<PAGE>
PURSUANT TO RULE 424(b)(5)
REGISTRATION NUMBER 333-76627
PROSPECTUS SUPPLEMENT DATED DECEMBER 4, 2000
TO PROSPECTUS DATED NOVEMBER 29, 2000
$369,344,000
SOVEREIGN BANK HOME EQUITY LOAN TRUST 2000-1
HOME EQUITY LOAN ASSET-BACKED CERTIFICATES, SERIES 2000-1
<TABLE>
<S> <C>
SOVEREIGN BANK LEHMAN ABS CORPORATION,
AS SELLER AND MASTER AS DEPOSITOR
SERVICER
</TABLE>
<TABLE>
<CAPTION>
CLASS A PRINCIPAL CERTIFICATE PRICE TO UNDERWRITING PROCEEDS TO THE
CERTIFICATES BALANCE RATE PUBLIC(1) DISCOUNT DEPOSITOR(2)
<S> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
Class A-1 $ 75,719,000 7.26% 100.000000% 0.150% 99.850000%
----------------------------------------------------------------------------------------------
Class A-2 $ 15,943,000 6.96% 99.993541% 0.175% 99.818541%
----------------------------------------------------------------------------------------------
Class A-3 $ 40,746,000 7.11% 100.000000% 0.225% 99.775000%
----------------------------------------------------------------------------------------------
Class A-4 $ 32,072,000 7.32% 99.953125% 0.350% 99.603125%
----------------------------------------------------------------------------------------------
Class A-5 $ 32,864,000 7.71% 99.953125% 0.400% 99.553125%
----------------------------------------------------------------------------------------------
Class A-6 $ 22,000,000 7.25% 99.968750% 0.325% 99.643750%
----------------------------------------------------------------------------------------------
Class A-7 $150,000,000 7.31% 99.984375% 0.250% 99.734375%
----------------------------------------------------------------------------------------------
Total for Offered
Certificates $369,344,000 N/A $369,282,219 $923,365 $368,358,854
----------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from December 1, 2000.
(2) Before deducting expenses, estimated to be approximately $500,000.
THE CERTIFICATES
- represent the entire beneficial interest in a trust, whose assets are a pool
of closed-end fixed-rate home equity loans having conforming balances
- currently have no trading market
- are not deposits and are not guaranteed by the Federal Deposit Insurance
Corporation
- are obligations of the trust only and are not obligations of the seller and
master servicer or its affiliates
CREDIT ENHANCEMENT
- will be provided in the form of overcollateralization and an irrevocable and
unconditional certificate guaranty insurance policy issued by Financial
Guaranty Insurance Company
[LOGO]
THE TRUST
- will make a REMIC election for federal income tax purposes
REVIEW THE INFORMATION IN RISK FACTORS ON PAGE S- 9 OF THIS PROSPECTUS
SUPPLEMENT AND ON PAGE 2 IN THE PROSPECTUS.
FOR COMPLETE INFORMATION ABOUT THE CLASS A CERTIFICATES, READ BOTH THIS
PROSPECTUS SUPPLEMENT AND PROSPECTUS. THIS PROSPECTUS SUPPLEMENT MUST BE
ACCOMPANIED BY PROSPECTUS IF IT IS BEING USED TO OFFER AND SELL THE
CERTIFICATES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE CERTIFICATES OR PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
LEHMAN BROTHERS SALOMON SMITH BARNEY
<PAGE>
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 Sovereign Bank Home Equity Loan Asset-Backed
Certificates, Series 2000-1 in any state where the offer is not permitted.
We do not claim that the information in this prospectus supplement and
prospectus is accurate as of any date other than the dates stated on the
respective covers.
Dealers will deliver a prospectus supplement and prospectus when acting as
underwriters of the Sovereign Bank Home Equity Loan Asset-Backed Certificates,
Series 2000-1 and with respect to their unsold allotments or subscriptions. In
addition, all dealers selling Sovereign Bank Home Equity Loan Asset-Backed
Certificates, Series 2000-1 will be required to deliver a prospectus supplement
and prospectus for ninety days following the date of this prospectus supplement.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
Summary..................................................... S-3
Risk Factors................................................ S-9
The Certificate Insurer..................................... S-14
The Seller and the Master Servicer.......................... S-16
Description of the Mortgage Loans........................... S-23
Prepayment and Yield Considerations......................... S-31
Description of the Certificates............................. S-38
Description of the Purchase Agreement....................... S-60
Incorporation of Certain Documents by Reference............. S-60
Use of Proceeds............................................. S-60
Certain Federal Income Tax Considerations................... S-60
State Taxes................................................. S-63
ERISA Considerations........................................ S-63
Legal Investment Considerations............................. S-64
Underwriting................................................ S-64
Experts..................................................... S-65
Legal Matters............................................... S-66
Ratings..................................................... S-66
Index of Defined Terms...................................... S-67
Annex I..................................................... A-I-1
PROSPECTUS
Risk Factors................................................ 2
Description of the Securities............................... 5
The Trust Funds............................................. 9
Enhancement................................................. 16
Servicing of Loans.......................................... 18
The Agreements.............................................. 26
Custody Receipts; Custody Agreements........................ 35
Legal Aspects of Loans...................................... 39
The Depositor............................................... 49
Use of Proceeds............................................. 50
Federal Income Tax Considerations........................... 51
State Tax Considerations.................................... 77
ERISA Considerations........................................ 77
Legal Investment............................................ 81
Ratings..................................................... 81
Plan of Distribution........................................ 81
Legal Matters............................................... 81
Additional Information...................................... 81
Index of Defined Terms...................................... 82
</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. To understand all of the terms of the offering of the
Class A Certificates, read carefully this entire document and the accompanying
prospectus.
This summary provides an overview of certain calculations, cash flows and
other information to aid your understanding and is qualified by the full
description of these calculations, cash flows and other information in this
prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
LAST SCHEDULED
PRINCIPAL DISTRIBUTION
CERTIFICATE CLASS CERTIFICATE RATE BALANCE DATE(1)
----------------- ---------------- ------------ --------------
<S> <C> <C> <C>
Class A-1................... 7.26% $ 75,719,000 February 2015
Class A-2................... 6.96% $ 15,943,000 February 2015
Class A-3................... 7.11% $ 40,746,000 February 2015
Class A-4................... 7.32% $ 32,072,000 October 2022
Class A-5................... 7.71% $ 32,864,000 December 2030
Class A-6................... 7.25% $ 22,000,000 February 2015
Class A-7................... 7.31% $150,000,000 December 2030
</TABLE>
------------------------
(1) We expect the actual last distribution date for each Class A Certificate
will be significantly earlier than its last scheduled distribution date.
THE TRUST
Sovereign Bank Home Equity Loan Trust 2000-1 will be formed by Lehman ABS
Corporation and Sovereign Bank. Sovereign Bank will sell the mortgage loans to
Lehman ABS Corporation and Lehman ABS Corporation will deposit the mortgage
loans with the Trust. State Street Bank and Trust Company will act as trustee
for the benefit of the certificateholders.
THE CERTIFICATES
On the expected closing date, December 12, 2000, the trust will issue the
Class A Certificates, which are senior certificates and the Class R
Certificates, which are subordinate certificates.
The Class A Certificates will be offered for purchase in denominations of
$1,000 and multiples of $1 above $1,000. The Class R Certificates are not being
offered to the public.
REGISTRATION OF CLASS A CERTIFICATES
We will issue the Class A Certificates in book-entry form. You will hold
your interests either through a depository in the United States or through one
of two depositories in Europe. While the certificates 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 certificates will replace the book-entry
certificates are described in this prospectus supplement.
WE REFER YOU TO "RISK FACTORS--BOOK-ENTRY CERTIFICATES", "DESCRIPTION OF THE
CERTIFICATES--BOOK-ENTRY CERTIFICATES" AND "ANNEX I" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
S-3
<PAGE>
TRUST PROPERTY
The trust property is held by the trustee for the benefit of the
certificateholders. The trust property includes:
- a pool of closed-end fixed-rate home equity loans having conforming
balances, secured by first-lien and second-lien deeds of trust or
mortgages on primarily one- to four-family residential properties
- payments on the mortgage loans received after November 30, 2000.
- property that secured a mortgage loan which has been acquired by
foreclosure or deed in lieu of foreclosure
- rights of the depositor under the mortgage loan purchase agreement
pursuant to which the depositor purchased the mortgage loans from the
seller. Under certain circumstances, if the representations and warranties
made by the Seller about the mortgage loans are breached, then it will be
obligated to repurchase those mortgage loans
- rights of the seller under any hazard insurance policies covering the
mortgaged properties
THE MORTGAGE LOANS
On December 12, 2000, the trust will acquire a pool of closed-end fixed rate
home equity loans having conforming balances. The information below is based on
the pool of mortgage loans as it existed on October 31, 2000. You are purchasing
the balances of the mortgage loans as of the close of business on November 30,
2000. There will be some change in the characteristics of the mortgage loans
from October 31, 2000 to November 30, 2000. The mortgage loans have the
following characteristics as of October 31, 2000:
- number of mortgage loans: 5,637
- aggregate principal balance:
$375,410,128.08
- mortgaged property location: 45 states and the District of Columbia
- average principal balance: $66,597.50
- maximum principal balance: $248,016.86
- interest rate range: 9.313% to 15.000%
- weighted average interest rate: 10.653% (approximate)
- weighted average remaining term to stated maturity, based on principal
balance: 223 months (approximate)
- remaining term to stated maturity range: 44 months to 360 months
- last maturity date: October 1, 2030
- combined loan-to-value ratio range: 7.69% to 95.00% (approximate)
- weighted average combined loan-to-value ratio: 79.41% (approximate)
- interest calculated on the "simple interest" method: 75.22% (approximate)
- monthly payments calculated on a fully amortizing method: 51.79%
(approximate)
- balloon loans; loans with amortization schedules that extend beyond their
maturity date: 48.21% (approximate)
WE REFER YOU TO "DESCRIPTION OF THE MORTGAGE LOANS" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
MASTER SERVICER
Sovereign Bank will act as master servicer and expects that Mortgage Lenders
Network USA, Inc. will act as subservicer of the mortgage loans.
WE REFER YOU TO "THE SELLER AND THE MASTER SERVICER" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
SERVICING
The master servicer will be responsible for servicing, managing and making
collections on the mortgage loans. The master servicer will deposit collections
on the mortgage loans into the collection account. Each calendar month, the
master servicer will be paid or will retain a portion of the interest payments
on the mortgage loans as a fee for its services. The amount of the fee paid to
the master servicer is based on the principal balance
S-4
<PAGE>
of the pool of mortgage loans as of the first day of that calendar month.
The master servicer has the option to purchase from the trust any mortgage
loan that is 90 days or more delinquent in its payments up to a maximum of five
percent (5%) of the original pool principal balance.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--SERVICING COMPENSATION AND
PAYMENT OF EXPENSES" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
MONTHLY ADVANCES AND INTEREST SHORTFALLS
During any given month, the master servicer may receive less than the amount
of interest due on each mortgage loan due to delinquent payments. Other than
shortfalls in the amount of interest received relating to prepayments or
resulting from the application of the Soldiers' and Sailors' Civil Relief Act of
1940, which are discussed in the following paragraphs, the master servicer has
agreed that under certain circumstances, it will deposit any such shortfall of
interest in the trust's distribution account. The trust will reimburse the
master servicer for the advance from future collections. The advances are
intended to provide liquidity for the payment of interest on the Class A
Certificates.
The master servicer has agreed that under certain circumstances, it will
deposit in the distribution account shortfalls in interest attributable to
prepayments which amounts are not reimbursable to the master servicer. When a
mortgagor prepays a mortgage loan in full, the mortgagor pays the interest that
has accrued up to the date of the prepayment, which may be less than if the
interest had accrued for the entire month.
The maximum amount the master servicer will deposit each month as a result
of shortfalls relating to prepayments is the amount of the servicing fee for the
preceding month.
The master servicer is not obligated to provide funds to cover any
shortfalls in interest collections on the mortgage loans that are attributable
to the application of the Soldiers' and Sailors' Civil Relief Act of 1940.
WE REFER YOU TO "RISK FACTORS--INTEREST PAYMENTS ON THE MORTGAGE LOANS AND
RESULTING REDUCTIONS IN INTEREST DISTRIBUTIONS ON THE CERTIFICATES" AND
"DESCRIPTION OF THE CERTIFICATES--ADVANCES" IN THIS PROSPECTUS SUPPLEMENT FOR
MORE DETAIL.
DISTRIBUTIONS TO CERTIFICATEHOLDERS
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
trustee will calculate the amounts to be paid to the certificateholders. If you
hold a certificate on the last day of a calendar month, you will be entitled to
receive payments on the distribution date in the next month. The distribution
date will be the 25th day of each month or, if the 25th day is not a business
day, the next business day, starting on January 25, 2001.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PRIORITY OF DISTRIBUTIONS"
IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
INTEREST
Interest on the Class A Certificates 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. You will receive each month's
interest on the distribution date in the next calendar month. On each
distribution date, you will be entitled to the following:
- interest that accrued at the related certificate rate on the related
principal balance immediately prior to such distribution date
- any interest that was due on a prior distribution date and not paid,
together with interest on that amount.
Your interest entitlement will be reduced by your pro rata share of
shortfalls in interest collections due to the application of the Soldiers' and
Sailors' Civil Relief Act of 1940. Your interest entitlement will be further
reduced by your pro rata share of prepayment interest shortfalls in excess of
the servicing fee to the extent not covered by the policy.
S-5
<PAGE>
Interest payments are made to all classes pro rata. For example, if there is
a $50 shortfall, all of the Class A Certificateholders will absorb a portion of
that shortfall, based on the amount of current interest that would have been
paid if the shortfall had not occurred. If the amount of current interest due to
holders of the Class A-3 Certificates is $100 and the amount of current interest
due to holders of all Class A Certificates is $1,000, then the amount of
interest to be paid to holders of Class A-3 Certificates would be $95, that is
(100 - ( 100/1000 X $50) = 95).
PRINCIPAL
On each distribution date, to the extent funds are available, you will be
entitled to distributions of principal in the order of priority described in
this prospectus supplement. The maximum amount for distribution as principal
payments to all Class A Certificateholders on any distribution date will be the
sum of:
- payments of principal on the mortgage loans received during the prior
calendar month, and all other amounts relating to principal on the
mortgage loans
- plus, the amount of any principal losses realized on the mortgage loans
during the prior calendar month
- plus, the amount, if any, 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
Class A Certificates and the principal balance of the mortgage loans,
thereby increasing the level of overcollateralization
- minus, the amount, if any, required to maintain the required level of
overcollateralization. This will reduce the difference between the
principal balance of the Class A Certificates and the principal balance of
the mortgage loans, thereby decreasing the level of overcollateralization.
If the certificate insurer has not defaulted, then principal, up to the
amount of funds available to be distributed on the related distribution date,
will be allocated concurrently on a pro rata basis (1) to the Class A-1 through
Class A-6 Certificates and (2) to the Class A-7 Certificates as follows:
(1) to the Class A-1 through Class A-6 sequentially as follows:
- to the Class A-6 Certificateholders, starting in January 2004, a fixed
percentage of the amount distributable as principal payments
- to the Class A-1 Certificateholders
- to the Class A-2 Certificateholders
- to the Class A-3 Certificateholders
- to the Class A-4 Certificateholders
- to the Class A-5 Certificateholders
- to the Class A-6 Certificateholders; and
(2) to the Class A-7 Certificateholders.
If there has been a default by the certificate insurer, then Class A
Certificateholders will share distributions according to their principal
balance, irrespective of class designations. For example, if there is a $200
shortfall, all of the Class A Certificateholders will absorb a percentage of
that shortfall, based on the principal balance of their class. If the principal
balance of Class A-3 Certificates is 20% of the principal balance of all of the
Class A Certificates, the payment to the Class A-3 Certificateholders will be
reduced by $40, that is ($200 x 20%).
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--PRINCIPAL" IN THIS
PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
OVERCOLLATERALIZATION FOR THE CERTIFICATES
The application of the payments on the mortgage loans to the holders of the
Class A Certificates has been structured to create overcollateralization in the
first few months after the Class A Certificates have been issued.
On November 30, 2000 the aggregate principal balance of the mortgage loans
will equal the aggregate principal balance of the Class A Certificates to be
issued on December 12, 2000. The interest payments on the mortgage loans are
expected to exceed the amount of interest due and payable on the certificates.
This excess will be
S-6
<PAGE>
applied as principal payments to the class then entitled to principal on that
distribution date. This will result in a limited acceleration of principal
payments on the Class A Certificates relative to the amortization of the
mortgage loans, thereby creating overcollateralization for the Class A
Certificates. Once the required level of overcollateralization is reached, the
application of the excess payments will cease, until it is again needed to
maintain the required level of overcollateralization.
