings" in this prospectus supplement for additional
information.
LIEN PRIORITY COULD RESULT IN PAYMENT DELAY AND LOSS
As of the cut-off date, approximately 14.59% of the group 1 mortgage loans,
22.15% of the group 2 mortgage loans and 15.14% of the group 3 mortgage loans
are secured by mortgages which are second in priority. Mortgage loans that are
secured by second mortgages will receive proceeds from a sale of the related
mortgaged property only after the first mortgage loan and prior statutory liens
have been paid. If the remaining proceeds are insufficient to satisfy the
liquidated mortgage loan, the insurer fails to perform its obligations under the
insurance policy and the other forms of credit enhancement are insufficient to
cover the loss, then:
o there will be a delay in payments to you if any deficiency judgment
against the borrower is sought; and
o you may incur a loss if a deficiency judgment cannot be obtained or is
not realized.
We refer you to "Legal Aspects of The Loans" in the prospectus for
additional information.
PAYMENTS TO AND RIGHTS OF INVESTORS ADVERSELY AFFECTED BY INSOLVENCY OF CHAMPION
The sale of the mortgage loans from Champion to the depositor will be
treated by Champion, the depositor and the trust, for financial accounting
purposes, as a sale of the mortgage loans. If Champion were to become insolvent,
a receiver or conservator for, or a creditor of, Champion may argue that the
transaction between Champion and the depositor was a pledge of mortgage loans as
security for a borrowing rather than a sale. Such an attempt, even if
unsuccessful, could result in delays in payments to you.
UNDERWRITING STANDARDS
Champion's underwriting standards generally are less restrictive than those
of Fannie Mae or Freddie Mac. As a result, the mortgage loans may experience
higher rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in accordance with Fannie Mae or Freddie Mac guidelines. In turn,
if the insurer fails to perform its obligations under the insurance policy, you
may experience a loss.
We refer you to "The Seller and the Servicer" and "Champion's Home Equity
Loan Program" in this prospectus supplement for additional information.
INTEREST PAYMENTS ON THE MORTGAGE LOANS MAY BE REDUCED
o Prepayments of Principal May Reduce Interest Payments. If a mortgagor
prepays a mortgage loan, the mortgagor is charged interest only up to the date
of the prepayment, instead of a full month. The servicer is obligated to reduce
its aggregate servicing fee with respect to the mortgage loans in the month of a
prepayment in full so that one month's interest is paid with such prepayment in
full. If the servicing fee is insufficient to pay the interest shortfalls
attributed to prepayments in full, a shortfall in interest due on the notes may
result. The insurer is required to cover any such shortfall, if the other credit
enhancement is insufficient to cover such shortfall. If the other credit
enhancements are insufficient to cover such shortfall and the insurer fails to
perform its obligations under the insurance policy, you may incur a loss.
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o Shortfalls from Simple Interest Payments. All of the fixed-rate mortgage
loans calculate interest using the simple interest method. Under this method,
interest is computed and charged to the mortgagor based on the number of days
elapsed between the date of the last interest payment and the date of receipt of
the most current payment. The portions of each monthly payment allocated to
interest and principal are adjusted based on the actual amount of interest
charged. Consequently, if less than a full month has elapsed between payments,
the amount of interest actually paid by the mortgagor will be less than a full
month's interest on the principal balance of that mortgage loan, thereby
creating an interest shortfall. Conversely, if more than a full month has
elapsed between the payments, the amount of interest actually paid by the
mortgagor will be greater than a full month's interest on the principal balance
of that mortgage loan, creating an interest excess. To the extent that the
aggregate of such shortfalls exceeds the aggregate of such excesses, a "net
simple interest shortfall" will result. The servicer is not, but the insurer is,
required to cover any such net simple interest shortfall to the extent such net
simple interest shortfall results in a shortfall in interest payable on the
notes. However, if other credit enhancements are insufficient to cover any such
net simple interest shortfall and the insurer fails to perform its obligations
under the insurance policy, you may incur a loss.
RISK OF LOSSES AS A RESULT OF GEOGRAPHIC CONCENTRATION
The mortgaged properties relating to the mortgage loans are located in 16
states and the District of Columbia. However, as of the close of business on
August 31, 1999 the following states had the concentrations of mortgaged
properties indicated (by aggregate principal balance of each loan group):
<TABLE>
<CAPTION>
STATE GROUP 1 GROUP 2 GROUP 3
- ----- ------- ------- -------
<S> <C> <C> <C>
Connecticut................... 5.56% 9.25% 5.12%
Illinois...................... 5.84% 4.14% 5.41%
Massachusetts................. 18.57% 7.70% 18.84%
New Jersey.................... 24.48% 29.09% 23.19%
New York...................... 26.83% 33.65% 26.16%
Pennsylvania.................. 8.57% 6.07% 10.86%
</TABLE>
No other states have concentrations in excess of 5% in any loan group. If the
northeast region experiences weaker economic conditions or greater rates of
decline in real estate values than the United States generally, then the
mortgage loans may experience higher rates of delinquencies, defaults and
foreclosures than if the mortgaged properties were more geographically diverse.
During the week of September 13, 1999, a hurricane passed along the eastern
seaboard of the United States, causing property damage in several states,
including New Jersey. The seller has not undertaken the physical inspection of
any of the mortgaged properties, and as a result, there can be no assurance that
material damage to any mortgaged property has not occurred. If a property has
been materially damaged, the related mortgage loan may be more likely to become
delinquent and default.
COMMINGLING RISK
The servicer may commingle collections held by it and may use such funds
for its own purpose provided that the following conditions are satisfied:
o Champion is the servicer,
o Key Bank USA has a rating with respect to short-term deposit obligations
of at least "A-1" by S&P and at least "P-1" by Moody's,
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o no event of servicing termination has occurred and is continuing under
the sale and servicing agreement, and
o Key Bank USA has entered into a support agreement for the benefit of the
trust.
If any of the conditions contained in the preceding sentence are not met, the
servicer will deposit all payments with respect to the mortgage loans and all
proceeds of the mortgage loans collected during each due period into the
collection account not later than two business days after receipt. In the event
that the servicer commingles collections, the noteholders will be subject to the
risk of loss of such collections, including as a result of the bankruptcy or
insolvency of the servicer, to the extent the insurer fails to perform its
obligations under the insurance policy. See "--Payments to and Rights of
Investors Adversely Affected by Insolvency of Champion" above. It is anticipated
that on the closing date, Key Bank USA will enter into a support agreement that
will permit Champion to commingle funds.
CONSEQUENCES ON LIQUIDITY AND PAYMENT DELAY BECAUSE OF OWNING BOOK-ENTRY NOTES
o Limit on Liquidity of Notes. Issuance of the notes in book-entry form may
reduce the liquidity of such notes in the secondary trading market since
investors may be unwilling to purchase notes for which they cannot obtain
physical notes.
o Limit on Ability to Transfer or Pledge. Since transactions in the
book-entry notes can be effected only through DTC, participating organizations,
indirect participants and certain banks, your ability to transfer or pledge a
book-entry note to persons or entities that do not participate in the DTC system
or otherwise to take actions in respect of such notes, may be limited due to
lack of a physical note representing the book-entry notes.
o Delays in Payments. You may experience some delay in the receipt of
payments on the book-entry notes because the payments will be forwarded by the
indenture trustee to DTC, DTC will then credit the accounts of its participants,
and such participants will thereafter credit them to your account either
directly or indirectly through indirect participants, as applicable.
We refer you to "Description of Notes--Book-Entry Notes" in this prospectus
supplement for additional information.
NOTEHOLDERS COULD BE ADVERSELY AFFECTED IN THE ABSENCE OF YEAR 2000 COMPLIANCE
As is the case with most companies using computers in their operations, the
servicer is faced with the task of preparing its computer systems and programs
for the year 2000. The year 2000 issue is the result of prior computer programs
being written using two digits, rather than four digits, to define the
applicable year. Any of the servicer's computer programs that have
time-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. Major computer system failure or miscalculations may occur
as a result. The servicer is presently engaged in various procedures to ensure
that their computer systems and software will be year 2000 compliant.
However, if the servicer or any of its suppliers, customers, brokers or
agents do not successfully and timely achieve year 2000 compliance, the
performance of obligations of the servicer could be materially adversely
affected. This could result in delays in processing payments on the mortgage
loans and may cause a related delay in payments to you.
We refer you to "The Seller and the Servicer--Year 2000" in this prospectus
supplement for additional information.
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<PAGE>
THE NOTE INSURER
The information set forth in this section and in the financial statements
of MBIA Insurance Corporation ("MBIA"), the note insurer, incorporated by
reference herein as described below has been provided by the note insurer. No
representation is made by the depositor, the underwriters, Champion or any of
their affiliates, as to the accuracy or completeness of any such information.
MBIA
MBIA is the principal operating subsidiary of MBIA Inc., a New York Stock
Exchange listed company (the "Company"). The Company is not obligated to pay the
debts of or claims against MBIA. MBIA is domiciled in the State of New York and
licensed to do business in and subject to regulation under the laws of all 50
states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. MBIA has two European branches, one in the
Republic of France and the other in the Kingdom of Spain. New York has laws
prescribing minimum capital requirements, limiting classes and concentrations of
investments and requiring the approval of policy rates and forms. State laws
also regulate the amount of both the aggregate and individual risks that may be
insured, the payment of dividends by MBIA, changes in control and transactions
among affiliates. Additionally, MBIA is required to maintain contingency
reserves on its liabilities in certain amounts and for certain periods of time.
MBIA does not accept any responsibility for the accuracy or completeness of
this prospectus supplement or any information or disclosure contained herein, or
omitted herefrom, other than with respect to the accuracy of the information
regarding the note insurer set forth under the headings "The Note Insurer" and
"Description of the Notes--The Note Policy." Additionally, MBIA makes no
representation regarding the notes or the advisability of investing in the
notes.
The note policy is not covered by the Property/Casualty Insurance Security
Fund specified in Article 76 of the New York Insurance Law.
MBIA FINANCIAL INFORMATION
The consolidated financial statements of MBIA, a wholly owned subsidiary of
the Company and its subsidiaries as of December 31, 1998 and December 31, 1997
and for each of the three years in the period ended December 31, 1998, prepared
in accordance with generally accepted accounting principles, included in the
Annual Report on Form 10-K of the Company for the year ended December 31, 1998
and the consolidated financial statements of MBIA and its subsidiaries as of
June 30, 1999 and for the six month periods ended June 30, 1999 and June 30,
1998 included in the Quarterly Report on Form 10-Q of the Company for the period
ended June 30, 1999, are hereby incorporated by reference into this prospectus
supplement and shall be deemed to be a part hereof. Any statement contained in a
document incorporated by reference herein shall be modified or superseded for
purposes of this prospectus supplement to the extent that a statement contained
herein or in any other subsequently filed document which also is incorporated by
reference herein modifies or
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supersedes such statement. Any statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
prospectus supplement.
All financial statements of MBIA and its subsidiaries included in documents
filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, subsequent to the date of this
prospectus supplement and prior to the termination of the offering of the notes
shall be deemed to be incorporated by reference into this prospectus supplement
and to be a part hereof from the respective dates of filing such documents.
The tables below present selected financial information of MBIA determined
in accordance with statutory accounting practices prescribed or permitted by
insurance regulatory authorities ("SAP") and generally accepted accounting
principles ("GAAP"):
<TABLE>
<CAPTION>
SAP
----------------------------------
DECEMBER 31, 1998 JUNE 30, 1999
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Admitted Assets................................... $ 6,521 $6,807
Liabilities....................................... 4,231 4,468
Capital and Surplus............................... 2,290 2,339
</TABLE>
<TABLE>
<CAPTION>
GAAP
----------------------------------
DECEMBER 31, 1998 JUNE 30, 1999
----------------- --------------
(AUDITED) (UNAUDITED)
(IN MILLIONS)
<S> <C> <C>
Assets............................................ $ 7,488 $7,429
Liabilities....................................... 3,211 3,234
Shareholder's Equity.............................. 4,277 4,195
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT MBIA
Copies of the financial statements of MBIA incorporated by reference herein
and copies of MBIA's 1998 year-end audited financial statements prepared in
accordance with statutory accounting practices are available, without charge,
from MBIA. The address of MBIA is 113 King Street, Armonk, New York 10504. The
telephone number of MBIA is (914) 273-4545.
YEAR 2000 READINESS DISCLOSURE
The Company is actively managing a high-priority Year 2000 program. The
Company has established an independent Year 2000 testing lab in its Armonk
headquarters, with a committee of business unit managers overseeing the project.
The Company has a budget of $1.13 million for its 1998-2000 Year 2000 efforts.
Expenditures are proceeding as anticipated, and the Company does not expect the
project budget to materially exceed this amount. The Company has initiated a
comprehensive Year 2000 plan that includes assessment, remediation, testing and
contingency planning. This plan covers "mission-critical" internally developed
systems, vendor software, hardware and certain third-party entities through
which the Company conducts its business. Testing to date indicates that
functions critical to the financial guarantee business, both domestic and
international, were Year 2000-ready as of December 31, 1998. Additional testing
will continue throughout 1999.
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FINANCIAL STRENGTH RATINGS OF MBIA
Moody's Investors Service, Inc. rates the financial strength of MBIA "Aaa."
Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc. rates the financial strength of MBIA "AAA."
Fitch IBCA, Inc. (formerly known as Fitch Investors Service, L.P.) rates
the financial strength of MBIA "AAA."
Each rating of MBIA should be evaluated independently. The ratings reflect
the respective rating agency's current assessment of the creditworthiness of
MBIA and its ability to pay claims on its policies of insurance. Any further
explanation as to the significance of the above ratings may be obtained only
from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
securities, and such ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of the
above ratings may have an adverse effect on the market price of the securities.
MBIA does not guaranty the market price of the securities nor does it guaranty
that the ratings on the securities will not be revised or withdrawn.
THE TRUST
GENERAL
Champion Home Equity Loan Trust 1999-3, the trust, is a business trust to
be formed under the laws of the State of Delaware pursuant to a trust agreement
for the purpose of the transactions described in this prospectus supplement.
Prior to formation, the trust will have no assets or obligations or any
operating history. The trust will not acquire any assets other than the trust
property, and it is not anticipated that the trust will have any need for
additional capital resources. Because the trust will have no operating history
upon its establishment and will not engage in any business other than the duties
discussed below, no historical or pro forma financial statements, or ratios of
earnings to fixed charges with respect to the trust have been included in this
prospectus supplement. The trust will not engage in any activities other than:
o acquiring, holding and managing the mortgage loans and the other
assets of the trust,
o issuing the notes, the Senior Interest Participations and the
Transferor Interest,
o making payments on the notes, the Senior Interest Participations and
the Transferor Interest, and
o engaging in other activities to accomplish the foregoing.
On the closing date, Champion will sell mortgage loans having an aggregate
principal balance, or pool balance, of approximately $270,832,357 as of the
close of business on August 31, 1999 to Lehman ABS Corporation, the depositor,
pursuant to a purchase agreement. Pursuant to a sale and servicing agreement,
the mortgage loans will be transferred immediately by the depositor to the
trust.
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The assets of the trust will consist primarily of three groups of home
equity loans, which we generically refer to as mortgage loans. The group 1
mortgage loans are closed-end, fixed-rate and adjustable-rate home equity loans
with principal balances that conform to the limits of Fannie Mae and Freddie Mac
and the group 2 mortgage loans and the group 3 mortgage loans are closed-end,
fixed-rate and adjustable-rate home equity loans with principal balances that
may not conform to such limits. All of the mortgage loans will be secured by
first- or second-lien mortgages on primarily one- to four-family residential
properties. See "Description of the Mortgage Loans" in this prospectus
supplement. The assets of the trust will also include:
o payments on the mortgage loans received after the cut-off date;
o mortgaged properties that are acquired by foreclosure or deed in
lieu of foreclosure;
o amounts on deposit in the collection account and the distribution
account;
o amounts on deposit in the pre-funding account and the capitalized
interest account;
o rights under certain hazard insurance policies, if any, covering the
mortgaged properties;
o certain other ancillary or incidental funds, rights and properties
related to the foregoing;
o all proceeds of the foregoing; and
o the irrevocable and unconditional financial guaranty insurance policy
issued by the note insurer.
The trust will include the unpaid principal balance of each mortgage loan
as of the close of business on the cut-off date. With respect to any date, the
pool balance will be equal to the aggregate principal balances of all mortgage
loans as of such date and the group balance will be equal to the aggregate
principal balances of the mortgage loans in the specified group. As of the
cut-off date, the group 1 balance is $154,780,215.79, the group 2 balance is
$38,664,762.73 and the group 3 balance is $77,387,378.02.
The assets of the trust will be pledged to the indenture trustee pursuant
to the indenture.
The servicer is obligated to service the mortgage loans pursuant to the
sale and servicing agreement (collectively with the indenture and the trust
agreement, the "Agreements") and will be compensated for such services as
described under "Description of the Agreements--Servicing Compensation and
Payment of Expenses" in this prospectus supplement.
The trust's principal offices are located in Wilmington, Delaware, in care
of Chase Manhattan Bank Delaware, as owner trustee, at the address set forth in
the following section.
THE OWNER TRUSTEE
Chase Manhattan Bank Delaware will act as the owner trustee under the trust
agreement. Chase Manhattan Bank Delaware is a Delaware banking corporation and
its principal offices are located at 1201 Market Street, Wilmington, Delaware
19801.
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THE SELLER AND THE SERVICER
GENERAL
Champion Mortgage Co., Inc., or Champion, will be the seller and the
servicer. Champion is a wholly-owned subsidiary of Key Bank USA, National
Association, a national banking association. Key Bank USA, National Association
is engaged in banking and related activities. Key Bank USA, National Association
is a wholly-owned subsidiary of KeyCorp, an Ohio financial services holding
company headquartered in Cleveland, Ohio. KeyCorp completed the acquisition of
Champion effective August 29, 1997.
Prior to the acquisition of Champion by KeyCorp, Champion conducted its
various business activities directly and through a number of affiliated
companies. Immediately prior to the acquisition of Champion, all affiliated
companies were consolidated into Champion Mortgage Co., Inc. Champion is a
mortgage banking company which originates non-conforming home equity loans
secured by first or second liens primarily on one- to four-family residential
properties.
For the fiscal years ended September 30, 1998, September 30, 1997 and
September 30, 1996, Champion funded $922.1 million, $580.4 million and
$507.4 million, respectively, of mortgage loans. During the fiscal year ended
September 30, 1998, approximately 75.60% and 24.40% of Champion's originations
were secured by first liens and second liens, respectively. During the nine
months ended June 30, 1999, Champion funded approximately $800,104,511.50 of
mortgage loans, of which approximately 80.20% and 19.80% were secured by first
liens and second liens, respectively. As of June 30, 1999, Champion was
servicing approximately $1,733,809,533 of mortgage loans for itself and others.
All of Champion's mortgage loans have been originated directly by Champion
through its own employees located at its corporate headquarters or at any of its
25 branch offices located in New Jersey, Illinois, Massachusetts, Connecticut,
Virginia, New York, Pennsylvania, Rhode Island and Maryland. Champion makes
extensive use of advertising, including direct mailing, to locate potential
customers and generally conducts the application and loan approval process in
person. As of June 30, 1999, Champion was originating mortgage loans secured by
residential properties in New Jersey, New York, Connecticut, Pennsylvania,
Delaware, Maryland, Virginia, Rhode Island, Colorado, Illinois, Massachusetts,
New Hampshire, Indiana, Ohio, Wisconsin, Michigan and the District of Columbia.
As of the end of June 1999, Champion had approximately 720 employees.
Champion occupies 114,029 square feet in a four story building located at
20 Waterview Boulevard, Parsippany, New Jersey 07054. Its telephone number is
(973) 402-7700.
YEAR 2000
The Year 2000 issue refers to the fact that many computer systems were
originally programmed using two digits rather than four digits to identify the
applicable year. When the year 2000 occurs, these systems could interpret the
year as 1900 rather than 2000. Unless hardware, system software and applications
are corrected to be Year 2000 compliant, computers and the devices they control
could generate miscalculations and create operational problems. Various systems
could be affected ranging from complex computer systems to telephone systems,
ATMs and elevators.
To address this issue, KeyCorp, the parent of Key Bank USA, National
Association, for the operations of Key Bank USA, National Association as well as
its other operating
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subsidiaries, including Champion, developed an extensive plan in 1995, including
the formation of a team consisting of internal resources and third-party
experts. The plan, has been in implementation since that time and consists of
five major phases: awareness--ensuring a common understanding of the issue
throughout KeyCorp; assessment--identifying and prioritizing the systems and
third parties with whom KeyCorp has exposure to Year 2000 issues;
renovation--enhancing, replacing or retiring hardware, software and systems
applications; validation--testing modifications made; and
implementation--certifying Year 2000 compliance and user understanding and
acceptance. The awareness and assessment phases have been completed. The
remaining phases are substantially complete. As of June 30, 1999, KeyCorp had
completed all phases of Year 2000 readiness testing for its mission critical
systems and is well along in completing the remaining steps for which regulatory
deadlines have been established.
As a financial institution, KeyCorp may experience increases in problem
loans and credit losses in the event that borrowers fail to properly respond to
this issue. In addition, financial institutions may incur higher funding costs
if consumers react to publicity about the issue by withdrawing deposits. They
also could be impacted if third parties they deal with in conducting their
business, such as foreign banks, governmental agencies, clearing houses,
telephone companies, and other service providers, fail to properly address this
issue.
Accordingly, KeyCorp has formed a separate internal team charged with the
task of identifying critical business interfaces; assessing potential problems
relating to credit, liquidity and counterparty risk; and where appropriate,
developing contingency plans. This team has been surveying significant credit
clients to determine their Year 2000 readiness and to evaluate the level of
potential credit risk to KeyCorp. Based on the information obtained, specific
follow-up programs have been established and the adequacy of the allowance for
loan losses is being assessed on an ongoing basis. The results of the assessment
will be reflected in the assignment of an appropriate risk rating in KeyCorp's
loan grading system. On an ongoing basis, KeyCorp is also contacting other
significant parties with which it conducts business to determine the status of
their Year 2000 compliance efforts.
Despite the actions taken by KeyCorp, there can be no assurance that
significant clients or other critical parties will adequately address their Year
2000 issues. Consequently, KeyCorp is developing contingency plans to help
mitigate the risks associated with potential delays in completing the
renovation, validation and implementation phases of its Year 2000 plan, as well
as the potential failure of external parties to adequately address their Year
2000 issues. In accordance with regulatory guidelines, these plans had been
completed as of June 30, 1999 and address primarily contingency solutions for
KeyCorp's core systems and the identification of alternative business partners.
In addition, during the first half of 1999, KeyCorp increased its borrowing
capacity with the Federal Reserve Bank to address the potential need for
additional funding as the Year 2000 approaches. Because the Year 2000 issue has
never occurred, it is not possible to foresee or quantify the possible overall
financial and operational impact and/or to determine whether it will be material
to the financial condition or operations of KeyCorp.
As of June 30, 1999, KeyCorp has recognized approximately $47 million of
its total estimated project cost of up to $50 million. It is currently expected
that the estimated remaining cost of up to $3 million will be recognized in 1999
and the first half of 2000. The total cost of the project is being funded
through operating cash flows of KeyCorp and its affiliates.
S-23
<PAGE>
CHAMPION'S HOME EQUITY LOAN PROGRAM
GENERAL
Champion's principal product is a closed-end, fixed-rate, fully-amortizing
mortgage loan with an original term to maturity of 15 years. Champion also
offers fixed-rate fully-amortizing mortgage loans with original terms to
maturity of 5, 7, 10, 20 and 30 years and fixed-rate balloon mortgage loans with
original terms to maturity of 5, 7 or 15 years and an amortization schedule of
up to 30 years.
In most instances, Champion's mortgage loans are non-purchase money
mortgages secured by first or second liens on owner-occupied one- to four-family
residential properties, including townhouses and individual units in
condominiums and planned unit developments. In the nine month period ending
June 30, 1999, approximately 96.27% of the mortgage loans originated by Champion
were secured by owner occupied residences. Champion also makes mortgage loans
secured by first or second liens on residential rental properties or vacation
properties.
All of Champion's fixed rate mortgage loans are simple interest loans.
Simple interest loans provide for a series of substantially equal monthly
payments which, except in the case of Balloon Loans, if paid when due, will
fully amortize the amount financed by the scheduled maturity date. Each monthly
payment includes an installment of interest which is calculated on the basis of
the outstanding principal balance of the mortgage loan multiplied by the stated
loan rate 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 of which is the number of days in the annual period for
which interest accrues on such loan. As payments are received under a simple
interest loan, the amount received is applied first to interest accrued to the
date of payment and the balance is applied to reduce the unpaid principal
balance. Accordingly, if a borrower pays a fixed monthly installment on a simple
interest loan before its scheduled due date, the portion of the payment
allocable to interest for the period since the preceding payment was made will
be less than it would have been had the payment been made as scheduled, and the
portion of the payment applied to reduce the unpaid principal balance will be
correspondingly greater. Conversely, if a borrower pays the fixed monthly
installment after the scheduled due date, the portion of the payment allocable
to interest will be greater, and the amortization of the unpaid principal
balance will be correspondingly less.
The adjustable-rate mortgage loans are actuarial loans. Actuarial loans
provide that interest is charged, and payments are due, as of a scheduled day in
each month that is fixed at the time of origination. Scheduled monthly payments
by a mortgagor on an actuarial loan made either earlier or later than the
scheduled due date will not affect the amortization schedule or the allocation
of such payment to principal and interest.
All of Champion's mortgage loans may be prepaid by the borrowers in whole
or in part at any time without penalty. Late charges are assessed on loans for
which payments are made after applicable grace periods established by federal
and state laws. None of Champion's mortgage loans are insured or guaranteed by
any governmental agency or instrumentality, and none are covered by primary
mortgage guaranty insurance policies.
S-24
<PAGE>
UNDERWRITING PROCEDURES
The following is a description of the underwriting procedures customarily
employed by Champion with respect to fixed-rate and adjustable-rate mortgage
loans secured by first or second liens primarily on one- to four-family
residential properties. Champion's underwriting process, which is centralized at
its corporate headquarters, is intended to assess the applicant's credit
standing and repayment ability and the value and adequacy of the real property
security as collateral for the proposed loan. Champion considers itself to be a
credit lender as opposed to an equity lender, focusing primarily on the
borrower's ability and willingness to repay, and only secondarily on the
potential value of the collateral upon foreclosure, in determining whether or
not to make a mortgage loan. As of June 30, 1999, Champion employed 273 loan
officers and 20 underwriters. Underwriters are primarily promoted from within
Champion on a selective basis in order to maintain the quality and integrity of
Champion's business philosophy. All underwriters receive fixed annual salaries
which are not based on underwriting volume.
The application process generally is conducted in person. Each applicant
for a mortgage loan is required to supply the information necessary to complete
an application which lists the applicant's liabilities, income, credit and
employment history and other demographic and personal information. If the
information in the loan application demonstrates that the applicant has
sufficient income and that there is sufficient equity in the real property to
justify making a mortgage loan, the loan officer will conduct a further credit
investigation of the applicant. This investigation includes obtaining and
reviewing an independent credit bureau report on the credit history of the
applicant in order to evaluate the applicant's ability to repay. The credit
report typically contains information relating to such matters as credit history
with local merchants and lenders, installment debt payments and any record of
defaults, bankruptcy, collateral repossessions, suits or judgments. Any adverse
information contained in the credit report must be acceptable, and if requested,
explained, to the underwriter.
Based on the information obtained from the applicant, the loan officer
advises the applicant of the loan program for which the applicant qualifies.
Upon gaining the agreement of the applicant, the loan officer submits the
application to the underwriting department for further review. An underwriter
will then evaluate the submission in accordance with certain established
guidelines. The underwriter will either approve, reject, or amend the loan
request based on the information submitted in the application. If the applicant
accepts the amendment, the underwriter will approve the amended loan
application.
The application is then further processed to verify the accuracy of the
information therein. Verification may take the form of written or verbal
communication with the applicant's employer or recent pay stubs and current W-2
forms supplied by the applicant. Income tax returns also may be obtained and
reviewed. Self-employed borrowers generally are required to have been in
business for at least two years and must provide signed federal income tax
returns, including all schedules thereto, for the past two tax years, and may be
required to furnish personal and business financial statements if deemed
necessary by the underwriter.
In certain circumstances, the borrower may choose not to have Champion
verify the income claimed on the application, but Champion is able to determine
sufficient ability to repay the loan through the borrower's good credit standing
and documentation of current employment. In such circumstances, the permitted
combined loan-to-value ratio will be less than otherwise would be the case.
Approximately 1.53% of the group 1 mortgage loans, 0.16% of the group 2 mortgage
loans and 0.45% of the group 3 mortgage loans (in each case by cut-
S-25
<PAGE>
off date group balance) were underwritten using this alternative approach to
income verification.
Some self employed borrowers may not be able to verify the income claimed
on the application but can document sufficient cash flow to support the loan for
which the application was made. One example of such support would be bank
statements. In such circumstances the permitted combined loan-to-value ratio
will be less than otherwise would be the case. Approximately 4.65% of the
group 1 mortgage loans, 10.80% of the group 2 mortgage loans and 7.01% of the
group 3 mortgage loans (in each case by cut-off date group balance) were
underwritten using this alternative approach to income verification.
If there is a first lien mortgage on the property to be used as security
for the mortgage loan, the underwriter also evaluates the type and outstanding
balance of the first lien mortgage loan and its payment history. Champion
obtains a credit reference on the first lien mortgage by using either credit
bureau information, telephone verification, the year-end first lien mortgage
statement, canceled checks or written verification from the senior mortgagee.
In every instance, the property securing a loan made by Champion is
appraised and title insurance acquired before the loan is closed. Such
appraisals are conducted by approved, independent third-party appraisers who are
paid a fee by the applicant, regardless of whether the application for a
mortgage loan is approved. All appraisals are required to be on forms approved
by Fannie Mae or Freddie Mac. Champion obtains a lender's title insurance policy
or binder, or other assurance of title customary in the relevant jurisdiction.
Homeowners insurance coverage is required on every property securing a home
equity loan originated by Champion. Necessary coverage and mortgagee clause
endorsements are acquired and monitored by the loan servicing department.
Forced-placed policies are acquired for properties in which the borrower has
allowed coverage to lapse.
After obtaining all applicable employment, credit and property information,
Champion determines whether sufficient unencumbered equity in the property
exists and whether the prospective borrower has sufficient monthly income
available to support the payments of principal and interest on the mortgage loan
in addition to any first lien mortgage loan payments, including any escrows for
property taxes and hazard insurance premiums, and other monthly credit
obligations. With respect to those mortgage loans for which Champion verifies
the income of the borrower, Champion applies the "debt-to-gross income ratio"
which is the ratio of the borrower's total monthly payments on all outstanding
debt, including the new loan, to the borrower's gross verifiable monthly income.
The debt-to-gross income ratio generally may not exceed 45%. For adjustable-rate
loans, Champion uses the fully indexed mortage rate. In addition, the maximum
combined loan-to-value ratio of any mortgage loan may not exceed 100% and may be
reduced depending on a number of factors, including the applicant's credit
history and employment status.
Any exceptions to the underwriting policies may be approved by certain
members of the management of Champion. The factors considered when determining
if an exception to the general underwriting standards should be made include:
the quality of the property, how long the borrower has owned the property, the
amount of disposable income, the type and length of employment, the credit
history, the current and pending debt obligations, the payment habits and the
status of past and currently existing mortgages.
When an application is approved, a mortgage loan is completed by signing
the applicable loan documents, including a promissory note and mortgage. All
mortgage loans are closed by approved attorneys or title companies. Following
the three business day rescission period
S-26
<PAGE>
required by the federal Truth-in-Lending Act, a mortgage loan is fully funded.
Scheduled repayment of principal and interest on such loan generally begins one
month from the date interest starts to accrue. After a mortgage loan is
underwritten, approved and funded, the loan package is reviewed by an internal
quality control department.
REFINANCING POLICY
When Champion finds that borrowers having existing loans with Champion are
in the process of refinancing such loans due to interest rate changes or other
reasons, Champion actively attempts to retain such borrowers through
solicitations of such borrowers to refinance with Champion. Such refinancings
generate fee and servicing income for Champion. Since the solicited borrowers
may refinance their existing loans in any case, Champion believes that this
practice will be unlikely to affect the prepayment experience of the mortgage
loans in a material respect. Champion also has solicited its borrowers who are
in good standing to apply for additional loans, consistent with its origination
standards, where deemed appropriate.
SERVICING OF HOME EQUITY LOANS
Champion has established standard policies for the servicing and collection
of its mortgage loans. Servicing includes, but is not limited to,
post-origination loan processing, customer service, collections, remittance
processing and liquidations.
Champion sends a monthly statement to each of its borrowers. Collection
procedures vary somewhat depending on whether a late payment is the first
payment due under the mortgage loan. If the first payment is not received on or
prior to the due date, an initial phone call is made on the first business day
after the due date. Phone calls continue on a daily basis until contact is made.
A "Friendly Reminder Letter" is sent on the second business day after the due
date. If no contact is made with the borrower by the 10th day after the due
date, a "Pre-foreclosure Letter" is sent, and a qualified outside agency is used
to inspect the property. On the 20th day after a first payment default, a
"Notice of Default" is sent to the borrower. This letter indicates an intent to
accelerate the mortgage loan if satisfactory arrangements are not made within
ten days.
If the delinquency relates to a due date other than the first due date, a
Friendly Reminder Letter is sent on the second business day after the due date.
On the fifth day after the due date, telephone calls to the borrower begin and
telephone calls continue on a daily basis until payment is received or contact
is made. In addition, a series of mailings is made depending on the customer's
payment history. On the 20th day of delinquency a Notice of Default is sent. A
qualified outside agency is used to conduct an interview with the borrower and
the property is inspected.
Accounts which are 32 days past due without a specific arrangement for
repayment will be sent a "Notice of Intent to Foreclose" which gives the
customer five days in which to respond. On the 37th day of delinquency, a
determination whether to foreclose is made. If Champion decides to foreclose,
the necessary documentation is sent to an approved attorney who then sends the
borrower an acceleration letter allowing the borrower 30 days to reinstate the
mortgage. When foreclosure proceedings are initiated, a third party appraiser
completes a drive-by evaluation of the property and obtains comparable sales
prices and listings in the area. In addition, homeowner's insurance is verified
and the status of senior mortgages and property taxes is checked. Subject to
applicable state law, all legal expenses are assessed to the account and become
the responsibility of the borrower.
S-27
<PAGE>
Regulations and practices regarding the liquidation of properties and the
rights of the borrower in default vary greatly from state to state. Champion
will decide that liquidation is the appropriate course of action only if a
delinquency cannot otherwise be cured. If Champion determines that purchasing a
property securing a mortgage loan will minimize the loss associated with such
defaulted loan, Champion may bid at the foreclosure sale for such property or
accept a deed in lieu of foreclosure.
Servicing and collection practices may change over time in accordance with,
among other things, Champion's business judgment, changes in the portfolio and
applicable laws and regulations. Any realization from the sale of foreclosed
property is taken as a recovery. After Champion acquires title to a mortgaged
property by foreclosure or deed in lieu of foreclosure, an approved realtor is
selected to list and advertise the property for sale.
Champion may not foreclose on the property securing a junior mortgage loan
unless it forecloses subject to all senior mortgages. If any senior mortgage
loan is in default after Champion has initiated its foreclosure actions,
Champion may advance funds to keep such senior mortgage loan current until such
time as Champion satisfies such senior mortgage loan. Such amounts are added to
the balance of the mortgage loan. In the event that foreclosure proceedings have
been instituted on any senior mortgage prior to the initiation of Champion's
foreclosure action, Champion will either satisfy the senior mortgage loan at the
time of the foreclosure sale or take other action to protect its interest in the
related property.
DELINQUENCY AND LOSS EXPERIENCE
Set forth below is the delinquency and loss experience on the mortgage
loans serviced by Champion for the periods and dates indicated. The delinquency
and loss experience set forth below represents the experience with respect to
only a portion of Champion's loan production for the periods indicated and has
not been adjusted to eliminate the effect of the significant growth in the size
of Champion's portfolio of mortgage loans during the periods shown. Accordingly,
loss and delinquency as a percentage of mortgage loans serviced for each period
could be higher than those shown if a group of mortgage loans were artificially
isolated at a point in time and the information showed the activity only in that
isolated group.
S-28
<PAGE>
DELINQUENCY EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDING SEPTEMBER 30, ENDING JUNE 30,
------------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Number of Loans........ 1,588 4,416 9,058 14,327 19,565 18,037 24,450
Dollar Amount of
Loans................ $ 75,916 $ 214,860 $ 526,816 $ 866,673 $1,309,172 $1,185,470 $1,733,809
Delinquency Period
30-59 days
% of number of
loans............ 0.12% 1.18% 1.30% 2.14% 1.43% 1.44% 1.16%
% of dollar amount
of loans......... 0.07% 1.12% 1.17% 2.16% 1.24% 1.19% 1.00%
60-89 days
% of number of
loans............ 0.06% 0.25% 0.15% 0.34% 0.27% 0.24% 0.37%
% of dollar amount
of loans......... 0.05% 0.16% 0.14% 0.35% 0.25% 0.17% 0.35%
90 days and over(1)
% of number of
loans............ 0.00% 0.38% 0.69% 1.20% 0.82% 0.73% 1.00%
% of dollar amount
of loans......... 0.00% 0.46% 0.81% 1.27% 0.72% 0.62% 0.85%
Loans in Foreclosure
% of number of
loans.............. 0.00% 0.21% 0.62% 0.51% 0.60% 0.58% 0.69%
% of dollar amount of
loans.............. 0.00% 0.30% 0.76% 0.60% 0.56% 0.62% 0.76%
Total
% of number of
loans.............. 0.18% 1.81% 2.14% 3.68% 3.32% 3.17% 3.42%
% of dollar amount of
loans.............. 0.12% 1.74% 2.12% 3.78% 2.97% 2.77% 3.14%
</TABLE>
- ------------------
The totals include loans in foreclosure and real estate owned.
LOSS EXPERIENCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDING SEPTEMBER 30, ENDING JUNE 30,
------------------------------------------------------------------ ------------------------
1994 1995 1996 1997 1998 1998 1999
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Dollar Amount
of Loans
Outstanding During
Period............... $ 43,374 $ 144,721 $ 367,584 $ 702,555 $1,103,510 $1,046,838 $1,558,563
Net Losses(1).......... $ 146 $ 145 $ 39 $ 488 $ 1,142 $ 956 $ 1,684
Net Losses as a
Percentage of
Average Amount
Outstanding.......... 0.34% 0.10% 0.01% 0.07% 0.11% 0.13% 0.15%
</TABLE>
- ------------------
"Net Losses" means gross losses minus recoveries.