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 overcollateralization will increase
and decrease over time.
For example, an increase in the required level of overcollateralization will
result if the delinquency or default experience on the mortgage loans exceeds
certain set levels. In that event, amortization of the Class A Certificates
would be accelerated until the level of overcollateralization reaches its
required level.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" AND "DESCRIPTION OF
THE CERTIFICATES--OVERCOLLATERALIZATION PROVISIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
THE INSURANCE POLICY
Financial Guaranty Insurance Company, a New York stock insurance company,
will issue an insurance policy for the benefit of the Class A Certificates. The
policy will unconditionally and irrevocably guarantee payment of the outstanding
principal amount of the Certificates by the distribution date in December 2030,
plus accrued and unpaid interest due on the Class A Certificates.
On each distribution date, the trustee will calculate to what extent the
funds available to make the payments of principal and interest are insufficient
to (i) pay accrued interest or (ii) reduce the principal balance of the Class A
Certificates to an amount equal to the aggregate principal balance of the
mortgage loans. If an insufficiency exists and it is covered by the policy, then
the trustee will make a draw on the policy. In addition, the policy will
guarantee the full payment of the Class A principal balance on the distribution
date in December 2030.
If for any reason the certificate insurer does not make the payments
required in the policy, the holders of the Class A Certificates will rely solely
on the mortgage loans for their payments of interest and principal and
certificateholders may suffer a loss.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--THE POLICY," AND "THE
CERTIFICATE INSURER" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
OPTIONAL TERMINATION OF THE TRUST
On any date when the principal balance of the mortgage loans is less than 5%
of what it was on November 30, 2000, the holder of the Class R Certificates will
have the right to terminate the trust on a subsequent distribution date.
Termination of the trust will be accomplished by the holder of the Class R
Certificates purchasing all of the mortgage loans from the trust and making some
additional payments. If the holder of the Class R Certificates doesn't exercise
its right to terminate the trust, the certificate insurer will have the right to
terminate the trust.
Upon receipt of the purchase price of the mortgage loans from the holder of
the Class R Certificates or the certificate insurer, the trustee will make a
final payment to the certificateholders.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--TERMINATION; PURCHASE OF
THE MORTGAGE LOANS" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
FEDERAL TAX CONSIDERATIONS
Brown & Wood LLP has acted as counsel to the trust and the underwriters and
is of the opinion that:
- the trust will be treated as a real estate mortgage investment conduit, or
REMIC, for federal income tax purposes
- the Class A Certificates will be "regular interests" in the REMIC and will
be treated as debt instruments of the REMIC
S-7
<PAGE>
for federal income tax purposes with payment terms equivalent to the terms
of such Certificates
WE REFER YOU TO "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" IN THIS
PROSPECTUS SUPPLEMENT AND IN THE PROSPECTUS FOR MORE DETAIL.
ERISA CONSIDERATIONS
The fiduciary responsibility provisions of the Employee Retirement Income
Security Act of 1974, or ERISA, and the prohibited transaction provisions of
ERISA and Section 4975 of the Code can limit investments by certain pension,
employee benefit and other plans. For example, the acquisition of certificates
by some plans may be a "prohibited transaction" under ERISA. Exemptions from the
prohibited transactions rules could be applicable to the acquisition of the
Class A Certificates. If you are a fiduciary of a pension, employee benefit or
other plan which is subject to ERISA or to Section 4975 of the Internal Revenue
Code, you should consult with your counsel regarding the applicability of the
provisions of ERISA and the Internal Revenue Code before purchasing a Class A
Certificate.
Subject to the considerations and conditions described under "ERISA
CONSIDERATIONS," it is expected that the Class A Certificates may be purchased
by a pension, employee benefit or other plan.
LEGAL INVESTMENT CONSIDERATIONS
The Secondary Mortgage Market Enhancement Act of 1984 defines "mortgage
related securities" to include only first-lien mortgages, and not second-lien
mortgages. Because the pool of mortgage loans owned by the trust includes
second-lien mortgage loans, the certificates will not be "mortgage related
securities" under that definition. Some institutions may be limited in their
legal investment authority to only first-lien mortgages or "mortgage related
securities" and will be unable to invest in the Class A Certificates.
WE REFER YOU TO "LEGAL INVESTMENT CONSIDERATIONS" AND "LEGAL INVESTMENT" IN
THE PROSPECTUS FOR MORE DETAIL.
CERTIFICATE RATING
Before the Class A Certificates can be issued, the trust must obtain ratings
on the Class A Certificates of:
- AAA by Standard & Poor's Ratings Services, a division of The McGraw-Hill
Companies, Inc.
- Aaa by Moody's Investors Service, Inc.
Ratings such as the ratings obtained for the Class A Certificates address
credit risk. When evaluating credit risk, the rating agencies evaluate the
likelihood of whether or not you will receive your interest and principal
payments. Credit risk does not relate to the likelihood of prepayments on the
mortgage loans. Prepayments affect the timing of your payments, such that your
actual return could differ substantially from your anticipated return on your
investment.
WE REFER YOU TO "RATINGS" AND "RISK FACTORS--CERTIFICATE RATINGS RELATE TO
CREDIT RISK ONLY" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
S-8
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors prior to any
purchase of certificates. You should also carefully consider the information set
forth under "RISK FACTORS" in the prospectus.
PREPAYMENTS AFFECT TIMING AND RATES OF RETURN
All of the mortgage loans may be prepaid in whole or in part at any time.
Certain of the mortgage loans are subject to a prepayment penalty. Home equity
loans, such as the mortgage loans, have been originated in significant volume
only during the past few years and neither the depositor nor the master servicer
is aware of any publicly available studies or statistics on the rate of
prepayment of such loans. Generally, home equity loans are not viewed by
borrowers as permanent financing; therefore, the mortgage loans may experience a
higher rate of prepayment than traditional mortgage loans. The trust's
prepayment experience may be affected by a wide variety of factors, including
general economic conditions, interest rates, the availability of alternative
financing and homeowner mobility. Prepayments on the mortgage loans will result
in earlier distributions of principal on your certificates.
In certain circumstances, breaches of representations, warranties or
covenants of the seller may result in repurchases of the related mortgage loans
by the seller. Such repurchases would have substantially the same effect on
certificateholders as a prepayment of such mortgage loans.
WE REFER YOU TO "PREPAYMENT AND YIELD CONSIDERATIONS" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
In addition, all of the mortgage loans contain due-on-sale provisions
requiring the mortgagor to prepay the mortgage loan in full when the mortgaged
property is sold. The master servicer will be required to enforce such
provisions unless enforcement is not permitted by applicable law or the master
servicer permits the purchaser of the related mortgaged property to assume the
mortgage loans. Enforcement of due-on sale provisions results in the trust
receiving proceeds on a mortgage loan earlier than it otherwise would.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF LOANS--DUE-ON-SALE CLAUSES IN
MORTGAGE LOANS" IN THE PROSPECTUS.
Since amounts received on a mortgage loan are distributed on the next
following distribution date, the rate at which the amounts described above are
paid on the mortgage loans will affect the payment rate on the certificates. If
the timing and amount of such payment is not as anticipated, your rate of return
will differ from your anticipated rate of return.
CASH FLOW MAY BE AFFECTED BY BALLOON LOANS
Balloon loans pose a risk because a 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 may suffer a loss if the
certificate insurer fails to perform its obligations under the policy.
Approximately 48.21% of the mortgage loans, by statistic calculation date
pool principal balance, are balloon loans.
RECENTLY ORIGINATED 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 you anticipate and
the certificate insurer fails to perform its obligations under the policy, then
you may experience a loss.
Approximately 63.24% of the mortgage loans, by statistic calculation date
pool principal balance, were originated within twelve months prior to the
statistic calculation date.
S-9
<PAGE>
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 will reduce the
portion of liquidation proceeds payable to you. In addition, there may be
certain instances where, based upon the relevant costs associated with the
foreclosure process, the master servicer will decide not to foreclose on the
loan. If a mortgaged property fails to provide adequate security for the
mortgage loan, you will incur a loss on your investment if the certificate
insurer fails to perform its obligation under the policy.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF LOANS--FORECLOSURE" IN THE
PROSPECTUS FOR MORE DETAIL.
MASTER SERVICER DOES NOT MONITOR PAYMENT OF TAXES
Although the mortgage loans may require that each mortgagor pay all property
taxes on the related mortgaged property, the master servicer has no obligation
to monitor the payment of property taxes. If a borrower is delinquent in paying
property taxes, a lien may be placed on the mortgaged property which would be
senior in priority to the mortgage securing the related mortgage note. The
delinquent property taxes will be paid first out of any liquidation proceeds and
the remaining funds may be insufficient to satisfy the mortgage loan and any
senior mortgage loan. If the certificate insurer fails to perform its obligation
under the policy, you will experience a loss.
MASTER SERVICER DOES NOT MONITOR MAINTENANCE OF HAZARD INSURANCE
Although the mortgage loans require standard hazard insurance policies on
the mortgage loans, the master servicer has no obligation to monitor whether or
not such policies are in fact in place. The master servicer has obtained a
blanket insurance policy insuring against fire and hazard of extended coverage
on all of the mortgaged properties securing the mortgage loans and has named the
master servicer and the trust as loss payees. The insurance carrier for the
blanket insurance policy has the right to cancel the policy at any time. In the
event of any cancellation, the master servicer will use commercially reasonable
efforts to obtain a comparable insurance policy at comparable cost. As a result,
there is a risk to you that if the master servicer fails to maintain a blanket
policy and if the mortgagors fail to maintain their hazard insurance policies,
then the related mortgaged properties would not be covered for losses typically
covered by such policies. If the certificate insurer fails to perform its
obligation under the policy, you will experience a loss.
PRIORITY OF LIENS
Some of the mortgage loans are secured by mortgages which are junior in
priority. For mortgage loans in the trust secured by second-lien mortgages, the
master servicer may consent under certain circumstances to a new first priority
lien regardless of the principal amount.
Mortgage loans that are secured by junior mortgages will receive proceeds
from the sale of the related mortgaged property only after any senior mortgage
loans and prior statutory liens have been paid. If the remaining proceeds are
insufficient to satisfy the mortgage loan in the trust and the certificate
insurer fails to perform its obligations under the policy, then:
- there will be a delay in distributions to you while a deficiency judgment
against the borrower is sought
- you may incur a loss if a deficiency judgment cannot be obtained or
collected.
Approximately 11.39% of the mortgage loans, by statistic calculation date
pool principal balance, are secured by second mortgages or deeds of trust.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF THE LOANS" IN THE PROSPECTUS FOR
MORE DETAIL.
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<PAGE>
GEOGRAPHIC CONCENTRATION MAY AFFECT PERFORMANCE
To the extent that specific geographic regions have experienced or may
experience weaker economic conditions or greater rates of decline in real estate
values than the United States generally, a concentration of the mortgage loans
in that region may be expected to exacerbate all of the risks relating to the
mortgage loans. The seller and the depositor can neither quantify the impact of
any recent property value declines on the mortgage loans nor predict whether, to
what extent or for how long such declines may continue.
The concentration of mortgage loans by state, as an approximate percentage
of statistic calculation date pool principal balance is as follows:
<TABLE>
<CAPTION>
STATE MORTGAGE LOANS
----- --------------
<S> <C>
Ohio........................................................ 12.78%
New York.................................................... 9.10%
North Carolina.............................................. 8.68%
Michigan.................................................... 7.65%
Pennsylvania................................................ 6.99%
Illinois.................................................... 5.88%
</TABLE>
LIMITED RECORDATION OF ASSIGNMENTS OF MORTGAGE
The seller is generally required to deliver to the trustee, among other
things, originals or copies of assignments of mortgage or deed of trust,
including assignments that are required to be recorded. The assignments are
required to be in recordable form but only assignments relating to mortgage
properties located in Florida, Maryland, Mississippi, South Carolina and
Tennessee are required to be recorded.
UNDERWRITING STANDARDS
The seller's underwriting standards generally are less stringent than those
of Fannie Mae or Freddie Mac. For example, a borrower's past credit history may
not preclude the seller from purchasing a mortgage loan; however, it will reduce
the size, and consequently the combined loan-to-value ratio of the mortgage loan
that the seller is willing to purchase. As a result of this approach to
underwriting, the mortgage loans in the mortgage pool may experience higher
rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in accordance with Fannie Mae or Freddie Mac's guidelines. In turn,
if the certificate insurer fails to perform its obligations under the policy,
you will experience a loss.
WE REFER YOU TO "THE SELLER AND THE MASTER SERVICER" IN THIS PROSPECTUS
SUPPLEMENT FOR MORE DETAIL.
INTEREST PAYMENTS ON THE MORTGAGE LOANS AND RESULTING REDUCTIONS IN INTEREST
DISTRIBUTIONS ON THE CERTIFICATES
PREPAYMENTS OF PRINCIPAL MAY REDUCE INTEREST PAYMENTS. When a principal
prepayment in full is made on a mortgage loan, the mortgagor is charged interest
only up to the date of prepayment, instead of a full month. This may result in
an interest shortfall. The master servicer is obligated to pay these interest
shortfalls, without any right of reimbursement (net of certain amounts as
described in this prospectus supplement under "DESCRIPTION OF THE
CERTIFICATES--Servicing Compensation and Payment of Expenses") up to the amount
of its servicing fee for that month. If the servicing fee is insufficient to pay
prepayment interest shortfalls they will be covered by the policy.
SHORTFALLS FROM SIMPLE INTEREST PAYMENTS. Some 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
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<PAGE>
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.
As a result of this method of accrual, if the aggregate of interest
shortfalls exceeds the aggregate of interest excesses for a calendar month, then
the master servicer is obligated to advance to the trustee the amount of such
difference for the related distribution date.
Approximately 75.22% of the mortgage loans, by statistic calculation date
pool principal balance, calculate interest using the simple interest method.
CIVIL RELIEF ACT INTEREST SHORTFALLS ARE NOT COVERED BY THE MASTER SERVICER
OR THE POLICY. The Soldiers' and Sailors' Civil Relief Act of 1940 permits
certain modifications to the payment of interest for loans, such as the mortgage
loans, under certain circumstances. The master servicer will not cover any
shortfalls in interest collections on the mortgage loans that are due to
application of the Soldiers' and Sailors' Civil Relief Act. These shortfalls
will not be covered by payments under the policy.
WE REFER YOU TO "CERTAIN LEGAL ASPECTS OF LOANS--SOLDIERS' AND SAILORS'
CIVIL RELIEF ACT OF 1940" IN THE PROSPECTUS FOR MORE DETAIL.
LIMITED HISTORICAL SERVICING EXPERIENCE OF MORTGAGE LENDERS NETWORK USA, INC.
Mortgage Lenders Network USA, Inc. will be the initial subservicer of the
mortgage loans. The subservicer commenced its servicing activities for mortgage
loans in April 1997 and as a result, it has limited historical data available
regarding loan performance. Accordingly, meaningful statistics relating to the
historical performance of the mortgage loans in its servicing portfolio are
unavailable. Consequently, we do not know how the subservicer's mortgage loan
portfolio will perform relative to the portfolios of other mortgage servicers.
Therefore, no assurance can be given as to the level of losses and delinquencies
that the mortgage loans will experience. If the losses and delinquencies are
greater than you anticipate, you may experience a lower than expected return on
your investment.
WE REFER YOU TO "THE SELLER AND THE MASTER SERVICER--SERVICING" IN THIS
PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
CLAIMS UNDER THE HOME OWNERSHIP AND EQUITY PROTECTION ACT OF 1994
The Home Ownership and Equity Protection Act of 1994 sets forth certain
requirements in the origination of loans such as the mortgage loans. The
mortgagor under any mortgage loan covered by the act is permitted to make any
claim under the act against either the originator of the mortgage loan or
against a purchaser of the mortgage loan, such as the trust. It is the policy of
the seller not to purchase mortgage loans covered by the act. Nevertheless, the
trust may include some mortgage loans which are covered by the act. The
inclusion of any such mortgage loans in the trust would constitute a breach of
the seller's representations and warranties under the mortgage loan purchase
agreement and the seller would be required to repurchase or replace such
mortgage loan. If the seller is unable to repurchase or replace the mortgage
loan, the trust will be subject to all of the claims and defenses which the
borrower could assert against the seller. In such event, if the certificate
insurer were unable to perform its obligations under the policy, you would bear
any related loss.
WE REFER YOU TO "RISK FACTORS--CERTAIN OTHER LEGAL CONSIDERATIONS REGARDING
THE LOANS" IN THE PROSPECTUS FOR MORE DETAIL.
INSOLVENCY OF SELLER; RECLASSIFICATION OF SALE AS A LOAN
The sale of the mortgage loans from the seller to the depositor will be
treated by the seller, the depositor and the trust as a sale of the mortgage
loans. The seller will warrant that the transfer is a sale of its interest in
the mortgage loans. The depositor will warrant that the transfer of the mortgage
loans to the trust is a valid transfer and assignment of the mortgage loans to
the trustee. In the event of an insolvency of the seller, it is possible that a
receiver or conservator for, or a creditor of, the seller may argue that the
transaction between the seller and the depositor, was a pledge of the mortgage
loans in connection with a
S-12
<PAGE>
borrowing by the seller rather than a true sale. Such an attempt, even if
unsuccessful, could result in delays in distributions to you.
RISKS RELATING TO THE NEW ENGLAND ACQUISITION
Sovereign Bancorp, Inc., the holding company for Sovereign Bank, has
significantly increased its level of debt in connection with the New England
acquisition (as described in this prospectus supplement under "THE SELLER AND
THE MASTER SERVICER"). This significant amount of debt at the holding company
level could adversely impact Sovereign Bank. Furthermore, the acquisition poses
a number of integration, operational and other risks. Individually, and in the
aggregate, these issues present risks which could adversely effect Sovereign
Bancorp, Inc.'s and Sovereign Bank's financial performance and condition and
impact Sovereign Bank's ability to perform its obligations as seller and master
servicer under the pooling and servicing agreement. Accordingly, if this adverse
effect occurred, you would experience losses to the extent that the certificate
insurer failed to perform its obligations under the policy.
WE REFER YOU TO "THE SELLER AND THE MASTER SERVICER" IN THIS PROSPECTUS
SUPPLEMENT.
BOOK-ENTRY CERTIFICATES
LIQUIDITY OF CERTIFICATES. Issuance of the Class A Certificates in
book-entry form may reduce the liquidity of these certificates in the secondary
trading market since investors may be unwilling to purchase Class A Certificates
for which they cannot obtain physical certificates.
LIMIT ON ABILITY TO PLEDGE. Since transactions in the Class A Certificates
can be effected only through DTC, Clearstream, Euroclear, participating
organizations, indirect participants and certain banks, your ability to pledge a
Class A Certificate to persons or entities that do not participate in the DTC,
Clearstream or Euroclear system or otherwise to take actions in respect of such
certificates, may be limited due to lack of a physical certificate representing
the Class A Certificates.
DELAYS IN DISTRIBUTIONS. You may experience some delay in the receipt of
distributions of interest and principal on the Class A Certificates since such
distributions will be forwarded by the trustee to DTC and DTC will credit such
distributions to the accounts of its participants which will thereafter credit
them to your account either directly or indirectly through indirect
participants.
WE REFER YOU TO "DESCRIPTION OF THE CERTIFICATES--BOOK-ENTRY CERTIFICATES"
IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
CERTIFICATE RATINGS RELATE TO CREDIT RISK ONLY
The ratings of the Class A Certificates will depend primarily on an
assessment by S&P and Moody's of the mortgage loans and upon the financial
strength of the certificate insurer. Any future reduction in a rating assigned
to the financial strength of the certificate insurer may result in a
corresponding reduction in the rating of the Class A Certificates. There is no
assurance that the ratings will remain in place for any given period of time or
that the ratings will not be lowered or withdrawn by the rating agencies. In
general, the ratings address the likelihood that you will receive distributions
of principal and interest and do not address the likelihood of prepayments on
mortgage loans or the possibility that you might realize a lower than
anticipated yield.
WE REFER YOU TO "RATINGS" IN THIS PROSPECTUS SUPPLEMENT FOR MORE DETAIL.
S-13
<PAGE>
THE CERTIFICATE INSURER
The information set forth in this section and in the financial statements of
Financial Guaranty Insurance Company, a New York stock insurance corporation
(the "Certificate Insurer") incorporated by reference herein as described below
have been provided by the Certificate Insurer. No representation is made by the
Underwriters, the Seller, the Trustee, the Master Servicer, the Depositor or any
of their affiliates as to the accuracy or completeness of any such information.
The Certificate Insurer is a monoline financial guaranty insurance company
which, since January 1984, has been a leading insurer of bonds issued by
municipal governmental subdivisions and agencies thereof. The Certificate
Insurer also insures a variety of non-municipal structured debt obligations and
pass-through securities. The Certificate Insurer is authorized to write
insurance in all 50 states and the District of Columbia and is also authorized
to carry on general insurance business in the United Kingdom and to write credit
and guaranty insurance business in France.
The Certificate Insurer is a wholly-owed subsidiary of FGIC Corporation, a
Delaware holding company, FGIC Corporation is a subsidiary of General Electric
Capital Corporation ("GE Capital"). Neither FGIC Corporation nor GE Capital is
obligated to pay the debts of or the claims of the Certificate Insurer.
The Certificate Insurer and its holding company, FGIC Corporation, are
subject to regulation by the State of New York Insurance Department and by each
other jurisdiction in which the Certificate Insurer is licensed to write
insurance. These regulations vary from jurisdiction to jurisdiction, but
generally require insurance holding companies and their insurance subsidiaries
to register and file certain reports, including information concerning their
capital structure, ownership and financial condition and require prior approval
by the insurance department of their state of domicile of changes in control, of
dividends and of other intercorporate transfers of assets and of transactions
between insurance companies, their parents and affiliates. The Certificate
Insurer is required to file quarterly and annual statutory financial statements
and is subject to statutory restrictions concerning the types and quality of
investments, the use of policy forms, premium rates and the size of risk that it
may insure, subject to reinsurance. Additionally, the Certificate Insurer is
subject to triennial audits by the State of New York Insurance Department.
The audited financial statements of Financial Guaranty Insurance Company as
of December 31, 1999 and December 31, 1998 and for each of the years in the
three year period ended December 31, 1999 prepared in accordance with generally
accepted accounting principles and the unaudited financial statements of
Financial Guaranty Insurance Company as of September 30, 2000 and for the
periods ending September 30, 2000 and September 30, 1999, which are included in
a Form 8-K filed in connection with the Registration Statement of which this
Prospectus Supplement is a part (filed with Securities and Exchange Commission
on or about November 28, 2000; Commission File Number 333-76627) are hereby
incorporated in this Prospectus Supplement.
As of September 30, 2000, December 31, 1999 and December 31, 1998, the
Certificate Insurer had written directly or assumed through reinsurance,
guaranties of approximately $318.9 billion, $298.9 billion and $268.1 billion
par value of securities, respectively (of which approximately 86 percent,
86 percent and 86 percent, respectively, constituted guaranties of municipal
bonds), for which it had collected gross premiums of approximately
$2.44 billion, $2.37 billion and $2.25 billion, respectively. As of
September 30, 2000, the Certificate Insurer had reinsured approximately 20
percent of the risks it had written, 32 percent through quota share reinsurance,
12 percent through excess of loss reinsurance and 56 percent through facultative
arrangements.
S-14
<PAGE>
The following table sets forth the capitalization of the Certificate Insurer
as of December 31, 1998, and December 31, 1999 and September 30, 2000,
respectively, on the basis of generally accepted accounting principles subject
to year adjustments with respect to interim periods.
FINANCIAL GUARANTY INSURANCE COMPANY
CAPITALIZATION TABLE
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Unearned premiums....................................... $ 610 $ 579 $ 581
Other liabilities....................................... 302 180 270
Stockholder's equity
Common Stock.......................................... 15 15 15
Additional paid-in capital............................ 384 384 384
Accumulated other comprehensive income (loss)......... 92 (47) (21)
Retained earnings..................................... 1,581 1,687 1,570
------ ------ ------
Total stockholder's equity.............................. 2,072 2,039 1,948
------ ------ ------
Total liabilities and stockholder's equity.............. $2,984 $2,798 $2,799
====== ====== ======
</TABLE>
For further financial information concerning the Certificate Insurer, see
the audited financial statements of the Certificate Insurer incorporated by
reference into this Prospectus Supplement.
Copies of the Certificate Insurer's quarterly and annual statutory
statements filed by the Certificate Insurer with the State of New York Insurance
Department are available upon request to financial Guaranty Insurance Company,
115 Broadway, New York, New York 10006, Attention: Corporate Communications
Department. The Certificate Insurer's telephone number is (212) 312-3000.
The Certificate Insurer considers its role in providing insurance to be
credit enhancement rather than credit substitution. The Certificate Insurer only
insures securities that it considers to be of investment grade quality. With
respect to each category of obligations considered for insurance, the
Certificate Insurer has established and maintains its own underwriting standards
that are based on those aspects of credit quality that the Certificate Insurer
deems important for the category and that take into account criteria established
for the category typically used by rating agencies. Credit criteria for
evaluating securities influence economic and social trends, debt management,
financial management and legal and administrative factors, the adequacy of
anticipated cash flow, including the historical and expected performance of
assets pledged for payment of securities under varying economic scenarios,
underlying levels of protection such as insurance or overcollaterlization, and,
particularly in the case of long-term municipal securities, the importance of
the project being financed.
The Certificate Insurer also reviews the security features and reserves
created by the financing documentation, as well as the financial and other
covenants imposed upon the credit backing the issue. In connection with
underwriting new issues, the Certificate Insurer sometimes requires, as a
condition to insuring an issue, that collateral be pledged or, in some
instances, that third-party guarantee be provided for a term of the insured
obligation by a party of acceptable credit quality obligated to make payment
prior to any payment by the Certificate Insurer.
Insurance written by the Certificate Insurer insures the full and timely
payment of interest and principal when due on insured debt securities and timely
interest and ultimate principal payments due in respect of pass-through
securities such as the Certificates. If the issuer of a security insured by the
Certificate Insurer defaults on its obligations to pay such debt service, or, in
the case of a pass-through
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<PAGE>
security, available funds are insufficient to pay the insured amounts, the
Certificate Insurer will make the scheduled insured payments without regard to
any acceleration of the securities which may have occurred, and will be
subrogated to the rights of security holders to the extent of its payments. The
claims paying ability of the Certificate Insurer is rated Aaa, AAA and AAA by
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's, a division of
The McGraw-Hill Companies, Inc. ("S&P") and Fitch, Inc. ("Fitch"), respectively.
In consideration for issuing its insurance, the Certificate Insurer received
a premium which is generally paid in full upon issuance of the policy or on an
annual, semiannual or monthly basis. The premium rates charged depend
principally on the credit strength of the securities as judged by the
Certificate Insurer according to its internal credit rating system and the type
of issue.
The Certificate Insurer makes no representation regarding the Certificates
or the advisability of investing in the Certificates. The Certificate Insurer
does not accept any responsibility for the accuracy or completeness of this
Prospectus Supplement or the related Prospectus, or any information or
disclosure contained herein or therein, or omitted herefrom or therefrom, other
than the information supplied by the Certificate Insurer and presented under the
headings "THE CERTIFICATE INSURER" and "DESCRIPTION OF THE CERTIFICATES--The
Policy" and in the financial statements incorporated herein by reference.
Each rating of the Certificate Insurer should be evaluated independently.
The ratings reflect the respective rating agency's current assessment of the
financial strength of the Certificate Insurer. Any further explanation as to the
significance of the rating of the Certificate Insurer may be obtained only from
the applicable rating agency.
The above ratings are not recommendations to buy, see or hold the
Certificates, 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
Certificates. The Certificate Insurer does not guaranty the market price of the
Certificates nor does it guaranty that the ratings on the Certificates will not
be revised or withdrawn.
THE SELLER AND THE MASTER SERVICER
Sovereign Bank was organized as a federal savings bank in 1987 under the
name Penn Savings Bank, F.S.B. and assumed its current name on December 31,
1991. Sovereign Bank is a wholly-owned subsidiary of Sovereign Bancorp, Inc.,
which is a Pennsylvania business corporation and a "savings and loan holding
company." Both Sovereign Bank and Sovereign Bancorp, Inc. are subject to
regulation and examination by the Office of Thrift Supervision. Sovereign Bank
is a member of the Federal Home Loan Bank of Pittsburgh and is subject to
regulation by The Board of Governors of The Federal Reserve System with respect
to reserves maintained against deposits and certain other matters. Sovereign
Bank and Sovereign Bancorp, Inc. operate in a heavily regulated environment and
changes in laws and regulations affecting them and their subsidiaries may have
an impact on their operations.
Sovereign Bank's primary business consists of attracting deposits from its
network of community banking offices located throughout eastern Pennsylvania,
New Jersey, northern Delaware, Connecticut, Massachusetts and Rhode Island,
originating small business and middle market commercial, asset-based, consumer
and residential mortgage loans and home equity lines of credit in those
communities, and engaging in related activities, including cash management and
capital market activities. Sovereign Bank also operates 1st Webbankdirect, a
fully operational first stage internet bank focused primarily on affinity
relationships. Based on pro forma total assets at June 30, 2000, the Bank was
the third largest depository institution headquartered in Pennsylvania, the
third largest in New England and one of the 25th largest in the United States.
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<PAGE>
Sovereign Bank's principal executive offices are located at 1130 Berkshire
Boulevard, Wyomissing, Pennsylvania, and its telephone number is
(610) 320-8400.
As of September 30, 2000, Sovereign Bancorp, Inc. had consolidated assets,
deposits and shareholder's equity of approximately $34.6 billion, $24.5 billion
and $1.9 billion, respectively, and Sovereign Bank had consolidated assets,
deposits and shareholder's equity of approximately $34.7 billion, $23.5 billion
and $3.2 billion, respectively.
In July 2000, Sovereign Bancorp and Sovereign Bank completed a transaction
with Fleet Boston Corporation, and a number of affiliated banking institutions
(collectively, "Fleet/BankBoston"), pursuant to which Fleet/BankBoston
transferred to Sovereign Bank deposits, loans and other businesses (the "New
England Acquisition").
As part of the New England Acquisition, Sovereign Bank acquired many of the
assets and obtained most of the key employees that constituted the consumer
asset finance division of Fleet/BankBoston. Approximately $267.8 million
aggregate principal balance of the Mortgage Loans were purchased from
Fleet/BankBoston as part of the New England Acquisition. The remaining Mortgage
Loans were purchased from approved correspondents by the consumer asset finance
division as reconstituted as part of Sovereign Bank (the "Consumer Asset Finance
Division").
ORIGINATIONS
Sovereign Bank, through the Consumer Asset Finance Division, purchases
closed-end home equity mortgage loans from approved correspondents that have
been provided with the Sovereign Bank underwriting guidelines for such loans. In
order to obtain approval to participate in Sovereign Bank's wholesale lending
program, Sovereign Bank requires a correspondent to submit to an approval
process designed to determine, among other things, the correspondent's financial
condition, organization and staffing, origination activity and servicing
experience. An approved correspondent must be engaged in the origination of
residential mortgage loans as one of its principal business activities.
Sovereign Bank generally evaluates each correspondent's lending experience, the
composition of its staff and the quality of its control procedures prior to
approving a correspondent for the program. In addition, Sovereign Bank requires
that the financial condition of each correspondent be acceptable to Sovereign
Bank. In that regard, Sovereign Bank generally requires that a correspondent
have a minimum net worth of $250,000. Once a correspondent has been approved for
the program, Sovereign Bank reviews the correspondent's financial condition and
business activities annually to assure that it continues to meet the required
standards. Sovereign Bank currently purchases loans from 36 active
correspondents.
UNDERWRITING
Sovereign Bank's wholesale lending program purchases closed loans from
program correspondents on either a bulk basis or, for a limited number of loans,
a pre-approval basis. All loans purchased under the wholesale lending program
are underwritten by Sovereign Bank's credit analysts in accordance with the
program underwriting guidelines. The seller's underwriting standards generally
are less stringent than those of Fannie Mae or Freddie Mac. As a result of this
approach to underwriting, the mortgage loans in the mortgage pool may experience
higher rates of delinquencies, defaults and foreclosures than mortgage loans
underwritten in accordance with Fannie Mae or Freddie Mac's guidelines. Loan
documentation or applications for pre-approval are analyzed according to certain
characteristics, including but not limited to: credit history of the borrower,
ability to pay, loan-to-value ratio and general stability of the borrower or
applicant in terms of employment history and time in residence. Sovereign Bank
has established classifications with respect to the credit profile of the
borrower, and each loan or application for pre-approval is placed into one of
five ratings listed at the head of each column in the table which follows. The
interest rate and certain other terms of loans purchased by Sovereign Bank, as
well as maximum loan-to-value ratios and debt-to-income ratios, vary depending
on the classification of the borrower or applicant. The
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<PAGE>
general criteria used by Sovereign Bank's underwriting staff in classifying
borrowers or applicants are set forth below.