The June 30 figures have been annualized.
S-29
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The mortgage loans were originated by the seller in accordance with the
policies set forth above under the heading "Champion's Home Equity Loan
Program." All of the mortgage loans are home equity loans with fixed or
adjustable loan rates, and are evidenced by promissory notes, or mortgage notes,
secured by deeds of trust or mortgages on mortgaged properties.
Unless otherwise specified, the statistical information presented in this
prospectus supplement concerns only the initial mortgage loans and is based upon
the aggregate principal balance of the initial mortgage loans in each group as
of the cut-off date.
However, after the closing date and on or prior to October 29, 1999, the
trust is expected to acquire subsequent mortgage loans with an approximate
aggregate principal balance of $79,167,643.46. The subsequent mortgage loans for
each group will be selected using generally the same criteria used to select the
initial mortgage loans in that group and are required to meet the criteria
specified by the note insurer. In general, other than the specific statistical
information presented in this prospectus supplement, the description of the
mortgage loans will apply to both the initial mortgage loans and the subsequent
mortgage loans.
The exact characteristics of each group of mortgage loans will vary from
the specific statistical information presented in this prospectus supplement
upon the acquisition of the subsequent mortgage loans.
A mortgage loan secured by a first lien is considered to have a conforming
balance if the original principal balance was no more than $240,000 for
single-family properties, $307,100 for two-family properties, $371,200 for
three-family properties and $461,350 for four-family properties. A mortgage loan
secured by a second lien is considered to have a conforming balance if (a) the
original principal balance of the mortgage loan was no more than $120,000 and
(b) the sum of the original principal balance of the second lien loan and the
related senior lien loan amount, at the time of the origination of the second
lien loan, is not more than $240,000 for single-family properties, $307,100 for
two-family properties, $371,200 for three-family properties and $461,350 for
four-family properties, unless the related senior lien loan, at the time of
origination of the second lien loan, had a principal balance greater than
$240,000 for single-family properties, $307,100 for two-family properties,
$371,200 for three-family properties and $461,350 for four-family properties.
The loan rate borne by each adjustable-rate mortgage loan, or "ARM", is
subject to adjustment annually on the date set forth in the related mortgage
note to equal the sum of (i) the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year, as made available by the
Federal Reserve Board as of the date 45 days before the applicable rate
adjustment date (the "Loan Index") and (ii) the number of basis points set forth
in such mortgage note, or the margin, subject to rounding to the nearest
one-eighth of one percent and to the effects of the periodic cap, the applicable
maximum rate and the applicable minimum rate. The periodic cap limits changes in
the loan rate for each ARM on each rate adjustment date to 200 basis points. The
maximum rate is the maximum loan rate that may be borne by an ARM over its life
and is equal to the sum of (i) the initial loan rate for such ARM and (ii) 600
basis points. The minimum rate is the minimum loan rate that may be borne by an
ARM over its life and is equal to the initial loan rate for such ARM. The ARMs
do not provide for negative amortization.
S-30
<PAGE>
The combined loan-to-value ratio, or CLTV, with respect to each mortgage
loan, is equal to (A) the sum of (1) the original principal balance of such
mortgage loan at the date of origination plus (2) the remaining balance of the
senior lien, if any, at the date of origination of such mortgage loan divided by
(B) (1) in the case of a purchase money mortgage loan, the lesser of the
applicable sales price and the value of the related mortgaged property, based
upon the appraisal made at the time of origination of such mortgage loan or
(2) in the case of all other mortgage loans, the value of the related mortgaged
property, based upon the appraisal made at the time of origination of such
mortgage loan.
GROUP 1 MORTGAGE LOAN STATISTICS
The group 1 mortgage loans have the characteristics stated in this
paragraph and in the group 1 tables below. All information is expressed as of
the cut-off date and percentages are based on the group 1 balance unless
otherwise specified. All of the group 1 mortgage loans have conforming balances.
Approximately 85.41% of the mortgage loans are secured by first liens, and
approximately 14.59% of the mortgage loans are secured by second liens.
Approximately 66.15% of the mortgage loans require monthly payments of principal
that will fully amortize such mortgage loans by their respective maturity dates,
assuming all payments are received on the due date, and approximately 33.85% of
the mortgage loans are balloon loans having original terms to stated maturity of
up to 15 years and amortization schedules of up to 30 years, leaving a
substantial payment due at the stated maturity. No mortgage loan was 30 or more
days delinquent. Approximately 2.60% of the mortgage loans are subject to the
Home Ownership and Equity Protection Act. See "Risk Factors--Violations of
Lending Laws Could Result in Losses on Primary Assets" in the prospectus.
Approximately 89.18% of the mortgage loans have fixed loan rates and
approximately 10.82% of the mortgage loans are ARMS.
GROUP 1 CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE INITIAL CUT-OFF DATE DATE GROUP
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01 - $ 25,000.00......................... 324 $ 5,566,792.81 3.60%
25,000.01 - 50,000.00......................... 374 14,529,388.41 9.39
50,000.01 - 75,000.00......................... 333 20,712,023.88 13.38
75,000.01 - 100,000.00.......................... 273 23,988,901.84 15.50
100,000.01 - 125,000.00........................... 209 23,726,012.97 15.33
125,000.01 - 150,000.00........................... 152 20,978,874.17 13.55
150,000.01 - 175,000.00........................... 95 15,407,224.11 9.95
175,000.01 - 200,000.00........................... 77 14,354,909.24 9.27
200,000.01 - 225,000.00........................... 35 7,405,924.39 4.78
225,000.01 - 250,000.00........................... 30 7,027,886.33 4.54
250,000.01 - 275,000.00........................... 3 797,746.85 0.52
275,000.01 - 300,000.00........................... 1 284,530.79 0.18
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The maximum principal balance was $284,530.79, the minimum principal balance was
$7,946.32 and the average principal balance was $81,206.83.
S-31
<PAGE>
GROUP 1 GEOGRAPHIC DISTRIBUTION BY STATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Connecticut......................................... 106 $ 8,612,588.41 5.56%
Delaware............................................ 12 1,055,039.59 0.68
District of Columbia................................ 7 664,087.12 0.43
Illinois............................................ 106 9,040,786.39 5.84
Indiana............................................. 2 170,959.43 0.11
Maryland............................................ 90 6,924,058.12 4.47
Massachusetts....................................... 312 28,744,233.18 18.57
Michigan............................................ 14 678,352.05 0.44
New Hampshire....................................... 16 869,655.46 0.56
New Jersey.......................................... 496 37,883,276.79 24.48
New York............................................ 480 41,526,695.69 26.83
Ohio................................................ 1 63,600.00 0.04
Pennsylvania........................................ 189 13,258,717.99 8.57
Rhode Island........................................ 44 3,297,610.90 2.13
Virginia............................................ 25 1,577,032.68 1.02
Wisconsin........................................... 6 413,521.99 0.27
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The geographic distribution was determined by the property address in the
related mortgage.
GROUP 1 COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01%-10.00%........................................ 1 $ 10,000.00 0.01%
10.01-20.00......................................... 10 575,856.68 0.37
20.01-30.00......................................... 39 2,397,777.10 1.55
30.01-40.00......................................... 59 3,363,190.27 2.17
40.01-50.00......................................... 80 4,943,932.95 3.19
50.01-60.00......................................... 126 9,051,664.98 5.85
60.01-70.00......................................... 195 15,046,617.75 9.72
70.01-80.00......................................... 829 73,744,432.45 47.64
80.01-90.00......................................... 567 45,646,743.61 29.49
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The weighted average combined loan-to-value ratio was approximately 74.595%.
S-32
<PAGE>
GROUP 1 LOAN RATES
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.501%-8.000%....................................... 5 $ 544,536.63 0.35%
8.001 -8.500........................................ 63 7,682,370.40 4.96
8.501 -9.000........................................ 164 20,800,550.48 13.44
9.001 -9.500........................................ 223 26,753,714.94 17.28
9.501 -10.000....................................... 278 29,348,436.28 18.96
10.001 -10.500....................................... 136 12,413,901.98 8.02
10.501 -11.000....................................... 192 16,348,736.34 10.56
11.001 -11.500....................................... 160 9,886,827.30 6.39
11.501 -12.000....................................... 148 7,847,710.89 5.07
12.001 -12.500....................................... 94 5,483,647.86 3.54
12.501 -13.000....................................... 117 5,744,176.34 3.71
greater than 13.000.................................. 326 11,925,606.35 7.70
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The loan rates ranged from 7.750% to 16.625% and the weighted average loan rate
was approximately 10.408%.
GROUP 1 ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
ORIGINAL TERM INITIAL CUT-OFF DATE DATE GROUP
TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
49-60.............................................. 30 $ 733,053.54 0.47%
73-84.............................................. 15 451,892.23 0.29
109-120............................................. 187 5,730,225.73 3.70
169-180............................................. 1,011 79,976,094.29 51.67
229-240............................................. 489 48,191,228.53 31.14
349-360............................................. 174 19,697,721.47 12.73
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The original term to stated maturity ranged from 60 months to 360 months and the
weighted average original term to scheduled maturity was approximately
219 months.
Each group 1 mortgage loan was originated on or after September 3, 1997.
S-33
<PAGE>
GROUP 1 REMAINING TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
REMAINING TERM INITIAL CUT-OFF DATE DATE GROUP
TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
37-48.............................................. 1 $ 9,722.84 0.01%
49-60.............................................. 29 723,330.70 0.47
73-84.............................................. 15 451,892.23 0.29
97-108............................................. 4 124,399.53 0.08
109-120............................................. 183 5,605,826.20 3.62
157-168............................................. 23 1,365,166.93 0.88
169-180............................................. 988 78,610,927.36 50.79
217-228............................................. 9 928,001.92 0.60
229-240............................................. 480 47,263,226.61 30.54
349-360............................................. 174 19,697,721.47 12.73
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The remaining term to stated maturity ranged from 39 months to 360 months and
the weighted average remaining term to stated maturity was approximately
216 months.
The last scheduled maturity date for a group 1 mortgage loan is August 30, 2029.
GROUP 1 SEASONING
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
SEASONING (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0................................................. 526 $ 39,400,420.11 25.46%
1-6................................................ 1,279 107,143,941.06 69.22
7-12............................................... 70 6,243,740.07 4.03
13-18............................................... 11 932,349.07 0.60
19-24............................................... 20 1,059,765.48 0.68
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
GROUP 1 PROPERTY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Attached.............................. 163 $ 10,180,041.09 6.58%
Single Family Detached.............................. 1,478 120,908,985.73 78.12
Condo Low Rise...................................... 71 4,527,236.08 2.92
2 Family............................................ 152 14,336,759.34 9.26
3 Family............................................ 34 3,729,025.96 2.41
4 Family............................................ 8 1,098,167.59 0.71
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-34
<PAGE>
GROUP 1 OCCUPANCY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Primary Home........................................ 1,827 $148,556,105.56 95.98%
Investment.......................................... 73 5,722,961.74 3.70
Second Home......................................... 6 501,148.49 0.32
------ --------------- -------
Total:.................................. 1,906 $154,780,215.79 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The occupancy type was based upon representations made by the borrowers at the
time of origination of the mortgage loans.
GROUP 1 MARGINS
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MARGIN MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------ -------------- ----------------- -----------------
<S> <C> <C> <C>
4.501%-5.000%....................................... 76 $ 8,474,082.26 50.58%
5.001 -5.500........................................ 1 76,962.12 0.46
5.501 -6.000........................................ 51 4,660,231.29 27.82
6.001 -6.500........................................ 5 140,609.53 0.84
6.501 -7.000........................................ 30 2,650,862.60 15.82
7.001 -7.500........................................ 1 51,684.81 0.31
7.501 -8.000........................................ 7 259,552.23 1.55
8.001 -8.500........................................ 4 438,486.18 2.62
------ --------------- -------
Total:.................................. 175 $ 16,752,471.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 1 mortgage loans that have adjustable loan
rates.
The margins ranged from 4.850% to 8.100% and the weighted average margin was
approximately 5.526%.
GROUP 1 NEXT RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
% OF CUT-OFF
NEXT RATE INITIAL CUT-OFF DATE DATE GROUP
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
September 1999...................................... 1 $ 51,684.81 0.31%
April 2000.......................................... 1 179,559.19 1.07
May 2000............................................ 28 2,538,783.52 15.15
June 2000........................................... 43 4,533,642.02 27.06
July 2000........................................... 39 3,386,410.21 20.21
August 2000......................................... 63 6,062,391.27 36.19
------ --------------- -------
Total:.................................. 175 $ 16,752,471.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 1 mortgage loans that have adjustable loan
rates.
S-35
<PAGE>
GROUP 1 MAXIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MAXIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
14.001%-14.500%...................................... 6 $ 789,816.39 4.71%
14.501 -15.000....................................... 69 7,604,265.87 45.39
15.001 -15.500....................................... 20 2,132,086.36 12.73
15.501 -16.000....................................... 34 2,703,716.35 16.14
16.001 -16.500....................................... 6 307,694.36 1.84
16.501 -17.000....................................... 27 2,313,168.47 13.81
17.001 -17.500....................................... 4 265,961.12 1.59
17.501 -18.000....................................... 6 296,217.39 1.77
18.001 -18.500....................................... 2 188,544.71 1.13
19.001 -19.500....................................... 1 151,000.00 0.90
------ --------------- -------
Total:................................... 175 $ 16,752,471.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 1 mortgage loans that have adjustable loan
rates.
The maximum rates ranged from 14.500% to 19.125% and the weighted average
maximum rate was approximately 15.493%.
GROUP 1 MINIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MINIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
8.001%-8.500%....................................... 6 $ 789,816.39 4.71%
8.501-9.000......................................... 69 7,604,265.87 45.39
9.001-9.500......................................... 20 2,132,086.36 12.73
9.501-10.000........................................ 34 2,703,716.35 16.14
10.001-10.500....................................... 6 307,694.36 1.84
10.501-11.000....................................... 27 2,313,168.47 13.81
11.001-11.500....................................... 4 265,961.12 1.59
11.501-12.000....................................... 6 296,217.39 1.77
12.001-12.500....................................... 2 188,544.71 1.13
13.001-13.500....................................... 1 151,000.00 0.90
------ --------------- -------
Total:.................................. 175 $ 16,752,471.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 1 mortgage loans that have adjustable loan
rates.
The minimum rates ranged from 8.500% to 13.125% and the weighted average minimum
rate was approximately 9.493%.
Subsequent Loan Criteria--Group 1._Following the addition of the subsequent
mortgage loans, the group 1 mortgage loans in the aggregate will have the
following characteristics as of the end of the pre-funding period, unless waived
by the note insurer:
(a) the weighted average combined loan-to-value ratio will not exceed
74.76%;
(b) the weighted average loan rate will be no less than 10.35%;
(c) each mortgage loan will have a conforming original principal balance
and an outstanding principal balance of no more than $325,000;
S-36
<PAGE>
(d) each mortgage loan must either be a fully amortizing loan with level
payments over 15 or 30 years, or a loan with a 15-year ballon
maturity; no more than 33.92% of the mortgage loans will have balloon
maturities;
(e) no more than 51.42% of the mortgaged properties will be located in New
York and New Jersey;
(f) no more than 14.75% of the mortgage loans will be second lien mortgage
loans;
(g) no more than 11.55% of the mortgage loans will be adjustable rate
mortgage loans;
(h) no less than 95.85% of the mortgaged properties will be the primary
home of the related borrower;
(i) no less than 77.94% of the mortgaged properties will be single-family
detached homes; and
(j) no subsequent mortgage loan will be more than thirty days delinquent
as of the delivery date of such loan.
S-37
<PAGE>
GROUP 2 MORTGAGE LOAN STATISTICS
The group 2 mortgage loans have the characteristics stated in this
paragraph and in the group 2 tables below. All information is expressed as of
the cut-off date and percentages are based on the group 2 balance unless
otherwise specified. Approximately 16.13% of the group 2 mortgage loans have
conforming balances. Approximately 77.85% of the mortgage loans are secured by
first liens, and approximately 22.15% of the mortgage loans are secured by
second liens. Approximately 58.34% of the mortgage loans require monthly
payments of principal that will fully amortize such mortgage loans by their
respective maturity dates, assuming all payments are received on the due date,
and approximately 41.66% of the mortgage loans are balloon loans having original
terms to stated maturity of up to 15 years and amortization schedules of up to
30 years, leaving a substantial payment due at the stated maturity. No mortgage
loan was 30 or more days delinquent. Approximately 2.33% of the mortgage loans
are subject to the Home Ownership and Equity Protection Act. See "Risk
Factors--Violations of Lending Laws Could Result in Losses on Primary Assets" in
the prospectus. Approximately 90.15% of the mortgage loans have fixed loan rates
and approximately 9.85% of the mortgage loans are ARMs.
GROUP 2 CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE INITIAL CUT-OFF DATE DATE GROUP
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01-$25,000.00................................ 103 $ 1,950,883.98 5.05%
25,000.01- 50,000.00................................ 151 5,097,557.58 13.18
50,000.01- 75,000.00................................ 18 1,124,686.54 2.91
75,000.01-100,000.00................................ 10 899,004.86 2.33
100,000.01-125,000.00................................ 10 1,155,223.18 2.99
125,000.01-150,000.00................................ 9 1,292,963.42 3.34
150,000.01-175,000.00................................ 6 960,711.13 2.48
175,000.01-200,000.00................................ 2 382,598.41 0.99
200,000.01-225,000.00................................ 4 855,322.97 2.21
225,000.01-250,000.00................................ 10 2,436,669.18 6.30
250,000.01-275,000.00................................ 16 4,128,593.21 10.68
275,000.01-300,000.00................................ 18 5,206,813.02 13.47
300,000.01-325,000.00................................ 6 1,847,685.92 4.78
325,000.01-350,000.00................................ 6 2,042,406.65 5.28
350,000.01-375,000.00................................ 5 1,817,010.99 4.70
375,000.01-400,000.00................................ 3 1,189,604.03 3.08
400,000.01-425,000.00................................ 1 410,717.89 1.06
425,000.01-450,000.00................................ 3 1,322,011.48 3.42
450,000.01-475,000.00................................ 1 451,178.33 1.17
475,000.01-500,000.00................................ 3 1,491,299.78 3.86
500,000.01-525,000.00................................ 3 1,524,355.45 3.94
525,000.01-550,000.00................................ 2 1,077,464.73 2.79
---- --------------- -------
Total:................................... 390 $ 38,664,762.73 100.00%
---- --------------- -------
---- --------------- -------
</TABLE>
- ------------------
The maximum principal balance was $540,000.00, the minimum principal balance was
$5,841.92 and the average principal balance was $99,140.42.
S-38
<PAGE>
GROUP 2 GEOGRAPHIC DISTRIBUTION BY STATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Connecticut.......................................... 22 $ 3,576,379.12 9.25%
Delaware............................................. 3 81,537.93 0.21
District of Columbia................................. 3 851,710.12 2.20
Illinois............................................. 12 1,599,519.52 4.14
Maryland............................................. 22 1,777,223.95 4.60
Massachusetts........................................ 30 2,977,243.08 7.70
New Hampshire........................................ 2 69,400.00 0.18
New Jersey........................................... 111 11,247,611.79 29.09
New York............................................. 98 13,010,884.24 33.65
Pennsylvania......................................... 71 2,347,834.28 6.07
Rhode Island......................................... 9 471,740.34 1.22
Virginia............................................. 5 585,888.51 1.52
Wisconsin............................................ 2 67,789.85 0.18
---- --------------- -------
Total:................................... 390 $ 38,664,762.73 100.00%
---- --------------- -------
---- --------------- -------
</TABLE>
- ------------------
The geographic distribution was determined by the property address in the
related mortgage.
GROUP 2 COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE DATE GROUP
COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01%-10.00%........................................ 11 $ 157,204.36 0.41%
10.01 -20.00......................................... 48 1,094,296.68 2.83
20.01 -30.00......................................... 41 1,075,610.18 2.78
30.01 -40.00......................................... 36 1,073,484.55 2.78
40.01 -50.00......................................... 31 2,128,790.29 5.51
50.01 -60.00......................................... 29 1,774,894.12 4.59
60.01 -70.00......................................... 27 2,838,568.16 7.34
70.01 -80.00......................................... 97 15,322,240.53 39.63
80.01 -90.00......................................... 70 13,199,673.86 34.14
------ --------------- -------
Total:................................... 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The weighted average combined loan-to-value ratio was approximately 71.888%.
S-39
<PAGE>
GROUP 2 LOAN RATES
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.501%- 8.000%...................................... 5 $ 1,361,616.40 3.52%
8.001 - 8.500....................................... 6 1,723,598.38 4.46
8.501 - 9.000....................................... 26 7,508,136.28 19.42
9.001 - 9.500....................................... 27 6,450,511.97 16.68
9.501 -10.000....................................... 79 5,012,019.58 12.96
10.001 -10.500....................................... 42 3,078,987.44 7.96
10.501 -11.000....................................... 45 3,344,238.53 8.65
11.001 -11.500....................................... 34 2,763,838.65 7.15
11.501 -12.000....................................... 29 2,406,959.51 6.23
12.001 -12.500....................................... 22 1,572,839.08 4.07
12.501 -13.000....................................... 23 1,208,898.42 3.13
greater than 13.000.................................. 52 2,233,118.49 5.78
------ --------------- -------
Total:................................... 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The loan rates ranged from 7.625% to 16.250% and the weighted average loan rate
was approximately 10.222%.
GROUP 2 ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
ORIGINAL TERM TO INITIAL CUT-OFF DATE DATE GROUP
STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
49-60.............................................. 18 $ 372,811.55 0.96%
73-84.............................................. 9 261,376.93 0.68
109-120............................................. 60 1,656,221.83 4.28
169-180............................................. 203 22,621,022.98 58.51
229-240............................................. 82 9,370,990.92 24.24
349-360............................................. 18 4,382,338.52 11.33
------ --------------- -------
Total:.................................. 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The original term to stated maturity ranged from 60 months to 360 months and the
weighted average original term to scheduled maturity was approximately
211 months.
Each group 2 mortgage loan was originated on or after July 23, 1997.
S-40
<PAGE>
GROUP 2 REMAINING TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
REMAINING TERM INITIAL CUT-OFF DATE DATE GROUP
TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
49-60.............................................. 18 $ 372,811.55 0.96%
73-84.............................................. 9 261,376.93 0.68
97-108............................................. 1 9,836.72 0.03
109-120............................................. 59 1,646,385.11 4.26
145-156............................................. 1 25,221.51 0.07
157-168............................................. 9 2,177,994.23 5.63
169-180............................................. 193 20,417,807.24 52.81
217-228............................................. 3 691,618.15 1.79
229-240............................................. 79 8,679,372.77 22.45
349-360............................................. 18 4,382,338.52 11.33
------ --------------- -------
Total:.................................. 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The remaining term to stated maturity ranged from 49 months to 360 months and
the weighted average remaining term to stated maturity was approximately
207 months.
The last scheduled maturity date for a group 2 mortgage loan is August 27, 2029.
GROUP 2 SEASONING
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
SEASONING (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0................................................... 102 $ 5,954,028.88 15.40%
1-6................................................. 249 24,666,375.19 63.80
7-12................................................ 27 5,291,036.08 13.68
13-18............................................... 9 2,680,860.69 6.93
19-24............................................... 2 47,240.38 0.12
25-30............................................... 1 25,221.51 0.07
------ --------------- -------
Total:.................................. 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
GROUP 2 PROPERTY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Attached.............................. 75 $ 2,297,383.97 5.94%
Single Family Detached.............................. 261 31,368,246.89 81.13
Condo Low Rise...................................... 23 2,049,324.93 5.30
2 Family............................................ 19 1,396,724.81 3.61
3 Family............................................ 3 568,608.83 1.47
4 Family............................................ 2 59,330.68 0.15
5 Family............................................ 2 369,520.24 0.96
6 Family............................................ 2 210,963.14 0.55
7 Family............................................ 1 123,366.49 0.32
8 Family............................................ 2 221,292.75 0.57
------ --------------- -------
Total:.................................. 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
S-41
<PAGE>
GROUP 2 OCCUPANCY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Primary Home........................................ 350 $ 36,439,168.73 94.24%
Investment.......................................... 37 1,913,552.65 4.95
Second Home......................................... 3 312,041.35 0.81
------ --------------- -------
Total:.................................. 390 $ 38,664,762.73 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The occupancy type was based upon representations made by the borrowers at the
time of origination of the mortgage loans.
GROUP 2 MARGINS
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MARGIN MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------ -------------- ----------------- -----------------
<S> <C> <C> <C>
4.501%-5.000%....................................... 7 $ 2,065,298.14 54.23%
5.001 -5.500........................................ 2 300,817.95 7.90
5.501 -6.000........................................ 5 1,088,889.07 28.59
6.001 -6.500........................................ 3 147,653.42 3.88
6.501 -7.000........................................ 4 109,910.10 2.89
7.501 -8.000........................................ 1 70,800.00 1.86
9.001 -9.500........................................ 1 25,221.51 0.66
------ --------------- -------
Total:.................................. 23 $ 3,808,590.19 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflect those group 2 mortgage loans that have adjustable loan
rates.
The margins ranged from 4.850% to 9.225% and the weighted average margin was
approximately 5.298%.
GROUP 2 NEXT RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
% OF CUT-OFF
NEXT RATE INITIAL CUT-OFF DATE DATE GROUP
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
December 1999....................................... 1 $ 451,178.33 11.85%
January 2000........................................ 2 518,076.11 13.60
March 2000.......................................... 1 83,673.51 2.20
April 2000.......................................... 2 672,642.60 17.66
May 2000............................................ 2 430,261.23 11.30
June 2000........................................... 4 766,380.73 20.12
July 2000........................................... 7 201,677.68 5.30
August 2000......................................... 4 684,700.00 17.98
------ --------------- -------
Total:.................................. 23 $ 3,808,590.19 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 2 mortgage loans that have adjustable loan
rates.
S-42
<PAGE>
GROUP 2 MAXIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MAXIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
14.001%-14.500%...................................... 4 $ 1,190,718.71 31.26%
14.501 -15.000....................................... 4 1,325,757.76 34.81
15.001 -15.500....................................... 4 880,607.80 23.12
15.501 -16.000....................................... 4 165,974.31 4.36
16.001 -16.500....................................... 2 70,574.82 1.85
16.501 -17.000....................................... 3 78,935.28 2.07
17.501 -18.000....................................... 1 70,800.00 1.86
19.501 -20.000....................................... 1 25,221.51 0.66
------ --------------- -------
Total:............................................... 23 $ 3,808,590.19 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 2 mortgage loans that have adjustable loan
rates.
The maximum rates ranged from 14.500% to 19.750% and the weighted average
maximum rate was approximately 15.050%.
GROUP 2 MINIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MINIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
8.001%-8.500%....................................... 4 $ 1,190,718.71 31.26%
8.501 -9.000........................................ 4 1,325,757.76 34.81
9.001 -9.500........................................ 4 880,607.80 23.12
9.501 -10.000....................................... 4 165,974.31 4.36
10.001 -10.500....................................... 2 70,574.82 1.85
10.501 -11.000....................................... 3 78,935.28 2.07
11.501 -12.000....................................... 1 70,800.00 1.86
13.501 -14.000....................................... 1 25,221.51 0.66
------ --------------- -------
Total:................................... 23 $ 3,808,590.19 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 2 mortgage loans that have adjustable loan
rates.
The minimum rates ranged from 8.500% to 13.750% and the weighted average minimum
rate was approximately 9.050%.
Subsequent Loan Criteria--Group 2. Following the addition of the subsequent
mortgage loans, the group 2 mortgage loans in the aggregate will have the
following characteristics as of the end of the pre-funding period, unless waived
by the note insurer:
(a) the weighted average combined loan-to-value ratio will not exceed
72.05%;
(b) the weighted average loan rate will be no less than 10.15%;
(c) each mortgage loan will have an outstanding principal balance of no
more than $565,000;
(d) each mortgage loan must either be a fully amortizing loan with level
payments over 15 or 30 years, or a loan with a 15-year balloon
maturity; no more than 41.75% of the mortgage loans will have balloon
mortgages;
S-43
<PAGE>
(e) no more than 62.75% of the mortgaged properties will be located in New
York and New Jersey;
(f) no more than 22.35% of the mortgage loans will be second lien
mortgage loans;
(g) no more than 10.55%of the mortgage loans will be adjustable rate
mortgage loans;
(h) no less than 94.10% of the mortgaged properties will be the primary
home of the related borrower;
(i) no less than 80.95% of the mortgaged properties will be single-family
detached homes; and
(j) no subsequent mortgage loan will be more than thirty days delinquent
as of the delivery date of such loan.
GROUP 3 MORTGAGE LOAN STATISTICS
The group 3 mortgage loans have the characteristics stated in this
paragraph and in the group 3 tables below. All information is expressed as of
the cut-off date and percentages are based on the group 3 balance unless
otherwise specified. Approximately 88.08% of the group 3 mortgage loans have
conforming balances. Approximately 84.86% of the mortgage loans are secured by
first liens, and approximately 15.14% of the mortgage loans are secured by
second liens. Approximately 62.95% of the mortgage loans require monthly
payments of principal that will fully amortize such mortgage loans by their
respective maturity dates, assuming all payments are received on the due date,
and approximately 37.05% of the mortgage loans are balloon loans having original
terms to stated maturity of up to 15 years and amortization schedules of up to
30 years, leaving a substantial payment due at the stated maturity. No mortgage
loan was 30 or more days delinquent. Approximately 2.60% of the mortgage loans
are subject to the Home Ownership and Equity Protection Act. See "Risk
Factors--Violations of Lending Laws Could Result in Losses on Primary Assets" in
the prospectus. Approximately 88.22% of the mortgage loans have fixed loan rates
and approximately 11.78% of the mortgage loans are ARMs.
S-44
<PAGE>
GROUP 3 CUT-OFF DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
% OF CUT-OFF
CUT-OFF DATE INITIAL CUT-OFF DATE DATE GROUP
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
$ 0.01-$25,000.00............................... 157 $ 2,806,455.54 3.63%
25,000.01- 50,000.00............................... 216 8,153,009.31 10.54
50,000.01- 75,000.00............................... 139 8,730,966.80 11.28
75,000.01-100,000.00............................... 103 9,102,306.04 11.76
100,000.01-125,000.00............................... 101 11,416,920.59 14.75
125,000.01-150,000.00............................... 66 9,082,325.23 11.74
150,000.01-175,000.00............................... 36 5,807,432.34 7.50
175,000.01-200,000.00............................... 33 6,202,588.26 8.01
200,000.01-225,000.00............................... 25 5,355,931.16 6.92
225,000.01-250,000.00............................... 10 2,332,815.64 3.01
250,000.01-275,000.00............................... 8 2,085,038.39 2.69
275,000.01-300,000.00............................... 5 1,447,990.96 1.87
300,000.01-325,000.00............................... 6 1,868,268.56 2.41
325,000.01-350,000.00............................... 4 1,341,474.29 1.73
350,000.01-375,000.00............................... 2 715,290.75 0.92
375,000.01-400,000.00............................... 1 390,172.17 0.50
525,000.01-550,000.00............................... 1 548,391.99 0.71
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The maximum principal balance was $548,391.99, the minimum principal balance was
$8,562.16 and the average principal balance was $84,761.64.
GROUP 3 GEOGRAPHIC DISTRIBUTION BY STATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INTIAL CUT-OFF DATE DATE GROUP
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Colorado............................................ 1 $ 169,901.77 0.22%
Connecticut......................................... 52 3,963,539.37 5.12
Delaware............................................ 5 312,698.84 0.40
District of Columbia................................ 1 72,105.15 0.09
Illinois............................................ 50 4,188,789.16 5.41
Maryland............................................ 41 3,505,563.26 4.53
Massachusetts....................................... 148 14,580,343.11 18.84
Michigan............................................ 10 487,655.94 0.63
New Hampshire....................................... 6 744,690.84 0.96
New Jersey.......................................... 231 17,944,057.69 23.19
New York............................................ 214 20,241,279.21 26.16
Ohio................................................ 1 70,000.00 0.09
Pennsylvania........................................ 117 8,405,965.89 10.86
Rhode Island........................................ 25 1,962,679.50 2.54
Virginia............................................ 7 545,939.29 0.71
Wisconsin........................................... 4 192,169.00 0.25
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The geographic distribution was determined by the property address in the
related mortgage.
S-45
<PAGE>
GROUP 3 COMBINED LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
COMBINED LOAN-TO-VALUE RATIOS MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ----------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0.01%-10.00%........................................ 4 $ 61,243.47 0.08%
10.01-20.00......................................... 32 882,432.95 1.14
20.01-30.00......................................... 25 1,049,145.76 1.36
30.01-40.00......................................... 34 1,746,837.45 2.26
40.01-50.00......................................... 34 2,249,540.84 2.91
50.01-60.00......................................... 59 4,600,126.31 5.94
60.01-70.00......................................... 90 7,990,262.81 10.33
70.01-80.00......................................... 357 33,891,744.35 43.79
80.01-90.00......................................... 278 24,916,044.08 32.20
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The weighted average combined loan-to-value ratio was approximately 74.184%.
GROUP 3 LOAN RATES
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
7.501%-8.000%....................................... 4 $ 827,963.03 1.07%
8.001 -8.500........................................ 24 3,380,220.59 4.37
8.501 -9.000........................................ 86 11,552,258.20 14.93
9.001 -9.500........................................ 92 12,707,801.36 16.42
9.501 -10.000....................................... 139 13,307,438.09 17.20
10.001 -10.500....................................... 67 6,581,456.70 8.50
10.501 -11.000....................................... 107 8,044,078.90 10.39
11.001 -11.500....................................... 90 5,786,571.70 7.48
11.501 -12.000....................................... 67 3,920,588.90 5.07
12.001 -12.500....................................... 44 2,698,505.76 3.49
12.501 -13.000....................................... 51 2,295,099.81 2.97
greater than 13.000.................................. 142 6,285,394.98 8.12
------ --------------- -------
Total:................................... 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The loan rates ranged from 7.625% to 16.500% and the weighted average loan rate
was approximately 10.398%.
S-46
<PAGE>
GROUP 3 ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
ORIGINAL TERM INITIAL CUT-OFF DATE DATE GROUP
TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
49-60............................................... 18 $ 369,631.17 0.48%
73-84............................................... 13 344,617.74 0.45
109-120............................................. 96 3,301,694.12 4.27
169-180............................................. 491 41,900,788.72 54.14
229-240............................................. 214 21,150,201.43 27.33
349-360............................................. 81 10,320,444.84 13.34
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The original term to stated maturity ranged from 60 months to 360 months and the
weighted average original term to scheduled maturity was approximately
217 months.
Each group 3 mortgage loan was originated on or after June 23, 1997.
GROUP 3 REMAINING TERM TO STATED MATURITY
<TABLE>
<CAPTION>
% OF CUT-OFF
REMAINING TERM INTIAL CUT-OFF DATE DATE GROUP
TO STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
49-60.............................................. 18 $ 369,631.17 0.48%
61-72.............................................. 1 22,389.66 0.03
73-84.............................................. 12 322,228.08 0.42
97-108............................................. 2 42,848.40 0.06
109-120............................................. 94 3,258,845.72 4.21
157-168............................................. 11 1,192,542.65 1.54
169-180............................................. 480 40,708,246.07 52.60
205-216............................................. 1 121,377.44 0.16
217-228............................................. 9 1,322,752.18 1.71
229-240............................................. 204 19,706,071.81 25.46
337-348............................................. 1 306,437.86 0.40
349-360............................................. 80 10,014,006.98 12.94
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The remaining term to stated maturity ranged from 49 months to 360 months and
the weighted average remaining term to stated maturity was approximately
214 months.
The last scheduled maturity date for a group 3 mortgage loan is August 30, 2029.
S-47
<PAGE>
GROUP 3 SEASONING
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
SEASONING (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
0................................................ 252 $ 20,003,049.26 25.85%
1-6................................................ 589 50,089,733.96 64.73
7-12............................................... 50 4,413,437.62 5.70
13-18............................................... 11 1,297,392.39 1.68
19-24............................................... 10 1,462,387.35 1.89
25-30............................................... 1 121,377.44 0.16
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
GROUP 3 PROPERTY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Attached.............................. 77 $ 3,843,487.38 4.97%
Single Family Detached.............................. 703 61,322,368.14 79.24
Condo Low Rise...................................... 35 2,183,250.64 2.82
2 Family............................................ 72 6,534,664.12 8.44
3 Family............................................ 24 3,272,948.94 4.23
4 Family............................................ 2 230,658.80 0.30
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
GROUP 3 OCCUPANCY TYPE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- -------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Primary Home........................................ 872 $ 74,644,839.91 96.46%
Investment.......................................... 34 2,301,449.00 2.97
Second Home......................................... 7 441,089.11 0.57
------ --------------- -------
Total:.................................. 913 $ 77,387,378.02 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
The occupancy type was based upon representations made by the borrowers at the
time of origination of the mortgage loans.
S-48
<PAGE>
GROUP 3 MARGINS
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MARGIN MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------ -------------- ----------------- -----------------
<S> <C> <C> <C>
4.501%-5.000%........................................ 37 $ 4,720,745.94 51.78%
5.501 -6.000......................................... 17 1,923,703.42 21.10
6.001 -6.500......................................... 2 111,936.28 1.23
6.501 -7.000......................................... 18 2,111,852.48 23.16
7.501 -8.000......................................... 5 188,966.17 2.07
8.501 -9.000......................................... 1 60,000.00 0.66
------ --------------- -------
Total:................................... 80 $ 9,117,204.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 3 mortgage loans that have adjustable loan
rates.
The margins ranged from 4.725% to 8.850% and the weighted average margin was
approximately 5.569%.
GROUP 3 NEXT RATE ADJUSTMENT DATE
<TABLE>
<CAPTION>
% OF CUT-OFF
NEXT RATE INITIAL CUT-OFF DATE DATE GROUP
ADJUSTMENT DATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- --------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
September 1999...................................... 1 $ 50,766.37 0.56%
December 1999....................................... 2 593,055.07 6.50
January 2000........................................ 1 279,032.12 3.06
April 2000.......................................... 1 138,659.58 1.52
May 2000............................................ 15 1,662,131.95 18.23
June 2000........................................... 13 1,187,198.49 13.02
July 2000........................................... 25 2,959,029.42 32.46
August 2000......................................... 22 2,247,331.29 24.65
------ --------------- -------
Total:.................................. 80 $ 9,117,204.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 3 mortgage loans that have adjustable loan
rates.