UNDERWRITING CRITERIA OF SOVEREIGN BANK
<TABLE>
<CAPTION>
"AAA" RISK
AND "AA" RISK "A" RISK "A2" RISK "B" RISK "C" RISK
---------------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Credit profile................. Excellent credit Very good credit Good overall Good to fair Fair to poor
history history credit credit credit
Existing mortgages past 12
months....................... No 30-day late Current at Current at Current at Current at
payments closing; no more closing; maximum closing; maximum closing; maximum
than one 30-day of two 30-day of three 30-day of four 30-day
late payment late payments late payments late payments
allowed allowed allowed with and one 60-day
satisfactory late payment
explanation allowed with
satisfactory
explanation
Other credit past 12 months.... No 30-day late Current at Current at Current at Current at
payments closing; some closing; some closing; some closing; some
30-day and 30-day and 30-day and 30-day and
60-day late 60-day late 60-day late 60-day late
payments allowed payments allowed payments, an payments, an
isolated 90-day isolated 90-day
late payment late payment and
allowed an isolated
120-day late
payment allowed
with
satisfactory
explanation
Charge-offs, bankruptcies and
related items................ No charge-offs Certain aged Certain aged No recent No recent
or judgments or charge-offs or charge-offs or charge-offs or charge-offs or
bankruptcies judgments judgments judgments; judgments;
within 5 years allowed; no allowed; no bankruptcy bankruptcy
bankruptcies bankruptcies allowed if allowed if
within 3 years within 2 years credit credit
reestablished reestablished
two years two years
Debt-service-to-income ratio... Generally 42% or Generally 45% or Generally 50% or Generally 50% or Generally 50% or
less less less less less
First lien maximum
loan-to-value ratio for a
one- to four-family
residence:
Owner-occupied................. "AAA"; Not Generally 85% Generally 85% Generally 80% Generally 75%
applicable;
"AA"; Generally
90%
Non-owner-occupied............. "AAA" Not Generally 70% Generally 70% Generally 65% Generally 60%
applicable;
"AA"; Generally
80%
Second lien maximum Combined
Loan-to-Value Ratio for a
one-to four-family residence:
Owner-Occupied................. "AAA"; Generally Generally 80% Generally 80% Generally 80% Generally 75%
90% "AA";
Generally 85%
Non-owner-occupied............. "AAA"; Not Generally 70% Generally 70% Generally 65% Generally 60%
applicable;
"AA"; Generally
80%
Employment history............. Minimum two Minimum two Minimum two Minimum two Minimum two
years employment years employment years employment years employment years employment
in the same in the same in the same in the same in the same
field field field field field
</TABLE>
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<PAGE>
Sovereign Bank uses the foregoing categories and characteristics as
guidelines only. On a case-by-case basis, if sufficient compensating factors
exist, Sovereign Bank may determine that the borrower warrants an exception.
Examples of such compensating factors are low loan-to-value ratio, low debt
ratio, long-term stability of employment and/or residence, excellent payment
history on past mortgages or a significant reduction in monthly housing
expenses.
Except for mortgage loans for which the related mortgagor is not required to
make monthly payments of principal that will be sufficient to amortize such
mortgage loan by their maturity (collectively, "Balloon Loans"), the mortgage
loans acquired by Sovereign Bank generally have amortization schedules ranging
from 10 years to 30 years, generally bear interest at fixed rates and require
monthly payments which are due as of a scheduled day of each month which is
fixed at the time of origination. Sovereign Bank also purchases Balloon Loans,
which generally provide for scheduled amortization over 30 years, with a due
date and a Balloon Payment at the end of the fifteenth year or in some cases at
the end of the seventh, tenth, twentieth or twenty-fifth year. Sovereign Bank
acquires mortgage loans that are level pay, actuarial loans as well as simple
interest loans. The principal amounts of the loans purchased by Sovereign Bank
generally range from a minimum of $10,000 to a maximum of $250,000. Sovereign
Bank does not generally acquire any mortgage loan if the Loan-to-Value Ratio
exceeds 90%. The collateral securing loans acquired by Sovereign Bank are
generally one- to four-family residences, including certain condominiums, second
homes, planned unit developments, rural properties that have a dwelling and
manufactured or modular homes deemed real estate, and such properties may or may
not be occupied by the owner. Generally, it is Sovereign Bank's policy not to
accept commercial or mixed-use properties or unimproved land as collateral.
Sovereign Bank generally does not purchase loans with a second lien position if
the senior mortgage contains open-end advances, negative amortization or shared
appreciation provisions.
Sovereign Bank's wholesale lending program is a full documentation program.
Under the program, the total monthly obligations (which include principal and
interest on the new loan and all other mortgages, loans, revolving credit lines,
charge accounts and scheduled indebtedness) generally does not exceed 50% of the
borrower's monthly gross income. A higher debt-service-to-income ratio may be
considered if the borrower's monthly gross income meets certain income
guidelines or if there are other compensating factors such as high disposable
income. Loans to borrowers who are salaried employees must be supported by
current employment information in addition to employment history. This
information for salaried employees is verified based on written confirmation
from employers, two or more pay-stubs, recent W-2 tax forms or recent tax
returns.
Sovereign Bank currently has seven credit analysts with between seven and 16
years experience in consumer lending and three to seven years experience in
underwriting non-conforming loans. These credit analysts perform and supervise
the performance of the underwriting of acquired loans. No underwriter at
Sovereign Bank is compensated on an incentive or commission basis.
Sovereign Bank's underwriting of every loan submitted consists of a credit
review, an appraisal review and a compliance review of documentation and
disclosures. Appraisals are performed by third-party, fee-based appraisers and
generally conform to current Fannie Mae/Freddie Mac secondary market
requirements for residential property and, where available, sales data within
the preceding 12 months of similar properties within the same general location
as the subject property.
Sovereign Bank performs a post-acquisition quality control review to monitor
and evaluate its loan origination policies and procedures. The quality assurance
department is separate from the underwriting department and reports directly to
the Consumer Asset Finance Division Director. The quality assurance program
consists of an appraisal review process, a credit review process and a
documentation and regulatory compliance review process. Under the review
program, generally a monthly random sample of approximately 10% of each pool of
mortgage loans purchased by Sovereign Bank is selected and a comparison is made
of the appraised values assigned by the original appraisers. In certain
instances, a new appraisal may be ordered. This process is designed to permit
Sovereign Bank to determine on an ongoing
S-19
<PAGE>
basis those appraisers that will no longer be acceptable for the lending
program. On a monthly basis, a random sample of 5% to 10% of the loans
underwritten by each credit analyst are reviewed to monitor credit quality by
testing adherence to underwriting guidelines and product parameters. In
addition, a random sample of 5% to 10% of the loans of each acquired
correspondent pool are reviewed to monitor compliance with loan documentation
requirements and to assess compliance with legal requirements. Sovereign Bank
does not review compliance with applicable state laws but relies on a
representation of its correspondents with respect to state law compliance. The
quality assurance process is reviewed from time to time as Sovereign Bank's
policies and procedures change.
SERVICING
Sovereign Bank will appoint Mortgage Lenders Network USA, Inc. ("MLN") as
the initial subservicer of the Mortgage Loans. Since June 1997, MLN has serviced
all residential one-to-four-family home equity loans, including the Mortgage
Loans, purchased by the Consumer Asset Finance Division and originated under
either of Fleet/BankBoston's or Sovereign Bank's wholesale home equity loan
programs. MLN is a privately owned company based in Middletown, Connecticut
which specializes in providing mortgage and home equity financing to borrowers
with impaired credit histories and servicing portfolios of conventional and
sub-prime residential mortgage loans that have been directly or indirectly
originated by MLN or that are being serviced by MLN under servicing agreements
with third parties. MLN was incorporated in November 1996, commenced closing
mortgage loans in April 1997, and began servicing such mortgage loans in the
same month. MLN does not have a significant history of servicing mortgage loans.
Sovereign Bank has financing relationships with MLN.
Servicing involves, among other things, billing and collecting payments when
due, remitting payments of principal and interest, and furnishing reports to the
current owners of serviced loans and enforcing such owners' rights with respect
to such loans, including recovering delinquent payments, instituting foreclosure
proceedings and liquidating the underlying collateral. MLN, as subservicer, will
perform all these services with respect to the Mortgage Loans. However,
Sovereign Bank generally will assist MLN in delinquency situations, make the
final decision to foreclose and manage all real estate acquired and all loan
dispositions.
Borrowers receive coupon books which show the required payment amount and
the required due date for the related mortgage loan. Collection activity on an
account begins as early as six days after the scheduled due date if a payment
has not been received. Beginning on or about that sixth day, the MLN loan
counselor will telephone the borrower to remind the borrower that a payment is
due. Further telephone contacts will be attempted until the account is current
or other payment arrangements have been made. A first notice of delinquency to
the borrower is mailed to the borrower generally on the eighth day after the
scheduled due date. It is MLN's policy to send subsequent notices of delinquency
on the 15th day after such due date. During this period the loan counselor also
generally attempts to interview the borrower by phone in order to determine the
reasons for the failure to make the payment and, if possible, make arrangements
with the borrower to bring the account current.
Documentation of collection activity is critically important in the default
management process. Between 60 and 90 days after a failure to make a payment,
the loan file is sent to MLN's default servicing center where the file is
reviewed, a loss mitigation plan is developed and the borrower is contacted to
implement such plan. The loss mitigation efforts include: (i) regular and
frequent contact with the borrower to obtain pertinent information and provide
foreclosure avoidance counseling, (ii) negotiation of a formal forbearance plan
not to exceed four months, (iii) discussion with the borrower of possible
sources of refinancing or the possibility of selling the real property and
(iv) evaluation of the possiblity of a deed-in-lieu of foreclosure. During this
time period, the loan file, along with the recommendation of MLN's Vice
President of Default for handling the loan, is sent to Sovereign Bank.
S-20
<PAGE>
In the event that a loan becomes 90 days past due, Sovereign Bank reviews
the loan file and the MLN collection efforts and presents the loan to its
foreclosure committee for a determination as to whether foreclosure proceedings
are appropriate, based upon an analysis of relevant factors, generally including
a market value analysis, the reason for default and the efforts by the borrower
to cure the default. Upon a determination of the desirable course of action,
Sovereign Bank's foreclosure committee instructs MLN to proceed with
foreclosure, attempt to take a deed-in-lieu of foreclosure or to attempt to put
in place and then monitor a payment plan. If the borrower is in bankruptcy, the
foreclosure committee will instruct MLN to follow special procedures.
Regulations and practices regarding liquidation of properties (e.g.
foreclosure) and the rights of a borrower in default vary greatly from state to
state. As a result, all foreclosures are assigned to external counsel.
Bankruptcies filed by borrowers are similarly assigned to appropriate external
counsel. All aspects of foreclosures and bankruptcies are monitored by MLN and
Sovereign Bank.
Prior to foreclosure sale, MLN and Sovereign Bank perform market analysis on
defaulted loans. This analyisis includes (i) a current valuation of the property
obtained through a drive-by appraisal or broker's price opinion conducted by an
independent appraiser and/or a broker generally including a description of the
property, recent price lists of comparable properties, recent closed
comparables, estimated marketing time and required or suggested repairs and an
estimate of the sales price, (ii) an evaluation of the amount owed, if any, for
real estate taxes, (iii) an evaluation of the amount owed, if any, to a senior
mortgagee and (iv) estimated carrying costs, brokers' fee, repair costs and
other related costs associated with real estate owned properties. Sovereign Bank
bases the amount it will bid at a foreclosure sale on this analysis.
If Sovereign Bank acquires title to a property at a foreclosure sale or
otherwise, Sovereign Bank immediately assumes responsibility for managing and
marketing the property. REO Properties are marketed through independent third
party brokers. Sovereign Bank tracks REO Property information on its database
used to house relevant data on REO Properties and elements pertinent to their
ultimate disposition.
DELINQUENCY AND LOSS EXPERIENCE
The following table sets forth the delinquency experience at December 31 for
the years 1998 and 1999 and for the nine months ending September 30, 2000 with
respect to the mortgage loan pools securitized by Fleet/BankBoston's Consumer
Asset Finance Division. All of the mortgage loans in the mortgage loan pools
securitized by Fleet/BankBoston's Consumer Asset Finance Division are serviced
by MLN.
It should be noted that MLN commenced its servicing activities in April
1997. Accordingly, MLN does not have significant historical delinquency,
bankruptcy foreclosure or default experience that may be referred to for
estimating the future delinquency experience of the Mortgage Loans. The
information in the tables below is for illustrative purposes only and is not
intended to indicate or predict the expected delinquency experience on past,
current or future pools of mortgage loans for which Sovereign Bank or MLN are
the servicers.
S-21
<PAGE>
DELINQUENCY PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
9 MONTHS ENDING -----------------------------------------------------
SEPTEMBER 30, 2000 1999 1998
------------------------- ------------------------- -------------------------
NUMBER OF DOLLAR AMOUNT NUMBER OF DOLLAR AMOUNT NUMBER OF DOLLAR AMOUNT
LOANS ($) LOANS ($) LOANS ($)
--------- ------------- --------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Portfolio(s) At....................... 12,610 825,967,275 14,252 949,272,549 11,215 768,447,522
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Delinquency Percentage (1)
30-59 days............................ 3.35% 3.24% 2.82% 2.92% 2.26% 2.29%
60-89 days............................ 0.43% 0.33% 0.32% 0.32% 0.48% 0.50%
90 days and over...................... 0.39% 0.36% 0.25% 0.24% 0.34% 0.36%
------ ----- ------ ----- ------ -----
Total Delinquency (2)................. 4.17% 3.93% 3.39% 3.48% 3.08% 3.15%
====== ===== ====== ===== ====== =====
Bankruptcies (3)...................... 1.58% 1.79% 1.09% 1.20% 0.46% 0.48%
Foreclosures (4)...................... 1.44% 1.50% 1.34% 1.38% 0.12% 0.14%
REO (5)............................... 0.91% 0.95% 0.20% 0.23% 0.01% 0.01%
</TABLE>
------------------------
(1) The delinquency percentages represent the number and dollar value of
aggregate account balances contractually past due as a percentage of
aggregate outstanding securitized loan balances as of the end of the periods
indicated. Such percentages exclude mortgage loans for which the related
borrower has declared bankruptcy and mortgage loans in process of
foreclosure and exclude mortgage loans for which the related property was
acquired through foreclosure or deed in lieu of foreclosure.
(2) The total delinquency percentages do not include mortgage loans for which
the related borrower has declared bankruptcy and mortgage loans in process
of foreclosure or loans for which the related property was acquired through
foreclosure or deed in lieu of foreclosure.
(3) The bankruptcy percentages represent the dollar value of aggregate account
balances where the related borrower has declared bankruptcy as a percentage
of the aggregate outstanding securitized loan balances as of the end of the
periods indicated.
(4) The foreclosure percentages represent the dollar value of aggregate account
balances in the process of foreclosure as a percentage of the aggregate
outstanding securitized loan balances as of the end of the periods
indicated.
(5) The REO percentages represent the dollar value of aggregate account balances
for which the related property was acquired through foreclosure or deed in
lieu of foreclosure as a percentage of the aggregate outstanding securitized
loan balances as of the end of the periods indicated.
Through September 30, 2000, cumulative losses on the BankBoston 1998-1,
1998-2 and the 1999-1 home equity loan portfolios were 0.407%, 0.177% and 0.074%
respectively. With respect to each securitization trust, the cumulative loss
percentage equals a fraction, the NUMERATOR of which is the aggregate amount by
which the principal balances of the defaulted mortgage loans, plus accrued,
unpaid interest and unreimbursed servicing advances exceed the aggregate net
liquidation proceeds related to such defaulted mortgage loans realized at the
time of liquidation, and the DENOMINATOR of which is the aggregate original pool
principal balance of the mortgage loans in each securitization trust. Due to the
limited seasoning of the Consumer Asset Finance Division's securitized
portfolios, Sovereign is unable to provide sufficient loss experience for
purposes of estimating the expected lifetime losses on the mortgage loans
securitized by Fleet/BankBoston or the Mortgage Loans in this transaction.
Moreover, although in the New England Acquisition Sovereign Bank acquired many
of the assets and obtained most of the employees that constituted the Consumer
Asset Finance Division of Fleet/BankBoston, nevertheless the New England
Acquisition is not an acquisition of a going business; therefore, Sovereign Bank
may not have all material information regarding the mortgage loans in the
securitization trusts. There can be no assurance that the loss experience of the
mortgage loans in the securitization trusts would necessarily correspond to the
loss experience of the Mortgage Loans acquired from Fleet/BankBoston or acquired
from correspondents by Sovereign Bank.
S-22
<PAGE>
DESCRIPTION OF THE MORTGAGE LOANS
GENERAL
The closed-end fixed rate home equity loans having conforming balances (the
"Mortgage Loans") were purchased by the Seller or an affiliate in accordance
with the policies set forth under the heading "THE SELLER AND THE MASTER
SERVICER--Underwriting Guidelines." All of the Mortgage Loans are home equity
loans bearing fixed interest rates (the "Loan Rates") and evidenced by
promissory notes (the "Mortgage Notes") secured by deeds of trust or mortgages
on Mortgaged Properties.
All of the Mortgage Loans have conforming balances which do not exceed, in
the case of first mortgages secured by one-family, two-family, three-family and
four-family residential properties, $252,700, $323,400, $390,900 and $485,800,
respectively and, in the case of second mortgages, $126,350.
The statistical information presented in this prospectus supplement
("Prospectus Supplement") concerning the pool of Mortgage Loans (such pool, the
"Statistic Calculation Pool" and each such Mortgage Loan, a "Statistic
Calculation Mortgage Loan") does not reflect all of the Mortgage Loans which
will be included in the final pool on December 12, 2000 (the "Closing Date").
The Statistic Calculation Pool consists of mortgage loans owned by the Seller
which as of October 31, 2000 (the "Statistic Calculation Date") are eligible to
be included in the pool of Mortgage Loans (the "Mortgage Pool"). As described
below, there will be some differences between the information as of the
Statistic Calculation Date and the corresponding information as of the close of
business on November 30, 2000 (the "Cut-Off Date") with respect to the Mortgage
Loans included in the final Mortgage Pool. With respect to any date, the "Pool
Principal Balance" will be equal to the aggregate of the Principal Balances of
all Mortgage Loans as of such date. The "Cut-Off Date Principal Balance" with
respect to each Mortgage Loan is the unpaid principal balance thereof as of the
Cut-Off Date. The statistical information presented herein is based on the
number and the principal balances of such Mortgage Loans as of the Statistic
Calculation Date. The "Principal Balance" of a Mortgage Loan (other than a
Liquidated Mortgage Loan) on any day is equal to its Cut-Off Date Principal
Balance, minus all collections applied in reduction of the Cut-Off Date
Principal Balance of such Mortgage Loan. A detailed description of the Mortgage
Loans actually delivered on the Closing Date (the "Detailed Description") will
be available to purchasers of the Class A Certificates and will be filed on Form
8-K with the Securities and Exchange Commission (the "Commission") within
fifteen days after delivery of the Certificates. The Detailed Description will
specify the aggregate of the Principal Balances of the Mortgage Loans included
in the Trust as of the Cut-Off Date and will also include other statistical
information with respect to the Mortgage Loans as of the Cut-Off Date.
The Mortgage Loans are secured by either first-lien or second-lien mortgages
or deeds of trust on Mortgaged Properties located in 45 states and the District
of Columbia. The Mortgaged Properties may be owner-occupied and non-owner
occupied (which includes second and vacation homes).
The "Statistic Calculation Date Principal Balance" with respect to each
Statistic Calculation Mortgage Loan is the unpaid principal balance thereof as
of the Statistic Calculation Date. The Statistic Calculation Pool consists of
5,637 Statistic Calculation Mortgage Loans with an aggregate Statistic
Calculation Date Principal Balance of $375,410,128.08 (the "Statistic
Calculation Date Pool Principal Balance"). Approximately 75.22% of the Statistic
Calculation Mortgage Loans (by Statistic Calculation Date Pool Principal
Balance) will bear interest at a fixed rate that is calculated on the "simple
interest" method and the remainder of the Statistic Calculation Mortgage Loans
are "actuarial." Approximately 48.21% of the Statistic Calculation Mortgage
Loans (by Statistic Calculation Date Pool Principal Balance) will have original
terms to stated maturity of up to 15 years and amortization schedules of up to
30 years ("Balloon Loans"), leaving a substantial payment due at the stated
maturity (each, a "Balloon Payment"). As of the Statistic Calculation Date, the
maximum Statistic Calculation Date Principal Balance of any of the Statistic
Calculation Mortgage Loans was $248,016.86, the minimum Statistic Calculation
Date
S-23
<PAGE>
Principal Balance thereof was $5,489.38, and the Statistic Calculation Date
Principal Balance of such Mortgage Loans averaged $66,597.50. As of the
Statistic Calculation Date, the Loan Rates on the Statistic Calculation Mortgage
Loans ranged from 9.313% to 15.000% per annum, and the weighted average Loan
Rate for the Statistic Calculation Mortgage Loans was approximately 10.653% per
annum. As of the Statistic Calculation Date, the original term to stated
maturity of the Statistic Calculation Mortgage Loans ranged from 60 months to
360 months, the remaining term to stated maturity ranged from 44 months to 360
months, the weighted average original term to stated maturity was approximately
232 months, the weighted average remaining term to stated maturity was
approximately 223 months. The Combined Loan-to-Value Ratio for the Statistic
Calculation Mortgage Loans ranged from approximately 7.69% to approximately
95.00% with a weighted average Combined Loan-to-Value Ratio of approximately
79.41%. Each Statistic Calculation Mortgage Loan was originated on or after
July 6, 1994. The Statistic Calculation Mortgage Loans had stated maturities
ranging from June 9, 2004 to October 1, 2030. Approximately 88.61% of the
Statistic Calculation Mortgage Loans (by Statistic Calculation Date Pool
Principal Balance) are secured by first liens, and approximately 11.39% by
second liens. With respect to each Statistic Calculation Mortgage Loan in the
first lien position, the maximum original principal balance was $248,016.86 for
single-family properties and $239,317.32 for two- to- four family properties. No
Statistic Calculation Mortgage Loan which represents a second lien on the
related Mortgaged Property had an original principal balance of more than
$124,622.69. With respect to each Statistic Calculation Mortgage Loan in the
second lien position at origination, the sum of the unpaid principal balances of
the first and second liens on the related Mortgaged Property as of such
origination did not exceed $401,096.00. Approximately 51.79% of the Statistic
Calculation 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 48.21% of the
Statistic Calculation Mortgage Loans were Balloon Loans. As of the Statistic
Calculation Date, approximately 1.51% of the Statistic Calculation Mortgage
Loans (by Statistic Calculation Date Pool Principal Balance) were 30 to 59 days
delinquent. As of the Statistic Calculation Date, no Mortgage Loan was 60 or
more days delinquent.
Approximately 75.22% of the Statistic Calculation Mortgage Loans (based on
Statistic Date Pool Principal Balance) accrue interest on a "simple interest"
basis (the "Simple Interest Loans") pursuant to which interest is computed and
charged to the mortgagor on the outstanding Principal Balance of the related
Mortgage Loan based on the number of days elapsed between the date through which
interest was last paid on the Mortgage Loan through the date of receipt of the
mortgagor's most current payment. Accordingly, portions of each monthly payment
that are allocated to interest and principal are adjusted based on the actual
amount of interest charged on such basis.
No Statistic Calculation Mortgage Loan was subject to the Home Ownership and
Equity Protection Act of 1994 ("HOEPA") or any comparable state law. No proceeds
from any Statistic Calculation Mortgage Loan were used to finance single-premium
credit insurance policies. The sub-servicer for each Statistic Calculation
Mortgage Loan will accurately and fully report its borrower credit files to all
three credit depositories in a timely manner. No Statistic Calculation Mortgage
Loan will impose a prepayment premium for a term in excess of five years.
DIFFERENCE BETWEEN STATISTIC CALCULATION POOL AND CUT-OFF MORTGAGE
POOL. The Mortgage Loans to be included in the final Mortgage Pool will
represent Mortgage Loans originated, acquired by the Seller on or prior to the
Cut-Off Date and sold by the Seller to the Depositor and by the Depositor to the
Trust on the Closing Date. In addition, with respect to the Statistic
Calculation Mortgage Loans, as to which the statistical information is presented
herein, some amortization will occur prior to the Cut-Off Date. Moreover,
certain Statistic Calculation Mortgage Loans may prepay in full or may be
determined not to meet the eligibility requirements for the final pool and as a
result may not be included in the final pool. As a result of the foregoing, the
statistical distribution of characteristics as of the Cut-Off Date for the final
Mortgage Pool will vary from the statistical distribution of characteristics of
the Statistic Calculation Pool as presented in this Prospectus Supplement,
although such variance is not expected to be material.
S-24
<PAGE>
The sum of the columns below may not equal the total indicated due to
rounding. The following tables describe the Statistic Calculation Mortgage Loans
and the related Mortgaged Properties based upon the Statistic Calculation Pool
as of the close of business on the Statistic Calculation Date.
STATISTIC CALCULATION DATE PRINCIPAL BALANCES
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
RANGE OF STATISTIC CALCULATION DATE CALCULATION CALCULATION DATE DATE POOL
PRINCIPAL BALANCES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----------------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5,000.01 - 10,000.00........................ 11 $ 100,753.76 0.03%
10,000.01 - 15,000.00........................ 94 1,259,044.25 0.34
15,000.01 - 20,000.00........................ 197 3,605,534.11 0.96
20,000.01 - 25,000.00........................ 263 6,069,096.42 1.62
25,000.01 - 50,000.00........................ 1,601 61,216,860.40 16.31
50,000.01 - 75,000.00........................ 1,653 102,400,474.44 27.28
75,000.01 - 100,000.00........................ 884 76,172,585.14 20.29
100,000.01 - 150,000.00........................ 725 86,379,510.70 23.01
150,000.01 - 200,000.00........................ 154 26,038,484.93 6.94
200,000.01 - 250,000.00........................ 55 12,167,783.93 3.24
------ --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
====== =============== ======
</TABLE>
S-25
<PAGE>
GEOGRAPHIC DISTRIBUTION BY STATE (1)
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
CALCULATION CALCULATION DATE DATE POOL
STATE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
----- -------------- ----------------- -----------------
<S> <C> <C> <C>
Ohio........................................... 762 $ 47,991,454.09 12.78%
New York....................................... 449 34,160,420.35 9.10
North Carolina................................. 454 32,575,194.53 8.68
Michigan....................................... 448 28,708,554.41 7.65
Pennsylvania................................... 423 26,225,623.10 6.99
Illinois....................................... 322 22,066,678.21 5.88
Indiana........................................ 280 15,828,606.97 4.22
Massachusetts.................................. 241 14,925,759.36 3.98
South Carolina................................. 231 14,282,051.94 3.80
Maryland....................................... 174 13,719,657.75 3.65
New Jersey..................................... 144 13,545,768.36 3.61
Tennessee...................................... 156 11,514,687.35 3.07
Florida........................................ 159 10,092,314.20 2.69
Virginia....................................... 137 9,947,350.05 2.65
Georgia........................................ 140 9,929,836.93 2.65
Kentucky....................................... 127 8,272,338.62 2.20
Missouri....................................... 116 6,730,361.38 1.79
Connecticut.................................... 114 6,699,284.92 1.78
Minnesota...................................... 82 5,856,669.63 1.56
Wisconsin...................................... 73 4,835,423.91 1.29
Iowa........................................... 57 3,709,141.66 0.99
Alabama........................................ 61 3,539,954.19 0.94
Kansas......................................... 52 3,523,102.08 0.94
Texas.......................................... 43 3,073,595.32 0.82
Oklahoma....................................... 46 2,881,016.16 0.77
Rhode Island................................... 50 2,799,480.24 0.75
West Virginia.................................. 46 2,718,070.14 0.72
Delaware....................................... 29 2,286,682.14 0.61
Colorado....................................... 37 2,128,184.81 0.57
Louisiana...................................... 27 1,662,682.49 0.44
New Hampshire.................................. 28 1,312,439.23 0.35
Mississippi.................................... 24 1,135,492.25 0.30
New Mexico..................................... 20 1,082,236.92 0.29
District of Columbia........................... 9 1,006,123.83 0.27
Washington..................................... 9 909,265.72 0.24
California..................................... 10 843,718.13 0.22
Nebraska....................................... 17 773,951.74 0.21
Arizona........................................ 9 465,571.03 0.12
Arkansas....................................... 8 429,048.11 0.11
Maine.......................................... 6 385,137.01 0.10
Utah........................................... 7 248,679.02 0.07
Montana........................................ 3 185,659.06 0.05
Vermont........................................ 3 168,599.73 0.04
Oregon......................................... 2 103,708.03 0.03
Alaska......................................... 1 73,038.86 0.02
Idaho.......................................... 1 57,514.12 0.02
----- --------------- ------
TOTAL.......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
------------------------
(1) Determined by property address designated as such in the related Mortgage.
S-26
<PAGE>
LOAN RATES
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
CALCULATION CALCULATION DATE DATE POOL
LOAN RATES MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------- -------------- ----------------- -----------------
<S> <C> <C> <C>
9.001 - 9.500%............................... 350 $ 28,456,817.29 7.58%
9.501 - 10.000................................ 1,386 106,699,342.35 28.42
10.001 - 10.500................................ 868 59,907,335.60 15.96
10.501 - 11.000................................ 1,083 71,334,474.56 19.00
11.001 - 11.500................................ 639 39,690,736.69 10.57
11.501 - 12.000................................ 687 41,514,811.89 11.06
12.001 - 12.500................................ 279 14,369,560.36 3.83
12.501 - 13.000................................ 201 8,271,640.06 2.20
13.001 - 13.500................................ 70 2,350,897.01 0.63
13.501 - 14.000................................ 48 1,769,466.38 0.47
14.001 - 14.500................................ 19 694,775.41 0.19
14.501 - 15.000%............................... 7 350,270.48 0.09
----- --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
ORIGINAL TERM TO STATED MATURITY
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
ORIGINAL TERM TO CALCULATION CALCULATION DATE DATE POOL
STATED MATURITY (MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
1 - 60...................................... 15 $ 638,646.05 0.17%
61 - 120...................................... 297 11,203,358.25 2.98
121 - 180...................................... 3,430 223,212,165.24 59.46
181 - 240...................................... 689 37,983,277.81 10.12
241 - 300...................................... 69 4,885,937.25 1.30
301 - 360...................................... 1,137 97,486,743.48 25.97
----- --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
S-27
<PAGE>
REMAINING MONTHS TO STATED MATURITY
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
REMAINING MONTHS CALCULATION CALCULATION DATE DATE POOL
TO STATED MATURITY MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------------ -------------- ----------------- -----------------
<S> <C> <C> <C>
37 - 48...................................... 4 $ 99,141.73 0.03%
49 - 60...................................... 11 539,504.32 0.14
61 - 72...................................... 6 192,458.43 0.05
73 - 84...................................... 9 466,306.23 0.12
85 - 96...................................... 3 104,152.12 0.03
97 - 108...................................... 116 4,446,813.45 1.18
109 - 120...................................... 172 6,222,632.60 1.66
121 - 132...................................... 5 203,101.43 0.05
133 - 144...................................... 2 72,107.54 0.02
145 - 156...................................... 7 345,634.31 0.09
157 - 168...................................... 1,225 83,651,052.02 22.28
169 - 180...................................... 2,184 138,737,004.54 36.96
181 - 192...................................... 1 106,086.99 0.03
193 - 204...................................... 3 286,572.09 0.08
205 - 216...................................... 2 80,247.96 0.02
217 - 228...................................... 193 10,845,411.73 2.89
229 - 240...................................... 488 26,639,219.86 7.10
241 - 252...................................... 1 101,874.35 0.03
253 - 264...................................... 1 76,830.38 0.02
265 - 276...................................... 2 78,879.41 0.02
277 - 288...................................... 22 1,607,500.87 0.43
289 - 300...................................... 43 3,020,852.24 0.80
313 - 324...................................... 1 46,258.71 0.01
325 - 336...................................... 6 513,650.09 0.14
337 - 348...................................... 352 29,262,321.90 7.79
349 - 360...................................... 778 67,664,512.78 18.02
----- --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
S-28
<PAGE>
SEASONING
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
CALCULATION CALCULATION DATE DATE POOL
SEASONING (IN MONTHS) MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
--------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
0............................................. 19 $ 1,250,621.71 0.33%
1 - 6........................................ 1,782 111,088,902.20 29.59
7 - 12........................................ 2,281 158,353,760.35 42.18
13 - 18........................................ 1,502 102,015,753.70 27.17
19 - 24........................................ 32 2,039,379.81 0.54
25 - 30........................................ 5 219,957.08 0.06
31 - 36........................................ 1 31,045.70 0.01
43 - 48........................................ 1 111,805.50 0.03
49 - 54........................................ 2 30,146.56 0.01
55 - 60........................................ 1 14,011.71 0.00
61 - 66........................................ 7 166,867.52 0.04
67 - 72........................................ 2 25,674.85 0.01
73 - 78........................................ 2 62,201.39 0.02
----- --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
PROPERTY TYPE
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
CALCULATION CALCULATION DATE DATE POOL
PROPERTY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Single Family Residence........................ 5,382 $357,854,776.04 95.32%
Two-to-Four Family............................. 186 13,325,861.39 3.55
Condominium.................................... 69 4,229,490.65 1.13
----- --------------- ------
TOTAL.......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
OCCUPANCY TYPE (1)
<TABLE>
<CAPTION>
NUMBER OF % OF STATISTIC
STATISTIC STATISTIC CALCULATION
CALCULATION CALCULATION DATE DATE POOL
OCCUPANCY TYPE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
Owner Occupied................................. 5,578 $372,321,282.94 99.18%
Non Owner Occupied............................. 59 3,088,845.14 0.82
----- --------------- ------
TOTAL.......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
------------------------
(1) Based upon representations made by the borrowers at the time of origination
of such Mortgage Loans.