S-49
<PAGE>
GROUP 3 MAXIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MAXIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
13.501%-14.000%..................................... 1 $ 286,617.21 3.14%
14.001 -14.500....................................... 6 616,412.49 6.76
14.501 -15.000....................................... 29 3,511,278.38 38.51
15.001 -15.500....................................... 6 855,288.55 9.38
15.501 -16.000....................................... 12 1,374,852.73 15.08
16.001 -16.500....................................... 3 390,968.40 4.29
16.501 -17.000....................................... 17 1,832,820.36 20.10
17.501 -18.000....................................... 5 188,966.17 2.07
18.501 -19.000....................................... 1 60,000.00 0.66
------ --------------- -------
Total:................................... 80 $ 9,117,204.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 3 mortgage loans that have adjustable loan
rates.
The maximum rates ranged from 13.990% to 18.990% and the weighted average
maximum rate was approximately 15.506%.
GROUP 3 MINIMUM RATE
<TABLE>
<CAPTION>
% OF CUT-OFF
INITIAL CUT-OFF DATE DATE GROUP
MINIMUM RATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
- ------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
7.501%-8.000%....................................... 1 $ 286,617.21 3.14%
8.001-8.500......................................... 6 616,412.49 6.76
8.501-9.000......................................... 29 3,511,278.38 38.51
9.001-9.500......................................... 6 855,288.55 9.38
9.501-10.000........................................ 12 1,374,852.73 15.08
10.001-10.500....................................... 3 390,968.40 4.29
10.501-11.000....................................... 17 1,832,820.36 20.10
11.501-12.000....................................... 5 188,966.17 2.07
12.501-13.000....................................... 1 60,000.00 0.66
------ --------------- -------
Total:.................................. 80 $ 9,117,204.29 100.00%
------ --------------- -------
------ --------------- -------
</TABLE>
- ------------------
This table only reflects those group 3 mortgage loans that have adjustable loan
rates.
The minimum rates ranged from 7.990% to 12.990% and the weighted average minimum
rate was approximately 9.506%.
Subsequent Loan Criteria--Group 3._Following the addition of the subsequent
mortgage loans, the group 3 mortgage loans in the aggregate will have the
following characteristics as of the end of the pre-funding period, unless waived
by the note insurer:
(a) the weighted average combined loan-to-value ratio will not exceed
74.35%;
(b) the weighted average loan rate will be no less than 10.35%;
(c) each mortgage loan will have an outstanding principal balance of no
more than $575,000;
S-50
<PAGE>
(d) each mortgage loan must either be a fully amortizing loan with level
payments over 15 or 30 years, or a loan with a 15-year balloon
maturity; no more than 37.15% of the mortgage loans will have balloon
maturities;
(e) no more than 49.46% of the mortgaged properties will be located in New
York and New Jersey;
(f) no more than 15.30% of the mortgage loans will be second lien mortgage
loans;
(g) no more than 12.50% of the mortgage loans will be adjustable rate
mortgage loans;
(h) no less than 96.30% of the mortgage properties will be the primary
home of the related borrower;
(i) no less than 79.05% of the mortgaged properties will be single-family
detached homes; and
(j) no subsequent mortgage loan will be more than thirty days delinquent
as of the delivery date of such loan.
S-51
<PAGE>
DESCRIPTION OF THE NOTES
The trust will issue the notes pursuant to an indenture. The trust will
also issue three interest-only Senior Interest Participations and Transferor
Interest pursuant to the trust agreement. The indenture, the trust agreement and
the sale and servicing agreement are collectively referred to as the
"Agreements" herein. The forms of the Agreements have been filed as exhibits to
the registration statement of which this prospectus supplement and the
prospectus are a part. The following summaries describe the material provisions
of the Agreements. Wherever particular sections or defined terms of the
Agreements are referred to, such sections or defined terms are hereby
incorporated herein by reference.
GENERAL
The notes will be issued in minimum denominations of $25,000 and multiples
of $1,000 in excess thereof and will represent non-recourse obligations of the
trust.
Definitive notes, if issued, will be transferable and exchangeable at the
corporate trust office of the indenture trustee, which will initially act as
note registrar. See "--Book-Entry Notes" below. No service charge will be made
for any registration of exchange or transfer of notes, but the indenture trustee
may require payment of a sum sufficient to cover any tax or other governmental
charge.
As of the closing date, each class of notes will have the original note
principal balance stated on page S-3. The principal amount of each class of
notes, or the note principal balance, on any payment date is equal to the
original note principal balance of such notes minus the aggregate of amounts
actually distributed as principal to the related noteholders. As of the closing
date, the notional principal balance of each Senior Interest Participation will
equal the sum of the related cut-off date group balance and the pre-funded
amount allocable to that group. The notional principal balance of a Senior
Interest Participation on any payment date is equal to the related group balance
of the mortgage loans as of the end of the second preceding due period and any
remaining pre-funded amounts allocable to that group.
Only the notes are being offered hereby. The Senior Interest
Participations, together with the Transferor Interest, are not offered hereby
and will be held by the transferor. The "transferor" is the person in whose name
the Senior Interest Participations and the Transferor Interest is registered,
which will initially be Champion or an affiliate thereof.
The person in whose name a note is registered as such in the note register
is referred to herein as a "noteholder."
BOOK-ENTRY NOTES
The offered notes will be book-entry notes. Persons acquiring beneficial
ownership interests in the offered notes, or beneficial owners, will hold their
offered notes through the DTC in the United States, or Cedelbank or Euroclear in
Europe if they are participants of those systems, or indirectly through
organizations which are participants in those systems. The book-entry notes will
be issued in one or more notes which equal the aggregate principal balance of
the offered notes and will initially be registered in the name of Cede & Co.,
the nominee of DTC. Cedelbank and Euroclear will hold omnibus positions on
behalf of their participants through customers' notes accounts in Cedelbank's
and Euroclear's names on the books of their respective depositaries which in
turn will hold such positions in customers' accounts in the depositaries' names
on the books of DTC. Citibank will act as depositary for Cedelbank and The Chase
Manhattan Bank will act as depositary for Euroclear. Investors may hold
beneficial interests in the book-entry notes in minimum denominations
representing note principal balances of $25,000 and in multiples of $1,000 in
excess thereof. Except as
S-52
<PAGE>
described below, no person acquiring a book-entry note will be entitled to
receive a physical, definitive note. Unless and until definitive notes are
issued, it is anticipated that the only noteholder of the offered notes will be
Cede, as nominee of DTC. Beneficial owners will not be noteholders as that term
is used in the sale and servicing agreement. Beneficial owners are only
permitted to exercise their rights indirectly through participants and DTC.
The beneficial owner's ownership of a book-entry note will be recorded on
the records of the brokerage firm, bank, thrift institution or other financial
intermediary that maintains the beneficial owner's account for such purpose. In
turn, the financial intermediary's ownership of that book-entry note will be
recorded on the records of DTC, or of a participating firm that acts as agent
for the financial intermediary, whose interest will in turn be recorded on the
records of DTC, if the beneficial owner's financial intermediary is not a DTC
participant and on the records of Cedelbank or Euroclear, as appropriate.
Beneficial owners will receive all distributions of principal of, and
interest on, the offered notes from the indenture trustee through DTC and DTC
participants. While the offered notes are outstanding, except under the
circumstances described below, under the rules, regulations and procedures
creating and affecting DTC and its operations, DTC is required to make book-
entry transfers among DTC participants on whose behalf it acts with respect to
the offered notes and is required to receive and transmit distributions of
principal of, and interest on, the offered notes. Participants and indirect
participants with whom beneficial owners have accounts with respect to offered
notes are similarly required to make book-entry transfers and receive and
transmit the distributions on behalf of their respective beneficial owners.
Accordingly, although beneficial owners will not possess notes, the DTC rules
provide a mechanism by which beneficial owners will receive distributions and
will be able to transfer their interest.
Because of time zone differences, credits of notes received in Cedelbank or
Euroclear as a result of a transaction with a DTC participant will be made
during subsequent notes settlement processing and dated the business day
following the DTC settlement date. Such credits or any transactions in such
notes settled during the processing will be reported to the relevant Euroclear
or Cedelbank participants on the business day. Cash received in Cedelbank or
Euroclear as a result of sales of notes by or through a Cedelbank participant or
Euroclear participant to a DTC participant will be received with value on the
DTC settlement date but will be available in the relevant Cedelbank 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 notes,
see "Federal Income Tax Consequences--Foreign Investors", "--Backup Withholding"
and "Schedule I" in this prospectus supplement.
Transfers between DTC participants will occur in accordance with DTC rules.
Transfers between Cedelbank 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 Cedelbank
participants or Euroclear participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the relevant depositary; however, cross market transactions
will require delivery of instructions to the relevant European international
clearing system by the counterparty in that 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 notes
in DTC, and making or receiving payment in accordance with normal
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procedures for same day funds settlement applicable to DTC. Cedelbank
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 notes, whether held for
its own account or as a nominee for another person. In general, beneficial
ownership of book-entry notes will be subject to the rules, regulations and
procedures governing DTC and DTC participants as in effect from time to time.
Cedelbank is incorporated under the laws of Luxembourg as a professional
depository. Cedelbank holds notes for its participating organizations and
facilitates the clearance and settlement of notes transactions between Cedelbank
participants through electronic book-entry changes in accounts of Cedelbank
participants, thereby eliminating the need for physical movement of notes.
Transactions may be settled in Cedelbank in any of 28 currencies, including
United States dollars. Cedelbank provides to its Cedelbank participants, among
other things, services for safekeeping, administration, clearance and settlement
of internationally traded notes and notes lending and borrowing. Cedelbank
interfaces with domestic markets in several countries. As a professional
depository, Cedelbank is subject to regulation by the Luxembourg Monetary
Institute. Cedelbank participants are recognized financial institutions around
the world, including underwriters, notes brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Indirect
access to Cedelbank is also available to others, such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship with
a Cedelbank participant, either directly or indirectly.
Euroclear was created in 1968 to hold notes for its 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 notes and any risk from lack of simultaneous
transfers of notes and cash. Transactions may be settled in any of 32
currencies, including United States dollars. Euroclear includes various other
services, including notes 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, 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 notes 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, notes 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.
Notes 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 notes and cash within Euroclear, withdrawals of notes and cash from
Euroclear, and receipts of payments with respect to notes in Euroclear.
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All notes in Euroclear are held on a fungible basis without attribution of
specific notes to specific notes 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.
Under a book-entry format, beneficial owners of the book-entry notes may
experience some delay in their receipt of payments, since such payments will be
forwarded by the trustee to Cede. Distributions with respect to notes held
through Cedelbank or Euroclear will be credited to the cash accounts of
Cedelbank participants or Euroclear participants in accordance with the relevant
system's rules and procedures, to the extent received by the relevant
depositary. Those distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "Federal Income Tax
Consequences--Foreign Investors" and "--Backup Withholding" herein. Because DTC
can only act on behalf of financial intermediaries, the ability of a beneficial
owner to pledge book-entry notes to persons or entities that do not participate
in the depository system, or otherwise take actions in respect of such
book-entry notes, may be limited due to the lack of physical notes for such
book-entry notes.
Monthly and annual reports on the trust fund will be provided to Cede, as
nominee of DTC, and may be made available by Cede to beneficial owners upon
request, in accordance with the rules, regulations and procedures creating and
affecting the depository, and to the financial intermediaries to whose DTC
accounts the book-entry notes of the beneficial owners are credited.
DTC has advised the trustee that, unless and until definitive notes are
issued, DTC will take any action permitted to be taken by the holders of the
book-entry notes under the sale and servicing agreement only at the direction of
one or more financial intermediaries to whose DTC accounts the book-entry notes
are credited, to the extent that actions are taken on behalf of financial
intermediaries whose holdings include those book-entry notes. Cedelbank or the
Euroclear operator, as the case may be, will take any other action permitted to
be taken by a noteholder under the sale and servicing agreement on behalf of a
Cedelbank participant or Euroclear participant only in accordance with its
relevant rules and procedures and subject to the ability of the relevant
depositary to effect actions on its behalf through DTC. DTC may take actions, at
the direction of the related participants, with respect to some notes which
conflict with actions taken with respect to other notes.
Definitive notes will be issued to beneficial owners of the book-entry
notes, or their nominees, rather than to DTC, only if:
o DTC or the trust advises the indenture 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
notes and the trust or the indenture trustee is unable to locate a
qualified successor,
o the Transferor, at its sole option, elects to terminate a book-entry
system through DTC or
o after the occurrence of an Event of Servicing Termination (as defined
herein), beneficial owners having percentage interests aggregating not
less than 51% of the note principal balance of the book-entry notes
advise the indenture 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.
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Upon the occurrence of any of the events described in the immediately
preceding sentence, the indenture trustee will be required to notify all
beneficial owners of the occurrence of such event and the availability through
DTC of definitive notes. Upon surrender by DTC of the global note or notes
representing the book-entry notes and instructions for re-registration, the
indenture trustee will issue definitive notes, and thereafter the indenture
trustee will recognize the holders of such definitive notes as noteholders under
the indenture.
Although DTC, Cedelbank and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of notes among participants of DTC,
Cedelbank and Euroclear, they are under no obligation to perform or continue to
perform such procedures and such procedures may be discontinued at any time.
DTC management is aware that some computer applications, systems, and the
like for processing data that are dependent upon calendar dates, including dates
before, on, and after January 1, 2000, may encounter Year 2000 problems. DTC has
informed its participants and other members of the financial community that it
has developed and is implementing a program so that its systems, as the same
relate to the timely payment of distributions to securityholders, book-entry
deliveries, and settlement of trades within DTC, continue to function
appropriately. This program includes a technical assessment and a remediation
plan, each of which is complete. Additionally, DTC's plan includes a testing
phase, which is expected to be completed within appropriate time frames.
However, DTC's ability to perform properly its services is also dependent
upon other parties, including but not limited to issuers and their agents, as
well as third party vendors from whom DTC licenses software and hardware, and
third party vendors on whom DTC relies for information or the provision of
services, including telecommunication and electrical utility service providers,
among others. DTC has informed the financial community that it is contacting and
will continue to contact third party vendors from whom DTC acquires services to:
(a) impress upon them the importance of such services being Year 2000 compliant;
and (b) determine the extent of their efforts for Year 2000 remediation and, as
appropriate, testing of their services. In addition, DTC is in the process of
developing such contingency plans as it deems appropriate.
According to DTC, the foregoing information with respect to DTC has been
provided to the financial community for informational purposes only and is not
intended to serve as a representation, warranty, or contract modification of any
kind.
ASSIGNMENT OF MORTGAGE LOANS
On the closing date, the depositor will transfer to the trust all of its
right, title and interest in and to each mortgage loan, the related mortgage
notes, the mortgages and other related documents (collectively, the "Related
Documents"), including all collections received on or with respect to each such
mortgage loan after the cut-off date. The trust, concurrently with such
transfer, will deliver or cause to be delivered the notes to the depositor and,
upon the depositor's order, the Senior Interest Participations and the
Transferor Interest to Champion or its designee. Each mortgage loan transferred
to the trust will be identified on a mortgage loan schedule which will be
attached as an exhibit to the indenture. The schedule will include information
as to the cut-off date principal balance of each mortgage loan, as well as
information with respect to the loan rate and other information.
The sale and servicing agreement will provide that, within the time period
specified therein, the seller will deliver or cause to be delivered to the
indenture trustee or, a custodian, as the indenture trustee's agent for such
purpose, the mortgage notes endorsed in blank and the Related Documents. In lieu
of delivery of original mortgages, if such original is not available,
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the seller may deliver or cause to be delivered true and correct copies thereof
which have been certified as to authenticity by the appropriate county recording
office where the mortgage is recorded.
Within 30 days of the closing date, the indenture trustee will review the
mortgage loans and the Related Documents pursuant to the sale and servicing
agreement and if any mortgage loan or Related Document is found to be defective
in any material respect and such defect is not cured within 90 days following
notification to the seller by the indenture trustee, the trust or the note
insurer, the seller will be obligated to either (a) substitute for such mortgage
loan an Eligible Substitute Mortgage Loan as provided in the sale and servicing
agreement or (b) purchase the mortgage loan at a price (the "Purchase Price")
equal to the outstanding principal balance of such mortgage loan as of the date
of purchase, plus all accrued and unpaid interest, computed at the loan rate,
plus the amount of any unreimbursed servicing advances made by the servicer. The
Purchase Price will be deposited in the collection account on or prior to the
next succeeding determination date after such obligation arises. The obligation
of the seller to repurchase or substitute for a defective mortgage loan is the
sole remedy regarding any defects in the mortgage loans and Related Documents
available to the owner trustee, indenture trustee or the noteholders.
In connection with the substitution of an Eligible Substitute Mortgage
Loan, the seller will be required to deposit in the collection account on or
prior to the next succeeding determination date after such obligation arises an
amount (the "Substitution Adjustment") equal to the excess of the principal
balance of the related defective mortgage loan over the principal balance of
such Eligible Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage substituted by the
seller for a defective mortgage loan which must, on the date of such
substitution:
o have an outstanding principal balance, or in the case of a substitution
of more than one mortgage loan for a defective mortgage loan, an
aggregate principal balance, not in excess of, and not more than 5% less
than, the principal balance of the defective mortgage loan;
o have a loan rate not less than the loan rate of the defective mortgage
loan and not more than 1% in excess of the loan rate of such defective
mortgage loan;
o have a mortgage of the same or higher level of priority as the mortgage
relating to the defective mortgage loan;
o have a remaining term to maturity not more than six months earlier and
not later than the remaining term to maturity of the defective mortgage
loan;
o comply with each representation and warranty as to the mortgage loans set
forth in the sale and servicing agreement (deemed to be made as of the
date of substitution);
o have the same type of interest rate, i.e., fixed or adjustable; and
o satisfy certain other conditions specified in the sale and servicing
agreement.
Champion will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
indenture trustee with respect to each mortgage loan, including, cut-off date
principal balance and the loan rate. In addition, Champion will represent and
warrant on the closing date that, among other things:
o at the time of transfer to the depositor, Champion has transferred or
assigned all of its rights, title and interest in each mortgage loan and
the Related Documents, free of any lien and
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o each mortgage loan complied, at the time of origination, in all material
respects with applicable state and federal laws.
Upon discovery of a breach of any such representation and warranty which
materially and adversely affects the interests of the noteholders or the note
insurer in the related mortgage loan and Related Documents, Champion will have a
period of 60 days after discovery or notice of the breach to effect a cure. If
the breach cannot be cured within the 60-day period, Champion will be obligated
to:
o substitute for such defective mortgage loan an Eligible Substitute
Mortgage Loan or
o purchase such defective mortgage loan from the trust.
The same procedure and limitations that are set forth in the two preceding
paragraphs for the substitution or purchase of defective mortgage loans in
connection with deficient documentation will apply to the substitution or
purchase of a mortgage loan in connection with a breach of a representation or
warranty by Champion that materially and adversely affects the interests of the
noteholders or the note insurer.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The servicer has the option, but is not obligated, to purchase from the
trust any mortgage loan 90 days or more delinquent (a "Delinquent Mortgage
Loan") at the Purchase Price.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The servicer shall establish and maintain in the name of the indenture
trustee a separate collection account, which shall be a trust account, for the
benefit of the noteholders, the Transferor and the note insurer, as their
interests may appear. The collection account will be an Eligible Account.
Subject to the investment provisions described in the following paragraphs and
subject to the procedures described in the immediately following paragraph, upon
receipt by the servicer of amounts in respect of the mortgage loans, excluding
amounts representing the servicing fee, reimbursement for monthly advances and
servicing advances and insurance proceeds to be applied to the restoration or
repair of a mortgaged property or similar items, the servicer will deposit such
amounts in the collection account within two business days of receipt. Amounts
deposited in the collection account may be invested in the Eligible Investments
described in the sale and servicing agreement maturing no later than one
business day prior to the date on which amounts on deposit therein are required
to be deposited in the distribution account or on such date if approved by the
rating agencies and the note insurer.
Notwithstanding the above paragraph, the servicer may commingle collections
held by it, may use such funds for its own purpose and may remit amounts
required to be remitted for a payment date to the collection account no later
than the third business day prior to such payment date, provided that the
following conditions are satisfied:
o Champion is the servicer,
o Key Bank USA has a rating with respect to short-term deposit obligations
of at least "A-1" by S&P and "P-1" by Moody's,
o no Event of Servicing Termination (as defined under "Description of the
Agreements--Events of Servicing Termination") under the sale and
servicing agreement has occurred and is continuing, and
o Key Bank USA has entered into a support agreement for the benefit of the
trust.
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If any of the conditions contained in this paragraph are not met, the servicer
will deposit all payments on mortgage loans and all proceeds of mortgage loans
collected during each due period into the collection account not later than two
business days after receipt. It is anticipated that on the closing date, Key
Bank USA will enter into a support agreement that will permit the servicer to
commingle funds. Pending deposit into the collection account, collections may be
invested by the servicer at its own risk and for its own benefit, and will not
be segregated from funds of the servicer. See "Risk Factors--Commingling Risk."
The indenture trustee will establish a distribution account into which will
be deposited amounts withdrawn from the collection account for payment to
noteholders and the Senior Interest Participations. 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
payment date.
An "Eligible Account" is a segregated account that is:
o maintained with a depository institution whose debt obligations at the
time of any deposit have the highest short-term debt rating by the rating
agencies and whose accounts are fully insured by either the Savings
Association Insurance Fund or the Bank Insurance Fund of the FDIC with a
minimum long-term unsecured debt rating of "A1" by Moody's and "A" by
S&P, and which is approved in writing by the note insurer and is any of:
o a federal savings and loan association duly organized, validly
existing and in good standing under the applicable banking laws of
any state,
o an institution or association duly organized, validly existing and in
good standing under the applicable banking laws of any state,
o a national banking association duly organized, validly existing and
in good standing under the federal banking laws or
o a principal subsidiary of a bank holding company;
o a segregated trust account maintained with the corporate trust department
of a federal or state chartered depository institution or trust company,
having capital and surplus of not less than $50,000,000, acting in its
fiduciary capacity; or
o otherwise acceptable to each rating agency and the note insurer as
evidenced by a letter from each rating agency and the note insurer to the
indenture trustee, without reduction or withdrawal of their then current
ratings of the notes without regard to the note policy.
Eligible Investments are specified in the sale and servicing agreement and
are limited to investments which are acceptable to the note insurer and meet the
criteria of each rating agency from time to time as being consistent with their
then current ratings of the notes.
MONTHLY ADVANCES; SERVICING ADVANCES
Not later than two business days prior to each payment date, the servicer
will advance to the indenture trustee for deposit in the distribution account an
amount, to be distributed on such payment date, equal to interest accrued on
each mortgage loan through the related due date for such mortgage loan but not
received by the servicer as of the close of business on the related
determination date, net of the servicing fee. The monthly advance 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 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:
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o the preservation, restoration and protection of the mortgaged properties,
o any enforcement or judicial proceedings, including foreclosures, and
o the management and liquidation of mortgaged properties acquired in
satisfaction of the related mortgage.
Each expenditure specified in the paragraph will constitute a servicing advance.
The servicer's right to reimbursement for unreimbursed 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 servicer from the related
mortgagor or otherwise relating to the mortgage loan in respect of which such
unreimbursed amounts are owed. The servicer's right to reimbursement for
unreimbursed monthly 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 servicer's right to such reimbursements is prior to
the rights of noteholders.
Notwithstanding the foregoing, the servicer is not required to make any
monthly advance or servicing advance if in the good faith judgment and sole
discretion of the servicer, the servicer determines that the 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 the mortgage
loan. If any servicing advance or monthly advance paid by the servicer is
determined by the servicer to be nonrecoverable from other sources, the amount
of such nonrecoverable advance may be reimbursed to the servicer from other
amounts on deposit in the collection account.
PAYMENTS ON THE NOTES
Beginning with the first payment date (which will occur on October 25,
1999), payments on the notes will be remitted by the indenture trustee or the
paying agent to the persons in whose names the notes are registered on the
record date, which is the close of business on the day prior to each payment
date or, if the notes are no longer in book-entry form, at the close of business
on the last day of the month preceding the payment date based solely upon the
information provided to the indenture trustee by the servicer on each payment
date. The term "payment date" means the 25th day of each month or, if such day
is not a business day, then the next succeeding business day. Payments will be
made by check or money order mailed (or upon the request of a noteholder owning
notes having denominations aggregating at least $1,000,000, by wire transfer or
otherwise) to the address of the person entitled thereto (which, in the case of
book-entry notes, will be DTC or its nominee) as it appears on the note register
in amounts calculated as described herein. However, the final payment in respect
of the notes will be made only upon presentation and surrender thereof at the
office or the agency of the indenture trustee specified in the notice to
noteholders of such final payment. For purposes of the Agreements, a "business
day" is any day other than (1) a Saturday or Sunday or (2) a day on which the
note insurer or banking institutions in the States of New Jersey, New York or
the state in which the corporate trust office of the indenture trustee is
located are required or authorized by law to be closed.
DEPOSITS TO THE DISTRIBUTION ACCOUNT
On each payment date, the following amounts in respect of the previous due
period shall be withdrawn from the collection account and deposited into the
distribution account:
(1) payments of principal and interest on the mortgage loans net of amounts
representing the servicing fee with respect to each mortgage loan and
reimbursement for related monthly advances and servicing advances;
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(2) net liquidation proceeds and insurance proceeds with respect to the
mortgage loans, net of amounts applied to the restoration or repair of
a mortgaged property;
(3) the Purchase Price for repurchased mortgage loans and any related
Substitution Adjustments; and
(4) payments from the servicer in connection with (a) monthly advances,
(b) prepayment interest shortfalls and (c) the termination of the trust
with respect to the mortgage loans as provided in the sale and
servicing agreement.
In addition, on each payment date, amounts paid under the note policy in respect
of the previous due period shall be deposited into the distribution account.
The "Available Funds" for a payment date and a group shall consist of the
amounts with respect to the group described in clauses (1) through (4) of the
preceding paragraph, together with the amounts with respect to the group
described in the immediately preceding sentence and any other amounts with
respect to the group on deposit in the distribution account that are available
to be distributed on such payment date, including any Capitalized Interest
Requirement as described in the sale and servicing agreement. See "--Capitalized
Interest Account" in this prospectus supplement. The Class I-A notes will be
entitled to distributions only to the extent of amounts deposited in the
distribution account in respect of the group 1 mortgage loans, the Class II-A
notes will be entitled to distributions only to the extent of amounts deposited
in the distribution account in respect of the group 2 mortgage loans and the
Class III-A notes will be entitled to distributions only to the extent of
amounts deposited in the distribution account in respect of the group 3 mortgage
loans, in each case subject to the crosscollateralization provision described
herein.
PRIORITY OF DISTRIBUTIONS
On each payment date, the indenture trustee or the paying agent will
withdraw from the distribution account the Available Funds for each group, and
make the following disbursements and transfers as described below with respect
to such group and to the extent of Available Funds for such group, except that
amounts paid under the note policy shall only be available for distribution to
noteholders and the Senior Interest Participations, in the following order of
priority:
(1) to the indenture trustee, the indenture trustee fee for that
payment date, to the owner trustee, the owner trustee fee for the payment
date, and to the note insurer, the amount owing to the note insurer under
the insurance agreement for the premium, in each case with respect to the
related group;
(2) concurrently, to the holders of the related notes and the
Transferor in respect of the related Senior Interest Participation, an
amount equal to the related Interest Distribution for such notes and Senior
Interest Participation for the payment date; provided, that any shortfall
in the amount required to be distributed hereunder will be allocated
between the related notes and Senior Interest Participation, pro rata, as
described under "--Interest" below;
(3) to the holders of the related notes, the Principal Distribution for
the payment date, other than the portion constituting Distributable Excess
Spread;
(4) to the note insurer, the amount owing to the note insurer under the
insurance agreement for reimbursement for prior draws made on the note
policy for the group including interest thereon;
(5) to the holders of the related notes, to the extent of Available
Funds remaining, the Distributable Excess Spread for the group for the
payment date;
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(6) to the servicer, the amount of any accrued and unpaid servicing fee
for such group;
(7) to the servicer, the amount of nonrecoverable advances not
previously reimbursed for the group;
(8) to the note insurer any other amounts owing to the note insurer for
the group under the insurance agreement;
(9) to the noteholders of the other groups to the extent of any
Crosscollateralization Payment; and
(10) to the Transferor Interest, the balance.
A "Crosscollateralization Payment" is made from one group to another when
the Available Funds for a group applied in the order described above is not
enough to pay the related class of notes and the related Senior Interest
Participation the Interest Distribution as a result of default on the mortgage
loans and amounts owing to the note insurer for reimbursement for draws on the
note policy plus interest thereon and when net losses on liquidated mortgage
loans incurred by another group during the related due period exceed the amount
of Excess Spread and overcollateralization for that other group. If only one
group is eligible for a Crosscollateralization Payment, the other two groups
shall contribute pro rata, based on the amount of excess available from each
contributing group after payment of items (1) through (8). If only two groups
are eligible for a Crosscollateralization Payment and the contribution from the
third group is insufficient to fully pay the two eligible groups, the two
eligible groups shall share pro rata, based on the amount of shortfall in each
group.
CALCULATION OF THE NOTE RATE AND THE SENIOR INTEREST PARTICIPATION RATE
The note rate for a payment date and each class of notes, will equal the
lesser of (a) the sum of (i) LIBOR, determined as specified herein, as of the
second LIBOR Business Day prior to the immediately preceding payment date (or as
of two LIBOR Business Days prior to the closing date, in the case of the first
payment date) plus (ii) the related Note Margin, and (b) 13.00% per annum. The
"Note Margin" with respect to:
(1) the Class I-A notes is equal to 0.33% per annum for any payment
date on or prior to the Optional Termination Date (as defined under
"Description of the Agreements--Termination; Retirement of the Notes"), or
0.66% per annum for any payment date after the Optional Termination Date,
(2) the Class II-A notes is equal to 0.40% per annum for any payment
date on or prior to the Optional Termination Date, or 0.80% per annum for
any payment date after the Optional Termination Date and
(3) the Class III-A notes is equal to 0.34% per annum for any payment
date on or prior to the Optional Termination Date, or 0.68% per annum for
any payment date after the Optional Termination Date.
The "Senior Interest Participation Rate" will equal 1.50% (or 1.00% for the
Senior Interest Participation related to group 2) per annum, for each payment
date from and including the first payment date to and including the payment date
in September 2000, 0.60% (or 0.50% for the Senior Interest Participation related
to group 2) per annum, for each payment date from and including the payment date
in October 2000 to and including the payment date in March 2001, and 0.10% per
annum, for each payment date thereafter.
The "Interest Period" means, with respect to each payment date and the
notes, the period from the payment date in the month preceding the month of such
payment date, or, in the case of the first payment date, from the closing date,
through the day before that payment date.
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Interest on the notes in respect of any payment date will accrue during the
related Interest Period on the basis of a 360-day year and the actual number of
days elapsed.
The "Interest Period" means, with respect to each payment date and the
Senior Interest Participations, the period from the first day of the calendar
month preceding the month of such payment date through the last day of such
calendar month. Interest on the Senior Interest Participations in respect of any
payment date will accrue during the related Interest Period on the basis of a
360-day year consisting of twelve 30-day months.
Calculation of the LIBOR Rates. With respect to any payment date, LIBOR
shall be established by the indenture trustee and as to any Interest Period,
LIBOR will equal the rate for United States dollar deposits for one month which
appears on the Telerate Screen Page 3750 as of 11:00 A.M., London time, on the
second LIBOR Business Day prior to the first day of the related Interest Period.
"Telerate Screen Page 3750" means the display designated as page 3750 on the
Telerate Service or a successor page. If the rate does not appear on that page,
the rate will be determined on the basis of the rates at which deposits in U.S.
Dollars are offered by three major banks in the London interbank market,
selected by the servicer, as of 11:00 A.M., London time, on the determination
date to prime banks in the London interbank market for a period of one month in
amounts approximately equal to the principal amount of the notes then
outstanding. The indenture trustee will request the principal London office of
each of the reference banks to provide a quotation of its rate. If at least two
such quotations are provided, the rate will be the arithmetic mean of the
quotations. If on such date fewer than two quotations are provided as requested,
the rate will be the arithmetic mean of the rates quoted by two or more major
banks in New York City, selected by the servicer after consultation with the
indenture trustee, as of 11:00 A.M., New York City time, on such date for loans
in U.S. Dollars to leading European banks for a period of one month in amounts
approximately equal to the principal amount of the notes then outstanding. If no
such quotations can be obtained, the rate will be LIBOR for the prior payment
date. "LIBOR Business Day" means any day other than (i) a Saturday or a Sunday
or (ii) a day on which banking institutions in the State of New York or in the
city of London, England are required or authorized by law to be closed.
INTEREST
On each payment date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distributions," interest will be distributed to the notes and the Senior
Interest Participations in an amount equal to the related Interest Distribution.
For each payment date and each class of notes and Senior Interest
Participations, the "Interest Distribution" is the sum of (a) interest at the
related note rate that accrued during the related Interest Period on the related
note principal balance, or interest at the Senior Interest Participation Rate
that accrued during the related Interest Period on the Notional Principal
Balance, as applicable, immediately prior to such payment date (the "Monthly
Interest Distributable Amount") and (b) any applicable Interest Carryover
Shortfall. As to any payment date, the "Interest Carryover Shortfall" for each
class of notes and Senior Interest Participation is the sum of (a) the excess of
the sum of (A) the related Monthly Interest Distributable Amount for the
preceding payment date and (B) any outstanding Interest Carryover Shortfall with
respect to such notes or Senior Interest Participations, as applicable on such
preceding payment date, over the amount in respect of interest that is actually
distributed to such notes or Senior Interest Participations, as applicable, on
such preceding payment date plus (b) interest on such excess, to the extent
permitted by law, at the related note rate or Senior Interest Participation
Rate, as applicable, for the related Interest Period.
On each payment date, the Interest Distribution for the notes and the
Senior Interest Participations of the same group will be distributed on an equal
priority and any shortfall in
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the amount required to be distributed as interest to the notes and Senior
Interest Participation will be allocated between the notes and Senior Interest
Participation, pro rata, based on the amount which would have been distributed
to the notes and Senior Interest Participation in the absence of such shortfall.
See "--Crosscollateralization" below.
PRINCIPAL
On each payment date, to the extent of funds available therefor, in
accordance with the priorities described above under "--Priority of
Distributions," principal will be distributed to the noteholders of each class
in an amount equal to the lesser of (A) the related note principal balance and
(B) the related Principal Distribution for the payment date. "Principal
Distribution" means, with respect to any payment date and each class of notes,
the related Monthly Principal Distributable Amount for the payment date minus
the related Overcollateralization Reduction Amount for the payment date.
"Monthly Principal Distributable Amount" means, with respect to any payment
date and each class of notes, to the extent of funds available therefor as
described herein, the amount equal to the sum of the following amounts (without
duplication) with respect to the immediately preceding due period:
o each payment of principal on a mortgage loan in the related group
received by the servicer during the due period, including all full and
partial principal prepayments,
o the principal balance as of the end of the related due period of each
mortgage loan in the related group that became a liquidated mortgage loan
for the first time during the related due period,
o the portion of the Purchase Price allocable to principal of all
repurchased mortgage loans in the related group with respect to such due
period,
o_ any amounts released from the pre-funding account at the end of the
pre-funding period, allocable to the related group,
o any Substitution Adjustments received on or prior to the previous
determination date in respect of such group and not yet distributed, and
o the amount, if any, required to be distributed on the payment date to
satisfy the required level of overcollateralization in respect of the
group for the payment date (the "Distributable Excess Spread").
"Excess Overcollateralization Amount" means for any payment date and each
class of notes, the amount, if any, by which the related overcollateralization
amount exceeds the related required overcollateralization amount for the payment
date, assuming 100% of the related Monthly Principal Distributable Amount is
distributed on the payment date.
"Overcollateralization Reduction Amount" means, with respect to any payment
date, the lesser of the Monthly Principal Distributable Amount and the Excess
Overcollateralization Amount.
If the required level of overcollateralization for a class of notes is
reduced below the then existing amount of overcollateralization or if the
required level of overcollateralization is satisfied, the amount of the related
Monthly Principal Distributable Amount will be correspondingly reduced by the
amount of the reduction or by the amount necessary such that the
overcollateralization will not exceed the required level of
overcollateralization after giving effect to the related distribution in respect
of principal to be made on the payment date.
The application of Excess Spread in respect of a group as described below
is intended to create overcollateralization to provide a source of additional
cashflow to cover losses on the mortgage loans in the related group. A draw on
the note policy in respect of principal will not be made until the note
principal balance for the related class exceeds the sum of the related
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group balance and any related remaining pre-funded amounts. See "--The Note
Policy" herein. Accordingly, so long as the note principal balance for a class
of notes is less than the sum of the related group balance and any related
remaining pre-funded amounts there may be payment dates on which the related
noteholders receive little or no distributions in respect of principal.
On each payment date, net losses realized in respect of liquidated mortgage
loans for a group to the extent such amount is not covered by Excess Spread or
crosscollateralization will reduce the amount of overcollateralization, if any,
for that group.
Due period means, with respect to any determination date or payment date,
the calendar month immediately preceding the determination date or payment date,
as the case may be. Determination date means the eighteenth day of a month or,
if that day is not a business day, the immediately succeeding business day.
A liquidated mortgage loan as to any payment date, is a mortgage loan with
respect to which the servicer has determined, in accordance with the servicing
procedures specified in the sale and servicing agreement, as of the end of the
preceding due period, that all liquidation proceeds which it expects to recover
with respect to such mortgage loan have been recovered.
"Excess Spread" means, with respect to any payment date and each group, the
positive excess, if any, of (x) related Available Funds for such payment date
over (y) the portion thereof required to be distributed pursuant to subclauses
(1) through (4) as set forth under the heading "--Priority of Distributions" on
the payment date.
THE NOTE POLICY
The following information has been supplied by the note insurer for
inclusion in this prospectus supplement. Accordingly, no representation is made
by the depositor, the underwriters, Champion, or any of their affiliates, as to
the accuracy or completeness of such information.