S-29
<PAGE>
COMBINED LOAN-TO-VALUE RATIOS (1)
<TABLE>
<CAPTION>
NUMBER OF
STATISTIC STATISTIC % OF STATISTIC
CALCULATION CALCULATION DATE CALCULATION DATE
COMBINED LOAN-TO-VALUE RATIO MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
---------------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
5.01 - 10.00.................................. 3 $ 109,092.71 0.03%
10.01 - 15.00.................................. 5 116,256.10 0.03
15.01 - 20.00.................................. 15 373,551.50 0.10
20.01 - 25.00.................................. 19 656,661.67 0.17
25.01 - 30.00.................................. 35 1,375,854.08 0.37
30.01 - 35.00.................................. 30 1,094,427.49 0.29
35.01 - 40.00.................................. 51 2,102,536.25 0.56
40.01 - 45.00.................................. 60 2,218,096.01 0.59
45.01 - 50.00.................................. 77 3,239,018.56 0.86
50.01 - 55.00.................................. 85 4,402,418.64 1.17
55.01 - 60.00.................................. 118 6,049,700.03 1.61
60.01 - 65.00.................................. 151 8,004,703.51 2.13
65.01 - 70.00.................................. 282 15,764,589.54 4.20
70.01 - 75.00.................................. 543 32,305,560.20 8.61
75.01 - 80.00.................................. 2,007 137,884,971.71 36.73
80.01 - 85.00.................................. 1,194 83,622,378.56 22.27
85.01 - 90.00.................................. 951 75,476,875.44 20.11
90.01 - 95.00.................................. 11 613,436.08 0.16
----- --------------- ------
TOTAL:......................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
------------------------
(1) The Combined Loan-to-Value Ratios ("CLTV") shown above are equal, with
respect to each Statistic Calculation Mortgage Loan, to (i) the sum of
(a) the original principal balance of such Mortgage Loan at the date of
origination plus (b) the remaining balance of the senior lien, if any, at
the date of origination of such Mortgage Loan divided by (ii) the lesser of
(a) the value of the related Mortgaged Property, based upon the appraisal
made at the time of origination of such Mortgage Loan or (b) the purchase
price of such Mortgaged Property if the proceeds of such Mortgage Loan were
used to purchase such Mortgaged Property.
CREDIT GRADE
<TABLE>
<CAPTION>
NUMBER OF
STATISTIC STATISTIC % OF STATISTIC
CALCULATION CALCULATION DATE CALCULATION DATE POOL
CREDIT GRADE MORTGAGE LOANS PRINCIPAL BALANCE PRINCIPAL BALANCE
------------ -------------- ----------------- ---------------------
<S> <C> <C> <C>
AA.......................................... 1,121 $ 76,349,471.28 20.34%
A........................................... 1,969 133,848,790.44 35.65
A2.......................................... 1,935 131,934,165.08 35.14
B........................................... 510 28,734,706.03 7.65
C........................................... 102 4,542,995.25 1.21
----- --------------- ------
TOTAL:...................................... 5,637 $375,410,128.08 100.00%
===== =============== ======
</TABLE>
SEE "THE SELLER AND THE MASTER SERVICER--UNDERWRITING" IN THIS PROSPECTUS
SUPPLEMENT.
S-30
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The rate of principal payments on each Class of Class A Certificates, the
aggregate amount of distributions on the Class A Certificates and the yield to
maturity of the Class A Certificates will be related to the rate and timing of
payments of principal on the Mortgage Loans. The rate of principal payments on
the Mortgage Loans will in turn be affected by the amortization schedules of the
Mortgage Loans and by the rate of principal prepayments (including for this
purpose prepayments resulting from refinancing, liquidations of the Mortgage
Loans due to defaults, casualties, condemnations and repurchases by the Seller).
The Mortgage Loans may be prepaid by the Mortgagors at any time. Certain of the
Mortgage Loans are subject to penalties for prepayments.
PREPAYMENTS
Prepayments, liquidations, purchases and repurchases of the Mortgage Loans
(including any optional purchase by the Master Servicer of a Delinquent Mortgage
Loan and any optional purchase of the remaining Mortgage Loans in connection
with the termination of the Trust) will result in distributions on the Class A
Certificates of principal amounts which would otherwise be distributed over the
remaining terms of such Mortgage Loans. Since the rate of payment of principal
of the Mortgage Loans will depend on future events and a variety of factors, no
assurance can be given as to such rate or the rate of principal prepayments. The
extent to which the yield to maturity of a Class A Certificate may vary from the
anticipated yield will depend upon the degree to which a Certificate is
purchased at a discount or premium, and the degree to which the timing of
payments thereon is sensitive to prepayments, liquidations and purchases of such
Mortgage Loans.
The rate of prepayment on the Mortgage Loans cannot be predicted. Home
equity loans such as the Mortgage Loans have been originated in significant
volume only during the past few years and neither the Depositor nor the Seller
is aware of any publicly available studies or statistics on the rate of
prepayment of such mortgage loans. 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 Master Servicer is required by the Agreement
to enforce such provisions, unless such enforcement is not permitted by
applicable law. The enforcement of a "due-on-sale" provision will have the same
effect as a prepayment of the related Mortgage Loan. The rate of prepayment of
the Mortgage Loans will also be affected by the extent to which the Mortgage
Loans provide for the payment of a penalty in connection with a prepayment and
the amount of such penalties. Information relating to the percentage of the
Mortgage Pool to which prepayment penalties apply and the magnitude of such
penalties is not readily available to the Seller. See "CERTAIN 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.
In addition to the foregoing factors affecting the weighted average life of
the Class A Certificates, the use of Distributable Excess Spread (as defined
herein) to pay principal of the Class A Certificates to the extent required by
the Agreement will result in the acceleration of the Class of Class A
Certificates then entitled to principal, relative to the amortization of the
Mortgage Loans in early months of the transaction
S-31
<PAGE>
and may accelerate the first date on which each other Class of Class A
Certificates will begin to receive distributions of principal than would
otherwise be the case. This acceleration feature creates overcollateralization
which results from the excess of the Pool Principal Balance over the Aggregate
Class A Principal Balance (as defined herein). Once the required level of
overcollateralization is reached, the acceleration feature will cease, unless
necessary to maintain the required level of overcollateralization. See
"DESCRIPTION OF THE CERTIFICATES--Overcollateralization Provisions."
Distributable Excess Spread for the Mortgage Loans will be distributed in
reduction of the Class A Principal Balance of the Class of Class A Certificates
then entitled to distributions of principal on each Distribution Date to the
extent that the then required overcollateralization amount for the Mortgage
Loans exceeds the actual overcollateralization amount. If purchased at a premium
or a discount, the yield to maturity on a Class A Certificate will be affected
by the rate at which the Distributable Excess Spread is distributed in reduction
of the applicable Class A Principal Balance. If the actual rate of such
Distributable Excess Spread distribution is slower than the rate anticipated by
an investor who purchases a Class A Certificate at a discount, the actual yield
to such investor will be lower than such investor's anticipated yield. If the
actual rate of such Distributable Excess Spread distribution is faster than the
rate anticipated by an investor who purchases a Class A Certificate at a
premium, the actual yield to such investor will be lower than such investor's
anticipated yield. The amount of Distributable Excess Spread on any Distribution
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 changes in the weighted average of the Loan
Rates of such Mortgage Loans resulting from prepayments and liquidations. The
amount of Distributable Excess Spread distributions applied in reduction of the
applicable Class A Principal Balance on each Distribution Date will be based on
the then required overcollateralization amount, which may increase or decrease
during the period any Class of Class A Certificates remains outstanding. Any
increase in the required overcollateralization amount may result in an
accelerated rate of amortization of the Class A Certificates until the
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 Class A Certificates until the
Overcollateralization Amount equals the required overcollateralization amount.
PAYMENT DELAY FEATURE OF CLASS A CERTIFICATES
The effective yield to the Certificateholders of each Class of the Class A
Certificates will be lower than the yield otherwise produced by the Certificate
Rate for each such Class and the purchase price of such Certificates because
distributions will not be payable to the Certificateholders of the Class A
Certificates until the Distribution Date following the month of accrual (without
any additional distribution of interest or earnings thereon in respect of such
delay).
WEIGHTED AVERAGE LIVES
Generally, greater than anticipated prepayments of principal will increase
the yield on Class A Certificates purchased at a price less than par and will
decrease the yield on Class A Certificates purchased at a price greater than
par. The effect on an investor's yield due to principal prepayments on the
Mortgage Loans occurring at a rate that is faster (or slower) than the rate
anticipated by the investor in the period immediately following the issuance of
the Certificates will not be entirely offset by a subsequent like reduction (or
increase) in the rate of principal payments. The weighted average life of the
Class A Certificates will also be affected by the amount and timing of
delinquencies and defaults on the Mortgage Loans and the recoveries, if any, on
defaulted Mortgage Loans and foreclosed properties.
The "weighted average life" of a Certificate refers to the average amount of
time that will elapse from the date of issuance to the date each dollar in
respect of principal of such Certificate is repaid. The weighted average life of
any Class of the Class A Certificates 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.
S-32
<PAGE>
Prepayments on Mortgage Loans are commonly measured relative to a prepayment
standard or model. The model used in this Prospectus Supplement is the
prepayment assumption (the "Prepayment Assumption"), which represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of the pool of mortgage loans for the life of such mortgage loans. A 100%
Prepayment Assumption assumes a constant prepayment rate ("CPR") of 4% per annum
of the outstanding principal balance of such mortgage loans in the first month
of the life of the mortgage loans and approximately an additional 1.45%
(precisely 16/11) (expressed as a percentage per annum) in each month thereafter
until the twelfth month; beginning in the twelfth month and in each month
thereafter during the life of the mortgage loans, a constant prepayment rate of
20% per annum each month is assumed. As used in the table below, 0% Prepayment
Assumption assumes a constant prepayment rate equal to 0% of the Prepayment
Assumption, i.e., no prepayments. Correspondingly, 80% Prepayment Assumption
assumes prepayment rates equal to 80% of the Prepayment Assumption, and so
forth. The Prepayment Assumption does not purport to be a historical description
of prepayment experience or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans. The Depositor
believes that no existing statistics of which it is aware provide a reliable
basis for holders of Class A Certificates to predict the amount or the timing of
receipt of prepayments on the Mortgage Loans.
Since 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 tables. Any such discrepancy may have an effect upon the
percentages of the Principal Balances outstanding and weighted average lives of
the Class A Certificates set forth in the tables. In addition, since the actual
Mortgage Loans in the Trust have characteristics which differ from those assumed
in preparing the tables set forth below, the distributions of principal on the
Class A Certificates may be made earlier or later than as indicated in the
tables.
For the purpose of the tables below, it is assumed that: (i) the Mortgage
Loans consist of pools of loans with the level-pay and balloon amortization
characteristics set forth below, (ii) the Closing Date for the Class A
Certificates is December 12, 2000, (iii) distributions on the Class A
Certificates are made on the 25th day of each month regardless of the day on
which the Distribution Date actually occurs, commencing in January 2001 and are
made in accordance with the priorities described herein, (iv) the scheduled
monthly payments of principal and interest on the Mortgage Loans will be timely
delivered on the first day of each month (with no defaults), (v) the Mortgage
Loans' prepayment rates are a multiple of the Prepayment Assumption, (vi) all
prepayments are prepayments in full received on the last day of each month and
include 30 days' interest thereon, (vii) no optional termination is exercised,
(viii) the Class A Certificates of each Class have the respective Certificate
Rates and initial Class A Principal Balances as set forth herein and (ix) the
overcollateralization levels are set initially as specified in the Agreement,
and thereafter decrease in accordance with the provisions of the Agreement.
<TABLE>
<CAPTION>
ORIGINAL REMAINING ORIGINAL
AMORTIZATION TERM TO TERM TO
AMORTIZATION PRINCIPAL LOAN SEASONING TERM MATURITY MATURITY
METHODOLOGY BALANCE RATE (MONTHS) (MONTHS) (MONTHS) (MONTHS)
---------------------------- --------------- -------- --------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
Fully Amortizing............ $ 9,395,691.16 10.881% 10 120 110 120
Fully Amortizing............ 45,174,875.61 10.770 9 180 171 180
Fully Amortizing............ 39,349,716.60 10.645 9 243 234 243
Fully Amortizing............ 100,507,595.72 10.478 9 358 349 358
Balloon..................... 3,194,400.93 10.900 12 267 97 109
Balloon..................... 177,787,848.06 10.707 10 360 170 180
</TABLE>
Subject to the foregoing discussion and assumptions, the following tables
indicate the weighted average life of each Class of Class A Certificates and the
percentages of the initial Class A Principal Balance of each such Class of
Class A Certificates that would be outstanding after each of the dates shown at
various percentages of the Prepayment Assumption.
S-33
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION
<TABLE>
<CAPTION>
CLASS A-1
--------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 200%
----------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100
January 2002................................. 91 63 48 34 20 6 0
January 2003................................. 87 34 9 0 0 0 0
January 2004................................. 83 8 0 0 0 0 0
January 2005................................. 79 0 0 0 0 0 0
January 2006................................. 74 0 0 0 0 0 0
January 2007................................. 69 0 0 0 0 0 0
January 2008................................. 64 0 0 0 0 0 0
January 2009................................. 59 0 0 0 0 0 0
January 2010................................. 52 0 0 0 0 0 0
January 2011................................. 47 0 0 0 0 0 0
January 2012................................. 41 0 0 0 0 0 0
January 2013................................. 34 0 0 0 0 0 0
January 2014................................. 27 0 0 0 0 0 0
January 2015................................. 18 0 0 0 0 0 0
January 2016................................. 0 0 0 0 0 0 0
January 2017................................. 0 0 0 0 0 0 0
January 2018................................. 0 0 0 0 0 0 0
January 2019................................. 0 0 0 0 0 0 0
January 2020................................. 0 0 0 0 0 0 0
January 2021................................. 0 0 0 0 0 0 0
January 2022................................. 0 0 0 0 0 0 0
January 2023................................. 0 0 0 0 0 0 0
January 2024................................. 0 0 0 0 0 0 0
January 2025................................. 0 0 0 0 0 0 0
January 2026................................. 0 0 0 0 0 0 0
January 2027................................. 0 0 0 0 0 0 0
January 2028................................. 0 0 0 0 0 0 0
January 2029................................. 0 0 0 0 0 0 0
January 2030................................. 0 0 0 0 0 0 0
January 2031................................. 0 0 0 0 0 0 0
Weighted Average Life (years)**(1)........... 8.76 1.58 1.11 0.85 0.69 0.58 0.45
Weighted Average Life (years)**(2)........... 8.76 1.58 1.11 0.85 0.69 0.58 0.45
<CAPTION>
CLASS A-2
--------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 200%
----------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage........................... 100 100 100 100 100 100 100
January 2002................................. 100 100 100 100 100 100
January 2003................................. 100 100 100 34 0 0 0
January 2004................................. 100 100 0 0 0 0 0
January 2005................................. 100 35 0 0 0 0 0
January 2006................................. 100 0 0 0 0 0 0
January 2007................................. 100 0 0 0 0 0 0
January 2008................................. 100 0 0 0 0 0 0
January 2009................................. 100 0 0 0 0 0 0
January 2010................................. 100 0 0 0 0 0 0
January 2011................................. 100 0 0 0 0 0 0
January 2012................................. 100 0 0 0 0 0 0
January 2013................................. 100 0 0 0 0 0 0
January 2014................................. 100 0 0 0 0 0 0
January 2015................................. 100 0 0 0 0 0 0
January 2016................................. 0 0 0 0 0 0 0
January 2017................................. 0 0 0 0 0 0 0
January 2018................................. 0 0 0 0 0 0 0
January 2019................................. 0 0 0 0 0 0 0
January 2020................................. 0 0 0 0 0 0 0
January 2021................................. 0 0 0 0 0 0 0
January 2022................................. 0 0 0 0 0 0 0
January 2023................................. 0 0 0 0 0 0 0
January 2024................................. 0 0 0 0 0 0 0
January 2025................................. 0 0 0 0 0 0 0
January 2026................................. 0 0 0 0 0 0 0
January 2027................................. 0 0 0 0 0 0 0
January 2028................................. 0 0 0 0 0 0 0
January 2029................................. 0 0 0 0 0 0 0
January 2030................................. 0 0 0 0 0 0 0
January 2031................................. 0 0 0 0 0 0 0
Weighted Average Life (years)**(1)........... 14.20 3.93 2.66 2.00 1.59 1.31 0.95
Weighted Average Life (years)**(2)........... 14.20 3.93 2.66 2.00 1.59 1.31 0.95
</TABLE>
------------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the related
Class A Principal Balance by the number of years from the date of issuance
of the Certificate to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the original Class A Principal
Balance of the Certificate.
(1) To Maturity
(2) To Optional Termination
S-34
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION --(CONTINUED)
<TABLE>
<CAPTION>
CLASS A-3 CLASS A-4
-------------------------------------------------------------------------- -------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 200% 0% 50%
----------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100 100 100 100 100
January 2002..................... 100 100 100 100 100 100 98 100 100
January 2003..................... 100 100 100 100 73 35 0 100 100
January 2004..................... 100 100 95 42 0 0 0 100 100
January 2005..................... 100 100 47 0 0 0 0 100 100
January 2006..................... 100 78 8 0 0 0 0 100 100
January 2007..................... 100 48 0 0 0 0 0 100 100
January 2008..................... 100 23 0 0 0 0 0 100 100
January 2009..................... 100 8 0 0 0 0 0 100 100
January 2010..................... 100 0 0 0 0 0 0 100 89
January 2011..................... 100 0 0 0 0 0 0 100 69
January 2012..................... 100 0 0 0 0 0 0 100 49
January 2013..................... 100 0 0 0 0 0 0 100 31
January 2014..................... 100 0 0 0 0 0 0 100 13
January 2015..................... 100 0 0 0 0 0 0 100 0
January 2016..................... 0 0 0 0 0 0 0 70 0
January 2017..................... 0 0 0 0 0 0 0 59 0
January 2018..................... 0 0 0 0 0 0 0 48 0
January 2019..................... 0 0 0 0 0 0 0 36 0
January 2020..................... 0 0 0 0 0 0 0 22 0
January 2021..................... 0 0 0 0 0 0 0 11 0
January 2022..................... 0 0 0 0 0 0 0 3 0
January 2023..................... 0 0 0 0 0 0 0 0 0
January 2024..................... 0 0 0 0 0 0 0 0 0
January 2025..................... 0 0 0 0 0 0 0 0 0
January 2026..................... 0 0 0 0 0 0 0 0 0
January 2027..................... 0 0 0 0 0 0 0 0 0
January 2028..................... 0 0 0 0 0 0 0 0 0
January 2029..................... 0 0 0 0 0 0 0 0 0
January 2030..................... 0 0 0 0 0 0 0 0 0
January 2031..................... 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**(1)................... 14.20 6.14 4.06 3.00 2.36 1.94 1.40 16.97 11.09
Weighted Average Life
(years)**(2)................... 14.20 6.14 4.06 3.00 2.36 1.94 1.40 16.97 11.09
<CAPTION>
CLASS A-4
----------------------------------------------------
DISTRIBUTION DATE 75% 100% 125% 150% 200%
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100
January 2002..................... 100 100 100 100 100
January 2003..................... 100 100 100 100 57
January 2004..................... 100 100 97 47 0
January 2005..................... 100 91 35 0 0
January 2006..................... 100 43 0 0 0
January 2007..................... 73 9 0 0 0
January 2008..................... 43 0 0 0 0
January 2009..................... 29 0 0 0 0
January 2010..................... 12 0 0 0 0
January 2011..................... 0 0 0 0 0
January 2012..................... 0 0 0 0 0
January 2013..................... 0 0 0 0 0
January 2014..................... 0 0 0 0 0
January 2015..................... 0 0 0 0 0
January 2016..................... 0 0 0 0 0
January 2017..................... 0 0 0 0 0
January 2018..................... 0 0 0 0 0
January 2019..................... 0 0 0 0 0
January 2020..................... 0 0 0 0 0
January 2021..................... 0 0 0 0 0
January 2022..................... 0 0 0 0 0
January 2023..................... 0 0 0 0 0
January 2024..................... 0 0 0 0 0
January 2025..................... 0 0 0 0 0
January 2026..................... 0 0 0 0 0
January 2027..................... 0 0 0 0 0
January 2028..................... 0 0 0 0 0
January 2029..................... 0 0 0 0 0
January 2030..................... 0 0 0 0 0
January 2031..................... 0 0 0 0 0
Weighted Average Life
(years)**(1)................... 7.16 5.00 3.85 3.08 2.15
Weighted Average Life
(years)**(2)................... 7.16 5.00 3.85 3.08 2.15
</TABLE>
------------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the related
Class A Principal Balance by the number of years from the date of issuance
of the Certificate to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the original Class A Principal
Balance of the Certificate.
(1) To Maturity
(2) To Optional Termination
S-35
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION --(CONTINUED)
<TABLE>
<CAPTION>
CLASS A-5 CLASS A-6
-------------------------------------------------------------------------- -------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 200% 0% 50%
----------------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100 100 100 100 100
January 2002..................... 100 100 100 100 100 100 100 100 100
January 2003..................... 100 100 100 100 100 100 100 100 100
January 2004..................... 100 100 100 100 100 100 67 100 100
January 2005..................... 100 100 100 100 100 90 26 99 95
January 2006..................... 100 100 100 100 91 53 4 98 89
January 2007..................... 100 100 100 100 64 33 0 97 80
January 2008..................... 100 100 100 85 47 22 0 94 71
January 2009..................... 100 100 100 77 44 22 0 87 47
January 2010..................... 100 100 100 64 35 17 0 77 30
January 2011..................... 100 100 95 52 26 11 0 70 20
January 2012..................... 100 100 80 40 18 7 0 63 13
January 2013..................... 100 100 66 31 12 4 0 56 8
January 2014..................... 100 100 53 23 8 1 0 48 5
January 2015..................... 100 97 43 17 5 0 0 41 3
January 2016..................... 100 33 12 3 0 0 0 0 0
January 2017..................... 100 27 9 1 0 0 0 0 0
January 2018..................... 100 22 6 * 0 0 0 0 0
January 2019..................... 100 18 4 0 0 0 0 0 0
January 2020..................... 100 14 2 0 0 0 0 0 0
January 2021..................... 100 11 1 0 0 0 0 0 0
January 2022..................... 100 8 * 0 0 0 0 0 0
January 2023..................... 94 6 0 0 0 0 0 0 0
January 2024..................... 85 4 0 0 0 0 0 0 0
January 2025..................... 74 3 0 0 0 0 0 0 0
January 2026..................... 62 1 0 0 0 0 0 0 0
January 2027..................... 48 * 0 0 0 0 0 0 0
January 2028..................... 33 0 0 0 0 0 0 0 0
January 2029..................... 17 0 0 0 0 0 0 0 0
January 2030..................... 0 0 0 0 0 0 0 0 0
January 2031..................... 0 0 0 0 0 0 0 0 0
Weighted Average Life
(years)**(1)................... 25.72 15.82 13.21 10.48 8.09 6.20 3.61 11.72 8.17
Weighted Average Life
(years)**(2)................... 25.45 14.65 12.80 9.98 7.47 5.69 3.61 11.72 8.17
<CAPTION>
CLASS A-6
----------------------------------------------------
DISTRIBUTION DATE 75% 100% 125% 150% 200%
----------------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Initial Percentage............... 100 100 100 100 100
January 2002..................... 100 100 100 100 100
January 2003..................... 100 100 100 100 100
January 2004..................... 100 100 100 100 100
January 2005..................... 92 90 87 85 79
January 2006..................... 85 81 76 72 62
January 2007..................... 73 66 60 53 38
January 2008..................... 61 52 44 35 20
January 2009..................... 34 24 16 12 10
January 2010..................... 18 11 5 3 3
January 2011..................... 10 5 2 1 0
January 2012..................... 6 2 1 * 0
January 2013..................... 3 1 * * 0
January 2014..................... 2 * * * 0
January 2015..................... 1 * * 0 0
January 2016..................... 0 0 0 0 0
January 2017..................... 0 0 0 0 0
January 2018..................... 0 0 0 0 0
January 2019..................... 0 0 0 0 0
January 2020..................... 0 0 0 0 0
January 2021..................... 0 0 0 0 0
January 2022..................... 0 0 0 0 0
January 2023..................... 0 0 0 0 0
January 2024..................... 0 0 0 0 0
January 2025..................... 0 0 0 0 0
January 2026..................... 0 0 0 0 0
January 2027..................... 0 0 0 0 0
January 2028..................... 0 0 0 0 0
January 2029..................... 0 0 0 0 0
January 2030..................... 0 0 0 0 0
January 2031..................... 0 0 0 0 0
Weighted Average Life
(years)**(1)................... 7.39 6.85 6.44 6.14 5.67
Weighted Average Life
(years)**(2)................... 7.39 6.84 6.42 6.06 5.04
</TABLE>
------------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the related
Class A Principal Balance by the number of years from the date of issuance
of the Certificate to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the original Class A Principal
Balance of the Certificate.
(1) To Maturity
(2) To Optional Termination
S-36
<PAGE>
PERCENT OF INITIAL CLASS A PRINCIPAL BALANCE OUTSTANDING
AT THE FOLLOWING PERCENTAGES OF THE PREPAYMENT ASSUMPTION --(CONTINUED)
<TABLE>
<CAPTION>
CLASS A-7
--------------------------------------------------------------------------
DISTRIBUTION DATE 0% 50% 75% 100% 125% 150% 200%
----------------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percentage................................... 100 100 100 100 100 100 100
January 2002......................................... 97 87 82 77 72 68 58
January 2003......................................... 96 77 69 61 53 46 33
January 2004......................................... 94 68 57 47 39 32 20
January 2005......................................... 93 60 48 37 29 22 12
January 2006......................................... 91 53 40 29 21 15 7
January 2007......................................... 89 47 33 23 16 10 4
January 2008......................................... 87 41 27 18 11 7 2
January 2009......................................... 85 36 23 14 8 5 1
January 2010......................................... 81 31 19 11 6 3 *
January 2011......................................... 79 27 15 8 4 2 0
January 2012......................................... 76 24 13 6 3 1 0
January 2013......................................... 73 20 10 5 2 1 0
January 2014......................................... 69 17 8 3 1 * 0
January 2015......................................... 66 15 6 2 1 0 0
January 2016......................................... 25 5 2 * 0 0 0
January 2017......................................... 24 4 1 * 0 0 0
January 2018......................................... 22 3 1 * 0 0 0
January 2019......................................... 20 3 1 0 0 0 0
January 2020......................................... 18 2 * 0 0 0 0
January 2021......................................... 17 2 * 0 0 0 0
January 2022......................................... 15 1 * 0 0 0 0
January 2023......................................... 14 1 0 0 0 0 0
January 2024......................................... 13 1 0 0 0 0 0
January 2025......................................... 11 * 0 0 0 0 0
January 2026......................................... 9 * 0 0 0 0 0
January 2027......................................... 7 * 0 0 0 0 0
January 2028......................................... 5 0 0 0 0 0 0
January 2029......................................... 3 0 0 0 0 0 0
January 2030......................................... 0 0 0 0 0 0 0
January 2031......................................... 0 0 0 0 0 0 0
Weighted Average Life (years)**(1)................... 14.20 6.78 5.10 3.98 3.21 2.65 1.91
Weighted Average Life (years)**(2)................... 14.17 6.61 5.03 3.91 3.12 2.57 1.84
</TABLE>
------------------------------
* Indicates a percentage greater than 0.00% but less than 0.50%.
** The weighted average life of a Certificate of any class is determined by
(i) multiplying the amount of each distribution in reduction of the related
Class A Principal Balance by the number of years from the date of issuance
of the Certificate to the related Distribution Date, (ii) adding the
results, and (iii) dividing the sum by the original Class A Principal
Balance of the Certificate.
(1) To Maturity
(2) To Optional Termination
These 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-37
<PAGE>
DESCRIPTION OF THE CERTIFICATES
The Sovereign Bank Home Equity Loan Asset-Backed Certificates,
Series 2000-1 (the "Certificates") will consist of seven classes of senior
certificates (each, a "Class"): the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates, the Class A-6 Certificates and the Class A-7
Certificates (collectively, the "Class A Certificates") and one class of
subordinated certificates (the "Class R Certificates"). The Certificates will be
issued pursuant to a pooling and servicing agreement (the "Agreement"), dated as
of December 1, 2000, among Sovereign Bank, as seller and master servicer (in
such capacities, the "Seller" and "Master Servicer"), Lehman ABS Corporation, as
depositor (the "Depositor") and State Street Bank and Trust Company, as Trustee
(the "Trustee"). The form of the Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus Supplement and the prospectus
(the "Prospectus") is a part. The following summaries describe certain
provisions of the Agreement. The summaries do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all of the
provisions of the Agreement. Wherever particular sections or defined terms of
the Agreement are referred to, such sections or defined terms are hereby
incorporated herein by reference.
GENERAL
The Class A Certificates will be issued in denominations of $1,000 and
multiples of $1 in excess thereof and will evidence specified undivided
interests in the Trust. The property of the Trust will consist of, to the extent
provided in the Agreement: (i) the Mortgage Loans; (ii) payments on the Mortgage
Loans received after the Cut-Off Date; (iii) Mortgaged Properties relating to
the Mortgage Loans that are acquired by foreclosure or deed in lieu of
foreclosure; (iv) the Collection Account and the Distribution Account and funds
on deposit therein (excluding net earnings thereon); (v) rights under certain
hazard insurance policies, if any, covering the Mortgaged Properties; and
(vi) an assignment of the Depositor's rights under the mortgage loan purchase
agreement (the "Purchase Agreement"). In addition, the Depositor has caused the
Certificate Insurer to issue an irrevocable and unconditional certificate
guaranty insurance policy (the "Policy") for the benefit of the holders of the
Class A Certificates, pursuant to which the Certificate Insurer will guarantee
certain payments to the Class A Certificateholders as described herein.
Definitive Certificates (as defined below) will be transferable and exchangeable
at the corporate trust office of the Trustee, which will initially act as
Certificate Registrar. See "--Book-Entry Certificates" below. No service charge
will be made for any registration of exchange or transfer of Certificates, but
the Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge.
The principal amount of a Class of Class A Certificates (each, a "Class A
Principal Balance") on any Distribution Date is equal to the applicable Class A
Principal Balance on the Closing Date minus the aggregate of amounts actually
distributed as principal to the holders of such Class of Class A Certificates.
On any date, the "Aggregate Class A Principal Balance" is the aggregate of the
Class A Principal Balances of each Class of Class A Certificates.
Only the Class A Certificates are being offered hereby. Each Class of Class
A Certificates represents the right to receive payments of interest at the
Certificate Rate for such Class and payments of principal as described below.
The Person in whose name a Certificate is registered as such in the
Certificate Register is referred to herein as a "Certificateholder."
The "Percentage Interest" represented by a Class A Certificate of a Class as
of any date of determination will be equal to the percentage obtained by
dividing the denomination of such Certificate by the Class A Principal Balance
for the related Class as of the Cut-Off Date.
S-38
<PAGE>
BOOK-ENTRY CERTIFICATES
The Class A Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in the Offered
Certificates ("Certificate Owners") will hold their Class A Certificates through
The Depository Trust Company ("DTC") in the United States, or Clearstream
Banking, SOCIETE ANONYME a company with limited liability under Luxembourg law
and formerly known first as "Cedel S.A." and more recently as "Cedelbank"
("Clearstream") or Euroclear System ("Euroclear") (in Europe) if they are
participants of such systems, or indirectly through organizations which are
participants in such systems (the "Participants"). The Book-Entry Certificates
will be issued in one or more certificates which equal the aggregate principal
balance of the Class A Certificates and will initially be registered in the name
of Cede & Co., the nominee of DTC. Clearstream and Euroclear will hold omnibus
positions on behalf of their participants through customers' securities accounts
in Cedelbank's and Euroclear's names on the books of their respective
depositaries which in turn will hold such positions in customers' securities
accounts in the depositaries' names on the books of DTC. Citibank N.A. will act
as depositary for Clearstream and The Chase Manhattan Bank will act as
depositary for Euroclear (in such capacities, individually the "Relevant
Depositary" and collectively the "European Depositaries"). Investors may hold
such beneficial interests in the Book-Entry Certificates in minimum
denominations representing Class A Principal Balances of $1,000 and in multiples
of $1 in excess thereof. Except as described below, no person acquiring a
Book-Entry Certificate (each, a "beneficial owner") will be entitled to receive
a physical certificate representing such Certificate (a "Definitive
Certificate"). Unless and until Definitive Certificates are issued, it is
anticipated that the only "Certificateholder" of the Class A Certificates will
be Cede & Co., as nominee of DTC. Certificate Owners will not be
Certificateholders as that term is used in the Agreement. Certificate Owners are
only permitted to exercise their rights indirectly through Participants and DTC.