The note insurer, in consideration of the payment of the premium and
subject to the terms of the note policy, unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by the indenture trustee, or its successor, as trustee
for the Owners, on behalf of the Owners from the note insurer, for distribution
by the indenture trustee to each Owner of each Owner's proportionate share of
the Insured Payment. The note insurer's obligations under the note policy with
respect to a particular Insured Payment shall be discharged to the extent funds
equal to the applicable Insured Payment are received by the indenture trustee,
whether or not such funds are properly applied by the indenture trustee. Insured
Payments shall be made only at the time set forth in the note policy and no
accelerated Insured Payments shall be made regardless of any acceleration of the
notes, unless such accelerated Insured Payments are made at the sole option of
the note insurer.
Notwithstanding the foregoing paragraph, the note policy does not cover
shortfalls, if any, attributable to the liability of the trust or the indenture
trustee for withholding taxes, if any, including interest and penalties in
respect of any such liability.
The note insurer will pay any Insured Payment that is a Preference Amount
on the business day following receipt on a business day by the fiscal agent of
(1) a certified copy of the order requiring the return of a preference payment,
(2) an opinion of counsel satisfactory to the note insurer that such order is
final and not subject to appeal, (3) an assignment in such form as is reasonably
required by the note insurer, irrevocably assigning to the note insurer all
rights and claims of the Owner relating to or arising under the notes against
the debtor that made such preference payment or otherwise with respect to such
preference payment and (4) appropriate instruments to effect the appointment of
the note insurer as agent for such
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Owner in any legal proceeding related to such preference payment, such
instruments being in a form satisfactory to the note insurer, provided that if
such documents are received after 12:00 noon, New York City time, on such
business day, they will be deemed to be received on the following business day.
Such payments shall be disbursed to the receiver or trustee in bankruptcy named
in the final order of the court exercising jurisdiction on behalf of the Owner
and not to any Owner directly unless such Owner has returned principal or
interest paid on the notes or the Senior Interest Participations to such
receiver or trustee in bankruptcy, in which case such payment shall be disbursed
to such Owner.
The note insurer will pay any other amount payable under the note policy no
later than 10:00 a.m., New York City time, on the later of the business day
immediately preceding the payment date on which the related Deficiency Amount is
due or the second business day following receipt in New York, New York on a
business day by the note insurer and State Street Bank and Trust Company, N.A.,
as fiscal agent for the note insurer or any successor fiscal agent appointed by
the note insurer of a Notice; provided that if such Notice is received after
2:00 p.m., New York City time, on such business day, it will be deemed to be
received on the following business day. If any Notice received by the fiscal
agent is not in proper form or is otherwise insufficient for the purpose of
making claim under the note policy, it shall be deemed not to have been received
by the fiscal agent for purposes of this paragraph, and the note insurer or the
fiscal agent, as the case may be, shall promptly so advise the indenture trustee
and the indenture trustee may submit an amended Notice.
Insured Payments due under the note policy unless otherwise stated therein
will be disbursed by the fiscal agent to the indenture trustee on behalf of the
Owners by wire transfer of immediately available funds in the amount of the
Insured Payment less, in respect of Insured Payments related to Preference
Amounts, any amount held by the indenture trustee for the payment of such
Insured Payment and legally available therefor.
The fiscal agent is the agent of the note insurer only and the fiscal agent
shall in no event be liable to the Owners for any acts of the fiscal agent or
any failure of the note insurer to deposit or cause to be deposited, sufficient
funds to make payments due under the note policy.
Subject to the terms of the sale and servicing agreement, the note insurer
shall be subrogated to the rights of each Owner to receive payments under the
notes or the Senior Interest Participations to the extent of any payment by the
note insurer under the note policy.
As used herein, the following terms shall have the following meanings:
"Deficiency Amount" means for any payment date the sum of (A) the excess,
if any, of (i) accrued and unpaid interest due on the notes and the Senior
Interest Participations over (ii) the amount of Available Funds excluding any
payments under the note policy available to be distributed therefor on such
payment date and (B) the Guaranteed Principal Amount.
"Final Payment Date" means the Payment Date in September 2029.
"Guaranteed Principal Amount" means (a) for any payment date, other than
the Final Payment Date, and each class of notes the amount, if any, by which the
related note principal balance exceeds the related group balance at the end of
the related due period, after giving effect to all payments of principal on such
notes on such payment date, including the related Distributable Excess Spread
and any Crosscollateralization Payment, and (b) on the Final Payment Date, the
related outstanding note principal balance, after giving effect to all other
payments of principal on such notes on such payment date, including the related
Distributable Excess Spread and any Crosscollateralization Payment.
"Insured Payment" means (i) as of any payment date, any Deficiency Amount
and (ii) any Preference Amount.
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"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by telecopy, substantially in the form of Exhibit A attached to the note
policy, the original of which is subsequently delivered by registered or
certified mail, from the indenture trustee specifying the Insured Payment which
shall be due and owing on the applicable payment date.
"Owner" means each securityholder who, on the applicable payment date, is
entitled under the terms of the notes or the Senior Interest Participations to
payment thereunder.
"Preference Amount" means any amount previously distributed to an Owner on
the notes or the Senior Interest Participations that is recoverable and sought
to be recovered as a voidable preference by a trustee in bankruptcy with respect
to the seller, the depositor or the trust pursuant to the United States
Bankruptcy Code (11 U.S.C.), as amended from time to time in accordance with a
final nonappealable order of a court having competent jurisdiction.
So long as no Insurer Default is continuing, the note insurer will be
entitled to exercise the rights of the noteholders. An "Insurer Default" will
occur in the event the note insurer fails to make a payment required under the
note policy or if certain events of bankruptcy or insolvency occur with respect
to the note insurer.
Capitalized terms used in the note policy and not otherwise defined in the
note policy shall have the respective meanings set forth in the sale and
servicing agreement as of the date of execution of the note policy, without
giving effect to any subsequent amendment or modification to the sale and
servicing agreement unless such amendment or modification has been approved in
writing by the note insurer.
Any notice under the note policy or service of process on the fiscal agent
or the note insurer may be made at the address listed below for the fiscal agent
or the note insurer or such other address as the note insurer shall specify in
writing to the indenture trustee.
The notice address of the fiscal agent is 61 Broadway, 15th Floor, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the fiscal agent shall specify to the indenture trustee in
writing.
The note policy is being issued under and pursuant to, and shall be
construed under, the laws of the State of New York, without giving effect to the
conflict of laws principles thereof.
The insurance provided by the note policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
The note policy is not cancelable for any reason. The premium on the note
policy is not refundable for any reason including payment, or provision being
made for payment, prior to the maturity of the notes.
OVERCOLLATERALIZATION PROVISIONS
The sale and servicing agreement requires that, on each payment date, the
Distributable Excess Spread with respect to a group will be applied on such
payment date as an accelerated payment of principal on the related notes. This
has the effect of accelerating the amortization of the notes relative to the
amortization of the mortgage loans.
The required level of overcollateralization with respect to a group will be
satisfied as of each payment date when the related group balance at the end of
the related due period exceeds the related note principal balance by an amount
specified in the sale and servicing agreement. Thereafter, the level of
overcollateralization necessary to satisfy the required level of
overcollateralization may be increased or decreased from time to time based on
the loss and delinquency experience of the mortgage loans in accordance with the
provisions of the sale and servicing agreement. In addition, the required level
of overcollateralization may be decreased, in the sole discretion of the note
insurer and with the prior consent of each rating
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agency, as low as zero, which would have the effect of reducing the amortization
of the notes below what it otherwise would have been.
CROSSCOLLATERALIZATION
Excess Spread with respect to a group will be available to cover certain
shortfalls with respect to the notes and the Senior Interest Participations
relating to the other groups as described above under the caption "--Priority of
Distributions."
THE PRE-FUNDING ACCOUNT
The depositor will cause the pre-funding account to be established in the
name of the indenture trustee on the closing date and will deposit
$79,167,643.46 from the net proceeds of the sale of the notes. $45,219,784.21 of
the pre-funded amount will be allocated only to group 1, $11,335,237.27 of the
pre-funded amount will be allocated only to group 2 and $22,612,621.98 of the
pre-funded amount will be allocated only to group 3. With these funds, the trust
will purchase subsequent mortgage loans from the seller until the earlier of:
o_ the date on which the amount on deposit is less than $100,000;
o_ October 29, 1999; and
o_ the occurrence of an event of default under the sale and servicing
agreement.
After one of the listed events occurs, the pre-funding period will end and any
amounts on deposit in the pre-funding account that were allocated to a group
will be distributed on the related notes, as a prepayment of principal.
The pre-funding account will be an asset of the trust, but the amounts on
deposit in the account will not be available to cover losses on or in respect of
the mortgage loans. The amounts on deposit in the pre-funding account may be
invested as provided in the indenture. Any net investment income on the amount
on deposit in the account will be deposited into the capitalized interest
account.
CAPITALIZED INTEREST ACCOUNT
On the closing date, the depositor will make a cash deposit to the
capitalized interest account from the proceeds of the sale of the notes. On each
payment date during the pre-funding period, the indenture trustee will transfer
from the capitalized interest account to the distribution account an amount
equal to the "Capitalized Interest Requirement."
The "Capitalized Interest Requirement" will be the sum of (A) the amount of
interest accrued at the weighted average of the note rates and the Senior
Interest Participation Rates on the amount on deposit in the pre-funding account
as of the preceding payment date (or as of the closing date, in the case of the
first payment date) and (B) the amount of fees payable to the insurer, the owner
trustee and the indenture trustee in respect of the amount on deposit in the
pre-funding account.
STATED MATURITY DATE
The stated maturity date for each class of notes is the payment date in
September 2029, which is the payment date in the month immediately following the
last scheduled due date for the mortgage loan having the latest stated maturity
date. It is expected that the actual last payment date for the notes will occur
significantly earlier than the stated maturity dates specified above. See
"Prepayment and Yield Considerations" below.
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PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on the notes, the aggregate amount of
distributions on the notes and the yield to maturity of the notes will be
related to the rate and timing of payments of principal on the mortgage loans in
the related group. The rate of principal payments on the mortgage loans will in
turn be affected by the amortization schedules of the mortgage loans and by the
rate of principal prepayments, including for this purpose prepayments resulting
from refinancing, liquidations of the mortgage loans due to defaults,
casualties, condemnations and repurchases by the seller or purchases by the
servicer. The mortgage loans may be prepaid by the mortgagors at any time
without penalty.
PREPAYMENTS
Prepayments, liquidations and purchases of the mortgage loans, including
any optional purchase by the servicer of a delinquent mortgage loan in a group,
any release of amounts from the pre-funding account at the end of the
pre-funding period and any optional purchase of the remaining mortgage loans,
will result in distributions on the related notes of principal amounts which
would otherwise be distributed over the remaining terms of such mortgage loans.
Since the rate of payment of principal of the mortgage loans will depend on
future events and a variety of factors, no assurance can be given as to such
rate or the rate of principal prepayments. The extent to which the yield to
maturity of a note may vary from the anticipated yield will depend upon the
degree to which a note is purchased at a discount or premium, and the degree to
which the timing of payments thereon is sensitive to prepayments, liquidations
and purchases of such mortgage loans.
The rate of prepayment on the mortgage loans cannot be predicted. Home
equity loans such as the mortgage loans have been originated in significant
volume only during the past few years. Generally, home equity loans are not
viewed by borrowers as permanent financing. Accordingly, the mortgage loans may
experience a higher rate of prepayment than traditional first mortgage loans.
The prepayment experience of the trust with respect to the mortgage loans may be
affected by a wide variety of factors, including economic conditions, prevailing
interest rate levels, the availability of alternative financing and homeowner
mobility and changes affecting the deductibility for federal income tax purposes
of interest payments on home equity loans. All of the mortgage loans contain
"due-on-sale" provisions, and the servicer is required by the sale and servicing
agreement to enforce such provisions, unless such enforcement is not permitted
by applicable law. The enforcement of a "due-on-sale" provision will have the
same effect as a prepayment of the related mortgage loan. See "Legal Aspects of
Loans--Due-on-Sale Clauses in Mortgage Loans" in the prospectus.
As with fixed rate obligations generally, the rate of prepayment on a pool
of mortgage loans with fixed rates such as the mortgage loans is affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments.
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Some of the mortgage loans in each group are adjustable-rate mortgage
loans. As is the case with conventional fixed-rate mortgage loans,
adjustable-rate mortgage loans may be subject to a greater rate of principal
prepayments in a declining interest rate environment. For example, if prevailing
interest rates fall significantly, adjustable-rate mortgage loans could be
subject to higher prepayment rates than if prevailing interest rates remain
constant because the availability of fixed-rate mortgage loans at competitive
interest rates may encourage mortgagors to refinance their adjustable-rate
mortgage loans to "lock in" a lower fixed interest rate. The existence of
periodic rate caps, maximum rates and minimum rates may affect the likelihood of
prepayment. No assurance can be given as to the level of prepayments that the
mortgage loans will experience.
In addition to the foregoing factors affecting the weighted average life of
the notes, the use of Excess Spread to pay principal of the notes to the extent
required by the sale and servicing agreement will result in the acceleration of
the notes, relative to the amortization of the related mortgage loans in the
early months of the transaction. Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization. See
"Description of the Notes--Overcollateralization Provisions."
Excess Spread for the mortgage loans of a group will be distributed in
reduction of the note principal balance of the related notes on each payment
date to the extent that the then required overcollateralization amount for the
group exceeds the actual overcollateralization amount. If purchased at a premium
or a discount, the yield to maturity on a note will be affected, in the same
manner as described below under "--Weighted Average Lives," by the rate at which
the Excess Spread is distributed in reduction of the note principal balance. The
amount of Excess Spread on any payment date will be affected by the actual
amount of interest received, collected or recovered in respect of the mortgage
loans during the related due period and such amount will be influenced by the
number of days since receipt of the last payment of interest on a mortgage loan
and by changes in the weighted average of the loan rates of such mortgage loans
resulting from prepayments and liquidations. The amount of Excess Spread applied
in reduction of the note principal balance of a class of notes on each payment
date will be based on the then required overcollateralization amount for the
related group, which may increase or decrease during the period that the related
notes remain outstanding. Any increase in a required overcollateralization
amount may result in an accelerated rate of amortization of the related notes
until such overcollateralization amount equals the required
overcollateralization amount and any decrease in such required
overcollateralization amount will result in a decelerated rate of amortization
of the related notes until the overcollateralization amount equals the required
overcollateralization amount.
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on notes purchased at a price less than par and will decrease the
yield on notes purchased at a price greater than par. The effect on an
investor's yield due to principal prepayments on the mortgage loans occurring at
a rate that is faster (or slower) than the rate anticipated by the investor in
the period immediately following the issuance of the notes will not be entirely
offset by a subsequent like reduction (or increase) in the rate of principal
payments. The weighted average life of the notes will also be affected by the
amount and timing of delinquencies and defaults on the mortgage loans and the
recoveries, if any, on defaulted mortgage loans and foreclosed properties.
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The "weighted average life" of a note refers to the average amount of time
that will elapse from the date of issuance to the date each dollar in respect of
principal of such note is repaid. The weighted average life of the notes will be
influenced by, among other factors, the rate at which principal payments are
made on the mortgage loans, including final payments made upon the maturity of
balloon loans.
Most of the mortgage loans in each group bear interest at a fixed rate,
while all of the notes bear interest at an adjustable rate based on LIBOR.
Changes in the level of LIBOR may not correlate with prevailing interest rates
for fixed-rate mortgage loans. An investor considering the purchase of the notes
in the expectation that LIBOR will increase over time, thus increasing the note
rates, should consider the risk that prevailing interest rates for fixed-rate
mortgage loans could decline concurrently with an increase in LIBOR, which
decline would be expected to result in a faster rate of prepayments on the
fixed-rate mortgage loans, thereby reducing the weighted average life of the
notes.
Prepayments on mortgage loans are commonly measured relative to a
prepayment assumption model. The prepayment assumption model used in this
prospectus supplement for the fixed-rate mortgage loans represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of the pool of mortgage loans for the life of such mortgage loans. A 100%
prepayment assumption assumes a conditional prepayment rate, or CPR, of 4% per
annum of the outstanding principal balance of such mortgage loans in the first
month of the life of the mortgage loans and approximately an additional 1.45%
(precisely 16/11 of 1%) in each month thereafter until the twelfth month;
beginning in the twelfth month and in each month thereafter during the life of
the mortgage loans, a conditional prepayment rate of 20% per annum each month is
assumed. As used in the table below, 0% prepayment assumption assumes prepayment
rates equal to 0% of the prepayment assumption, i.e., no prepayments.
Correspondingly, 115% prepayment assumption assumes prepayment rates equal to
115% of the prepayment assumption, and so forth. The adjustable-rate mortgage
loans are assumed to prepay at the constant percentages of CPR set forth in the
tables below. Neither the prepayment assumption nor CPR purports 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 notes to predict the amount or
the timing of receipt of prepayments on the mortgage loans.
Because the following 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 table. Any such discrepancy may have an effect upon the
percentages of the principal balances outstanding and weighted average lives of
the notes 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 notes may be
made earlier or later than as indicated in the tables.
For the purpose of the tables below, it is assumed that:
o the mortgage loans consist of pools of loans with the level-pay and
balloon amortization characteristics set forth below,
o the closing date for the notes is September 23, 1999,
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o distributions on the notes are made on the 25th day of each month
regardless of the day on which the payment date actually occurs,
commencing in October 1999 and are made in accordance with the
priorities described herein,
o the scheduled monthly payments of principal and interest on the
mortgage loans will be timely made on the first day of each month
with no defaults,
o the mortgage loans' prepayment rates are a multiple of the prepayment
assumption or constant percentages of CPR, as applicable,
o all prepayments are prepayments in full received on the last day of
each month and include 30 days' interest thereon,
o no optional termination is exercised, except with respect to the
weighted average lives to optional termination,
o each class of notes has the note rate and original note principal
balance as set forth herein,
o_ on the closing date, all amounts in the prefunding account are used
to purchase subsequent mortgage loans and each subsequent mortgage
loan has a first payment due date no later than September 30, 1999,
o the overcollateralization levels are set initially as specified in
the sale and servicing agreement, and thereafter decrease in
accordance with the provisions of the sale and servicing agreement
and
o the level of LIBOR for each Interest Period will be 5.38% and the
level of the Loan Index for each Interest Period will be 5.25%.
GROUP 1 MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO NEXT RATE
AMORTIZATION PRINCIPAL TERM MATURITY MATURITY ADJUSTMENT
RATE TYPE METHODOLOGY BALANCE LOAN RATE (MONTHS) (MONTHS) (MONTHS) DATE INDEX
- ---------- ------------ -------------- --------- ------------ -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Level Pay $ 66,784.78 12.750% 180 180 157 10/1/99 1 Yr CMT
Adjustable Level Pay $ 232,018.27 8.500% 360 360 356 5/1/00 1 Yr CMT
Adjustable Level Pay $13,514,434.90 9.321% 338 338 336 7/1/00 1 Yr CMT
Adjustable Level Pay $ 7,833,548.03 9.796% 331 331 331 9/1/00 1 Yr CMT
Fixed Balloon $67,696,130.07 10.533% 360 180 178
Fixed Level Pay $ 8,935,472.10 11.608% 111 111 109
Fixed Level Pay $32,639,157.75 11.186% 180 180 177
Fixed Level Pay $62,270,527.64 10.057% 240 240 238
Fixed Level Pay $ 6,811,926.46 9.964% 360 360 358
<CAPTION>
MAXIMUM MINIMUM
GROSS PERIODIC INTEREST INTEREST
RATE TYPE MARGIN RATE CAP RATE RATE
- ---------- ------ -------- ------- -------
<S> <C> <C> <C> <C>
Adjustable 7.48% 2% 17.99% 11.99%
Adjustable 4.85% 2% 14.50% 8.50%
Adjustable 5.42% 2% 15.32% 9.32%
Adjustable 5.71% 2% 15.80% 9.80%
Fixed
Fixed
Fixed
Fixed
Fixed
</TABLE>
GROUP 2 MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO NEXT RATE
AMORTIZATION PRINCIPAL TERM MATURITY MATURITY ADJUSTMENT
RATE TYPE METHODOLOGY BALANCE LOAN RATE (MONTHS) (MONTHS) (MONTHS) DATE INDEX
- ---------- ------------ -------------- --------- ------------ -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Level Pay $ 885,431.53 9.686% 332 332 332 9/1/00 1 Yr CMT
Adjustable Level Pay $ 1,253,407.98 8.728% 360 360 353 2/1/00 1 Yr CMT
Adjustable Level Pay $ 978,043.13 8.665% 340 340 336 5/1/00 1 Yr CMT
Adjustable Level Pay $ 1,808,260.99 9.180% 337 337 334 7/1/00 1 Yr CMT
Fixed Balloon $20,831,492.71 10.318% 360 180 176
Fixed Level Pay $ 2,961,883.31 10.684% 106 106 104
Fixed Level Pay $ 7,941,317.26 10.701% 180 180 177
Fixed Level Pay $12,118,257.37 10.081% 240 240 236
Fixed Level Pay $ 1,221,905.73 10.469% 360 360 355
<CAPTION>
MAXIMUM MINIMUM
GROSS PERIODIC INTEREST INTEREST
RATE TYPE MARGIN RATE CAP RATE RATE
- ---------- ------ -------- ------- -------
<S> <C> <C> <C> <C>
Adjustable 5.75% 2% 15.69% 9.69%
Adjustable 5.20% 2% 14.73% 8.73%
Adjustable 5.02% 2% 14.66% 8.66%
Adjustable 5.30% 2% 15.17% 9.17%
Fixed
Fixed
Fixed
Fixed
Fixed
</TABLE>
S-72
<PAGE>
GROUP 3 MORTGAGE LOANS
<TABLE>
<CAPTION>
ORIGINAL ORIGINAL REMAINING
AMORTIZATION TERM TO TERM TO NEXT RATE
AMORTIZATION PRINCIPAL TERM MATURITY MATURITY ADJUSTMENT
RATE TYPE METHODOLOGY BALANCE LOAN RATE (MONTHS) (MONTHS) (MONTHS) DATE INDEX
- ---------- ------------ -------------- --------- ------------ -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Adjustable Level Pay $ 1,192,511.73 9.202% 360 360 348 1/1/00 1 Yr CMT
Adjustable Level Pay $ 179,175.96 8.500% 360 360 356 5/1/00 1 Yr CMT
Adjustable Level Pay $ 7,505,564.87 9.416% 347 347 345 7/1/00 1 Yr CMT
Adjustable Level Pay $ 2,904,002.37 9.926% 350 350 350 9/1/00 1 Yr CMT
Fixed Balloon $37,051,658.63 10.543% 360 180 178
Fixed Level Pay $ 5,189,403.15 11.473% 111 111 110
Fixed Level Pay $16,378,993.05 10.838% 180 180 178
Fixed Level Pay $27,330,298.52 10.197% 240 240 237
Fixed Level Pay $ 2,268,391.71 9.444% 360 360 358
<CAPTION>
MAXIMUM MINIMUM
GROSS PERIODIC INTEREST INTEREST
RATE TYPE MARGIN RATE CAP RATE RATE
- ---------- ------ -------- ------- -------
<S> <C> <C> <C> <C>
Adjustable 5.52% 2% 15.20% 9.20%
Adjustable 4.85% 2% 14.50% 8.50%
Adjustable 5.49% 2% 15.42% 9.42%
Adjustable 5.84% 2% 15.93% 9.93%
Fixed
Fixed
Fixed
Fixed
Fixed
</TABLE>
Subject to the foregoing discussion and assumptions, the following table
indicates the weighted average life of each class of notes and the percentages
of the original note principal balances that would be outstanding after each of
the dates shown at various percentages of the prepayment assumption and CPR.
The following tables have been prepared based on the assumptions described
above (including the assumptions regarding the characteristics and performance
of the mortgage loans which differ from the actual characteristics and
performance thereof) and should be read in conjunction therewith.
S-73
<PAGE>
PERCENT OF ORIGINAL NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION OR CPR
<TABLE>
<CAPTION>
CLASS I-A
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE LOANS (CPR) 0% 12% 24% 28% 36% 48%
----- ----- ----- ----- ---- ----
FIXED RATE MORTGAGE LOANS 0% 50% 100% 115% 150% 200%
----- ----- ----- ----- ---- ----
<CAPTION>
DISTRIBUTION DATE
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...................... 100 100 100 100 100 100
September 25, 2000...................... 96 88 80 78 73 65
September 25, 2001...................... 92 76 60 56 47 35
September 25, 2002...................... 91 66 46 41 32 21
September 25, 2003...................... 88 58 36 31 22 12
September 25, 2004...................... 86 50 28 23 15 7
September 25, 2005...................... 83 43 22 17 10 4
September 25, 2006...................... 81 37 17 13 7 2
September 25, 2007...................... 77 32 13 9 4 1
September 25, 2008...................... 74 28 10 7 3 *
September 25, 2009...................... 70 24 7 5 2 0
September 25, 2010...................... 67 20 6 4 1 0
September 25, 2011...................... 63 17 4 2 * 0
September 25, 2012...................... 58 14 3 2 * 0
September 25, 2013...................... 54 12 2 1 0 0
September 25, 2014...................... 21 4 * 0 0 0
September 25, 2015...................... 20 3 * 0 0 0
September 25, 2016...................... 18 2 0 0 0 0
September 25, 2017...................... 15 2 0 0 0 0
September 25, 2018...................... 11 1 0 0 0 0
September 25, 2019...................... 8 * 0 0 0 0
September 25, 2020...................... 7 * 0 0 0 0
September 25, 2021...................... 7 * 0 0 0 0
September 25, 2022...................... 6 0 0 0 0 0
September 25, 2023...................... 5 0 0 0 0 0
September 25, 2024...................... 4 0 0 0 0 0
September 25, 2025...................... 3 0 0 0 0 0
September 25, 2026...................... 1 0 0 0 0 0
September 25, 2027...................... * 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0 0
Weighted Average
Life to Maturity (years)............. 12.68 6.33 3.87 3.43 2.67 1.99
Weighted Average
Life to Optional Termination
(years).............................. 12.61 6.22 3.79 3.33 2.59 1.93
</TABLE>
- ------------------
Each "*" represents a percentage greater than 0% but less than 0.50%.
The weighted average life of a note is determined by (a) multiplying the amount
of each distribution in reduction of the related note principal balance by the
number of years from the date of issuance of the note to the related payment
date, (b) adding the results, and (c) dividing the sum by the related original
note principal balance.
S-74
<PAGE>
PERCENT OF ORIGINAL NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION OR CPR
<TABLE>
<CAPTION>
CLASS II-A
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE LOANS (CPR) 0% 12% 24% 28% 36% 48%
----- ----- ----- ----- ---- ----
FIXED RATE MORTGAGE LOANS 0% 50% 100% 115% 150% 200%
----- ----- ----- ----- ---- ----
<CAPTION>
DISTRIBUTION DATE
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...................... 100 100 100 100 100 100
September 25, 2000...................... 96 87 79 76 70 62
September 25, 2001...................... 91 74 58 54 45 33
September 25, 2002...................... 89 64 44 39 30 19
September 25, 2003...................... 87 55 34 29 20 11
September 25, 2004...................... 84 48 26 22 14 6
September 25, 2005...................... 82 41 20 16 9 4
September 25, 2006...................... 79 36 16 12 6 2
September 25, 2007...................... 75 31 12 9 4 1
September 25, 2008...................... 72 26 9 6 3 *
September 25, 2009...................... 69 23 7 5 2 0
September 25, 2010...................... 65 20 5 3 1 0
September 25, 2011...................... 62 17 4 2 * 0
September 25, 2012...................... 58 14 3 2 * 0
September 25, 2013...................... 53 12 2 1 0 0
September 25, 2014...................... 16 3 * 0 0 0
September 25, 2015...................... 16 2 0 0 0 0
September 25, 2016...................... 14 2 0 0 0 0
September 25, 2017...................... 11 1 0 0 0 0
September 25, 2018...................... 9 1 0 0 0 0
September 25, 2019...................... 7 * 0 0 0 0
September 25, 2020...................... 6 * 0 0 0 0
September 25, 2021...................... 6 0 0 0 0 0
September 25, 2022...................... 5 0 0 0 0 0
September 25, 2023...................... 4 0 0 0 0 0
September 25, 2024...................... 3 0 0 0 0 0
September 25, 2025...................... 2 0 0 0 0 0
September 25, 2026...................... 1 0 0 0 0 0
September 25, 2027...................... * 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0 0
Weighted Average
Life to Maturity (years)............. 12.19 6.11 3.74 3.31 2.57 1.91
Weighted Average
Life to Optional Termination
(years).............................. 12.12 6.03 3.66 3.21 2.49 1.85
</TABLE>
- ------------------
Each "*" represents a percentage greater than 0% but less than 0.50%.
The weighted average life of a note is determined by (a) multiplying the amount
of each distribution in reduction of the related note principal balance by the
number of years from the date of issuance of the note to the related payment
date, (b) adding the results, and (c) dividing the sum by the related original
note principal balance.
S-75
<PAGE>
PERCENT OF ORIGINAL NOTE PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION OR CPR
<TABLE>
<CAPTION>
CLASS III-A
--------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ADJUSTABLE RATE MORTGAGE LOANS (CPR) 0% 12% 24% 28% 36% 48%
----- ----- ----- ----- ---- ----
FIXED RATE MORTGAGE LOANS 0% 50% 100% 115% 150% 200%
----- ----- ----- ----- ---- ----
<CAPTION>
DISTRIBUTION DATE
- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Initial Percentage...................... 100 100 100 100 100 100
September 25, 2000...................... 96 88 80 78 72 64
September 25, 2001...................... 92 76 60 56 47 35
September 25, 2002...................... 91 66 46 41 32 21
September 25, 2003...................... 88 57 36 31 21 12
September 25, 2004...................... 86 50 28 23 15 7
September 25, 2005...................... 83 43 21 17 10 4
September 25, 2006...................... 81 37 16 13 7 2
September 25, 2007...................... 77 32 13 9 4 1
September 25, 2008...................... 74 28 10 7 3 *
September 25, 2009...................... 71 24 7 5 2 0
September 25, 2010...................... 67 20 6 3 1 0
September 25, 2011...................... 63 17 4 2 * 0
September 25, 2012...................... 59 14 3 2 * 0
September 25, 2013...................... 55 12 2 1 0 0
September 25, 2014...................... 20 4 * 0 0 0
September 25, 2015...................... 19 3 0 0 0 0
September 25, 2016...................... 17 2 0 0 0 0
September 25, 2017...................... 14 1 0 0 0 0
September 25, 2018...................... 11 1 0 0 0 0
September 25, 2019...................... 8 * 0 0 0 0
September 25, 2020...................... 8 * 0 0 0 0
September 25, 2021...................... 7 * 0 0 0 0
September 25, 2022...................... 6 0 0 0 0 0
September 25, 2023...................... 6 0 0 0 0 0
September 25, 2024...................... 5 0 0 0 0 0
September 25, 2025...................... 4 0 0 0 0 0
September 25, 2026...................... 2 0 0 0 0 0
September 25, 2027...................... 1 0 0 0 0 0
September 25, 2028...................... 0 0 0 0 0 0
Weighted Average
Life to Maturity (years)............. 12.73 6.32 3.86 3.42 2.66 1.98
Weighted Average
Life to Optional Termination
(years).............................. 12.62 6.21 3.78 3.32 2.58 1.92
</TABLE>
- ------------------
Each "*" represents a percentage greater than 0% but less than 0.50%.
The weighted average life of a note is determined by (a) multiplying the amount
of each distribution in reduction of the related note principal balance by the
number of years from the date of issuance of the note to the related payment
date, (b) adding the results, and (c) dividing the sum by the related original
note principal balance.
S-76
<PAGE>
DESCRIPTION OF THE AGREEMENTS
The following summary describes the material terms of the sale and
servicing agreement, the trust agreement and the indenture. Whenever particular
defined terms in the indenture are referred to, such defined terms are thereby
incorporated herein by reference. See "The Agreements" in the prospectus.
REPORTS TO NOTEHOLDERS
Concurrently with each payment to the noteholders, the servicer will
forward to the indenture trustee for mailing to each noteholder and the note
insurer a statement setting forth among other items with respect to each payment
date and each class of notes:
(1) the aggregate amount of the distribution to the noteholders on such
payment date;
(2) the amount of distribution set forth in paragraph (1) above in
respect of interest and the amount thereof in respect of any related
Interest Carryover Shortfall, and the amount of any related Interest
Carryover Shortfall remaining;
(3) the aggregate amount of any distribution to the Senior Interest
Participations, and the amount thereof in respect of any related Interest
Carryover Shortfall, and the amount of any related Interest Carryover
Shortfall remaining;
(4) the amount of the distribution set forth in paragraph (1) above in
respect of principal and the amount thereof in respect of the Principal
Shortfall Amount, and any remaining Principal Shortfall Amount;
(5) the amount of Excess Spread for each group and the amount applied
as a distribution of Distributable Excess Spread on the notes;
(6) the Guaranteed Principal Amount for each group for the payment
date;
(7) the amount paid under the note policy for the payment date in
respect of the Interest Distribution to each class of notes and the Senior
Interest Participations;
(8) the servicing fee;
(9) the pool balance and each group balance as of the close of business
on the last day of the preceding due period;
(10) the note principal balance for each class of notes after giving
effect to payments allocated to principal above;
(11) the amount of overcollateralization for each group as of the close
of business on the payment date, after giving effect to distributions of
principal on the payment date;
(12) the number and aggregate principal balances of the mortgage loans
in each group 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 due period;
(13) the book value of any real estate which is acquired by the trust
through foreclosure or grant of deed in lieu of foreclosure;
S-77
<PAGE>
(14) the aggregate amount of prepayments received on the mortgage loans
during the previous due period and specifying the amount for each group;
(15) the weighted average loan rate on the mortgage loans as of the
first day of the month prior to the payment date and specifying such rate
for each group;
(16) the note rate for each class of notes for the payment date; and
(17) the required overcollateralization for each group for the payment
date.
In the case of information furnished pursuant to clauses (2), (3) and (4)
above, the amounts shall be expressed as a dollar amount per note with a $1,000
denomination.
Within 60 days after the end of each calendar year, the servicer will be
required to forward to the indenture trustee a statement containing the
information set forth in clauses (2), (3) and (4) above aggregated for such
calendar year.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The servicer will make reasonable efforts to collect all payments called
for under the mortgage loans and will, consistent with the sale and servicing
agreement, follow such collection procedures as it follows from time to time
with respect to the home equity loans in its servicing portfolio comparable to
the mortgage loans. Consistent with the above, the 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 may arrange with a
borrower a schedule for the payment of interest due and unpaid for a period,
provided that any such arrangement is consistent with the servicer's policies
with respect to the home equity mortgage loans it owns or services and the terms
of the sale and servicing agreement. In accordance with the terms of the sale
and servicing agreement, the servicer may consent under certain circumstances to
the placing of a subsequent senior lien in respect of a mortgage loan.
HAZARD INSURANCE
The servicer will cause to be maintained for each mortgage loan 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:
o the outstanding principal balance on the mortgage loan and any related
first lien,
o the full insurable value of the premises securing the mortgage loan and
o 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 Federal Emergency Management Agency as FLOOD ZONE "A,"
such flood insurance has been made available and the servicer determines that
such insurance is necessary in accordance with accepted mortgage servicing
practices of prudent lending institutions, the 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:
S-78
<PAGE>
o the outstanding principal balance of the mortgage loan and any related
first lien,
o the full insurable value of the mortgaged property, or
o the maximum amount of insurance available under the National Flood
Insurance Act of 1968, as amended.
The 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 determines that such
insurance is necessary in accordance with accepted mortgage servicing practices
of prudent lending institutions, flood insurance in an amount equal to that
required above. Any amounts collected by the 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 borrower in accordance with customary
mortgage servicing procedures will be deposited in the collection account,
subject to retention by the servicer to the extent such amounts constitute
servicing compensation or for withdrawal pursuant to the sale and servicing
agreement.
In the event that the servicer obtains and maintains a blanket policy as
provided in the sale and servicing 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 its designee 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 will be deemed conclusively to have
satisfied its obligations with respect to fire and hazard insurance coverage.
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The 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 sale
and servicing agreement, no satisfactory arrangements can be made for the
collection of delinquent payments. In connection with such foreclosure or other
conversion, the 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 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 will be reimbursed out of liquidation proceeds for advances of its
own funds as liquidation expenses before any net liquidation proceeds are
distributed to noteholders or the seller.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each due period, the servicer will receive from interest
collections in respect of the mortgage loans a portion of such interest
collections as a monthly servicing fee in the amount equal to 0.40% per annum,
or, if Champion is no longer the servicer, 0.50% per annum, on the group balance
of each group as of the first day of the related due period, or as of the
cut-off date for the first due period. All assumption fees, late payment charges
and other
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<PAGE>
fees and charges, to the extent collected from borrowers, will be retained by
the servicer as additional servicing compensation.
Not later than two business days prior to each payment date, the servicer
is required to remit to the indenture trustee, without any right of
reimbursement, an amount equal to, with respect to each mortgage loan as to
which a principal prepayment in full was received during the related due period,
the lesser of (a) the excess, if any, of 30 days' interest on the principal
balance of such mortgage loan at the loan rate, or at such lower rate as may be
in effect for such mortgage loan because of application of the Soldiers' and
Sailors' Civil Relief Act of 1940, or as a result of any reduction of the
monthly payment due on such mortgage loan as a result of a bankruptcy
proceeding, minus the servicing fee for such mortgage loan, over the amount of
interest actually paid by the related mortgagor in connection with such
principal prepayment (with respect to all such mortgage loans, the "Prepayment
Interest Shortfall") and (b) the sum of the aggregate servicing fee received by
the servicer in the most recently ended due period. The servicing fee will not
be reduced to cover shortfalls in interest collections resulting from partial
prepayments on the mortgage loans.
EVIDENCE AS TO COMPLIANCE
The sale and servicing agreement provides for delivery on or before the
last day of the fifth month following the end of the servicer's fiscal year,
beginning with the fiscal year ending 1999, to the indenture trustee, the rating
agencies and the note insurer of an annual statement signed by an officer of the
servicer to the effect that the servicer has fulfilled its material obligations
under the sale and servicing 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 with the fiscal year ending 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, the note insurer 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 September 30.
CERTAIN MATTERS REGARDING THE SERVICER
The sale and servicing agreement provides that the servicer may not resign
from its obligations and duties thereunder, except in connection with a
permitted transfer of servicing, unless (1) such duties and obligations are no
longer permissible under applicable law as evidenced by an opinion of counsel
delivered to the note insurer or (2) upon the satisfaction of the following
conditions:
o the servicer has proposed a successor servicer to the indenture trustee
and the note insurer in writing and such proposed successor servicer is
reasonably acceptable to the indenture trustee;
o the rating agencies have confirmed to the indenture trustee and the note
insurer 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 notes; and
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<PAGE>
o such proposed successor servicer is acceptable to the note insurer.
No such resignation will become effective until the indenture trustee or a
successor servicer has assumed the servicer's obligations and duties under the
sale and servicing agreement.
The servicer may perform any of its duties and obligations under the sale
and servicing 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 indenture trustee, the owner
trustee, the noteholders and the note insurer for the servicer's duties and
obligations under the sale and servicing agreement, without any diminution of
such duties and obligations and as if the servicer itself were performing such
duties and obligations.
Any person into which, in accordance with the sale and servicing agreement,
the servicer may be merged or consolidated or any person resulting from any
merger or consolidation to which the servicer is a party, or any person
succeeding to the business of the servicer, will be the successor to the
servicer under the sale and servicing agreement.
The sale and servicing agreement provides that the servicer will indemnify
the trust, the indenture trustee, the note insurer and the owner trustee from
and against any loss, liability, expense, damage or injury suffered or sustained
as a result of the servicer's actions or omissions in connection with the
servicing and administration of the mortgage loans which are not in accordance
with the provisions of the sale and servicing agreement. The sale and servicing
agreement provides that neither the seller nor the servicer nor their directors,
officers, employees or agents will be under any other liability to the trust,
the indenture trustee, the owner trustee, the noteholders or any other person
for any action taken or for refraining from taking any action pursuant to the
sale and servicing agreement. However, neither the seller nor the servicer will
be protected against any liability which would otherwise be imposed by reason of
willful misconduct, bad faith or gross negligence of the seller or the servicer
in the performance of its duties under the sale and servicing agreement or by
reason of reckless disregard of its obligations thereunder. In addition, the
sale and servicing agreement provides that the 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 sale and servicing
agreement and which in its opinion may expose it to any expense or liability.
The servicer and any director or officer or employee or agent of the servicer
shall be indemnified by the trust against a loss, liability or expense incurred
in connection with any legal action relating to the sale and servicing agreement
or the notes or Senior Interest Participations, other than (1) any loss,
liability or expense related to any specific mortgage loan or mortgage loans
except as any such loss, liability or expense would otherwise be reimbursable
pursuant to the sale and servicing agreement and (2) any loss, liability or
expense incurred by reason of its willful misfeasance, bad faith or gross
negligence in the performance of its duties under the sale and servicing
agreement or by reason of its reckless disregard of obligations and duties under
the sale and servicing agreement. The servicer may, in its sole discretion,
undertake any such legal action which it may deem necessary or desirable with
respect to the sale and servicing agreement and the rights and duties of the
parties thereto and the interest of the noteholders and the note insurer
thereunder.
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<PAGE>
EVENTS OF SERVICING TERMINATION
"Events of Servicing Termination" will consist of:
o any failure by the servicer to make any required monthly advance, or
any other failure by the servicer to deposit in the collection
account or distribution account any deposit required to be made under
the terms of the sale and servicing agreement which continues
unremedied for two business days after the giving of written notice
of such failure to the servicer by the indenture trustee or to the
servicer and the indenture trustee by the note insurer or by the
holders of notes evidencing not less than 25% of the aggregate note
principal balance;
o any failure by the servicer duly to observe or perform in any
material respect any other of its covenants or agreements in the sale
and servicing agreement which, in each case, materially and adversely
affects the interests of the noteholders or the note insurer and
continues unremedied for 30 days after the giving of written notice
of such failure to the servicer by the indenture trustee, or to the
servicer and the indenture trustee by the note insurer or noteholders
evidencing not less than 25% of the aggregate note principal balance;
o any failure by the 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 by the
indenture trustee, or to the servicer and the indenture trustee by
the note insurer or any noteholders holding notes evidencing not less
than 25% of the aggregate note principal balance;
o certain events of insolvency, readjustment of debt, marshalling of
assets and liabilities or similar proceedings relating to the
servicer and remaining undischarged, unbonded or unstayed for a
period of 60 consecutive days and certain actions by the servicer
indicating insolvency, reorganization or inability to pay its
obligations ("Insolvency Events");
o so long as the seller is the servicer, any failure of the seller to
repurchase or substitute Eligible Substitute Mortgage Loans for
defective mortgage loans as required pursuant to the purchase
agreement or the sale and servicing agreement;
o any breach by the servicer of a representation or warranty made in
the sale and servicing agreement which materially and adversely
affects the interests of the noteholders or the note insurer and
continues unremedied for a period of 60 days after the giving of
written notice of such failure to the servicer by the indenture
trustee, or to the servicer and the indenture trustee by the note
insurer or noteholders evidencing not less than 25% of the aggregate
note principal balance, (or such longer period, with the consent of
the note insurer (which consent shall not be unreasonably withheld),
as may be reasonably necessary to remedy such breach, provided that
the servicer has commenced and diligently pursues such remedy to
completion and
o any insufficiency in the Available Funds excluding any payment made
under the note policy occurs on a payment date resulting in the need
for a draw on the note policy.
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In addition the note insurer in its sole discretion may terminate the
servicer upon a Trigger Event. A "Trigger Event" will consist of, among other
things:
o the failure by the seller or the servicer to pay any amount due the note
insurer pursuant to the insurance agreement which continues unremedied
for three business days after written notice of such failure by the note
insurer;
o the note insurer determines that the performance of the servicer is not
in material compliance with the terms of the sale and servicing
agreement; or
o the servicer is a party to a merger, consolidation or other corporate
transaction in which the servicer is not the surviving entity, the debt
of such surviving entity is not investment grade or the note insurer
determines that the servicing capabilities of the surviving entity could
materially and adversely affect the servicing of the mortgage loans.
RIGHTS UPON AN EVENT OF SERVICING TERMINATION
So long as an Event of Servicing Termination remains unremedied, either the
indenture trustee shall at the direction of the note insurer, or shall at the
direction of noteholders representing at least 51% of the aggregate note
principal balance with the consent of the note insurer terminate all of the
rights and obligations of the servicer under the sale and servicing agreement
and in and to the mortgage loans, whereupon the indenture trustee will succeed
to all the responsibilities, duties and liabilities of the servicer under the
sale and servicing agreement and will be entitled to similar compensation
arrangements. In the event that the indenture trustee would be obligated to
succeed to the duties and obligations of the servicer but is 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 sale and servicing agreement and having a net worth of at
least $50,000,000 and acceptable to the note insurer to act as successor to the
servicer under the sale and servicing agreement. Pending such appointment, the
indenture trustee will be obligated to act in such capacity unless prohibited by
law. Such successor will be entitled to receive a servicing fee of 0.50% or such
lesser compensation as the indenture trustee and such successor may agree. A
receiver or conservator for the servicer may be empowered to prevent the
termination and replacement of the servicer where the only Event of Servicing
Termination that has occurred is an Insolvency Event.
EVENTS OF DEFAULT UNDER THE INDENTURE
"Events of Default" under the indenture include:
o a default in the payment of any interest when the same becomes due
and payable and continuance of such default for a period of five days
or a default in the payment in full of the note principal balance at
the stated maturity date;
o failure on the part of the trust to perform in any material respect
any covenant or agreement under the indenture, other than a covenant
covered in the prior clause, or the breach of a representation or
warranty of the trust, which continues for a period of thirty days
after notice thereof is given; and
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o certain events of bankruptcy, insolvency, receivership or liquidation
of the trust.
REMEDIES ON EVENT OF DEFAULT UNDER THE INDENTURE
If an Event of Default under the indenture has occurred and is continuing,
the indenture trustee may, with the consent of the note insurer, or shall, at
the direction of the note insurer or upon the direction of noteholders
representing at least 51% of the aggregate note principal balance, together with
the prior written consent of the note insurer, declare the principal amount of
the notes due and payable immediately. Such a declaration may be rescinded by
the note insurer or noteholders representing at least 51% of the aggregate note
principal balance, together with the prior written consent of the note insurer.
If the principal of the notes has been declared due and payable as
described in the preceding paragraph, the indenture trustee may, with the prior
written consent of the note insurer, or shall, at the direction of the note
insurer, elect not to liquidate the assets of the trust provided that the assets
are generating sufficient cash to pay interest and principal as it becomes due
and payable to the noteholders.
However, the indenture trustee may not sell or otherwise liquidate the
assets of the trust following an Event of Default unless:
o the holders of 100% of the notes and the note insurer consent to such
sale,
o the proceeds of such sale or liquidation are sufficient to pay all
amounts due and owing to the noteholders, to the holders of the Senior
Interest Participations and the note insurer, or
o the indenture trustee determines that the assets of the trust would not
be sufficient on an ongoing basis to make all payments on the notes as
they become due and payable and the indenture trustee obtains the consent
of the note insurer and the holders of 66 2/3% of the aggregate note
principal balance of the notes.
CERTAIN MATTERS REGARDING THE INDENTURE TRUSTEE AND THE OWNER TRUSTEE
Neither the indenture trustee nor any director, officer or employee of the
indenture trustee will be under any liability to the trust or the noteholders
for taking any action or for refraining from the taking of any action in good
faith pursuant to the indenture, or for errors in judgment; provided, that none
of the indenture trustee or any director, officer or employee thereof will be
protected against any liability that would otherwise be imposed on it by reason
of willful malfeasance, bad faith or negligence in the performance of its duties
or by reason of its reckless disregard of its obligations and duties under the
indenture. Subject to certain limitations set forth in the indenture, the
indenture trustee and any director, officer, employee or agent thereof will be
indemnified by the servicer and held harmless against any loss, liability or
expense incurred in connection with any of its duties under the Agreements other
than any loss, liability or expense incurred by reason of its own willful
malfeasance, bad faith or negligence in the performance of its duties under the
indenture, or by reason of its reckless disregard of its obligations and duties
under the indenture. All persons into which the indenture trustee may be merged
or with which it may be consolidated, or any person resulting from such merger
or consolidation, will be the successor to the indenture trustee under the
indenture.
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The owner trustee, the indenture trustee and any of their respective
affiliates may hold notes in their own names or as pledgees. For the purpose of
meeting the legal requirements of certain jurisdictions, the owner trustee and
the indenture trustee acting jointly, or in some instances, the owner trustee or
the indenture trustee acting alone, with the consent of the note insurer (which
consent will not be unreasonably withheld), will have the power to appoint co-
trustees or separate trustees of all or any part of the trust. In the event of
such an appointment, all rights, powers, duties and obligations conferred or
imposed upon the owner trustee by the sale and servicing agreement and the trust
agreement and the indenture trustee by the indenture will be conferred or
imposed upon the owner trustee and the indenture trustee, respectively, and in
each such case such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the owner trustee or indenture trustee will be incompetent
or unqualified to perform certain acts, singly upon such separate trustee or
co-trustee who will exercise and perform such rights, powers, duties and
obligations solely at the direction of the owner trustee or the indenture
trustee, respectively.
The owner trustee may resign at any time, in which event the indenture
trustee will be obligated to appoint a successor thereto acceptable to the note
insurer. The indenture trustee may also remove the owner trustee if it ceases to
be eligible to continue as such under the trust agreement or becomes legally
unable to act or becomes insolvent. Any resignation or removal of the owner
trustee and appointment of a successor thereto will not become effective until
acceptance of the appointment by such successor.
DUTIES OF THE OWNER TRUSTEE AND INDENTURE TRUSTEE
The owner trustee will make no representations as to the validity or
sufficiency of the trust agreement, the notes, or of any mortgage loans or
related documents, and will not be accountable for the use or application by
Champion or the servicer of any funds paid to Champion or the servicer in
respect of the notes, or the mortgage loans, or the investment of any monies by
the servicer before such monies are deposited into the collection account or the
distribution account. The owner trustee will be required to perform only those
duties specifically required of it under the trust agreement. Generally, those
duties will be limited to the receipt of the various certificates, reports or
other instruments required to be furnished to the owner trustee under the trust
agreement, in which case it will only be required to examine them to determine
whether they conform to the requirements of the trust agreement.
The indenture trustee will make no representations as to the validity or
sufficiency of the indenture, the notes, other than the execution and
authentication thereof, or of any mortgage loans or related documents, and will
not be accountable for the use or application by Champion or the servicer of any
funds paid to Champion or the servicer in respect of the notes or the mortgage
loans, or the use or investment of any monies by the servicer before such monies
are deposited into the collection account or the distribution account. So long
as no Event of Default or Event of Servicing Termination has occurred and is
continuing, the indenture trustee will be required to perform only those duties
specifically required of it under the indenture. Generally, those duties will be
limited to the receipt of the various certificates, reports or other instruments
required to be furnished to the indenture trustee under the indenture, in which
case it will only be required to examine them to determine whether they conform
to the requirements of the indenture. The indenture trustee will not be charged
with knowledge of a failure by the servicer to perform its duties under the
trust agreement or sale and servicing agreement which failure constitutes an
Event of Servicing Termination unless
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the indenture trustee obtains actual knowledge of such failure as will be
specified in the indenture.
AMENDMENT
The sale and servicing agreement may be amended from time to time by the
parties thereto and with the consent of the note insurer, which consent will not
be unreasonably withheld, but without the consent of the noteholders, to cure
any ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the sale and servicing agreement, to
add to the duties of the seller or the servicer or to add or amend any
provisions of the sale and servicing agreement, as required by the rating
agencies in order to maintain or improve any rating of the notes (it being
understood that, after obtaining the ratings in effect on the closing date, none
of the seller, the depositor, the indenture trustee, the owner trustee or the
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 sale
and servicing agreement, which shall not be inconsistent with the provisions of
the sale and servicing agreement, provided that such action will not, as
evidenced by an opinion of counsel, materially and adversely affect the
interests of any noteholder or the note insurer; provided, that any such
amendment will not be deemed to materially and adversely affect the noteholders
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 the
notes (without regard to the note policy). The sale and servicing agreement may
also be amended from time to time by the seller, the depositor, the servicer,
the owner trustee and the indenture trustee, with the consent of the affected
noteholders representing at least 51% of the related aggregate note principal
balance and the note insurer (which consent will not be unreasonably withheld)
for the purpose of adding any provisions to or changing in any manner or
eliminating any of the provisions of the sale and servicing agreement or of
modifying in any manner the rights of the noteholders, provided that no such
amendment will (a) reduce in any manner the amount of, or delay the timing of,
collections of payments on the notes or payments under the note policy which are
required to be made on any note without the consent of the holder of such note
and the note insurer or (b) reduce the aforesaid percentage required to consent
to any such amendment, without the consent of the holders of all notes then
outstanding.
The indenture provides that, without the consent of the holders of any
notes, but with the consent of the note insurer and prior notice to the rating
agencies, when authorized by a request of the trust pursuant to the indenture,
at any time and from time to time, the trust and the indenture trustee may enter
into one or more supplemental indentures which will conform to the provisions of
the Trust Indenture Act of 1939, as amended (the "TIA"), as in force at the date
of the execution thereof, in form satisfactory to the indenture trustee, for any
of the following purposes:
(a) to correct or amplify the description of any property at any time
subject to the lien of the indenture, or better to assure, convey and
confirm unto the indenture trustee any property subject or required to be
subjected to the lien of the indenture, or to subject to the lien of the
indenture additional property;
(b) to evidence the succession, in compliance with the applicable
provisions of the indenture, of another entity to the trust, and the
assumption by any such successor of the covenants of the trust contained in
the notes or the indenture;
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(c) to add to the covenants of the trust for the benefit of the holders
of the notes, or to surrender any right or power conferred upon the trust
in the indenture;
(d) to convey, transfer, assign, mortgage or pledge any property to or
with the indenture trustee;
(e) to cure any ambiguity, to correct or supplement any provision in
the indenture or in any supplemental indenture that may be inconsistent
with any other provision in the indenture or in any supplemental indenture;
(f) to evidence and provide for the acceptance of the appointment under
the indenture by a successor trustee with respect to the notes and to add
to or change any of the provisions of the indenture as will be necessary to
facilitate the administration of the trusts thereunder by more than one
trustee, pursuant to the requirements of the indenture; or
(g) to modify, eliminate or add to the provisions of the indenture to
such extent as will be necessary to effect the qualification of the
indenture under the TIA or under any similar federal statute enacted after
the date of the indenture and to add to the indenture such other provisions
as may be expressly required by the TIA;
provided, however, that no such supplemental indentures will be entered into
unless the indenture trustee shall have received an opinion of counsel to the
effect that entering into such supplemental indenture will not have any material
adverse tax consequences to the trust or the noteholders.
In addition, the indenture provides that, without the consent of the
holders of any notes, but with the consent of the rating agencies and the note
insurer, when authorized by a request of the trust pursuant to the indenture, at
any time and from time to time, the trust and indenture trustee may enter into
one or more supplemental indentures (which will conform to the TIA, as in force
at the date of execution thereof), in the form satisfactory to the indenture
trustee, for the purpose of adding any provisions to, or changing in any manner
or eliminating any of the provisions of the indenture, or of modifying in any
manner the rights of the noteholders, provided that such action will not, as
evidenced by an opinion of counsel, have a material adverse tax consequence to
the trust or the noteholders; and provided further, that such action will not,
as evidenced by an opinion of counsel, materially and adversely affect the
interests of the noteholders or the note insurer, provided that no such opinion
of counsel regarding material adverse affect to the noteholders and note insurer
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 the notes (without regard to the
note policy).
The indenture also provides that the trust and the indenture trustee, when
authorized by a written request of the trust, also may, with prior notice to the
note insurer and each rating agency and with the consent of the note insurer and
the holders of notes affected thereby representing not less than a majority of
the related aggregate note principal balance thereof, enter into a supplemental
indenture for the purpose of adding any provisions to, or changing in any manner
or eliminating any of the provisions of, the indenture or of modifying in any
manner the rights of such noteholders thereunder; provided, that no such
supplemental indenture may, without the consent of the holder of each note
affected thereby:
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(a) change the date of payment of any installment of principal of or
interest on any note, or reduce the principal amount thereof or the
interest rate thereon, change the provisions of the indenture relating to
the application of collections on, or the proceeds of the sale of, the
corpus of the trust to payment of principal of or interest on the notes, or
change any place of payment where, or the coin or currency in which, any
note or the interest thereon is payable, or impair the right to institute
suit for the enforcement of the provisions of the indenture requiring the
application of funds available therefor to the payment of any such amount
due on the notes on or after the respective dates such amounts become due;
(b) reduce the percentage of the note principal balances of the notes,
the consent of the holders of which is required for any such supplemental
indenture, or the consent of the holders of which is required for any
waiver of compliance with certain provisions of the indenture or certain
defaults thereunder and their consequences provided for in the indenture;
(c) modify or alter the provisions of the proviso to the definition of
the term "Outstanding" in the indenture or modify or alter the exception in
the definition of the term "Holder" therein;
(d) reduce the percentage of the note principal balance of the notes
required to direct the indenture trustee to direct the trust to sell or
liquidate the corpus of the trust pursuant to the indenture;
(e) modify any provision of the amendment provisions of the indenture
except to increase any percentage specified in the indenture or to provide
that certain additional provisions of the indenture or the other Agreements
cannot be modified or waived without the consent of the holder of each note
affected thereby;
(f) modify any of the provisions of the indenture in such manner as to
affect the calculation of the amount of any payment of interest or
principal due on any note on any payment date (including the calculation of
any of the individual components of such calculation); or
(g) permit the creation of any lien ranking prior to or on a parity
with the lien of the indenture with respect to any part of the trust estate
or, except as otherwise permitted or contemplated in the indenture,
terminate the lien of the indenture on any property at any time subject
thereto or deprive the holder of any note of the security provided by the
lien of the indenture;
and provided, further, that such action will not, as evidenced by an opinion of
counsel, cause the trust to be subject to an entity level tax.
TERMINATION; RETIREMENT OF THE NOTES
The trust will terminate on the payment date following the later of (A)
payment in full of all amounts owing to the note insurer, unless the note
insurer shall otherwise consent and (B) the earliest of (1) the final payment
(or other liquidation) of the last mortgage loan in the trust or the disposition
of all property acquired upon foreclosure or by deed in lieu of foreclosure of
any mortgage loan, (2) the optional transfer to the servicer of all of the
mortgage loans, as described below and (3) the payment date in September 2029.
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The mortgage loans will be subject to an optional transfer to the servicer
on any payment date on or after the pool balance is reduced to an amount less
than or equal to 5% of the sum of (a) the cut-off date pool balance and (b) the
initial pre-funded amount (the "Optional Termination Date") and all amounts due
and owing to the note insurer, including unreimbursed draws on the note policy,
together with interest thereon, as provided under the insurance agreement, have
been paid. The transfer price will be equal to the sum of the pool balance and
accrued and unpaid interest thereon at the weighted average of the loan rates
through the end of the due period preceding the final payment date together with
all amounts due and owing the note insurer.
In no event will the trust created by the trust agreement continue for more
than 21 years after the death of certain individuals named in the sale and
servicing agreement. Written notice of termination of the trust will be given to
each noteholder, and the final payment will be made only upon surrender and
cancellation of the notes at an office or agency appointed by the indenture
trustee which will be specified in the notice of termination.
NO PETITION
In the indenture, the indenture trustee and the noteholders by their
acceptance of a note will covenant that they will not institute, or join in any
institution, against the trust, the seller, the servicer or the depositor, any
bankruptcy, reorganization, insolvency, liquidation or similar proceeding in
connection with any obligations regarding the notes, the indenture or the
transactions contemplated by the Agreements.
THE INDENTURE TRUSTEE
Harris Trust and Savings Bank, a banking corporation organized under the
laws of the State of Illinois, will be named indenture trustee pursuant to the
sale and servicing agreement and the indenture.
The indenture trustee may own notes and have normal banking relationships
with the servicer, the seller and the note insurer and/or their affiliates.
The indenture trustee may resign at any time, in which event the trust will
be obligated to appoint a successor indenture trustee, with the consent of the
note insurer. The note insurer may also remove the indenture trustee if the
indenture trustee ceases to be eligible to continue as such under the indenture
or if the indenture trustee becomes insolvent. Upon becoming aware of such
circumstances, the trust will be obligated to appoint a successor indenture
trustee, as approved by the note insurer. Any resignation or removal of the
indenture trustee and appointment of a successor indenture trustee will not
become effective until acceptance of the appointment by the successor indenture
trustee.
No holder of a note will have any right under the indenture to institute
any proceeding with respect to the indenture unless the note insurer has
consented in writing to the institution of such proceeding and such holder
previously has given to the indenture trustee written notice of default and
unless noteholders representing at least 51% of the aggregate note principal
balance have made written requests upon the indenture trustee to institute such
proceeding in its own name as indenture trustee thereunder and have offered to
the indenture trustee reasonable indemnity and the indenture trustee for
60 days has neglected or refused to institute any such proceeding. The indenture
trustee will be under no obligation to exercise any of the trusts or powers
vested in it by the indenture or to make any investigation of matters arising
thereunder or to institute, conduct or defend any litigation thereunder or in
relation thereto at the request, order or direction of any of the noteholders,
unless such noteholders have offered
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to the indenture trustee reasonable security or indemnity against the costs,
expenses and liabilities which may be incurred therein or thereby and the note
insurer has consented to such action, which consent shall not be unreasonably
withheld.
THE PAYING AGENT
The paying agent shall initially be the indenture trustee, together with
any successor thereto in such capacity. The paying agent shall have the
revocable power to withdraw funds from the distribution account for the purpose
of making payments to the holders of the notes and the Senior Interest
Participations.
DESCRIPTION OF THE PURCHASE AGREEMENT
On the closing date, the mortgage loans will be purchased by the depositor
from Champion pursuant to the purchase agreement. Pursuant to the sale and
servicing agreement, the mortgage loans will be immediately transferred by the
depositor to the trust, and the depositor will assign its rights in, to and
under the purchase agreement to the trust.
In the purchase agreement, Champion will make representations and
warranties similar to those made by it in the sale and servicing agreement. In
the event of a breach of any such representations and warranties which has a
material adverse effect on the interests of the noteholders or the note insurer,
Champion will be required to repurchase or substitute for the mortgage loans as
described herein under "Description of the Notes--Assignment of Mortgage Loans."
Champion 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.
USE OF PROCEEDS
The net proceeds to be received from the sale of the notes will be applied
by the depositor towards the purchase of mortgage loans from Champion and to
fund the pre-funding account and the capitalized interest account.
FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following discussion, which summarizes certain U.S. federal income tax
aspects of the purchase, ownership and disposition of the notes, is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations, and published rulings and court decisions currently in
effect, all of which are subject to change, possibly retroactively. This
discussion does not address every aspect of the U.S. federal income tax laws
which may be relevant to beneficial owners in light of their personal investment
circumstances or to certain types of beneficial owners subject to special
treatment under the U.S. federal income tax laws, for example, banks and life
insurance companies. Accordingly, investors should consult their tax advisors
regarding U.S. federal, state, local, foreign and any other tax consequences to
them of investing in the notes.
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CHARACTERIZATION OF THE NOTES AS INDEBTEDNESS
Based on the application of existing law to the facts as set forth in the
Agreements and other relevant documents and assuming compliance with the terms
of the Agreements as in effect on the date of issuance of the notes, Brown &
Wood LLP, special tax counsel to the trust and counsel to the underwriters, is
of the opinion that (1) the notes will be treated as debt instruments for
federal income tax purposes as of such date and (2) the trust will not be
characterized as an association (or publicly traded partnership) taxable as a
corporation or as a taxable mortgage pool within the meaning of Section 7701(i)
of the Code. Accordingly, upon issuance, the notes will be treated as debt
securities as described in the prospectus. See "Federal Income Tax
Considerations" in the Prospectus.
The trust and the noteholders express in the indenture their intent that,
for applicable tax purposes, the notes will be indebtedness secured by the
mortgage loans. The trust and the noteholders, by accepting the notes, and each
beneficial owner by its acquisition of a beneficial interest in a note, have
agreed to treat the notes as indebtedness for U.S. federal income tax purposes.
In general, whether for U.S. federal income tax purposes a transaction
constitutes a sale of property or loan, the repayment of which is secured by
property, is a question of fact, the resolution of which is based upon the
economic substance of the transaction rather than its form or the manner in
which it is labeled. While the IRS and the courts have set forth several factors
to be taken into account in determining whether the substance of a transaction
is a sale of property or a secured loan, the primary factor in making this
determination is whether the transferee has assumed the risk of loss or other
economic burdens relating to the property and has obtained the benefits of
ownership thereof. Tax counsel has analyzed and relied on several factors in
reaching its opinion that the owner of the Transferor Interest and the Senior
Interest Participations will have the weight of the benefits and burdens of
ownership of the mortgage loans and not the beneficial owners of the notes.
In some instances, courts have held that a taxpayer is bound by the
particular form it has chosen for a transaction, even if the substance of the
transaction does not accord with its form. Tax counsel has advised that the
rationale of those cases will not apply to this transaction, because the form of
the transaction as reflected in the operative provisions, of the documents
either accords with the characterization of the notes as debt or otherwise makes
the rationale of those cases inapplicable to this situation.
TAXATION OF INTEREST INCOME OF BENEFICIAL OWNERS
Assuming that the beneficial owners are holders of debt obligations for
U.S. federal income tax purposes, the notes generally will be taxable as debt
securities. See "Federal Income Tax Considerations" in the prospectus.
While it is not anticipated that the notes will be issued at a greater than
de minimis discount, under the Treasury's OID regulations it is possible that
the notes could nevertheless be deemed to have been issued with OID if the
interest were not treated as unconditionally payable under the OID regulations.
If such regulations were to apply, all of the taxable income to be recognized
with respect to the notes would be includible in income of beneficial owners as
OID, but would not be includible again when the interest is actually received.
See "Federal Income Tax Considerations--Taxation of Debt Securities; Interest
and Acquisition Discount" in the prospectus for a discussion of the application
of the OID rules if the notes are in fact issued at a greater than de minimis
discount or are treated as having been issued with OID under the OID
regulations. For purposes of calculating OID, it is likely that the notes will
be treated as pay-through securities.
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POSSIBLE CLASSIFICATION OF THE TRUST AS A PARTNERSHIP OR ASSOCIATION TAXABLE AS
A CORPORATION
The opinion of tax counsel is not binding on the courts or the IRS. It is
possible that the IRS could assert that for purposes of the Code, the
transaction contemplated by this prospectus supplement with respect to the notes
constitutes a sale of the mortgage loans or an interest therein to the
beneficial owners and that the proper classification of the legal relationship
between the Transferor and the beneficial owners resulting from this transaction
is that of a partnership including a publicly traded partnership, a publicly
traded partnership treated as a corporation, or an association or taxable
mortgage pool taxable as a corporation. Since tax counsel has advised that the
notes will be treated as indebtedness in the hands of the noteholders for U.S.
federal income tax purposes, the Transferor will not attempt to comply with U.S.
federal income tax reporting requirements applicable to partnerships or
corporations as such requirements would apply if the notes were not treated as
indebtedness.
If it were determined that this transaction created an entity classified as
a corporation, including a publicly traded partnership or taxable mortgage pool
taxable as a corporation, the trust would be subject to U.S. federal income tax
at corporate income tax rates on the income it derives from the mortgage loans,
which would reduce the amounts available for payment to the beneficial owners.
Cash payments to the beneficial owners generally would be treated as dividends
for tax purposes to the extent of such corporation's earnings and profits. If
the transaction were treated as creating a partnership between the beneficial
owners and the Transferor, the partnership itself would not be subject to U.S.
federal income tax--unless it were to be characterized as a publicly traded
partnership taxable as a corporation; rather, the Transferor and each beneficial
owner would be taxed individually on their respective distributive shares of the
partnership's income, gain, loss, deductions and credits. The amount and timing
of items of income and deductions of the beneficial owner could differ if the
notes were held to constitute partnership interests rather than indebtedness.
FOREIGN INVESTORS
In general, subject to certain exceptions, interest, including OID, paid on
a note to a nonresident alien individual, foreign corporation or other
non-United States person is not subject to U.S. federal income tax, provided
that such interest is not effectively connected with a trade or business of the
recipient in the United States and the beneficial owner provides the required
foreign person information certification. See "Federal Income Tax
Considerations--Tax Treatment of Foreign Investors" in the prospectus.
If the interests of the beneficial owners were deemed to be partnership
interests, the partnership, if it were considered to be engaged in a U.S. trade
or business, would be required, on a quarterly basis, to pay withholding tax
equal to the product, for each foreign partner, of such foreign partner's
distributive share of "effectively connected" income of the partnership
multiplied by the highest rate of tax applicable to that foreign partner. In
addition, such foreign partner would be subject to branch profits tax. Each
non-foreign partner would be required to certify to the partnership that it is
not a foreign person. The tax withheld from each foreign partner would be
credited against such foreign partner's U.S. income tax liability.
If the trust were taxable as a corporation, payments to foreign persons, to
the extent treated as dividends, or if the trust were characterized as a
partnership that was not engaged in a trade or business, all interest payments,
would generally be subject to withholding at the rate of 30%, unless such rate
were reduced by an applicable tax treaty.
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If, contrary to the opinion of tax counsel, the notes are recharacterized
as equity interests in a partnership, or in an association or publicly traded
partnership taxable as a corporation, any taxes required to be so withheld will
be treated for all purposes of the notes and the note policy as having been paid
to the related noteholder.
BACKUP WITHHOLDING
Certain beneficial owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the notes if the beneficial owners, upon
issuance, fail to supply the indenture trustee with his taxpayer identification
number, furnish an incorrect taxpayer identification number, fail to report
interest, dividends, or other "reportable payments" (as defined in the Code)
property, or, under certain circumstances, fail to provide the indenture trustee
with a certified statement, under penalty of perjury, that he is not subject to
backup withholding.
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The indenture trustee will be required to report annually to the IRS, and
to each noteholder of record, the amount of interest paid and OID accrued, if
any, on the notes and the amount of interest withheld for U.S. federal income
taxes, if any, for each calendar year, except as to exempt holders which are,
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 noteholder of record is Cede, as nominee for DTC, beneficial
owners and the IRS will receive tax and other information including the amount
of interest paid on the notes from participants and indirect participants rather
than from the indenture trustee. The indenture 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 beneficial
owner will be required to provide, under penalty of perjury, a certificate on
IRS Form W-9 containing his or her name, address, correct federal taxpayer
identification number and a statement that he or she is not subject to backup
withholding. Should a non-exempt beneficial owner fail to provide the required
certification, the participants or indirect participants or the Paying Agent
will be required to withhold 31% of the interest and principal otherwise payable
to the holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Final regulations dealing with backup withholding and information reporting
on income paid to a foreign person and related matters (the "New Withholding
Regulations") were published in the Federal Register on October 14, 1997. In
general, the New Withholding Regulations do not significantly alter the
substantive withholding and information reporting requirements, but do unify
current certification procedures and forms and clarify reliance standards. The
New Withholding Regulations generally will be effective for payments made after
December 31, 2000, subject to certain transition rules. The discussion set forth
above does not take the New Withholding Regulations into account. Prospective
beneficial owners are strongly urged to consult their own tax advisor with
respect to the New Withholding Regulations.
STATE TAXES
Champion and the depositor make no representations regarding the tax
consequences of purchase, ownership or disposition of the notes under the tax
laws of any state. Investors considering an investment in the notes should
consult their own tax advisors regarding such tax consequences.
All investors should consult their own tax advisors regarding the federal,
state, local, foreign or any other income tax consequences of the purchase,
ownership and disposition of the notes.
ERISA CONSIDERATIONS
GENERAL
The Employee Retirement Income Security Act of 1974, as amended, or ERISA,
and Section 4975 of the Code impose certain restrictions on employee benefit
plans subject to ERISA or plans or 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
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of ERISA, and assets of such plans may be invested in the notes without regard
to the ERISA considerations described below, subject to other applicable federal
and state law. However, any 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. Any Plan fiduciary which proposes to cause a
Plan to acquire any of the notes should consult with its counsel with respect to
the potential consequences under ERISA and the Code of the Plan's acquisition
and ownership of the notes. See "ERISA Considerations" in the prospectus.
Investments by Plans subject to ERISA are also subject to general fiduciary
requirements, including the requirement of investment prudence and
diversification and the requirement that a Plan's investments be made in
accordance with the documents governing the Plan.
PROHIBITED TRANSACTIONS
GENERAL
Section 406 of ERISA prohibits parties in interest with respect to a Plan
from engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory, regulatory 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.
PLAN ASSET REGULATION
The DOL has issued final regulations concerning the definition of what
constitutes the assets of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code (the "Plan Asset Regulation"). The Plan Asset
Regulation describes the circumstances under which the assets of an entity in
which a Plan invests will be considered to be plan assets such that any person
who exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the Plan Asset Regulation, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulation provides that, if a Plan acquires an equity interest in an entity
that is neither a publicly-offered security nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
assets of the entity will be treated as assets of the Plan investor unless
certain exceptions apply. If the notes were deemed to be equity interests and no
statutory, regulatory or administrative exemption applies, the trust could be
considered to hold plan assets by reason of a Plan's investment in the notes.
Such plan assets would include an undivided interest in any assets held by the
trust. In such an event, the servicer and other persons, in providing services
with respect to the trust's assets, may be parties in interest with respect to
such Plans, subject to the fiduciary responsibility provisions of Title I of
ERISA, including the prohibited transaction provisions of Section 406 of ERISA,
and to Section 4975 of the Code with respect to transactions involving the
trust's assets. Under the Plan Asset Regulation, the term "equity interest" is
defined as any interest in an entity other than an instrument that is treated as
indebtedness under applicable local law and which has no substantial equity
features. Although the Plan Asset Regulation is silent with respect to the
question of which law constitutes applicable local law for this purpose, the DOL
has stated that these determinations should be made under the state law
governing interpretation of the instrument in question. In the preamble to the
Plan Asset Regulation, the DOL declined to provide a precise definition of what
features are equity
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features or the circumstances under which such features would be considered
substantial, noting that the question of whether a plan's interest has
substantial equity features is an inherently factual one, but that in making a
determination it would be appropriate to take into account whether the equity
features are such that a Plan's investment would be a practical vehicle for the
indirect provision of investment management services. Brown & Wood LLP has
rendered its opinion that the notes will be classified as indebtedness for tax
purposes and the depositor believes that the notes will be classified as
indebtedness without substantial equity features for ERISA purposes. However, if
the notes are deemed to be equity interests in the trust and no statutory,
regulatory or administrative exemption applies, the trust could be considered to
hold plan assets by reason of a Plan's investment in the notes.
PROHIBITED TRANSACTION EXEMPTIONS
Regardless of whether the notes are treated as indebtedness or equity for
purposes of ERISA, the acquisition or holding of notes by or on behalf of a Plan
could still be considered to give rise to a prohibited transaction if the trust,
the trustee, or any of their respective affiliates is or becomes a party in
interest or a disqualified person with respect to such Plan or in the event that
a subsequent transfer of a note is between a Plan and a party in interest or
disqualified person with respect to such Plan. One or more exemptions may be
available with respect to certain prohibited transaction rules of ERISA that
might apply in connection with the initial purchase, holding and resale of the
notes, depending in part upon the type of Plan fiduciary making the decision to
acquire notes and the circumstances under which such decision is made. These
exemptions include, but are not limited to:
o PTCE 96-23, regarding investments determined by in-house asset managers;
o PTCE 95-60, regarding investments by insurance company general accounts;
o PTCE 91-38, regarding investments by bank collective investment funds;
o PTCE 90-1, regarding investments by insurance company pooled separate
accounts; and
o PTCE 84-14, regarding transactions negotiated by qualified professional
asset managers.
Before purchasing notes, a Plan investor should consult with its counsel to
determine whether the conditions of any exemption would be met. A purchaser of a
note should be aware, however, that even if the conditions specified in one or
more exemptions are met, the scope of the relief provided by an exemption might
not cover all acts that might be construed as prohibited transactions. The
purchase of a note will be deemed a representation by the acquirer that either:
o it is not, and is not purchasing such note directly or indirectly for, or
on behalf of, a benefit plan investor as defined in the Plan Asset
Regulation with respect to a Plan which is subject to Title I of ERISA or
Section 4975 of the Code or
o the acquisition or holding of such note by the acquirer qualifies for
prohibited transaction exemptive relief under PTCE 96-23, PTCE 95-60,
PTCE 91-38, PTCE 90-1, PTCE 84-14 or some other applicable exemption.
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REVIEW BY PLAN FIDUCIARIES
Any Plan fiduciary considering whether to purchase any notes on behalf of a
Plan should consult with its counsel regarding the applicability of the
fiduciary responsibility and prohibited transaction provisions of ERISA and the
Code to such investment. Among other things, before purchasing any notes, a
fiduciary of a Plan should make its own determination as to whether the trust,
as obligor on the notes, is a party in interest with respect to the Plan, the
availability of the exemptive relief provided in the Plan Asset Regulations and
the availability of any other prohibited transaction exemptions.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the notes will be rated in the
highest rating category of the rating agencies, the notes will not constitute
mortgage related securities for purposes of the Secondary Mortgage Market
Enhancement Act of 1984, or SMMEA, because not all of the mortgages securing the
mortgage loans are first mortgages. Accordingly, many institutions with legal
authority to invest in comparably rated securities based on first mortgage loans
may not be legally authorized to invest in the notes, which because they
evidence interests in a pool that includes second mortgage loans are not
mortgage related securities under SMMEA. See "Legal Investment" in the
prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
the depositor has agreed to sell to the underwriters, and each of the
underwriters has severally agreed to purchase from the depositor the principal
amount of notes set forth below opposite their respective names.
<TABLE>
<CAPTION>
UNDERWRITER CLASS I-A NOTES CLASS II-A NOTES CLASS III-A NOTES
- -------------------------------------------------------- --------------- ---------------- -----------------
<S> <C> <C> <C>
Lehman Brothers Inc..................................... $ 114,000,000 $ 28,500,000 $ 57,000,000
McDonald Investments Inc................................ $ 86,000,000 $ 21,500,000 $ 43,000,000
------------- ------------ -------------
Total............................................. $ 200,000,000 $ 50,000,000 $ 100,000,000
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
In the underwriting agreement, the underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase the notes offered hereby if
any of the notes are purchased.
The depositor has been advised by the underwriters that they propose
initially to offer the notes to the public in Europe and the United States at
the offering price set forth herein and to certain dealers at such price, less a
selling concession, not in excess of 0.18% of the note denominations. The
underwriters may allow and such dealers may reallow a reallowance discount not
in excess of 0.09% of the note denominations to certain other dealers. After the
initial public offering, the public offering price, such concessions and such
discounts may be changed.
The depositor has been advised by Lehman Brothers Inc. that it presently
intends to, and by McDonald Investments Inc. that it may, make a market in the
notes offered hereby; however, the underwriters are not obligated to do so, any
market-making may be discontinued at any time, and there can be no assurance
that an active public market for the notes will develop.
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Until the payment of the notes is completed, rules of the SEC may limit the
ability of the underwriters and certain selling group members to bid for and
purchase the notes. As an exception to these rules, the underwriters are
permitted to engage in certain transactions that stabilize the price of the
notes. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the notes.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the depositor nor either of the underwriters makes any
representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the prices of the notes. In
addition, neither the depositor nor either of the underwriters makes any
representation that the underwriters will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.
The underwriting agreement provides that the depositor will indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Act of 1933, as amended.
The depositor is an affiliate of Lehman Brothers Inc.
After the initial distribution of the notes by the underwriters, the
prospectus and prospectus supplement may be used by McDonald Investments Inc.
("McDonald Investments"), a wholly-owned subsidiary of KeyCorp and an affiliate
of the seller and servicer, or its successors, in connection with market making
transactions in the notes. McDonald Investments is a member of the New York
Stock Exchange, Inc. McDonald Investments 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 notes will be passed upon for the
depositor by Brown & Wood LLP, New York, New York and for the underwriters by
Brown & Wood LLP, New York, New York. Certain legal matters will be passed upon
for Champion by Stroock & Stroock & Lavan LLP, New York, New York. Certain legal
matters will be passed upon for the note insurer by Shaw Pittman, New York, New
York.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and December 31, 1997 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1998,
incorporated by reference in this prospectus supplement, have been incorporated
herein in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
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RATINGS
It is a condition to issuance that the notes be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by noteholders
of payments 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 notes. The ratings on the notes do not, however, constitute
statements regarding the likelihood or frequency of prepayments on the mortgage
loans or the possibility that noteholders might realize a lower than anticipated
yield.
The ratings assigned to the notes will depend primarily upon the
creditworthiness of the note insurer. Any reduction in a rating assigned to the
financial strength of the note insurer below the ratings initially assigned to
the notes may result in a reduction of one or more of the ratings assigned to
the notes.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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SCHEDULE I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Home Equity
Loan Asset-Backed Notes, Series 1999-3 (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, Cedelbank 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 Cedelbank and Euroclear will be conducted in the ordinary way in
accordance with their normal rules and operating procedures and in accordance
with conventional eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors holding Global Securities
through DTC will be conducted according to the rules and procedures applicable
to U.S. corporate debt obligations and prior Home Equity Loan Asset-Backed Notes
issues.
Secondary cross-market trading between Cedelbank or Euroclear and DTC
Participants holding Notes will be effected on a delivery-against-payment basis
through the respective Depositaries of Cedelbank 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, Cedelbank and Euroclear will hold
positions on behalf of their participants through their respective Depositaries,
which in turn will hold such positions in accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
the settlement practices applicable to prior Home Equity Loan Asset-Backed Notes
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 Cedelbank 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.
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Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures applicable to prior Home
Equity Loan Asset-Backed Notes issues in same-day funds.
Trading between Cedelbank and/or Euroclear Participants. Secondary market
trading between Cedelbank Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC seller and Cedelbank or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedelbank Participant or a Euroclear Participant, the purchaser
will send instructions to Cedelbank or Euroclear through a Cedelbank Participant
or Euroclear Participant at least one business day prior to settlement.
Cedelbank or Euroclear will instruct the respective Depositary, as the case may
be, to receive the Global Securities against payment. Payment will include
interest accrued on the Global Securities from and including the last coupon
payment date to and excluding the settlement date, on the basis of the actual
number of days in such accrual period and a year assumed to consist of 360 days.
For transactions selling on the 31st of the month, payment will include interest
accrued to and excluding the first day of the following month. Payment will then
be made by the respective Depositary of the DTC Participant's account against
delivery of the Global Securities. After settlement has been completed, the
Global Securities will be credited to the respective clearing system and by the
clearing system, in accordance with its usual procedures, to the Cedelbank
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 Cedelbank or Euroclear cash debt will be valued instead as of the actual
settlement date.
Cedelbank 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 Cedelbank or Euroclear. Under
this approach, they may take on credit exposure to Cedelbank or Euroclear until
the Global Securities are credited to their accounts one day later.
As an alternative, if Cedelbank or Euroclear has extended a line of credit
to them, Cedelbank Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under their procedure, Cedelbank 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 Cedelbank 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 Cedelbank 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.
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Trading between Cedelbank or Euroclear seller and DTC purchaser. Due to
time zone differences in their favor, Cedelbank 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 Cedelbank or Euroclear through a Cedelbank Participant or
Euroclear Participant at least one business day prior to settlement. In these
cases Cedelbank or Euroclear will instruct the respective Depositary, as
appropriate, to deliver the Global Securities to the DTC Participant's account
against payment. Payment will include interest accrued on the Global Securities
from and including the last coupon payment to and excluding the settlement date
on the basis of the actual number of days in such accrual period and a year
assumed to consist of 360 days. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of the
Cedelbank Participant or Euroclear Participant the following day, and receipt of
the cash proceeds in the Cedelbank 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 Cedelbank 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 Cedelbank Participant's or
Euroclear Participant's account would instead be valued as of the actual
settlement date.
Finally, day traders that use Cedelbank or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Cedelbank 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 Cedelbank or Euroclear for one day (until the
purchase side of the day trade is reflected in their Cedelbank or Euroclear
accounts) in accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant
no later than one day prior to settlement, which would give the Global
Securities sufficient time to be reflected in their Cedelbank 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 Cedelbank
Participant or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Cedelbank 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:
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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 Note 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 Note). If the treaty provides only for a reduced rate,
withholding tax will be imposed at that rate unless the filer altenatively files
Form W-8. Form 1001 may be filed by the Note 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 Note 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:
o a citizen or resident of the United States,
o a corporation or partnership organized in or under the laws of the
United States or any political subdivision thereof,
o an estate the income of which is includible in gross income for
United States tax purposes, regardless of its source, or
o 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 trustees have authority to control all substantial
decisions of the trust.
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
including the application of Treasury regulations relating to tax documentation
requirements that are generally applicable with respect to payments made after
December 31, 2000. Investors are advised to consult their own tax advisors for
specific tax advice concerning their holding and disposing of the Global
Securities.
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PROSPECTUS
LEHMAN ABS CORPORATION
ASSET-BACKED CERTIFICATES
ASSET-BACKED NOTES
(ISSUABLE IN SERIES)
Lehman ABS Corporation, as depositor, may offer from time to time under this
prospectus and related prospectus supplements securities that are either
asset-backed notes, asset-backed certificates and asset-backed custody receipts
which may be sold from time to time in one or more series. Each series of
securities will be issued in one or more classes.
The related prospectus supplement will set forth the specific assets of the
trust fund and the seller or sellers from whom the assets are acquired. The
assets may include:
(a) one or more pools of
(1) closed-end and/or revolving home equity loans or
specified balances thereof and/or loans of which the
proceeds have been applied to the purchase of the
related mortgaged property, secured by mortgages
primarily on one- to four-family residential properties,
(2) home improvement installment sales contracts and
installment loan agreements which may be unsecured,
secured by mortgages primarily on one- to four-family
residential properties, or secured by purchase money
security interests in the related home improvements,
(3) private securities evidencing ownership interests in or
secured by loans similar to the types of loans described
in clauses (1) and (2) above,
(b) all monies due under the above assets (which may be net of amounts
payable to the servicer), and
(c) funds or accounts established for the related trust fund, or one or
more forms of enhancement.
The prospectus supplement will state if the trust fund will make a REMIC
election for federal income tax purposes.
FOR A DISCUSSION OF RISKS ASSOCIATED WITH AN INVESTMENT IN THE SECURITIES, SEE
RISK FACTORS ON PAGE 2.
Neither the SEC nor any state securities commission has approved or disapproved
the offered securities or determined if this prospectus is accurate or complete.
Making any contrary representation is a criminal offense.
LEHMAN BROTHERS
September 20, 1999
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RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of the securities.
LIMITED LIQUIDITY MAY RESULT IN DELAYS IN ABILITY TO SELL SECURITIES OR LOWER
RETURNS
There will be no market for the securities of any series prior to their
issuance, and there can be no assurance that a secondary market will develop. If
a secondary market does develop, there can be no assurance that it will provide
holders with liquidity of investment or that the market will continue for the
life of the securities of such series. Lehman Brothers, through one or more of
its affiliates, and any other underwriters presently expect to make a secondary
market in the securities, but have no obligation to do so. Absent a secondary
market for the securities you may experience a delay if you choose to sell your
securities or the price you receive may be less than you would receive for a
comparable liquid security.
LIMITED ASSETS FOR PAYMENTS--NO RECOURSE TO DEPOSITOR, SELLER OR SERVICER
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 that series. 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 or custody receipt.
Further, as described in the related prospectus supplement, at the times
set forth in the related prospectus supplement, some primary assets and/or any
amount remaining in the collection account or distribution account for a series
and other amounts described specified in the related prospectus supplement, may
be promptly released or remitted to the depositor, the servicer, the provider of
any enhancement or any other person entitled thereto and will no longer be
available for making payments to the holders of the securities. 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 that series, for the payment of principal of and interest
on the securities of that series.
If there is a default with respect to payments on a series of notes,
holders of those notes will be required under the indenture to proceed only
against the primary assets and other assets constituting the related trust fund
and may not proceed against any assets of the depositor. If payments with
respect to the assets securing a series of notes, including any enhancement,
were to become insufficient to make payments on those notes, no other assets
would be available for payment of the deficiency and holders of those notes may
experience a loss.
The only obligations, if any, of the depositor with respect to the
securities of any series will be pursuant to representations and warranties. 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. If the depositor does not have sufficient assets and no other party
is obligated to repurchase defective primary assets, you may experience a loss.
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We refer you to "The Agreements--Assignment of Primary Assets."
LIMITS ON ENHANCEMENT MAY RESULT IN LOSSES TO HOLDERS
Although enhancement for the securities is intended to reduce the risk of
delinquent payments or losses to holders of a series of securities entitled to
the benefit thereof, the amount of the enhancement will be limited, as set forth
in the related prospectus supplement. In addition the amount available will
decline and could be depleted prior to the payment in full of the related series
of securities, and losses on the primary assets could result in losses to
holders of those securities.
We refer you to "Enhancement."
TIMING AND RATE OF PREPAYMENTS MAY RESULT IN LOWER YIELD
The yield to maturity experienced by a holder of securities may be affected
by the rate and timing of payment of principal of the loans or of the underlying
loans relating to the private securities. The rate and timing of principal
payments of the securities of a series will be affected by a number of factors,
including the following:
(1) the extent of prepayments, which may be influenced by a variety
of factors,
(2) the manner of allocating principal payments among the classes of
securities of a series as specified in the related prospectus supplement,
and
(3) the exercise of any right of optional termination.
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
representations or warranties.
We refer you to "Description of the Securities--Weighted Average Life of
Securities."
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.
We refer you to "Description of the Securities--Payments of Interest."
STATUS OF LOANS AS JUNIOR LIENS MAY RESULT IN LOSSES IN FORECLOSURE PROCEEDINGS
The mortgages may be junior liens subordinate to the rights of the
mortgagee under the senior mortgage or mortgages on the same mortgaged property.
The proceeds from any liquidation, insurance or condemnation proceedings in
connection with a junior mortgage will be available to satisfy the outstanding
balance of that mortgage only to the extent that the claims of the senior
mortgagees have been satisfied in full, including any related foreclosure costs.
In addition, a junior mortgagee may not foreclose on the property securing a
junior mortgage unless it forecloses subject to the senior mortgages. If a
junior mortgagee forecloses on the mortgaged property, 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. The trust fund will
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not have any source of funds to satisfy the senior mortgages or make payments
due to the senior mortgagees. As a result, the servicer may not be able to
foreclose on a mortgaged property or may realize lower proceeds in a foreclosure
relating to a defaulted loan and you may experience a corresponding loss.
DECREASE IN VALUE OF MORTGAGED PROPERTY WOULD DISPROPORTIONATELY AFFECT JUNIOR
LIENHOLDERS
There are several factors that could adversely affect the value of
properties and the outstanding balance of the related loan, together with any
senior financing, 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 decline in the value of a property could extinguish
the value of a junior interest in that property before having any effect on the
related senior interest therein. If a decline in the value of the properties
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.
YOU COULD BE ADVERSELY AFFECTED BY VIOLATIONS OF ENVIRONMENTAL LAWS
Real property pledged as security to a lender may be subject to
environmental risks. Under the laws of some 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 other lien against the related property. In addition, under the laws of some
states and under 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 liability under CERCLA on foreclosure of the mortgaged
property securing a mortgage. Failure to comply with environmental laws may
result in fines and penalties that could be assessed against the trust fund as
owner of the related property. If a trust fund is considered an owner or an
operator of a contaminated property, the trust fund will suffer losses for any
liability imposed for environmental hazards on the property. These losses may
result in reductions in the amounts distributed to the holders of the related
securities.
VIOLATIONS OF LENDING LAWS COULD RESULT IN LOSSES ON PRIMARY ASSETS
Applicable state laws generally regulate interest rates and other charges
and require particular 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 related trust fund as the owner of the loan, to
damages and administrative enforcement.
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The loans are also subject to Federal laws, including laws that require
particular disclosures to borrowers, that prohibit discrimination and that
regulate the use and reporting of information relating to the borrower's credit
experience. Violations of 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 related trust fund as the owner of the
loan to damages and administrative enforcement.
We refer you to "Legal Aspects of Loans."
The home improvement contracts are also subject to the regulations of the
Federal Trade Commission and other similar federal and state statutes and 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, such as the related trust fund with respect to the loans, to all
claims and defenses which the obligor in the credit sale transaction could
assert against the seller of the goods.
Losses on loans from violation of these lending laws that are not otherwise
covered by the enhancement for a series will be borne by the holders of one or
more classes of securities for the related series.
RATING OF THE SECURITIES RELATES TO CREDIT RISK ONLY AND DOES NOT ASSURE PAYMENT
ON THE SECURITIES
The ratings of the securities would be based on, among other things, the
adequacy of the value of the primary assets and any enhancement with respect to
those securities. A rating should not be deemed a recommendation to purchase,
hold or sell securities, since it does not address market price or suitability
for a particular investor. There is also no assurance that any rating will
remain in effect for any given period of time or that the rating will 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 the related enhancer's financial strength. Any reduction or
withdrawal of a rating will have an adverse effect on the value of the related
securities.
LIQUIDATION VALUE OF TRUST FUND ASSETS MAY BE INSUFFICIENT TO SATISFY ALL CLAIMS
AGAINST TRUST FUND
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 then outstanding, plus accrued
interest thereon. In addition, 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 generally will be
entitled to receive the proceeds of any such sale to the extent of their unpaid
fees and other amounts prior to distributions to holders of securities. Upon a
sale, the proceeds may be insufficient to pay in full the principal of and
interest on the securities of a series.
The amount of liquidation expenses incurred with respect to defaulted loans
do not vary directly with the outstanding principal balance of the loan at the
time of default. Therefore,
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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 net realizations
in the case of a typical pool of first mortgage loans. The payment of
liquidation expenses will reduce the portion of the amount realized that will be
available to make payments on the securities and may result in the related
securityholders suffering a loss.
DESCRIPTION OF THE SECURITIES
GENERAL
A series of securities issued under this registration statement may consist
of any combination of notes, certificates or custody receipts. If notes are
issued, they will be issued in series pursuant to an indenture between the
related trust fund and the entity named in the related prospectus supplement as
trustee with respect to that series. A form of indenture has been filed as an
exhibit to the registration statement of which this prospectus forms a part. If
certificates are issued, they will also be issued in series pursuant to separate
agreements--either 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 and trust agreement have been filed as
exhibits to the registration statement of which this prospectus forms a part. If
custody receipts are issued, they will be issued in series pursuant to a custody
agreement among the depositor and the entity named in the related prospectus
supplement as custodian. A form of custody agreement has been filed as an
exhibit to the registration statement of which this prospectus forms a part.
The depositor will acquire the primary assets for any series of securities
from one or more sellers. The seller will agree to reimburse the depositor for
fees and expenses of the depositor incurred in connection with the issuance and
offering of the securities.
The following summaries describe 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. As described herein
under "Custody Receipts; Custody Agreements", custody receipts entitle the
related holder of securities to payments that are made on classes of notes held
by the custodian. Accordingly, to the extent the following descriptions apply to
notes, including the effect that payments on the loans may have on notes that
are secured by those loans, those descriptions also apply to custody receipts.
Each series of securities will consist of one or more classes of
securities, one or more of which may be Compound Interest Securities, Fixed
Interest Securities, Variable Interest Securities, Planned Amortization Class
Securities, Zero Coupon Securities, Principal Only Securities, Interest Only
Securities, Participating Securities and custody receipts. A series may also
include one or more classes of subordinate securities . The securities of each
series will be
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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 the registration of transfer or exchange. One or more classes of a series
may be available in book-entry form only.
Payments of principal of and interest on a series of securities will be
made on the distribution date to the extent and in the manner specified in the
prospectus supplement relating to that series. Payment to holders of securities
may be made by check mailed to those holders, registered at the close of
business on the related record date specified in the related prospectus
supplement at their addresses appearing on the security register, or by wire
transfer which may be at the expense of the holder requesting payment by wire
transfer. Final payments of principal in retirement of each security will be
made only upon presentation and surrender of that 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 that security before the distribution
date on which the final principal payment on any security is expected to be made
to the holder of that security.
Payments of principal of and interest on the securities will be made by the
trustee, by a paying agent on behalf of the trustee or by a custodian, as
specified in the related prospectus supplement. As described in the related
prospectus supplement, 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 credit enhancement specified
in the prospectus supplement (the "Enhancement") will be deposited directly into
a separate collection account established by the trustee or the servicer. If and
as provided in the related prospectus supplement, the deposit to the collection
account may be net of amounts payable to the related servicer and any other
person specified in the prospectus supplement. Amounts deposited in the
collection account will thereafter be deposited into the distribution account so
that they are available to make payments on securities of that series on the
next distribution date, as the case may be. See "The Trust Funds--Collection and
Distribution Accounts."
VALUATION OF THE PRIMARY ASSETS
If specified in the related prospectus supplement for a series of notes,
each primary asset included in the related trust fund for a series will be
assigned an initial asset value. As described in the related prospectus
supplement, 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 of amounts payable as expenses described in the prospectus supplement,
together with income earned on each 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 that
series over periods equal to the interval between payments on the notes, and (b)
the then principal balance of the primary assets. 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 or another amount described
in the related prospectus supplement.
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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 insured,
the related prospectus supplement will set forth the terms of that arrangement.
PAYMENTS OF INTEREST
Those securities entitled by their terms to receive interest will bear
interest from the date and at the rate per annum specified, or calculated in the
method described, in the related prospectus supplement. Interest on interest
bearing securities of a series will be payable on the distribution date and in
the priority specified in the related prospectus supplement. The rate of
interest on securities of a series may be fixed or 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 the related 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
that distribution date.
PAYMENTS OF PRINCIPAL
On each distribution date for a series, principal payments will be made to
the related holders to which principal is then payable, to the extent set forth
in the related prospectus supplement. Principal 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 some specified cases, include
allocation by random lot, set forth in the related prospectus supplement.
Interest only securities may be assigned a notional amount set forth in the
related prospectus supplement which is used solely for convenience for the
calculation of interest and for other purposes and does not represent the right
to receive any distributions allocable to principal.
FINAL SCHEDULED DISTRIBUTION DATE
The final scheduled distribution date with respect to each class of notes
and custody receipts is the date no later than the date on which its principal
will be fully paid. The final scheduled distribution date with respect to each
class of certificates will be the date on which the entire aggregate principal
balance of that class is expected to be reduced to zero. The final scheduled
distribution date for each class of securities will be calculated on the basis
of the assumptions applicable to the related 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. The final
scheduled distribution date of a class may be the maturity date of the primary
asset in the related trust fund which has the latest stated maturity or will be
determined as described 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 loans or underlying loans, as applicable, in the related trust
fund. Since payments on the primary assets, including prepayments, will be used
to make distributions in reduction of the outstanding principal amount of the
securities, it
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is likely that the actual final distribution date of any class will occur
earlier, and may occur substantially earlier, than its final scheduled
distribution date. Furthermore, with respect to a series of certificates 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 the primary assets related
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 distribution dates less frequently than monthly, one or more
classes of securities of that series may be subject to special redemption, in
whole or in part, on the day specified in the related prospectus supplement. A
special redemption may occur if, as a consequence of prepayments on the loans or
underlying loans, as applicable, relating to a series of 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 is
less than the amount of interest that will have accrued on those securities
through the designated interest accrual date specified in the related prospectus
supplement. In that event and as further described in the related prospectus
supplement, the trustee will redeem, prior to the designated interest accrual
date, a sufficient principal amount of outstanding securities of that series to
cause the available to pay interest to equal the amount of interest that will
have accrued on the principal amount that remains outstanding through the
designated interest accrual date for the series of securities outstanding
immediately after that 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 that 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 that 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 securities
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 a 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 must 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.
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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. Generally, 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, 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 that series and the percentage of the original principal amount
of each class of securities of that series that would be outstanding on
specified distribution dates for that series based on the assumptions stated in
such prospectus supplement, including assumptions that prepayments on the loans
or underlying loans, 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, 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, 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, as
applicable. If any loans or underlying loans, 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, or in a group of assets specified in
the related prospectus supplement. As described under "Custody Receipts; Custody
Agreements", custody receipts entitle the related holders of securities to
payments that are made on classes of notes held by the custodian. Accordingly,
to the extent the following descriptions apply to notes, including the
descriptions of loans that may be primary assets that secure notes, those
descriptions also apply to custody receipts. The trust fund of each series will
include assets purchased from the seller composed of:
(1) the Primary Assets;
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(2) amounts available from the reinvestment of payments on such primary
assets at the assumed reinvestment rate, if any, specified in the related
prospectus supplement;
(3) any Enhancement for that series;
(4) any property that secured a loan but which is acquired by
foreclosure or deed in lieu of foreclosure or repossession; and
(5) 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, will serve as collateral only for that series of
securities, unless the related prospectus supplement sets forth the other series
of securities for which those assets serve as collateral. Holders of a series of
notes may only proceed against the collateral securing that series of notes in
the case of a default with respect to that series of notes and may not proceed
against any assets of the depositor, any of its affiliates or assets of the
related trust fund not pledged to secure those 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, in the case of
private securities, not from the issuer of such private securities or an
affiliate of the issuer, or, in the case of the loans, in privately negotiated
transactions, which may include transactions with affiliates of the depositor.
The primary assets 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 between the trust fund and servicer, with respect to a series of
notes.
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 between the depositor and the trustee of that trust fund specified in
the related prospectus supplement.
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.
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 to the securities and
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. On the closing date, no more than 5% of the
primary assets (by aggregate principal balance as of the cut-off date) will have
characteristics that deviate from the description of those primary assets in the
related prospectus supplement.
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THE LOANS
Mortgage Loans. The property which secures repayment of the loans is
referred to as the mortgaged property. The primary assets for a series may
consist, in whole or in part, of closed-end and/or revolving home equity loans
or balances thereof and/or loans the proceeds of which have been applied to the
purchase of the related mortgaged property 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
variable 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, may be computed and payable monthly on the
average daily outstanding principal balance of the 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 the balances on the revolving credit line loans. The amounts of
draws and payments on the revolving credit line loans will usually differ each
day. 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 the loan at its stated
maturity. As more fully described in the related prospectus supplement, interest
on each loan is calculated on the basis of the outstanding principal balance of
the loan multiplied by its loan rate and further multiplied by a fraction
described in the related prospectus supplement. The original terms to stated
maturity of the loans generally will not exceed 360 months, but may be greater
than 360 months if so specified in the related prospectus supplement. If
described in the related prospectus supplement, 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 properties,
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. 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.
The mortgaged properties may include properties containing one to four
residential units and no more than three income producing non-residential units.
Small Mixed-Use Properties may be owner-occupied or investor properties and the
loan purpose may be a refinancing or a purchase.
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Mortgages on cooperative dwellings generally consist of a lien on the
shares issued by the cooperative dwelling and the proprietary lease or occupancy
agreement relating to that cooperative dwelling.
The aggregate principal balance of loans secured by mortgaged properties
that are owner-occupied will be disclosed in the related 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:
(1) the making of a representation by the borrower at origination of
the loan either that the underlying mortgaged property will be used by the
borrower 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
(2) a finding that the address of the underlying mortgaged property
is the borrower'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.
The initial combined loan-to-value ratio of a loan is computed in the
manner described in the related prospectus supplement and may take into account
the amounts of any related senior mortgage loans.
Home Improvement Contracts. The primary assets for a series also may
consist, in whole or part, of home improvement installment sales contracts and
installment loan agreements 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 which are generally subordinate to other mortgages on the same
mortgaged property or by purchase money security interest in the home
improvements financed thereby. The home improvement contracts may be fully
amortizing or provide for a balloon payment, 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.
The home improvements securing the home improvement contracts may include
among other things, but are not limited to, replacement windows, house siding,
new roofs, swimming pools, satellite dishes, kitchen and bathroom remodeling
goods and solar heating panels.
If applicable, 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.
Some loans may be delinquent as specified in the related prospectus
supplement. Loans may be originated by or acquired from an affiliate of the
depositor. 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 specified asset value tests are met, as described in the
related prospectus supplement.
A trust fund 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
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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 may provide information
with respect to the Loans that are primary assets as of the cut-off date
specified in such prospectus supplement 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 outstanding 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 outstanding 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 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 will be filed with the SEC within 15 days
after the initial issuance of the securities.
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PRIVATE SECURITIES
General. 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
underlying loans that are of the type that would otherwise be eligible to be
loans; or
(b) collateralized obligations secured by underlying loans; or
While the underlying loans will be of a type that would otherwise be
eligible to be loans since they will have been part of a prior unrelated
securitization they may include underlying loans that are more delinquent or
that have been foreclosed.
The pass-through certificates or collateralized obligations will have previously
been (1) offered and distributed to the public pursuant to an effective
registration statement or (2) purchased in a transaction not involving any
public offering from a person who is not an affiliate of the issuer of the
private 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 of the United
States, they need not be. Private securities will not be insured or guaranteed
by the United States or any agency or instrumentality of the United States.
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
the private securities or any affiliate thereof. As a result, no 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 that Agreement (the "PS Trustee"). The PS
Trustee, its agent, or a custodian, will possess the underlying loans. The
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 those
trusts, and selling beneficial interests in those 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 representations and
warranties with respect to the assets conveyed by it to the related trust. The
PS Sponsor generally will not have guaranteed any of the assets conveyed to the
related trust or any of the private securities issued under the PS Agreement but
may guarantee those assets if specified in the prospectus supplement.
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. Payments on the private securities generally will be distributed
directly to the trustee
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as the registered owner of such private securities. The PS Sponsor or the PS
Servicer may have the right to repurchase the underlying loans after a specified
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.
Enhancement Relating to Private Securities. Enhancement 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 enhancement may be provided with respect to the
underlying loans or with respect to the private securities themselves. The type,
characteristics and amount of enhancement will be a function of the
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 on an approximate
basis, to the extent relevant and to the extent the information is reasonably
available to the depositor and the depositor reasonably believes the information
to be reliable:
(1) the aggregate approximate principal amount and type of the
private securities to be included in the trust fund for such series;
(2) characteristics of the underlying loans including:
(A) the payment features of the 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
the underlying loans insured or guaranteed by a governmental entity,
(C) the servicing fee or range of servicing fees with respect to
the underlying loans,
(D) the minimum and maximum stated maturities of the underlying
loans at origination,
(E) the lien priority and credit utilization rates, if any, of
the underlying loans, and
(F) the delinquency status and year of origination of the
underlying loans;
(3) the maximum original term-to-stated maturity of the private
securities;
(4) the weighted average term-to-stated maturity of the private
securities;
(5) the pass-through or certificate rate or ranges thereof for the
private securities;
(6) the PS Sponsor, the PS Servicer and the PS Trustee for the
private securities;
(7) the characteristics of enhancement, if any, including reserve
funds, insurance policies, letters of credit or guarantees relating to the
underlying loans or to the private securities themselves;
(8) 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
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(9) the terms on which additional loans may be substituted for those
underlying loans 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 SEC within 15 days the initial issuance of the 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.
The trustee may be required to apply a portion of the amount in the collection
account, together with reinvestment earnings from eligible investments to the
extent they are not to be included in payments to the holders to the payment of
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 by the trustee for that series, each in the manner and at the
times established in the related prospectus supplement. Amounts available
pursuant to any Enhancement, as provided in the related prospectus supplement,
will also be deposited in the related distribution account.
Amounts deposited in the distribution account may be available for the
following purposes:
(1) application to the payment of principal of and interest on the
series of securities on the next distribution date,
(2) the making of adequate provision for future payments on specified
classes of securities and
(3) 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 the Series or any other
person entitled to those amounts in the manner and at the times described in the
related prospectus supplement. As described in the related prospectus
supplement, the trustee may invest the funds in the collection and distribution
accounts in eligible investments maturing, with permissible 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, not
later than the day preceding the next distribution date for the related series
of securities. Eligible investments may include, among other investments,
obligations of the United States and agencies thereof, federal funds,
certificates of deposit, commercial paper, demand and time deposits and banker's
acceptances, repurchase agreements of United States government securities and
guaranteed investment contracts, in each case, acceptable to the rating agency.
Notwithstanding any of the foregoing, amounts may be deposited and
withdrawn pursuant to any deposit agreement or minimum principal payment
agreement as specified in the related prospectus supplement.
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ENHANCEMENT
If stated in the prospectus supplement relating to a series of securities,
simultaneously with the depositor's assignment of the primary assets to the
trustee, the depositor or the seller will obtain Enhancement in favor of the
trustee on behalf of holders of the related series or designated classes of the
series. Enhancement may take the form of an irrevocable letter of credit, surety
bond or insurance policy, reserve funds, subordinate securities,
overcollateralization or any other form of enhancement or combination thereof.
The Enhancement will support the payment of principal and interest on the
securities, and may be applied for other purposes to the extent and under the
conditions set forth in such prospectus supplement. If so specified in the
related prospectus supplement, any Enhancement may be structured so as to
protect against losses relating to more than one trust fund, in the manner
described therein. As described under "Custody Receipts; Custody Agreements",
custody receipts entitle the related holders to payments that are made on
classes of notes held by the related custodian. Accordingly, to the extent the
following descriptions apply to notes such descriptions apply to custody
receipts.
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 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 pool insurance policies, 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 or the seller may obtain a
pool insurance policy for the loans in the related trust fund. A pool insurance
policy would cover, subject to the limitations described in a related prospectus
supplement, any loss sustained by reason of default, but would 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 the policies vary
to some degree, a special hazard insurance policy typically provides coverage,
where there has been damage to property securing a defaulted or foreclosed loan
to which title has been acquired by the insured and to the extent the damage is
not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to the property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy. Typically, the special
hazard insurer will pay the lesser of (1) the cost of repair or replacement of
such property or (2) upon transfer of the property to the special hazard
insurer, the unpaid principal balance of the loan at the time of acquisition of
the property by foreclosure or deed in lieu of foreclosure, plus accrued
interest to the date of claim settlement and expenses incurred by the servicer
with respect to
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the property. If the unpaid principal balance plus accrued interest and expenses
is paid by the special hazard insurer, the amount of further coverage under the
special hazard insurance policy will be reduced by that amount less any net
proceeds from the sale of the property. Any amount paid as the cost of repair of
the property will reduce coverage by that amount. Special hazard insurance
policies typically do not cover losses occasioned by, among other risks, war,
civil insurrection, governmental actions, errors in design, faulty workmanship
or materials, nuclear reaction, flood, if the mortgaged property is in a
federally designated flood area and chemical contamination.
Restoration of the property with the proceeds described under (1) above is
expected to satisfy the condition under any pool insurance policy that the
property be restored before a claim under the pool insurance policy may be
validly presented with respect to the defaulted loan secured by the property.
The payment described under (2) above will render unnecessary presentation of a
claim in respect of the loan under any pool insurance policy. Therefore, so long
as the 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 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 the loan.
The amount of the secured debt could be reduced to the value established by the
bankruptcy court, and the holder of the loan thus would become an unsecured
creditor to the extent the outstanding principal balance of the loan exceeds
that value. In addition, other modifications of the terms of a loan can result
from a bankruptcy proceeding. See "Legal Aspects of Loans." If so provided in
the related prospectus supplement, the depositor, the seller or other entity
specified in the related prospectus supplement will obtain a bankruptcy bond or
similar insurance contract covering losses resulting from proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond will cover a
portion of losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a loan or a reduction by that court of
the principal amount of a loan and will cover a portion of unpaid interest on
the amount of that 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 that
series. The amount of coverage will be reduced by payments made under the
bankruptcy bond in respect of the loans, and may or may not be restored, as
described in the related prospectus supplement.
RESERVE FUNDS
If so specified in the related prospectus supplement, the depositor or the
seller will deposit into one or more funds to be established with the trustee as
part of the trust fund for the series or for the benefit of any enhancer with
respect to that series 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 the
related prospectus supplement. In the alternative or in addition to that
deposit, a reserve fund for a series may be funded over time through the
application of all or a portion of the excess cash flow from the primary assets
for the series, to the extent described in the related prospectus supplement. If
applicable, the initial amount of the reserve fund and the reserve fund
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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 or the seller will enter into a minimum principal payment
agreement with an entity meeting the criteria of the rating agency pursuant to
which that entity will provide payments on the securities of the series in the
event that aggregate scheduled principal payments and/or prepayments on the
primary assets for that series are not sufficient to make payments on the
securities of that series, all as provided in the prospectus supplement.
DEPOSIT AGREEMENT
If specified in a prospectus supplement, the depositor or the seller and
the trustee for a series of securities will enter into a guaranteed investment
contract or an investment agreement with the entity specified in such prospectus
supplement on or before the sale of that series of securities. Pursuant to the
deposit agreement, all or a portion of the amounts held in the collection
account, the distribution account or in any reserve fund would be invested with
the entity specified in the prospectus supplement. The purpose of a deposit
agreement would be to accumulate available cash for investment so that the cash,
together with income thereon, can be applied to future distributions on one or
more classes of securities. The trustee would be entitled to withdraw amounts
invested pursuant to a deposit agreement, plus interest at a rate equal to the
assumed reinvestment rate, in the manner specified in the prospectus supplement.
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.
DERIVATIVE PRODUCTS
If specified in the related prospectus supplement, the depositor or the
seller may establish one or more derivative products to provide enhancement for
the related series of securities. Derivative products may consist of a swap to
convert floating or fixed rate payments, as applicable on the loans or private
securities into fixed or floating rate payments, as applicable, on the
securities or in a cap or floor agreement intended to provide protection against
changes in floating rates of interest payable on the loans, private securities
or the securities.
OTHER INSURANCE, SURETY BONDS, GUARANTIES, LETTERS OF CREDIT AND SIMILAR
INSTRUMENTS OR AGREEMENTS
A trust fund may also include insurance, guaranties, surety bonds, letters
of credit or similar arrangements for the purpose of:
(1) maintaining timely payments to holders of securities or providing
additional protection against losses on the assets included in such trust
fund,
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(2) paying administrative expenses or
(3) establishing a minimum reinvestment rate on the payments made in
respect of the assets or principal payment rate on the assets.
These arrangements may include agreements under which holders of securities
are entitled to receive amounts deposited in various accounts held by the
trustee upon the terms specified in the related prospectus supplement.
SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to loans comprising the primary
assets in a 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. As described herein under "Custody Receipts; Custody Agreements", custody
receipts entitle the related holders of securities to payments that are made on
classes of notes held by the related custodian. Those classes of notes may be
secured by loans. Accordingly, the following descriptions of servicing are
relevant to holders of securities which are custody receipts.
In performing its 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. 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.
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 those 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,
(1) waive any assumption fee, late payment charge, or other charge in connection
with a loan or (2) to the extent provided in the related agreement, arrange with
an obligor a schedule for curing delinquencies by modifying the due dates of
scheduled payments on that loan.
If specified in the related prospectus supplement, the servicer, to the
extent permitted by law, will establish and maintain escrow or impound 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 escrow payments under the related loan
documents, in which case the servicer would not be required to establish any
escrow account with respect to those 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 the escrow account. The servicer will be
responsible for the administration of the escrow accounts and generally will
make advances to that account when a deficiency exists therein.
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DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
The trustee or the servicer will establish a collection account in the name
of the trustee. Typically, the collection account will be an account maintained
(1) 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 that series at levels satisfactory to each rating agency or
(2) 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.
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.
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 the time-period specified in the related prospectus
supplement after the date of receipt thereof, the following payments and
collections received or made by it to the extent required to be deposited in to
the Collection Account:
(1) All payments on account of principal, including prepayments, on the
primary assets;
(2) All payments on account of interest on the 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 those primary assets;
(3) 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 the 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,
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;
(4) All proceeds under any title insurance, hazard insurance or other
insurance policy covering any 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;
(5) All amounts required to be deposited therein from any applicable
reserve fund for that series pursuant to the related agreement;
(6) All advances of delinquent payments of principal of and interest on
a loan or other payments specified in the agreement made by the servicer as
required pursuant to the related agreement; and
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(7) All repurchase prices of any such primary assets repurchased by the
depositor, the servicer or the seller, as appropriate, pursuant to the
related agreement.
The servicer generally is permitted, from time to time, to make withdrawals
from the collection account for each series for the following purposes:
(1) to reimburse itself for advances for that series made by it
pursuant to the related agreement to the extent of 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, late recoveries of scheduled payments with respect to
which any Advance was made;
(2) to the extent provided in the related agreement, to reimburse
itself for any advances for that series that the servicer determines in
good faith it will be unable to recover from the related primary asset;
(3) 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 that reimbursement exceed the outstanding
principal balance of the related loan, together with accrued and unpaid
interest thereon to the due date for that loan next succeeding the date of
its receipt of the liquidation proceeds, to pay to itself out of the excess
the amount of any unpaid servicing fee and any assumption fees, late
payment charges, or other charges on the related loan;
(4) 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 the
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 scheduled payment, late payment or other recovery, to
the extent permitted by the related agreement;
(5) to reimburse itself for expenses incurred by and recoverable by or
reimbursable to it pursuant to the related agreement;
(6) 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;
(7) to make payments to the trustee of the series for deposit into the
distribution account, if any, or for remittance to the holders of the
series in the amounts and in the manner provided for in the related
agreement; and
(8) 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 that amount from the collection account.
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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 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 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. The related prospectus
supplement will state whether or not 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 other hazards as is customary in the state in which the related
property is located. If such insurance is required, generally it would 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, these 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 standard hazard insurance 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 some cases, vandalism. The
foregoing list is merely indicative 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 that
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,
the coinsurance clause will provide that the hazard insurer's liability in the
event of partial loss
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will not exceed the greater of (1) the actual cash value (the replacement cost
less physical depreciation) of the Property, including the improvements, if any,
damaged or destroyed or (2) 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 the 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.
Coverage typically will be in an amount at least equal to the greater of
(1) the amount necessary to avoid the enforcement of any co-insurance clause
contained in the policy or (2) the outstanding principal balance of the related
loan. Coverage may also be in a lesser amount if so described in the related
prospectus supplement. The servicer typically 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 the REO
Property. However, if so specified in the related prospectus supplement, the
servicer may not maintain insurance policies for acquired 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 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 that 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 the policy absent the deductible
clause, deposit in the collection account the amount of the deductible.
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 the practices and procedures it deems necessary or advisable and 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:
(1) 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
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(2) 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 three years after the acquisition
of the beneficial ownership of that 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 that loan to the extent provided in the related prospectus
supplement. 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.
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 the prospective conveyance and prior to
the time of the consummation of that 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 the "due-on-sale" clause is
not enforceable under applicable law or if the enforcement of that clause would
result in loss of coverage under any primary mortgage insurance policy. In that
event, the servicer is authorized to accept from or enter into an assumption
agreement with the person to whom the property has been or is about to be
conveyed, pursuant to which that person becomes liable under the loan and
pursuant to which the original obligor is released from liability and that
person is substituted as the obligor 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.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The servicer will be entitled to a periodic fee as servicing compensation
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.
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. To the extent provided in the
related prospectus supplement, 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 prepayment
interest shortfalls in a month exceeds the servicing fee for that month, a
shortfall to holders may occur.
To the extent permitted by the related agreement, the servicer will be
entitled to reimbursement for expenses incurred by it in connection with the
liquidation of defaulted
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loans. The related holders will suffer no loss by reason of liquidation expenses
to the extent expenses are covered under related insurance policies or from
excess liquidation proceeds. If claims are either not made or not 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, 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 generally is also entitled
to reimbursement from the collection account for advances in respect of loans.
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 the series.
EVIDENCE AS TO COMPLIANCE
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 documents and records relating to the
servicing of the loans by the servicer and that, on the basis of such
examination, that firm is of the opinion that the servicing has been conducted
in compliance with the agreement, except for (1) those exceptions as such firm
believes to be immaterial and (2) such other exceptions as are set forth in the
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 the agreement, throughout
the preceding calendar year.
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. Events of Default and the rights of the trustee upon a
default under the agreement for the related series will be described in the
related prospectus supplement substantially similar to those described under
"The Agreements--Events of Default; Rights Upon Events of Default--Pooling and
Servicing Agreement; Servicing Agreement."
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:
(1) services similar loans in the ordinary course of its business,
(2) is reasonably satisfactory to the trustee for the related series,
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(3) has a net worth of not less than the amount specified in the
related prospectus supplement,
(4) would not cause any Rating Agency's rating of the securities for
that series in effect immediately prior to the assignment, sale or transfer
to be qualified, downgraded or withdrawn as a result of the assignment,
sale or transfer and
(5) executes and delivers to the trustee an agreement, in form and
substance reasonably satisfactory to the trustee, which contains an
assumption by the 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 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 that 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 the 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 person will be protected
against any breach of warranty or representations made under the 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 the 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 that event, the legal expenses and costs of the
action and any liability resulting therefrom may be expenses, costs, and
liabilities of the trust fund and the servicer may be entitled to be reimbursed
therefor out of the collection account.
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THE AGREEMENTS
The following summaries describe 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. As described
herein under "Custody Receipts; Custody Agreements", custody receipts entitle
the related holders of securities to payments that are made on classes of notes
held by the related custodian. Accordingly, the following descriptions of
agreements, insofar as they relate to notes, are relevant to holders of custody
receipts.
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. The 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 the
amount or percentage thereof which is not included in the trust fund for the
related series). The trustee will, concurrently with the assignment, execute and
deliver the securities.
Assignment of Loans. If required by the related prospectus supplement,
the depositor will, as to each loan secured by a mortgage, deliver or cause to
be delivered to the trustee, or an asset custodian on behalf of the trustee,
o the mortgage note endorsed without recourse to the order of the
trustee or in blank,
o 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 that mortgage will be delivered, together with a
certificate that the original of that mortgage was delivered to the
recording office) and
o an assignment of the mortgage in recordable form.
The trustee, or the asset custodian, will hold the documents in trust for
the benefit of the holders of securities.
If required by the related prospectus supplement, the depositor will as to
each home improvement contract, deliver or cause to be delivered to the trustee
or the asset 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 the home improvement contract. In order to give notice
of the right, title and interest of holders of securities to the home
improvement contracts, the depositor or the seller 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. Typically, 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 the
assignment, the interest of holders of securities in the home improvement
contracts could be defeated. If specified by the related prospectus supplement,
however, the home improvement contracts may be stamped or otherwise marked to
reflect their assignment to the trust. See "Legal Aspects of Loans--The Home
Improvement Contracts."
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With respect to loans secured by mortgages, if so specified in the related
prospectus supplement, the depositor or the seller 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 assignments of mortgage to be recorded within the time
after issuance of the securities as is specified in the related prospectus
supplement. If the assignments of mortgage are not so recorded as required, the
agreement may, as specified in the related prospectus supplement, require the
depositor or the seller to repurchase from the trustee any loan the related
mortgage of which is not recorded within the required time, at the price
described below with respect to repurchases by reason of defective
documentation. The enforcement of the repurchase obligation typically will
constitute the sole remedy available to the holders or the trustee for the
failure of a mortgage to be recorded. If the agreement for a series does not
require that assignments be recorded at closing, the related prospectus
supplement will describe the circumstances, if any, under which recordation
would be required in the future.
Each loan will be identified in a loan schedule appearing as an exhibit to
the related agreement. The 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, if applicable.
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. Generally, 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." Each private security will
be identified in a schedule appearing as an exhibit to the related agreement,
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:
(1) that the information contained in the private security schedule is
true and correct in all material respects;
(2) that, immediately prior to the conveyance of the private
securities, the depositor had good title thereto to the extent good title
was conveyed to it, and was the sole owner thereof subject to any retained
interest of the depositor or the seller;
(3) that there has been no other sale by it of the private securities;
and
(4) that there is no existing lien, charge, security interest or other
encumbrance other than any retained interest of the depositor or the seller
on the 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
asset custodian is found by the trustee during its examination to be defective
in any material respect for which the depositor or seller does not cure the
defect within the required time period, the depositor or seller will within the
required period, 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
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thereof from the trustee. The repurchase shall be at a price equal to, unless
otherwise specified in the related prospectus supplement, (a) the lesser of
(1) the outstanding principal balance of such primary asset and (2) 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 the primary asset at the
rate set forth in the related agreement, (less any unreimbursed advances
respecting the primary asset,) provided, however, the purchase price shall not
be limited in (1) above to the trust fund's federal income tax basis if the
repurchase at a price equal to the outstanding principal balance of the 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 the primary asset from the trust fund and substitute in its place
one or more other primary assets provided, however, that (1) with respect to a
trust fund for which no REMIC election is made, the substitution must be
effected within 120 days of the date of initial issuance of the securities and
(2) 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 the 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.
Generally, any qualifying substitute primary asset will have, on the date
of substitution, the following characteristics:
(1) 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 with the amount of any
shortfall to be deposited to the collection account or distribution account
in the month of substitution for distribution to holders,
(2) an interest rate not less than (and not more than 2% greater than)
the interest rate of the deleted primary asset,
(3) a remaining term-to-stated maturity not greater than (and not more
than two years less than) that of the deleted primary asset, and
(4) will comply with all of the representations and warranties set
forth in the applicable agreement as of the date of substitution.
The depositor, the seller or another entity will make representations and
warranties with respect to primary assets for a series. If the depositor, the
seller or the other entity cannot cure a breach of its representations and
warranties in all material respects within the time period specified in the
related prospectus supplement after notification by the trustee of the breach,
and if the breach is of a nature that materially and adversely affects the value
of the primary asset, the depositor, the seller or the other 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 the primary assets. See "Risk
Factors--Limited Assets for Payments--No Recourse to Depositor, Seller or
Servicer."
The above-described cure, repurchase or substitution obligations generally
constitute the sole remedies available to the holders or the trustee for a
material defect in a document for a primary asset.
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No holder of securities of a series, solely by virtue of that holder's
status as a holder, will have any right under the applicable agreement for a
series to institute any proceeding with respect to the agreement, unless the
holder previously has given to the trustee for that 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 that series have made written
request upon the trustee to institute a 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 that proceeding.
PRE-FUNDING ACCOUNT
If so provided in the related prospectus supplement, on the related closing
date the depositor will deposit cash in an amount specified in the related
prospectus supplement into a pre-funding account. In no event shall the
pre-funded amount exceed 50% of the initial aggregate principal amount of the
securities of the related series. The pre-funded amount will be used to purchase
subsequent loans during the funding period which is the period from the related
closing date to a date not more than one year after the closing date. The
pre-funding account will be maintained with the trustee for the related series
of securities and will be designed solely to hold funds to be applied by the
trustee during the funding period to pay to the seller the purchase price for
subsequent loans. Monies on deposit in the pre-funding account will not be
available to cover losses on or in respect of the related loans. To the extent
that the entire pre-funded amount has not been applied to the purchase of
subsequent loans by the end of the related funding period, any amounts remaining
in the pre-funding account will be distributed as a prepayment of principal to
the holders of the related securities on the distribution date immediately
following the end of the funding period, in the amounts and pursuant to the
priorities set forth in the related prospectus supplement. Any reinvestment risk
resulting from a prepayment will be borne entirely by the classes of the related
series of securities entitled to receive the corresponding principal payment.
Monies on deposit in the pre-funding account may be invested in eligible
investments under the circumstances and in the manner described in the related
agreement. Earnings on investment of funds in the pre-funding account will be
deposited into the account specified in the related prospectus supplement and
losses will be charged against the funds on deposit in the pre-funding account.
In addition, if so provided in the related prospectus supplement, on the
related closing date the depositor will deposit in a capitalized interest
account cash in an amount sufficient to cover shortfalls in interest on the
related series of securities that may arise as a result of the use of funds in
the pre-funding account to purchase subsequent loans. The capitalized interest
account shall be maintained with the trustee for the related series of
securities and is designed solely to cover the above-mentioned interest
shortfalls. If monies on deposit in the capitalized interest account have not
been applied to cover shortfalls in interest on the related series of securities
by the end of the funding period, any amounts remaining in the capitalized
interest account will be paid to the depositor or the seller.
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:
(1) the amount of principal distributed to holders of the related
securities and the outstanding principal balance of the securities
following the distribution;
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(2) the amount of interest distributed to holders of the related
securities and the current interest on the securities;
(3) the amounts of (a) any overdue accrued interest included in the
distribution, (b) any remaining overdue accrued interest with respect to
the securities or (c) any current shortfall in amounts to be distributed as
accrued interest to holders of the securities;
(4) the amounts of (a) any overdue payments of scheduled principal
included in the distribution, (b) any remaining overdue principal amounts
with respect to the 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 the securities;
(5) the amount received under any related Enhancement, and the
remaining amount available under the Enhancement;
(6) the amount of any delinquencies with respect to payments on the
related primary assets;
(7) the book value of any REO Property acquired by the related trust
fund; and
(8) any other information specified in the related Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the trustee or other entity will furnish to each holder of record
at any time during the calendar year: (a) the aggregate of amounts reported
pursuant to (1), (2), and (4)(d) above for such calendar year and (b) the
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."
EVENTS OF DEFAULT; RIGHTS UPON EVENT OF DEFAULT
Pooling and Servicing Agreement; Servicing Agreement. Events of Default
under a pooling and servicing agreement or a servicing agreement for each series
of certificates relating to loans include, among other things:
(1) any failure by the servicer to deposit amounts in the collection
account and distribution account to enable the trustee to distribute to
holders of that 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 the failure to the
servicer by the trustee for that series, or to the servicer and the trustee
by the holders of the series evidencing not less than 25% of the aggregate
voting rights of the holders for that series,
(2) 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
that failure to the servicer by the trustee, or to the servicer
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and the trustee by the holders of the series evidencing not less than 25%
of the aggregate voting rights of the holders of that series, and
(3) specified events of insolvency, readjustment of debt, marshalling
of assets and liabilities or similar proceedings and 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 that
series or holders of securities of that series evidencing not less than 51% of
the aggregate voting rights of the securities for that 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 that agreement which rights the servicer will
retain under all circumstances. Upon the termination of the servicer, the
trustee will succeed to all the responsibilities, duties and liabilities of the
servicer under the 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 the 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 the agreement.
During the continuance of any Event of Default of a servicer under an
agreement for a series of securities, the trustee for that 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 that series, and holders of
securities evidencing not less than 51% of the aggregate voting rights of the
securities for that series may, if so specified in the related prospectus
supplement, 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 remedy or to exercise any of the trusts or powers unless the holders
have offered the trustee reasonable security or indemnity against the cost,
expenses and liabilities which may be incurred by the trustee in connection with
a servicer termination. Also, the trustee may decline to follow any direction if
the trustee determines that the action or proceeding so directed may not
lawfully be taken or would involve the trustee in personal liability or be
unjustly prejudicial to the nonassenting holders.
Indenture. Events of Default under the indenture for each series of notes
may include, among other things:
(1) a default for five (5) days or more in the payment of any interest
on any note of such series or the default in the payment of the principal
of any note at any note's maturity;
(2) 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;
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(3) 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;
(4) specified events of bankruptcy, insolvency, receivership or
liquidation of the depositor or the trust fund; or
(5) 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 occurs and
is continuing, either the trustee or the holders of a majority of the then
aggregate outstanding amount of the notes of that series may declare the
principal amount, or, if the notes of that series are Zero Coupon Securities,
that 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
that series to be due and payable immediately. The declaration described above
may, under specified circumstances, be rescinded and annulled by the holders of
a majority in aggregate outstanding amount of the notes of the series.
If, following an Event of Default with respect to any series of notes, the
notes of that series have been declared to be due and payable, the trustee may,
in its discretion, notwithstanding any acceleration, elect to maintain
possession of the collateral securing the notes of that series and to continue
to apply distributions on the collateral as if there had been no declaration of
acceleration if the collateral continues to provide sufficient funds for the
payment of principal of and interest on the notes of that series as they would
have become due if there had not been a declaration of acceleration. In
addition, the trustee may not sell or otherwise liquidate the collateral
securing the notes of a series following an Event of Default, unless:
(a) the holders of 100% of the then aggregate outstanding amount of the
notes of the series consent to the sale,
(b) the proceeds of the sale or liquidation are sufficient to pay in
full the principal of and accrued interest, due and unpaid, on the
outstanding notes of that series at the date of the sale or
(c) the trustee determines that the collateral would not be sufficient
on an ongoing basis to make all payments on the notes as those payments
would have become due if the 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 that series. In the event that
one or more classes of a series have the benefit of a security insurance
policy, the issuer of the policy will have the right to consent to any sale
described above.
In the event that the trustee liquidates the collateral in connection with
an Event of Default, the indenture provides that the trustee will have a prior
lien on the proceeds of any liquidation for unpaid fees and expenses. As a
result, upon the occurrence of an Event of Default, 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 holders of the notes after the occurrence
of an Event of Default.
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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 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 that 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 a series, unless the 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 the provisions for indemnification and limitations
contained in the indenture, the holders of a majority of the then aggregate
outstanding amount of the notes of a 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 that series, and the holders of a majority of the then
aggregate outstanding amount of the notes of that series may 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 that series affected thereby.
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 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 an
appointment, all rights, powers, duties and obligations conferred or imposed
upon the trustee by the agreement relating to the related series will be
conferred or imposed upon the trustee and each separate trustee or co-trustee
jointly, or, in any jurisdiction in which the trustee shall be incompetent or
unqualified to perform acts, singly upon the 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
that 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 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 of the documents
furnished by it or the holders to the servicer under the agreement.
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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 the funds or adequate
indemnity against that 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 or the seller 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:
(1) if the trustee ceases to be eligible to continue as such under the
agreement,
(2) if the trustee becomes insolvent, or
(3) 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
The agreement for each series of securities may be amended by the
depositor, the servicer, if any, the trustee and any other party specified in
the agreement, without notice to or consent of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement any
provision in the agreement,
(3) to add to the duties of the depositor, the trust fund or servicer,
(4) to add any other provisions with respect to matters or questions
arising under the agreement or related Enhancement,
(5) to add or amend any provisions of the agreement as required by a
rating agency in order to maintain or improve the rating of the securities,
or
(6) to comply with any requirements imposed by the Code;
provided that any such amendment except pursuant to clause (6) above will not
adversely affect in any material respect the interests of any holders of that
series, as evidenced by an opinion of counsel or by written confirmation from
each rating agency rating the securities that the amendment will not cause a
reduction, qualification or withdrawal of the then current rating of the
securities.
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The agreement for each series may also be amended by the trustee, the
servicer, if applicable, the depositor and any other party specified in the
agreement with respect to that series with the consent of the holders possessing
not less than 66 2/3% of the aggregate outstanding principal amount of the
securities of that series or, if only some classes of that series are affected
by the amendment, 66 2/3% of the aggregate outstanding principal amount of the
securities of each class of that series affected thereby, for the purpose of
adding any provisions to or changing in any manner or eliminating any of the
provisions of the agreement or modifying in any manner the rights of holders of
the series; provided, however, that no amendment may (a) reduce the amount or
delay the timing of payments on any security without the consent of the holder
of that 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 amendment without the consent of the holders of
100% of the aggregate outstanding principal amount of each class of securities
affected by that amendment.
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
the holders propose to transmit, the trustee will afford the 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 required reports and other administrative duties with respect to the trust
fund may be performed by a REMIC administrator, who may be an affiliate of the
depositor, the servicer or the seller.
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 payment to the provider of any related Enhancement of any
required amount and the distribution to holders of all amounts distributable to
them pursuant to that agreement after the earlier of:
(1) the later of (a) the final payment or other liquidation of the last
primary asset remaining in the trust fund for that 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
(2) the repurchase, as described below, by the servicer or other entity
specified in the related prospectus supplement from the trustee for all
primary assets and other property at that time subject to the 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 that series
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all remaining primary assets at a price equal to the price specified in the
related prospectus supplement. The exercise of the right to purchase the primary
assets will effect early retirement of the securities of that series, but the
entity's right to so purchase is subject to the aggregate principal balance of
the primary assets or the securities 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 or the
securities on the closing 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 the 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, the servicer or another entity may effect an
optional termination of the trust fund under the circumstances described in such
prospectus supplement. See "Description of the Securities--Optional Redemption,
Purchase or Termination."
Indenture. The indenture will be discharged with respect to a series of
notes, except with respect to continuing rights, upon the delivery to the
trustee for cancellation of all the notes of that series or, with limitations,
upon deposit with the trustee of funds sufficient for the payment in full of all
of the notes of that series.
In addition to the discharge with 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
that series, except for obligations relating to temporary notes and exchange of
notes, to register the transfer of or exchange notes of that series, to replace
stolen, lost or mutilated notes of that 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 the series on the last scheduled distribution date for the notes and any
installment of interest on the notes in accordance with the terms of the
indenture and the notes of the series. In the event of any defeasance and
discharge of notes of the series, holders of notes of the series would be able
to look only to the money and/or direct obligations for payment of principal and
interest, if any, on their notes until maturity.
CUSTODY RECEIPTS; CUSTODY AGREEMENTS
A series of securities may include one or more classes of custody receipts.
Custody receipts entitle the related holders of securities to payments made on
notes that are held by a custodian. Such notes will be issued pursuant to an
indenture and if the primary assets securing the notes are loans, the loans will
be serviced pursuant to a servicing agreement. The custody receipts will be
issued pursuant to a custody agreement between the depositor and the custodian.
The identity of the commercial bank, savings and loan association or trust
company named as custodian for each series of securities that includes custody
receipts will be set forth in the related prospectus supplement. The entity
serving as custodian may have normal banking relationships with the depositor or
servicer.
Payments on notes held by a custodian will be made by the related indenture
trustee to the custodian. The custodian will in turn remit to holders of custody
receipts, from payments
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on the notes, the amounts to which those holders are entitled in accordance with
the terms of the custody receipts.
If a series of securities includes custody receipts, the related prospectus
supplement will describe:
o the primary assets that are security for the related notes
o the terms of the related notes, and
o the terms of the custody receipts.
At the time of issuance of a series of securities that includes one or more
classes of custody receipts the depositor will deposit the related notes with
the custodian. Such notes will be registered in the name of and held by the
custodian in a custody account. The custody account will be required at all
times to be maintained as a custodial account in the corporate trust department
of the custodian for the benefit of the holders of the custody receipts,
separated and segregated on the books of the custodian from all other accounts,
funds and property in the possession of the custodian.
The custodian will not have any equitable or beneficial interest in the
related notes. The notes held by the custodian will not be available to the
custodian for its own use or profit, nor will any note be deemed to be part of
the general assets of the custodian. Neither the notes held by the custodian nor
the proceeds of the notes will be subject to any right, charge, security
interest, lien or claim of any kind in favor of the custodian.
No holder of a custody receipt will have the right to withdraw the related
notes from the custody account and the custodian will not deliver the related
notes to that holder.
Neither the depositor nor the custodian shall have any obligation to
advance its own funds to make any payment to any holder of a custody receipt.
NOTICES; VOTING
Upon receipt from a trustee or servicer under agreements relating to the
notes held by the custodian of any notice with respect to a note, the custodian
shall promptly transmit a copy of that notice by mail to the holders of the
related custody receipts. For that purpose, the holders shall consider the date
of the receipt by the custodian of any notice as the record date for the purpose
of determining the holders of record to whom notices shall be transmitted. In
the event notice requests or requires any vote, action or consent by the holders
of a note, the custodian shall within the time period specified in the related
prospectus supplement following receipt of that notice, deliver to the holders
of the custody receipts of a letter of direction with respect to the vote,
action or consent, returnable to the custodian, and the custodian shall vote the
notes in accordance with that letter of direction. Any record date established
by the notice for purposes specified in the notice shall be the record date for
the purpose of determining the holders of record for those purposes. If no
record date is established by the related trustee, the date the notice is
received by the custodian shall be the record date.
Notwithstanding the above, without the consent of the holders of all of the
custody receipts of a series, neither the custodian shall vote nor shall the
holders of custody receipts consent to any amendments to the related indenture
or any other actions which would reduce the amount of or change the amount or
timing or currency of payment on the custody receipts.
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DEFAULTS
The custodian will not be authorized to proceed against the servicer or the
trustee under any agreement relating to notes held by the custodian in the event
of a default under the related servicing agreement or indenture. The custodian
also has no power or obligation to assert any of the rights and privileges of
the holders of the custody receipts. In the event of any default in payment on
the notes or any Event of Default or similar event with respect to the servicer,
each holder of a custody receipt will have the right to proceed directly and
individually against the issuer or the servicer in whatever manner is deemed
appropriate by the holder by directing the custodian to take specific actions on
behalf of the holder. A holder of a custody receipt will not be required to act
in concert with any holder. The custodian will not be required to take any
actions on behalf of holders except upon receipt of reasonable indemnity from
those holders for resulting costs and liabilities.
THE CUSTODIAN
Under the custody agreement, the note custodian will not be liable other
than by reason of bad faith or gross negligence in the performance of its duties
as are specifically set forth in the custody agreement except in regard to
payments under notes received by it for the benefit of the owners and
safekeeping of notes, with respect to which it shall be a fiduciary. The
custodian will not be liable for any damages resulting from any distribution
from the custody account to a holder at the address of record of that holder on
the books of the custodian. The custodian will not be liable for any action or
inaction by it done in reasonable reliance upon the written advice of its
accountants or legal counsel. The custodian may request and rely and shall be
fully protected in acting in reliance upon any written notice, request,
direction or other document reasonably believed by it to be genuine and to have
been signed or presented by the proper party or parties.
DUTIES OF THE CUSTODIAN
The custodian makes no representations as to the validity or sufficiency of
the custody agreement, the securities or of any primary asset or related
documents. The custodian is required to perform only those duties specifically
required of it under the custody agreement.
The custodian will not be required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under the custody agreement, or in the exercise of any of its rights or powers,
if it has reasonable grounds for believing that repayment of funds or adequate
indemnity against the risk or liability is not reasonably assured to it.
RESIGNATION OF CUSTODIAN
The custodian may, upon written notice to the depositor, resign at any
time, in which event the depositor will appoint a successor custodian. If no
successor custodian has been appointed and has accepted the appointment within
90 days after giving notice of resignation, the resigning custodian may petition
any court of competent jurisdiction for appointment of a successor custodian.
The custodian may also be removed at any time upon 30 days notice from the
depositor or by holders of custody receipts evidencing at least 66 2/3% of the
aggregate voting rights of all custody receipts of the related series.
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Any resignation or removal of the custodian and appointment of a successor
custodian will not become effective until acceptance of the appointment by the
successor custodian.
AMENDMENT OF CUSTODY AGREEMENT
As set forth in the applicable agreement, the custody agreement for each
series of custody receipts may be amended by the depositor, the servicer, if
any, and the custodian with respect to that series, without notice to or consent
of the holders:
(1) to cure any ambiguity,
(2) to correct any defective provisions or to correct or supplement any
provision in the custody agreement,
(3) to add to the duties of the depositor or the custodian, or
(4) to add any other provisions with respect to matters or questions
arising under the custody agreement or provided that any such amendment
will not adversely affect in any material respect the interests of any
holders of such series, as evidenced by an opinion of counsel or by written
confirmation from each rating agency that the amendment will not cause a
reduction, qualification or withdrawal of the then current rating thereof.
In addition, the custody agreement for each series may also be amended by
the custodian and the depositor with respect to that series with the consent of
the holders possessing not less than 66 2/3% of the aggregate outstanding
principal amount of the custody receipts of each class of that series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of the custody agreement or modifying in
any manner the rights of holders of such series; provided, however, that no
amendment may (a) reduce the amount or delay the timing of payments on any
custody receipt without the consent of the holder of those custody receipts or
(b) reduce the required percentage of the aggregate outstanding principal amount
of custody receipts of each class, the holders of which are required to consent
to any amendment, without the consent of the holders of 100% of the aggregate
outstanding principal amount of each class of custody receipts affected thereby.
VOTING RIGHTS
The related prospectus supplement will set forth the method of determining
allocation of voting rights with respect to custody receipts included in a
series.
TERMINATION OF CUSTODY AGREEMENT
The obligations created by the custody agreement for a series will
terminate upon the payment in full of the notes held by the custodian and the
receipt by holders of custody receipts of all amounts to which they are
entitled.
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LEGAL ASPECTS OF LOANS
The following discussion contains summaries of the material legal aspects
of mortgage loans, home improvement installment sales contracts and home
improvement installment loan agreements which are general in nature. Because
some 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 home improvement contracts for a series
may, be secured by either mortgages or deeds of trust or deeds to secure debt,
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 those 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,
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
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upon any default by the borrower under the terms of the note or deed of trust.
In some states, 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 the applicable cure
period, a notice of sale must be posted in a public place and, in most states,
published for a specified period of time in one or more newspapers. In addition,
some state laws require that a copy of the notice of sale be posted on the
property and sent to all parties having an interest of record in the property.
The trustor, borrower, or any person having a junior encumbrance on the real
estate, may, during a reinstatement period, cure the default by paying the
entire amount in arrears plus the costs and expenses incurred 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 that would warrant a court of equity to
refuse affirmative relief to the mortgagee. In some circumstances, a court of
equity may relieve the mortgagor from an entirely technical default where that
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 that the 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
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expenses of foreclosure, in which event the mortgagor's debt will be
extinguished. Alternatively, 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 a deficiency 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 those 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.
ENVIRONMENTAL RISKS
Real property pledged as security to a lender may be subject to unforeseen
environmental risks. Under the laws of some states, contamination of a property
may give rise to a lien on the property to assure the payment of the costs of
clean-up. In several states a lien for the costs of clean-up has priority over
the lien of an existing mortgage against such property. In addition, under
CERCLA, the EPA may impose a lien on property where EPA has incurred clean-up
costs. However, a CERCLA lien is subordinate to pre-existing, perfected security
interests.
Under the laws of some states and under CERCLA, it is conceivable that a
secured lender may be held liable as an "owner" or "operator" for the costs of
addressing releases or threatened releases of hazardous substances at a
property, even though the environmental damage or threat was caused by a prior
or current owner or operator. CERCLA imposes liability for those costs on any
and all "responsible parties," including owners or operators. However, CERCLA
excludes from the definition of "owner or operator" a secured creditor who holds
indicia of ownership primarily to protect its security interest but without
"actually participating in the management" of the property. Thus, if a lender's
activities begin to encroach on the actual management of a contaminated facility
or property, the lender may incur liability as an "owner or operator" under
CERCLA. Similarly, if a lender foreclosures and takes title to a contaminated
facility or property, the lender may incur CERCLA liability in various
circumstances, including, but not limited to, when it holds the facility or
property as an investment, including leasing the facility or property to third
party, or fails to market the property in a timely fashion.
Whether actions taken by a lender would constitute actual participation in
the management of a mortgaged property or the business of a borrower so as to
render the secured creditor exemption unavailable to a lender has been a matter
of judicial interpretation of the statutory language, and court decisions have
been inconsistent. In 1990, the Court of Appeals for the Eleventh Circuit
suggested that the mere capacity of the lender to influence a borrower's
decisions regarding disposal of hazardous substances was sufficient
participation in the management of the borrower's business to deny the
protection of the secured creditor exclusion to the lender.
This ambiguity appears to have been resolved by the enactment of the Asset
Conservation, Lender Liability and Deposit Insurance Protection Act of 1996,
which was signed into law by President Clinton on September 30, 1996. The new
legislation provides that, in order to be deemed to have participated in the
management of a mortgaged property, a lender must actually participate in the
operational affairs of the property or the borrower. The legislation also
provides that participation in the management of the property does not include
"merely having the capacity to influence, or unexercised right to control"
operations. Rather,
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a lender will lose the protection of the secured creditor exclusion only if it
exercises decision-making control over the borrower's environmental compliance
and hazardous substance handling and disposal practices, or assumes day-to-day
management of all operational functions of the mortgaged property. If a lender
is or becomes liable, it can bring an action for contribution against any other
"responsible parties," including a previous owner or operator, who created the
environmental hazard, but those persons or entities may be bankrupt or otherwise
judgment proof. The costs associated with environmental clean-up may be
substantial. It is conceivable that clean-up costs arising from the
circumstances set forth above would result in a loss to holders.
CERCLA does not apply to petroleum products, and the secured creditor
exclusion does not govern liability for cleanup costs under federal laws other
than CERCLA, in particular Subtitle I of the federal Resource Conservation and
Recovery Act ("RCRA"), which regulates underground petroleum storage tanks other
than heating oil tanks. The EPA has adopted a lender liability rule for
underground storage tanks under Subtitle I of RCRA. Under that rule, a holder of
a security interest in an underground storage tank or real property containing
an underground storage tank is not considered an operator of the underground
storage tank as long as petroleum is not added to, stored in or dispensed from
the tank. In addition, under the Asset Conservation, Lender Liability and
Deposit Insurance Protection Act of 1996, the protections accorded to lenders
under CERCLA are also accorded to the holders of security interests in
underground storage tanks. Liability for clean-up of petroleum contamination
may, however, be governed by state law, which may not provide for any specific
protection for secured creditors.
Except as otherwise specified in the related prospectus supplement, at the
time the loans were originated, no environmental or a very limited environmental
assessments of the properties were conducted.
RIGHTS OF REDEMPTION
In some states, after a 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.
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
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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 the 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 those proceeds and awards to any indebtedness secured
by the mortgage, in the order 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 those amounts
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 all taxes and
assessments on the property before delinquency 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 some
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 those 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.
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ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Some states have imposed statutory prohibitions which limit the remedies of
a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment is a personal judgment against the former
borrower equal in most cases to the difference between the net amount realized
upon the public sale of the real property and the amount due to the lender.
Other statutes require the beneficiary or mortgagee to exhaust the security
afforded under a deed of trust or mortgage by foreclosure in an attempt to
satisfy the full debt before bringing a personal action against the borrower. In
other states, the lender may have the option of bringing a personal action
against the borrower on the debt without first exhausting the security; however,
in some of these states, the lender, following judgment on the personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, 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 of 1940, 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 permissible 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.
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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 particular 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, RESPA, Equal Credit Opportunity Act,
Fair Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. These federal laws impose specific statutory liabilities upon
lenders who originate loans and who fail to comply with the provisions of the
law. In some cases, this liability may affect assignees of the loans.
DUE-ON-SALE CLAUSES 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 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 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 (1) 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 (2) originated by lenders other than
national banks, federal savings institutions and federal credit unions. Freddie
Mac 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 some 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 be eliminated in any modified
mortgage resulting from a 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 some states, there are
or may be specific limitations upon the late charges which a lender may collect
from a borrower for delinquent payments. Some states also limit the
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amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fathomed
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes of the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing affecting the property. Finally, some courts
have been faced with the issue of whether or not federal or state constitutional
provisions reflecting due process concerns for adequate notice require that
borrowers under security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board
prohibit the imposition of a prepayment penalty or equivalent fee for or in
connection with the acceleration of a loan by exercise of a due-on-sale clause.
A mortgagee to whom a prepayment in full has been tendered may be compelled to
give either a release of the mortgage or an instrument assigning the existing
mortgage. The absence of a restraint on prepayment, particularly with respect to
mortgage loans having higher mortgage rates, may increase the likelihood of
refinancing or other early retirements of such mortgage loans.
APPLICABILITY OF USURY LAWS
Title V provides that state usury limitations shall not apply to all types
of residential first mortgage loans originated by particular 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.
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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 generally are "chattel
paper" or constitute "purchase money security interests" each as defined in 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. Generally, 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, 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
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deficiency judgements, and in many cases the defaulting borrower would have no
assets with which to pay a judgement.
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 Holder-in-Due-Course rule of the FTC is intended to defeat the ability
of the transferor of a consumer credit contract which is the seller of the goods
that gave rise to the transaction and related lenders and assignees to transfer
that contract free of notice of claims by the debtor under that contract. 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 provides that, subject to the following conditions, state usury
limitations shall not apply to any contract which is secured by a first lien on
particular kinds of consumer goods. The contracts would be covered if they
satisfy specified 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 the seller, or lender, retains legal title to the property and enters
into an agreement with the purchaser, or borrower, for the payment of the
purchase price, plus interest, over the term of the 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.
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
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equitable interest in the property is forfeited. In that situation, the lender
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 those 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:
(1) are entitled to have interest rates reduced and capped at 6% per annum,
on obligations incurred prior to the commencement of military service
for the duration of military service,
(2) 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
(3) 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 (1), (2), or (3) 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 those amounts, and any loss in respect thereof may reduce the amounts
available to be paid to the holders of the certificates of that series.
Typically, any shortfalls in interest collections on loans or underlying loans,
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 that series that is entitled to receive interest in
respect of those loans or underlying loans in proportion to the interest that
each class of securities would have otherwise been entitled to receive in
respect of those loans or underlying loans had the interest shortfall not
occurred.
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CONSUMER PROTECTION LAWS
Numerous federal and state consumer protection laws impose substantive
requirements upon mortgage lenders in connection with originating, servicing and
enforcing loans secured by certain residential properties. Theses laws include
the federal Truth-in-Lending Act and Regulation Z promulgated thereunder, RESPA
and Regulation B promulgated thereunder, Equal Credit Opportunity Act, Fair
Credit Billing Act, Fair Credit Reporting Act and related statutes and
regulations. In particular, Regulation Z requires particular disclosures to
borrowers regarding terms of the loans; the Equal Credit Opportunity Act and
Regulation B promulgated thereunder prohibit discrimination in the extension of
credit on the basis of age, race, color, sex, religion, martial status, national
origin, receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act; and the Fair Credit Reporting Act regulates the
use and reporting of information related to the borrower's credit experience.
Provisions of these laws impose specific statutory liabilities upon lenders who
fail to comply with them. In addition, violations of such laws may limit the
ability of the servicer to collect all or part of the principal of or interest
on the loans and could subject the servicer and in some cases its assignees to
damages and administrative enforcement.
The loans may be subject to the Home Ownership and Equity Protection Act of
1994, or HOEPA, which amended the Truth in Lending Act as it applies to
mortgages subject to HOEPA. HOEPA requires additional disclosures, specifies the
timing of such disclosures and limits or prohibits inclusion of particular
provisions in mortgages subject to HOEPA. HOEPA also provides that any purchaser
or assignee of a mortgage covered by HOEPA, such as the trust fund with respect
to the loans, 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 HOEPA 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 HOEPA, it will be subject to all of the
claims and defenses which the borrower could assert against the seller. Any
violation of HOEPA 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.
THE DEPOSITOR
GENERAL
The depositor was incorporated in the State of Delaware on January 29,
1988, and is a wholly-owned subsidiary of Lehman Commercial Paper Inc., which is
a wholly-owned subsidiary of Lehman Brothers Inc., a wholly-owned subsidiary of
Lehman Brothers Holdings Inc. 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. None of the depositor, Lehman Brothers Holdings Inc.,
Lehman Commercial Paper Inc., Lehman Brothers Inc., the servicer, the trustee or
the seller has guaranteed or is otherwise obligated with respect to the
securities of any series.
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
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participation or beneficial ownership in one or more pools of receivables, and
the proceeds of the foregoing, that arise in connection with the following:
(1) the sale or lease of automobiles, trucks or other motor vehicles,
equipment, merchandise and other personal property,
(2) credit card purchases or cash advances,
(3) the sale, licensing or other commercial provision of services, rights,
intellectual properties and other intangibles,
(4) trade financings,
(5) loans secured by certain first or junior mortgages on real estate,
(6) loans to employee stock ownership plans and
(7) 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
those 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 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:
(1) to purchase the related primary assets,
(2) to repay indebtedness which has been incurred to obtain funds to
acquire the primary assets,
(3) to establish any reserve funds described in the related prospectus
supplement and
(4) to pay costs of structuring and issuing the securities, including the
costs of obtaining Enhancement, if any.
If so specified in the related prospectus supplement, the purchase of the
primary assets for a series may be effected by an exchange of securities with
the seller of such primary assets.
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FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The following is a summary of the material United States 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 Internal Revenue Code of 1986, as
amended (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 United States
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 United States federal income tax consequences to holders will vary
depending on whether:
(1) the securities of a series are classified as indebtedness;
(2) an election is made to treat the trust fund relating to a
particular series of securities as a REMIC under the Code;
(3) the securities represent an ownership interest in some or all of
the assets included in the trust fund for a series; or
(4) 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, partnership or other entity created or organized
in or under the laws of the United States or any state thereof, including the
District of Columbia, other than a partnership that is not treated as a Unites
States person under any applicable Treasury regulations, an estate whose income
is subject to United States 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.
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TAXATION OF DEBT SECURITIES
Status as Real Property Loans. Except to the extent provided otherwise in
a prospectus supplement as to each series of securities Brown & Wood LLP will
have advised the Depositor that:
(1) securities held by a mutual savings bank or domestic building and
loan association will represent interests in "qualifying real property
loans" within the meaning of Code section 593(d);
(2) 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
(3) securities held by a real estate investment trust will constitute
"real estate assets" within the meaning of Code section 856(c)(5)(A) and
interest on securities will be considered "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code section 856(c)(3)(B).
Interest and Acquisition Discount. Securities representing regular
interests in a REMIC ("Regular Interest Securities") are generally taxable to
holders in the same manner as evidences of indebtedness issued by the REMIC.
Stated interest on the Regular Interest Securities will be taxable as ordinary
income and taken into account using the accrual method of accounting, regardless
of the holder's normal accounting method. Interest, other than original issue
discount, on securities, other than Regular Interest Securities, that are
characterized as indebtedness for federal income tax purposes will be includible
in income by holders thereof in accordance with their usual methods of
accounting. Securities characterized as debt for federal income tax purposes and
Regular Interest Securities will be referred to hereinafter collectively as
"Debt Securities."
Debt Securities that are Compound Interest Securities will, and certain of
the other Debt Securities may, be issued with "original issue discount". 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 (the "OID Regulations"). A holder should be aware, however, that the
OID Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Debt Securities.
In general, OID, if any, will equal the difference between the stated
redemption price at maturity of a Debt Security and its issue price. A holder of
a Debt Security must include such OID in gross income as ordinary interest
income as it accrues under a method taking into account an economic accrual of
the discount. In general, 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."
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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. Some Debt Securities may provide for default remedies
in the event of late payment or nonpayment of interest. The interest on those
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 those Debt Securities
includes all distributions of interest as well as principal thereon. Where the
interval between the issue date and the first distribution date on a Debt
Security is either longer or shorter than the interval between subsequent
distribution dates, all or part of the interest foregone, in the case of the
longer interval, and all of the additional interest, in the case of the shorter
interval, will be included in the stated redemption price at maturity and tested
under the de minimis rule described below. In the case of a Debt Security with a
long first period which has non-de minimis OID, all stated interest in excess of
interest payable at the effective interest rate for the long first period will
be included in the stated redemption price at maturity and the Debt Security
will generally have OID. Holders of Debt Securities should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Debt Security.
Under the de minimis rule, OID on a Debt Security will be considered to be
zero if such OID is less than 0.25% of the stated redemption price at maturity
of the Debt Security multiplied by the weighted average maturity of the Debt
Security. For this purpose, the weighted average maturity of the Debt Security
is computed as the sum of the amounts determined by multiplying the number of
full years--i.e., rounding down partial years--from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled to
be made by a fraction, the numerator of which is the amount of each distribution
included in the stated redemption price at maturity of the Debt Security and the
denominator of which is the stated redemption price at maturity of the Debt
Security. Holders generally must report de minimis OID pro rata as principal
payments are received, and the 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, (1) such interest is
unconditionally payable at least annually, (2) the issue price of the debt
instrument does not exceed the total noncontingent principal payments and (3)
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.
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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 OID. 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 OID 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: (1) 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), (2) events which have occurred before the end of the accrual
period and (3) 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 OID 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 OID 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 IRS 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 those securities as if, solely for the purposes of computing
OID, the separate regular interests were a single debt instrument.
A subsequent holder of a Debt Security will also be required to include OID
in gross income, but such a holder who purchases such Debt Security for an
amount that exceeds its adjusted issue price will be entitled (as will an
initial holder who pays more than a Debt
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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 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 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 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 IRS 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 that 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 IRS
could assert that an Interest Weighted Security should be taxable under the
rules governing bonds issued with contingent payments. That 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 (1) the yield to maturity of such Debt
Securities and (2) 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 those
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. The 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 (1)
on the basis of a constant yield, in the case of a
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Pay-Through Security, taking into account a prepayment assumption, or (2) 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 that security, not originally
issued with OID, 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 that security, originally issued at a discount, OID in the
relevant period to total OID remaining to be paid.
Section 1277 of the Code provides that, regardless of the origination date
of the Debt Security, or, in the case of a Pass-Through Security, the 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 that 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 that security, and not as a separate deduction item, on a
constant yield method. Although no regulations addressing the computation of
premium accrual on securities similar to the securities have been issued, the
legislative history of the 1986 Act indicates that premium is to be accrued in
the same manner as market discount. Accordingly, it appears that the accrual of
premium on a class of Pay-Through Securities will be calculated using the
prepayment assumption used in pricing such class. If a holder makes an election
to amortize premium on a 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. 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.
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TAXATION OF THE REMIC AND ITS HOLDERS
General. In the opinion of Brown & Wood LLP, special counsel to the
depositor, if a REMIC election is made with respect to a series of securities,
then the arrangement by which the securities of that series are issued will be
treated as a REMIC as long as all of the provisions of the applicable agreement
are complied with and the statutory and regulatory requirements are satisfied.
Securities will be designated as "Regular Interests" or "Residual Interests" in
a REMIC, as specified in the related prospectus supplement.
Except to the extent specified otherwise in a prospectus supplement, if a
REMIC election is made with respect to a series of securities, (1) securities
held by a mutual savings bank or domestic building and loan association will
represent interests in "qualifying real property loans" within the meaning of
Code Section 593(d) (assuming that at least 95% of the REMIC's assets are
"qualifying real property loans"); (2) 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 (3) securities held by a real estate
investment trust will constitute "real estate assets" within the meaning of Code
Section 856(c)(6)(B), and income with respect to the securities will be
considered "interest on obligations secured by mortgages on real property or on
interests in real property" within the meaning of Code Section 856(c)(3)(B)
(assuming, for both purposes, that at least 95% of the REMIC's assets are
qualifying assets). If less than 95% of the REMIC's assets consist of assets
described in (1), (2) or (3) above, then a security will qualify for the tax
treatment described in (1), (2) or (3) in the proportion that such REMIC assets
are qualifying assets.
REMIC EXPENSES; SINGLE CLASS REMICS
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of certificates representing a Residual Interest (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, those expenses will be deductible only to the extent that those
expenses, plus other "miscellaneous itemized deductions" of the holder, exceed
2% of that 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 the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (1) 3% of the excess of adjusted gross income over the
applicable amount, or (2) 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 a
holder. In general terms, a single class REMIC is one that either (1) 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 (2) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. In most cases, the expenses of the REMIC will be allocated to
holders of the related Residual Interest Securities.
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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 (1) 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 (2) 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, which is 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 OID (i.e., under the constant yield method taking into account the
Prepayment Assumption). The REMIC will deduct OID on the Regular Interest
Securities in the same manner that the holders of the Regular Interest
Securities include such discount in income, but without regard to the de
minimis rules. See "Taxation of Debt Securities" above. However, a REMIC that
acquires loans at a market discount must include such market discount in income
currently, as it accrues, on a constant interest basis.
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:
(1) subject to limited exceptions, the sale or other disposition of any
qualified mortgage transferred to the REMIC;
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(2) subject to a limited exception, the sale or other disposition of a
cash flow investment;
(3) the receipt of any income from assets not permitted to be held by
the REMIC pursuant to the Code; or
(4) 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 the REMIC.
TAXATION OF HOLDERS OF RESIDUAL INTEREST SECURITIES
The holder of 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 the 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 that 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 the holder's purchase price, and
will subsequently be increased by the amount of the REMIC's taxable income
allocated to the holder, and decreased, but not below zero, by the amount of
distributions made and the amount of the REMIC's net loss allocated to the
holder. Any disallowed loss may be carried forward indefinitely, but may be used
only to offset income of
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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 the 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 that 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.
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 the
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, the holder's excess inclusion income will be
treated as unrelated business taxable income of the 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, or 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
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Security, over the daily accruals for such quarterly period of (1) 120% of the
long term applicable federal rate on the Startup Day multiplied by (2) the
adjusted issue price of such Residual Interest Security at the beginning of such
quarterly period. The adjusted issue price of a Residual Interest at the
beginning of each calendar quarter will equal its issue price, calculated in a
manner analogous to the determination of the issue price of a Regular Interest,
increased by the aggregate of the daily accruals for prior calendar quarters,
and decreased, but not below zero, by the amount of loss allocated to a holder
and the amount of distributions made on the Residual Interest Security before
the beginning of the quarter. The long-term federal rate, which is announced
monthly by the Treasury Department, is an interest rate that is based on the
average market yield of outstanding marketable obligations of the United States
government having remaining maturities in excess of nine years.
Under the REMIC Regulations, in certain circumstances, transfers of
Residual Securities may be disregarded. See "--Restrictions on Ownership and
Transfer of Residual Interest Securities" and "--Tax Treatment of Foreign
Investors" below.
Restrictions on Ownership and Transfer of Residual Interest
Securities. As a condition to qualification as a REMIC, reasonable
arrangements must be made to prevent the ownership of a REMIC residual interest
by any "Disqualified Organization." Disqualified Organizations include the
United States, any State or political subdivision thereof, any foreign
government, any international organization, or any agency or instrumentality of
any of the foregoing, a rural electric or telephone cooperative described in
Section 1381(a)(2)(C) of the Code, or any entity exempt from the tax imposed by
Sections 1-1399 of the Code, if such entity is not subject to tax on its
unrelated business income. Accordingly, the applicable pooling and servicing
agreement will prohibit Disqualified Organizations from owning a Residual
Interest Security. In addition, no transfer of a Residual Interest Security will
be permitted unless the proposed transferee shall have furnished to the trustee
an affidavit representing and warranting that it is neither a Disqualified
Organization nor an agent or nominee acting on behalf of a Disqualified
Organization.
If a Residual Interest Security is transferred to a Disqualified
Organization after March 31, 1988 (in violation of the restrictions set forth
above), a substantial tax will be imposed on the transferor of such Residual
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 (1) 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 (2) 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
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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 IRS 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 IRS in a unified
administrative proceeding.
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 those 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, 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 fees to the trustee and the servicer. 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 the fees to the trustee and the servicer under Section 162 or
Section 212 of the Code to the extent that those 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, fees to the trustee and the servicer, to the
extent not otherwise disallowed, e.g., because they exceed reasonable
compensation, will be deductible in computing that holder's regular tax
liability only to the extent that those fees, when added to other miscellaneous
itemized deductions, exceed 2% of adjusted gross income and may not be
deductible to any extent in computing such holder's alternative minimum tax
liability. In addition, for taxable years beginning after December 31, 1990, the
amount of itemized deductions otherwise allowable for the taxable year for an
individual whose adjusted gross income exceeds the applicable amount, which
amount will be adjusted for inflation in taxable years beginning after 1990,
will be reduced by the lesser of
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(1) 3% of the excess of adjusted gross income over the applicable amount or
(2) 80% of the amount of itemized deductions otherwise allowable for that
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, 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
minimis 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 Pass-Through
Security, 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 "--Taxation of Debt
Securities--Premium" above.
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 the principal payment
is made. This 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 specified payments of
both interest and principal. Some 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 OID, a stripped bond or a
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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 the stripped interest.
Servicing fees in excess of reasonable servicing fees 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 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 OID rules are to apply to Stripped Securities and
other Pass-Through Securities. Under the method described above for Pay-Through
Securities (the "Cash Flow Bond Method"), a prepayment assumption is used and
periodic recalculations are made which take into account with respect to each
accrual period the effect of prepayments during such period. However, the 1986
Act does not, absent Treasury regulations, appear specifically to cover
instruments such as the Stripped Securities which technically represent
ownership interests in the underlying loans, rather than being debt instruments
"secured by" those loans. Nevertheless, it is believed that the Cash Flow Bond
Method is a reasonable method of reporting income for those 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 IRS could, however, assert that OID 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 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.
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 IRS could contend
that (1) in certain series, each non-Interest Weighted Security is composed of
an unstripped undivided ownership interest in mortgage loans and an installment
obligation consisting of stripped principal payments; (2) the non-Interest
Weighted Securities are subject to the contingent payment provisions of the
Proposed Regulations; or (3) 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
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tax purposes, will be the same as the loans. The IRS could take the position
that the loan's character is not carried over to the securities in such
circumstances. Pass-Through Securities will be, and, although the matter is not
free from doubt, Stripped Securities should be considered to represent
"qualifying real property loans" within the meaning of Section 593(d) of the
Code, "real estate assets" within the meaning of Section 856(c)(6)(B) of the
Code, and "loans secured by an interest in real property" within the meaning of
Section 7701(a)(19)(C)(v) of the Code. Interest income attributable to the
securities should be considered to represent "interest on obligations secured by
mortgages on real property or on interests in real property" with the meaning of
Section 856(c)(3)(B) of the Code. Reserves or funds underlying the securities
may cause a proportionate reduction in the above-described qualifying status
categories of securities.
SALE OR EXCHANGE
Subject to the discussion below with respect to trust funds as to which a
partnership election is made, a holder's tax basis in its security is the price
such holder pays for a security, plus amounts of original issue or market
discount included in income and reduced by any payments received, other than
qualified stated interest payments, and any amortized premium. Gain or loss
recognized on a sale, exchange, or redemption of a security, measured by the
difference between the amount realized and the security's basis as so adjusted,
will generally be capital gain or loss, assuming that the security is held as a
capital asset. In the case of a security held by a bank, thrift, or similar
institution described in Section 582 of the Code, however, gain or loss realized
on the sale or exchange of a Regular Interest Security will be taxable as
ordinary income or loss. In addition, gain from the disposition of a Regular
Interest Security that might otherwise be capital gain will be treated as
ordinary income to the extent of the excess, if any, of 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 maximum tax rate on ordinary income for individual taxpayers is
39.6% and the maximum tax rate on long-term capital gains for such taxpayers is
20%. The maximum tax rate on both ordinary income and long-term capital gains of
corporate taxpayers is 35%.
MISCELLANEOUS TAX ASPECTS
Backup Withholding. Subject to the discussion below with respect to trust
funds as to which a partnership election is made, a holder, other than a holder
of a REMIC Residual Security, may, under certain circumstances, be subject to
"backup withholding" at a rate of 31% with respect to distributions or the
proceeds of a sale of certificates to or through brokers that represent interest
or original issue discount on the securities. This withholding generally applies
if the holder of a security
(1) fails to furnish the trustee with its taxpayer identification
number ("TIN");
(2) furnishes the trustee an incorrect TIN;
(3) fails to report properly interest, dividends or other "reportable
payments" as defined in the Code; or
(4) 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
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to certain Nonresidents (as defined below). On October 6, 1997, the Treasury
Department issued new regulations (the "New Regulations") which make certain
modifications to the backup withholding and information reporting rules
described above. The New Regulations will generally be effective for payments
made after December 31, 1999, subject to 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 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 (1) the recipient is a holder, directly or by attribution, of 10%
or more of the capital or profits interest in the issuer, or (2) 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. Those 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
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holder amounts that will equal at least 30% of each excess inclusion, and that
such amounts will be distributed at or after the time at which the excess
inclusions accrue and not later than the calendar year following the calendar
year of accrual. If a Nonresident transfers a Residual Interest Security to a
United States person, and if the transfer has the effect of allowing the
transferor to avoid tax on accrued excess inclusions, then the transfer is
disregarded and the transferor continues to be treated as the owner of the
Residual Interest Security for purposes of the withholding tax provisions of the
Code. See "--Excess Inclusions."
TAX CHARACTERIZATION OF THE TRUST AS A PARTNERSHIP
Brown & Wood 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
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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 that 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. Special
rules apply if a Short-Term Note is purchased for more or less than its
principal amount.
Sale or Other Disposition. If a noteholder sells a note, the holder will
recognize gain or loss in an amount equal to the difference between the amount
realized on the sale and the holder's adjusted tax basis in the note. The
adjusted tax basis of a note to a particular noteholder will equal the holder's
cost for the note, increased by any market discount, acquisition discount, OID
and gain previously included by such noteholder in income with respect to the
note and decreased by the amount of bond premium, if any, previously amortized
and by the amount of principal payments previously received by such noteholder
with respect to that note. Any 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
(1) 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 (2) 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 the interest is not portfolio
interest, then it will be subject to United States federal income and
withholding tax at a rate of 30
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percent, unless reduced or eliminated pursuant to an applicable tax treaty. The
New Regulations which make certain modifications to the withholding and
information reporting rules described above. 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.
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 (1) such gain is not
effectively connected with the conduct of a trade or business in the United
States by the foreign person and (2) 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.
The New Regulations described above also make certain modifications to the
backup withholding and information reporting rules. 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.
Possible Alternative Treatments of the Notes. If, contrary to the opinion
of special counsel to the depositor, the IRS successfully asserted that one or
more of the notes did not represent debt for federal income tax purposes, the
notes might be treated as equity interests in the trust fund. If so treated, the
trust fund might be taxable as a corporation with the adverse consequences
described above, and the taxable corporation would not be able to reduce its
taxable income by deductions for interest expense on notes recharacterized as
equity. Alternatively, and most likely in the view of special counsel to the
depositor, the trust fund might be treated as a publicly traded partnership that
would not be taxable as a corporation because it would meet certain qualifying
income tests. Nonetheless, treatment of the notes as equity interests in such a
publicly traded partnership could have adverse tax consequences to certain
holders. For example, income to certain tax-exempt entities, including pension
funds, would be "unrelated business taxable income", income to foreign holders
generally would be subject to U.S. tax and U.S. tax return filing and
withholding requirements, and individual holders might be subject to certain
limitations on their ability to deduct their share of the trust fund's expenses.
TAX CONSEQUENCES TO HOLDERS OF THE CERTIFICATES
Treatment of the Trust Fund as a Partnership. The trust fund and the
servicer will agree, and the certificateholders will agree by their purchase of
certificates, to treat the trust fund as a partnership for purposes of federal
and state income tax, franchise tax and any other tax measured in whole or in
part by income, with the assets of the partnership being the assets held by the
trust fund, the partners of the partnership being the certificateholders, and
the notes being debt of the partnership. However, the proper characterization of
the arrangement
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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 securities are denominated in U.S. dollars, none of the
certificates are Indexed Securities or Strip Securities, and that a series of
securities includes a single class of securities. 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
(1) 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;
(2) 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;
(3) prepayment premium payable to the certificateholders for such
month; and
(4) 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 depositor or the seller. 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
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all certificateholders but certificateholders may be purchasing certificates at
different times and at different prices, certificateholders may be required to
report on their tax returns taxable income that is greater or less than the
amount reported to them by the trust fund.
All of the taxable income allocated to a certificateholder that is a
pension, profit sharing or employee benefit plan or other tax-exempt entity,
including an individual retirement account, will constitute "unrelated business
taxable income" generally taxable to such a holder under the Code.
An individual taxpayer's share of expenses of the trust fund, including
fees to the servicer but not interest expense, would be miscellaneous itemized
deductions. Such deductions might be disallowed to the individual in whole or in
part and might result in such holder being taxed on an amount of income that
exceeds the amount of cash actually distributed to that 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 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 the 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 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 loans would generally be treated as
ordinary income to the
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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 holder is required to recognize an aggregate amount of income, not
including income attributable to disallowed itemized deductions described above,
over the life of the certificates that exceeds the aggregate cash distributions
with respect thereto, such excess will generally give rise to a capital loss
upon the retirement of the certificates.
Allocations Between Transferors and Transferees. In general, the trust
fund's taxable income and losses will be determined monthly and the tax items
for a particular calendar month will be apportioned among the certificateholders
in proportion to the principal amount of certificates owned by them as of the
close of the last day of such month. As a result, a holder purchasing
certificates may be allocated tax items, which will affect its tax liability and
tax basis, attributable to periods before the actual transaction.
The use of such a monthly convention may not be permitted by existing
regulations. If a monthly convention is not allowed, or only applies to
transfers of less than all of the partner's interest, taxable income or losses
of the trust fund might be reallocated among the certificateholders. The trust
fund's method of allocation between transferors and transferees may be revised
to conform to a method permitted by future regulations.
Section 754 Election. In the event that a certificateholder sells its
certificates at a profit (loss), the purchasing certificateholder will have a
higher (lower) basis in the certificates than the selling certificateholder had.
The tax basis of the trust fund's assets will not be adjusted to reflect that
higher (or lower) basis unless the trust fund were to file an election under
Section 754 of the Code. In order to avoid the administrative complexities that
would be involved in keeping accurate accounting records, as well as potentially
onerous information reporting requirements, the trust fund will not make such
election. As a result, certificateholders might be allocated a greater or lesser
amount of trust fund income than would be appropriate based on their own
purchase price for certificates.
Administrative Matters. The owner trustee is required to keep or have
kept complete and accurate books of the trust fund. The 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. That information includes (1) the name,
address and taxpayer identification number of the nominee and (2) as to each
beneficial owner (x) the name, address and identification number of 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
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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 depositor will be designated as the tax matters partner in the related
trust agreement and, as such, will be responsible for representing the
certificateholders in any dispute with the IRS. The Code provides for
administrative examination of a partnership as if the partnership were a
separate and distinct taxpayer. Generally, the statute of limitations for
partnership items does not expire before three years after the date on which the
partnership information return is filed. Any adverse determination following an
audit of the return of the trust fund by the appropriate taxing authorities
could result in an adjustment of the returns of the certificateholders, and,
under certain circumstances, a certificateholder may be precluded from
separately litigating a proposed adjustment to the items of the trust fund. An
adjustment could also result in an audit of a certificateholder's returns and
adjustments of items not related to the income and losses of the trust fund.
Tax Consequences to Foreign Certificateholders. It is not clear whether
the trust fund would be considered to be engaged in a trade or business in the
United States for purposes of federal withholding taxes with respect to non-U.S.
persons because there is no clear authority dealing with that issue under facts
substantially similar to those described herein. Although it is not expected
that the trust fund would be engaged in a trade or business in the United States
for such purposes, the trust fund will withhold as if it were so engaged in
order to protect the trust fund from possible adverse consequences of a failure
to withhold. The trust fund expects to withhold on the portion of its taxable
income that is allocable to foreign certificateholders pursuant to Section 1446
of the Code, as if such income were effectively connected to a U.S. trade or
business, at a rate of 35% for foreign holders that are taxable as corporations
and 39.6% for all other foreign holders. Subsequent adoption of Treasury
regulations or the issuance of other administrative pronouncements may require
the Trust to change its withholding procedures. In determining a holder's
withholding status, the trust fund may rely on IRS Form W-8, IRS Form W-9 or the
holder's certification of nonforeign status signed under penalties of perjury.
Each foreign holder might be required to file a U.S. individual or
corporate income tax return, including, in the case of a corporation, the branch
profits tax, on its share of the trust fund's income. Each foreign holder must
obtain a taxpayer identification number from the IRS and submit that number to
the trust on Form W-8 or similar form 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 that case, a
foreign holder would only be entitled to claim a refund for that portion of
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the taxes in excess of the taxes that should be withheld with respect to the
guaranteed payments. The New Regulations make certain modifications to the
withholding and information reporting rules described above. 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.
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. The New Regulations described above also make
certain modifications to the backup withholding and information reporting rules.
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.
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 holders of securities.
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 (1) a
FASIT election is in effect, (2) certain tests concerning (A) the composition of
the FASIT's assets and (B) the nature of the holders of securities" interests in
the FASIT are met on a continuing basis, and (3) 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
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closing date and at all times thereafter (the "FASIT Qualification Test").
Permitted assets include
(1) cash or cash equivalents,
(2) 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,
(3) foreclosure property,
(4) 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,
(5) contract rights to acquire qualifying debt instruments or
qualifying hedging instruments,
(6) FASIT regular interests, and
(7) 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: (1) one or more classes of
regular interests or (2) 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
(1) it is designated as a regular interest,
(2) it has a stated maturity no greater than thirty years,
(3) it entitles its holder to a specified principal amount,
(4) the issue price of the interest does not exceed 125% of its stated
principal amount,
(5) the yield to maturity of the interest is less than the applicable
Treasury rate published by the Service plus 5%, and
(6) 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 "Federal Income Tax Considerations--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 (3), (4), or (5), 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 (6), but
the interest payable on the security consists of a specified
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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 Considerations--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 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 those securities in the
same manner described for REMIC Regular Securities. See "Federal Income Tax
Considerations--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 holder generally will
recognize gain or loss upon the sale in the manner described above for REMIC
Regular Securities. See "Federal Income Tax Considerations--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
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of such losses in income are uncertain. See "Federal Income Tax
Considerations--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
those 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 "Federal Income Tax Considerations--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 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 the 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
Considerations--FASIT
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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 the 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:
(1) the receipt of income derived from assets that are not permitted
assets,
(2) certain dispositions of permitted assets,
(3) the receipt of any income derived from any loan originated by a
FASIT, and
(4) 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 "Federal Income
Tax Considerations--Miscellaneous Tax Aspects--Backup Withholding." For purposes
of reporting and tax administration, holders of record of FASIT Securities
generally will be treated in the same manner as holders of REMIC Securities.
DUE TO THE COMPLEXITY OF THE FEDERAL INCOME TAX RULES APPLICABLE TO
SECURITYHOLDERS AND THE CONSIDERABLE UNCERTAINTY THAT EXISTS WITH RESPECT TO
MANY ASPECTS OF THOSE RULES, POTENTIAL INVESTORS SHOULD CONSULT THEIR OWN TAX
ADVISORS REGARDING THE TAX TREATMENT OF THE ACQUISITION, OWNERSHIP, AND
DISPOSITION OF THE SECURITIES.
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STATE TAX CONSIDERATIONS
In addition to the federal income tax consequences described in "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
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, and on persons who are parties in interest or disqualified persons
with respect to those 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, regulatory 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.
Depending on the relevant facts and circumstances, certain prohibited
transaction exemptions may apply to the purchase or holding of the
securities--for example, Prohibited Transaction Class Exemption ("PTE") 96-23,
which exempts certain transactions effected on behalf of a Plan by an "in-house
asset manager"; PTE 95-60, which exempts certain transactions between insurance
company general accounts and parties in interest; PTE 91-38, which exempts
certain transactions between bank collective investment funds and parties in
interest; PTE 90-1, which exempts certain transactions between insurance company
pooled separate accounts and parties in interest; or PTE 84-14, which exempts
certain transactions effected on behalf of a Plan by a "qualified professional
asset manager". There can be no assurance that any of these exemptions will
apply with respect to any Plan's investment in the securities, or that such an
exemption, if it did apply, would apply to all prohibited transactions that may
occur in connection with such investment. Furthermore, these exemptions would
not apply to transactions involved in operation of the Trust if, as described
below, the assets of the Trust were considered to include Plan assets.
DOL has issued a final regulation (29 C.F.R. Section 2510.3-101) (the "Plan
Assets Regulation") containing rules for determining what constitutes the assets
of a Plan. The Plan Assets Regulation provides that, as a general rule, the
underlying assets and properties of
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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 Plan Assets Regulation, the trust fund may be deemed
to hold plan assets by reason of a Plan's investment in a security; the plan
assets would include an undivided interest in the primary assets and any other
assets held by the trust fund. In that 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, regulatory or administrative exemption.
The "look-through" rule of the Plan Assets Regulation does not apply if the
interest acquired by the Plan is treated as indebtedness under applicable local
law and 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. The prospectus supplement related to a
series will indicate the expected treatment of the securities in that series
under the Plan Assets Regulation.
If the interest is an "equity interest," the Plan Assets Regulation creates
an exception if the class of equity interests in question is: (1) "widely held"
(held by 100 or more investors who are independent of the Depositor and each
other); (2) freely transferable; and (3) sold as part of an offering pursuant to
(A) an effective registration statement under the Securities Act of 1933, and
then subsequently registered under the Securities Exchange Act of 1934 or
(B) an effective registration statement under Section 12(b) or 12(g) of the
Securities Exchange Act of 1934 ("Publicly Offered Securities"). In addition,
the regulation provides that if at all times more than 75% of the value of each
class 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, employee benefit plans as defined under ERISA, whether or not they are
subject to ERISA, and any entity whose underlying assets include plan assets by
reason of a plan's investment in the entity, the investing Plan's assets will
not include any of the underlying assets of the depositor or the trust fund.
If the security is an "equity interest" under the Plan Assets Regulation
and no exception applies, an exemption may be available. On February 22, 1991,
the DOL granted to Lehman Brothers Inc. 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 may include the
certificates. 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, if a number of
conditions (some of which are described below) are met.
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Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the certificates by a Plan is on terms
(including the price for the certificates) that are at least as favorable
to the Plan as they would be in an arm's-length transaction with an
unrelated party;
(2) The rights and interests evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by
other certificates of the trust;
(3) The 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 Ratings Group, Moody's Investors
Service, Inc., Duff & Phelps Inc. or Fitch IBCA, Inc.;
(4) The sum of all payments made to the underwriter in connection with
the distribution of the certificates represents not more than reasonable
compensation for underwriting the certificates. 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;
(5) The trustee must not be an affiliate of any other member of the
Restricted Group (as defined below); and
(6) The Plan investing in the certificates is an "accredited investor"
as defined in Rule 501(a)(1) of Regulation D of the Securities and Exchange
SEC under the Securities Act of 1933.
On July 21, 1997, the DOL published in the Federal Register an amendment to
the underwriter exemptions, which extends exemptive relief to certain
mortgage-backed and asset-backed securities transactions using pre-funding
accounts for trusts issuing pass-through certificates. The amendment generally
allows mortgage loans or other secured receivables supporting payments to
certificateholders, and having a value equal to no more than twenty-five percent
(25%) of the total principal amount of the certificates being offered by the
trust, to be transferred to the trust within a 90-day or three-month period
following the closing date (the "pre-funding period"), instead of requiring that
all such receivables be either identified or transferred on or before the
closing date. The relief is available when the following conditions are met:
(1) The ratio of the amount allocated to the pre-funding account to the
total principal amount of the certificates being offered (the "pre-funding
limit") must not exceed twenty-five percent (25%).
(2) All receivables transferred after the closing date (the "additional
obligations") must meet the same terms and conditions for eligibility as
the original receivables used to create the trust, which terms and
conditions have been approved by a rating agency.
(3) The transfer of additional obligations to the trust during the
funding period must not result in the certificates to be covered by the
Exemption receiving a lower credit rating from a rating agency upon
termination of the funding period than the rating that was obtained at the
time of the initial issuance of the certificates by the trust.
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(4) Solely as a result of the use of pre-funding, the weighted average
annual percentage interest rate for all of the receivables in the trust at
the end of the funding period must not be more than 100 basis points lower
than the average interest rate for the receivables transferred to the trust
on the closing date.
(5) In order to insure that the characteristics of the additional
obligations are substantially similar to the original receivables which
were transferred to the trust:
(a) the characteristics of the additional obligations must
be monitored by an insurer or other enhancement provider that is
independent of the depositor; or
(b) an independent accountant retained by the depositor must
provide the depositor with a letter (with copies provided to each
rating agency rating the certificates, the related underwriter and
the related trustee) stating whether or not the characteristics of
the additional obligations conform to the characteristics
described in the related prospectus or prospectus supplement
and/or pooling and servicing agreement. In preparing such letter,
the independent accountant must use the same type of procedures as
were applicable to the receivables transferred to the trust as of
the closing date.
(6) The funding period must end no later than three months or 90 days
after the closing date or earlier in certain circumstances if the
pre-funding account falls below the minimum level specified in the
agreement or an Event of Default occurs.
(7) Amounts transferred to any pre-funding account and/or capitalized
interest account used in connection with the pre-funding may be invested
only in certain permitted investments.
(8) The related prospectus or prospectus supplement must describe:
(a) any pre-funding account and/or capitalized interest
account used in connection with a pre-funding account;
(b) the duration of the funding period;
(c) the percentage and/or dollar amount of the pre-funding
limit for the trust; and
(d) that the amounts remaining in the pre-funding account at
the end of the funding period will be remitted to
certificateholders as repayments of principal.
(9) The related agreement must describe the permitted investments for
the pre-funding account and/or capitalized interest account and, if not
disclosed in the related prospectus or prospectus supplement, the terms and
conditions for eligibility of additional obligations.
The trust also must meet the following requirements:
(1) the corpus of the trust must consist solely of assets of the type
which have been included in other investment pools;
(2) 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
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(3) 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 holding receivables as to which
the fiduciary or its affiliates is an obligor provided that, among other
requirements:
(1) in the case of an acquisition in connection with the initial
issuance of securities, at least fifty (50) percent of each class of
securities in which Plans have invested is acquired by persons independent
of the Restricted Group and at least fifty (50) percent of the aggregate
interest in the trust is acquired by persons independent of the Restricted
Group;
(2) 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;
(3) a Plan's investment in securities does not exceed twenty-five
(25) percent of all of the securities outstanding after the acquisition;
and
(4) immediately after the acquisition, no more than twenty-five
(25) percent of the assets of any Plan for which such person is a fiduciary
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 depositor, the
underwriters of the securities, the trustee, any 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" under 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.
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
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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, as applicable, for a series may have on the yield to investors
in the securities of the series.
PLAN OF DISTRIBUTION
The depositor may offer each series of securities through Lehman Brothers
Inc. or one or more other firms that may be designated at the time of each
offering of the 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 the series of
securities and of each class within the 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
dealers. The place and time of delivery of each series of securities will also
be set forth in the prospectus supplement relating to that series. Lehman
Brothers is an affiliate of the depositor.
LEGAL MATTERS
Unless otherwise specified in the related prospectus supplement, legal
matters in connection with the securities will be passed upon for the depositor
by Brown & Wood LLP, New York, New York.
AVAILABLE 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 SEC in Washington,
D.C. Copies may be obtained at rates prescribed by the SEC upon request to the
SEC, and may be inspected, without charge, at the offices of the SEC, 450 Fifth
Street, N.W., Washington, D.C.
A trust fund formed to issue securities under this prospectus will be
subject to the informational requirements of the Securities Exchange Act of 1934
and in accordance therewith files, for the required period of time, reports and
other information with the SEC. Those reports and other information can be
inspected and copied at the public reference facilities maintained by the SEC 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 that
material can also be obtained from the Public Reference Section of the SEC,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the SEC 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 electronically with
the SEC.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Term Page
- ---------------------------------------------------------------------------------------------------------- ----
<S> <C>
Assumed Reinvestment Rate................................................................................. 8
Cash Flow Bond Method..................................................................................... 69
Code...................................................................................................... 56
Depositor Securities...................................................................................... 54
Disqualified Organization................................................................................. 66
Eligible Corporations..................................................................................... 81
Enhancement............................................................................................... 7
Exemption................................................................................................. 85
FASIT Qualification Test.................................................................................. 80
Interest Weighted Securities.............................................................................. 60
IO........................................................................................................ 80
New Regulations........................................................................................... 71
OID Regulations........................................................................................... 57
Pass-Through Securities................................................................................... 67
Pay-Through Security...................................................................................... 59
Plan Assets Regulation.................................................................................... 84
Prepayment Assumption..................................................................................... 59
PS Agreement.............................................................................................. 15
PS Servicer............................................................................................... 15
PS Sponsor................................................................................................ 15
PS Trustee................................................................................................ 15
PTE....................................................................................................... 84
Publicly Offered Securities............................................................................... 85
Ratio Strip Securities.................................................................................... 68
RCRA...................................................................................................... 46
Regular Interest Securities............................................................................... 57
Residual Interest Securities.............................................................................. 62
Restricted Group.......................................................................................... 88
Short-Term Note........................................................................................... 73
Stripped Securities....................................................................................... 67
U.S. Person............................................................................................... 56
</TABLE>
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<PAGE>
$350,000,000
CHAMPION HOME EQUITY
LOAN TRUST 1999-3
Home Equity Loan
Asset-Backed Notes,
Series 1999-3
Champion Mortgage Co., Inc.,
as Seller and Servicer
Lehman ABS Corporation,
as Depositor
--------------------
PROSPECTUS SUPPLEMENT
September 20, 1999
--------------------
LEHMAN BROTHERS
MCDONALD INVESTMENTS
A KeyCorp Company