The beneficial owner's ownership of a Book-Entry Certificate will be
recorded on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
beneficial owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the beneficial owner's Financial Intermediary is not a DTC participant and on
the records of Cedelbank or Euroclear, as appropriate).
Certificate Owners will receive all distributions of principal of, and
interest on, the Class A Certificates from the Trustee through DTC and DTC
participants. While the Class A Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to the Class A Certificates and is required to receive and transmit
distributions of principal of, and interest on, the Class A Certificates.
Participants and indirect participants with whom Certificate Owners have
accounts with respect to Class A Certificates are similarly required to make
book-entry transfers and receive and transmit such distributions on behalf of
their respective Certificate Owners. Accordingly, although Certificate Owners
will not possess certificates, the Rules provide a mechanism by which
Certificate Owners will receive distributions and will be able to transfer their
interest.
Certificate Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Certificate Owners who are not Participants may
transfer ownership of Class A Certificates only through Participants and
indirect participants by instructing such Participants and indirect participants
to transfer Class A Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in accordance
with DTC's normal procedures, transfers of ownership of Class A Certificates
will be executed through DTC and the accounts of the respective Participants at
DTC
S-39
<PAGE>
will be debited and credited. Similarly, the Participants and indirect
participants will make debits or credits, as the case may be, on their records
on behalf of the selling and purchasing Certificate Owners.
Because of time zone differences, credits of securities received in
Clearstream or Euroclear as a result of a transaction with a Participant will be
made during subsequent securities settlement processing and dated the business
day following the DTC settlement date. Such credits or any transactions in such
securities settled during such processing will be reported to the relevant
Euroclear or Clearstream Participants on such business day. Cash received in
Clearstream or Euroclear as a result of sales of securities by or through a
Clearstream Participant (as defined below) or Euroclear Participant (as defined
below) to a DTC Participant will be received with value on the DTC settlement
date but will be available in the relevant Clearstream or Euroclear cash account
only as of the business day following settlement in DTC. For information with
respect to tax documentation procedures relating to the Certificates, see
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Federal Income Tax Consequences to
Foreign Investors" and "--Backup Withholding" herein and "GLOBAL CLEARANCE,
SETTLEMENT AND TAX DOCUMENTATION PROCEDURES--Certain U.S. Federal Income Tax
Documentation Requirements" in Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Clearstream 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 Clearstream
Participants or Euroclear Participants, on the other, will be effected in DTC in
accordance with DTC rules on behalf of the relevant European international
clearing system by the Relevant Depositary; however, such cross market
transactions will require delivery of instructions to the relevant European
international clearing system by the counterparty in such system in accordance
with its rules and procedures and within its established deadlines (European
time). The relevant European international clearing system will, if the
transaction meets its settlement requirements, deliver instructions to the
Relevant Depositary to take action to effect final settlement on its behalf by
delivering or receiving securities in DTC, and making or receiving payment in
accordance with normal procedures for same day funds settlement applicable to
DTC. Clearstream Participants and Euroclear Participants may not deliver
instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its participants, some of which (and/or their representatives) own
DTC. In accordance with its normal procedures, DTC is expected to record the
positions held by each DTC participant in the Book-Entry Certificates, whether
held for its own account or as a nominee for another person. In general,
beneficial ownership of Book-Entry Certificates will be subject to the rules,
regulations and procedures governing DTC and DTC participants as in effect from
time to time.
Clearstream Banking, societe anonyme, 67 Bd Grande-Duchesse Charlotte,
L-2967 Luxembourg ("Clearstream, Luxembourg"), was incorporated in 1970 as
"Cedel S.A.", a company with limited liability under Luxembourg law (a societe
anonyme). Cedel S.A. subsequently changed its name to Cedelbank. On 10 January
2000, Cedelbank's parent company, Cedel International, societe anonyme ("CI")
merged its clearing, settlement and custody business with that of Deutsche Borse
Clearing AG ("DBC"). The merger involved the transfer by CI of substantially all
of its assets and liabilities (including its shares of CB) to a new Luxembourg
company, New Cedel International, societe anonyme ("New CI"), which is 50% owned
by CI and 50% owned by DBC's parent company Deutsche Borse AG. The shareholders
of these two entities are banks, securities dealers and financial institutions.
Cedel International currently has 92 shareholders, including U.S. financial
institutions or their subsidiaries. No single entity may own more than
5 percent of Cedel International's stock.
Further to the merger, the Board of Directors of New Cedel International
decided to re-name the companies in the group in order to give them a cohesive
brand name. The new brand name that was
S-40
<PAGE>
chosen is "Clearstream". With effect from 14 January 2000 New CI has been
renamed to "Clearstream International, societe anonyme". On 18 January 2000,
Cedelbank was renamed "Clearstream Banking, societe anonyme", and Cedel Global
Services was renamed "Clearstream Services, societe anonyme".
On 17 January 2000 DBC was renamed to "Clearstream Banking AG". This means
that there are now two entities in the corporate group headed by Clearstream
International which share the name "Clearstream Banking", the entity previously
named "Cedelbank" and the entity previously named "Deutsche Borse Clearing AG".
Clearstream, Luxembourg holds securities for its customers and facilitates
the clearance and settlement of securities transactions between Clearstream,
Luxembourg customers through electronic book-entry changes in accounts of
Clearstream, Luxembourg customers, thereby eliminating the need for physical
movement of certificates. Transactions may be settled by Clearstream, Luxembourg
in any of 36 currencies, including United States Dollars. Clearstream,
Luxembourg provides to its customers, among other things, services for
safekeeping, administration, clearance and settlement of internationally traded
securities and securities lending and borrowing. Clearstream, Luxembourg also
deals with domestic securities markets in over 30 countries through established
depositary and custodial relationships. Clearstream, Luxembourg is registered as
a bank in Luxembourg, and as such is subject to regulation by the Commission de
Surveillance du Secteur Financier, 'CSSF', which supervises Luxembourg banks.
Clearstream, Luxembourg's customers are world-wide financial institutions
including underwriters, securities brokers and dealers, banks, trust companies
and clearing corporations. Clearstream, Luxembourg's U.S. customers are limited
to securities brokers and dealers, and banks. Currently, Clearstream, Luxembourg
has approximately 2,000 customers located in over 80 countries, including all
major European countries, Canada, and the United States. Indirect access to
Clearstream, Luxembourg is available to other institutions that clear through or
maintain a custodial relationship with an account holder of Clearstream,
Luxembourg. Clearstream, Luxembourg has established an electronic bridge with
Morgan Guaranty Trust Company of New York as the Operator of Euroclear System
(MGT/EOC) in Brussels to facilitate settlement of trades between Clearstream,
Luxembourg and MGT/EOC.
Euroclear was created in 1968 to hold securities for its participants
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of Morgan
Guaranty Trust Company of New York (the "Euroclear Operator"), under contract
with Euroclear Clearance Systems S.C., a Belgian cooperative corporation (the
"Cooperative"). All operations are conducted by the Euroclear Operator, and all
Euroclear securities clearance accounts and Euroclear cash accounts are accounts
with the Euroclear Operator, not the Cooperative. The Cooperative establishes
policy for Euroclear on behalf of Euroclear Participants. Euroclear Participants
include banks (including central banks), securities brokers and dealers and
other professional financial intermediaries. Indirect access to Euroclear is
also available to other firms that clear through or maintain a custodial
relationship with a Euroclear Participant, either directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking
corporation which is a member bank of the Federal Reserve System. As such, it is
regulated and examined by the Board of Governors of the Federal Reserve System
and the New York State Banking Department, as well as the Belgian Banking
Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear,
S-41
<PAGE>
and receipts of payments with respect to securities in Euroclear. All securities
in Euroclear are held on a fungible basis without attribution of specific
certificates to specific securities clearance accounts. The Euroclear Operator
acts under the Terms and Conditions only on behalf of Euroclear Participants,
and has no record of or relationship with persons holding through Euroclear
Participants.
Distributions on the Book-Entry Certificates will be made on each
Distribution Date by the Trustee to DTC. DTC will be responsible for crediting
the amount of such payments to the accounts of the applicable DTC participants
in accordance with DTC's normal procedures. Each DTC participant will be
responsible for disbursing such payments to the beneficial owners of the
Book-Entry Certificates that it represents and to each Financial Intermediary
for which it acts as agent. Each such Financial Intermediary will be responsible
for disbursing funds to the beneficial owners of the Book-Entry Certificates
that it represents.
Under a book-entry format, beneficial owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Clearstream or Euroclear will be credited to the cash accounts of
Clearstream Participants or Euroclear Participants in accordance with the
relevant system's rules and procedures, to the extent received by the Relevant
Depositary. Such distributions will be subject to tax reporting in accordance
with relevant United States tax laws and regulations. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS--Federal Income Tax Consequences to Foreign Investors"
and "--Backup Withholding" herein. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a beneficial owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry Certificates in book-entry
form may reduce the liquidity of such Certificates in the secondary market since
certain potential investors may be unwilling to purchase Certificates for which
they cannot obtain physical certificates.
Monthly and annual reports on the Trust will be provided to Cede & Co., as
nominee of DTC, and may be made available by Cede & Co. to beneficial owners
upon request, in accordance with the rules, regulations and procedures creating
and affecting the Depository, and to the Financial Intermediaries to whose DTC
accounts the Book-Entry Certificates of such beneficial owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates
are issued, DTC will take any action permitted to be taken by the holders of the
Book-Entry Certificates under the Agreement only at the direction of one or more
Financial Intermediaries to whose DTC accounts the Book-Entry Certificates are
credited, to the extent that such actions are taken on behalf of Financial
Intermediaries whose holdings include such Book-Entry Certificates. Clearstream
or the Euroclear Operator, as the case may be, will take any other action
permitted to be taken by a Certificateholder under the Agreement on behalf of a
Clearstream Participant or Euroclear Participant only in accordance with its
relevant rules and procedures and subject to the ability of the Relevant
Depositary to effect such actions on its behalf through DTC. DTC may take
actions, at the direction of the related Participants, with respect to some
Class A Certificates which conflict with actions taken with respect to other
Class A Certificates.
Definitive Certificates will be issued to beneficial owners of the
Book-Entry Certificates, or their nominees, rather than to DTC, only if (a) DTC
or the Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, with the consent of the Trustee, elects to terminate a book-entry
system through DTC or (c) after the occurrence of an Event of Default (as
defined herein), beneficial owners having Percentage Interests aggregating not
less than 51% of the aggregate Class A Principal Balance of the Book-Entry
Certificates advise the Trustee and DTC through the Financial Intermediaries and
the DTC participants in writing that the continuation of a book-entry system
through DTC (or a successor thereto) is no longer in the best interests of
beneficial owners.
S-42
<PAGE>
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all beneficial
owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as
Certificateholders under the Agreement.
Although DTC, Clearstream and Euroclear have agreed to the foregoing
procedures in order to facilitate transfers of Class A Certificates among
participants of DTC, Clearstream and Euroclear, they are under no obligation to
perform or continue to perform such procedures and such procedures may be
discontinued at any time.
Neither the Depositor, the Seller, the Master Servicer, the Certificate
Insurer nor the Trustee will have any responsibility for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Book-Entry Certificates held by Cede & Co., as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
ASSIGNMENT OF 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 (or, with respect to a limited number of Mortgage Loans, a lost note
affidavit), Mortgages and other related documents (collectively, the "Related
Documents"), including all payments received on or with respect to each such
Mortgage Loan after the Cut-Off Date. The Trustee, concurrently with such
transfer, will deliver the Certificates to the Depositor. Each Mortgage Loan
transferred to the Trust will be identified on a schedule (the "Mortgage Loan
Schedule") delivered to the Trustee pursuant to the Agreement. Such schedule
will include information such as the Principal Balance of each Mortgage Loan as
of the Cut-Off Date, its Loan Rate as well as other information.
The Agreement provides that the Seller will deliver to the Trustee on the
Closing Date the Mortgage Note relating to each Mortgage Loan and certain other
documentation relating to each Mortgage Loan (together with the Mortgage Note,
the "Mortgage File"). The Seller will generally deliver the assignments of the
Mortgage relating to each Mortgage Loan (including assignments of Mortgages
which are required to be recorded as described below). The assignments of the
Mortgage are to be delivered in recordable form. The assignments are not
required to be recorded, except in the case of assignments of Mortgages which
are secured by Mortgaged Properties located within the states of Florida,
Maryland, Mississippi, South Carolina and Tennessee, which are required to be
submitted for recordation by the Seller, at its own expense.
Within 60 days of the date of delivery thereof, the Trustee will review the
Mortgage Loans and the Related Documents pursuant to the Agreement and if any
Mortgage Loan or Related Document is found to be defective in any material
respect and such defect is not cured within 60 days following notification
thereof to the Seller by the Trustee, the Seller will be obligated to either
(i) substitute for such Mortgage Loan an Eligible Substitute Mortgage Loan;
provided, however, such substitution is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that such substitution will not disqualify the Trust as a REMIC or result
in a prohibited transaction tax under the Code or (ii) purchase such Mortgage
Loan at a price (the "Purchase Price") equal to the outstanding Principal
Balance of such Mortgage Loan as of the date of purchase, plus the greater of
(a) all accrued and unpaid interest thereon, or (b) 30 day's interest thereon,
computed at the Loan Rate, plus the amount of any unreimbursed Servicing
Advances made by the Master Servicer. The Purchase Price will be deposited in
the Collection Account on or prior to the next succeeding Determination Date
after such obligation arises. The obligation of the Seller to cure, repurchase
or substitute for a Defective Mortgage Loan is the sole remedy regarding any
defects in the Mortgage Loans and Related Documents available to the Trustee or
the Certificateholders.
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<PAGE>
In connection with the substitution of an Eligible Substitute Mortgage Loan,
the Seller will be required to deposit in the Collection Account on or prior to
the next succeeding Determination Date after such obligation arises an amount
(the "Substitution Adjustment") equal to the excess of the Principal Balance of
the related Defective Mortgage Loan over the Principal Balance of such Eligible
Substitute Mortgage Loan.
An "Eligible Substitute Mortgage Loan" is a mortgage loan substituted by the
Seller for a Defective Mortgage Loan which must, on the date of such
substitution, (i) have an outstanding Principal Balance (or in the case of a
substitution of more than one Mortgage Loan for a Defective Mortgage Loan, an
aggregate Principal Balance), not in excess of, and not more than 5% less than,
the Principal Balance of the Defective Mortgage Loan; (ii) have a 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; (iii) have a mortgage
of the same or higher level of priority as the mortgage relating to the
Defective Mortgage Loan at the time the Defective Mortgage Loan was transferred
to the trust; (iv) 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; (v) comply with each representation and warranty as to the
Mortgage Loans set forth in the Agreement (deemed to be made as of the date of
substitution); and (vi) satisfy certain other conditions specified in the
Agreement.
The Seller will make certain representations and warranties as to the
accuracy in all material respects of certain information furnished to the
Trustee with respect to each Mortgage Loan (e.g., Cut-Off Date Principal Balance
and the Loan Rate). In addition, the Seller will represent and warrant, on the
Closing Date, that, among other things: (i) at the time of transfer to the
Depositor, the Seller has transferred or assigned all of its right, title and
interest in each Mortgage Loan and the Related Documents, free of any lien; and
(ii) each Mortgage Loan complied, at the time of origination, in all material
respects with applicable state and federal laws. Upon discovery of a breach of
any such representation and warranty which materially and adversely affects the
interests of the Certificateholders or the Certificate Insurer in the related
Mortgage Loan and Related Documents, the Seller will have a period of 60 days
after discovery or notice of the breach to effect a cure. If the breach cannot
be cured within the 60-day period, the Seller will be obligated to
(i) substitute for such Defective Mortgage Loan an Eligible Substitute Mortgage
Loan or (ii) purchase such Defective Mortgage Loan from the Trust. The same
procedure and limitations that are set forth above for the substitution or
purchase of Defective Mortgage Loans as a result of deficient documentation
relating thereto will apply to the substitution or purchase of a Defective
Mortgage Loan as a result of a breach of a representation or warranty in the
Agreement that materially and adversely affects the interests of the
Certificateholders or the Certificate Insurer.
Mortgage Loans required to be transferred to the Seller as described in the
preceding paragraphs are referred to as "Defective Mortgage Loans."
Pursuant to the Agreement, the Master Servicer will service and administer
the Mortgage Loans as more fully set forth below.
PAYMENTS ON MORTGAGE LOANS; DEPOSITS TO COLLECTION ACCOUNT AND DISTRIBUTION
ACCOUNT
The Master Servicer shall establish and maintain in the name of the Trustee
a separate trust account (the "Collection Account") for the benefit of the
holders of the Certificates. The Collection Account will be an Eligible Account
(as defined herein). Within two Business Days after receipt, the Master Servicer
will deposit or cause to be deposited into the Collection Account all 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). Amounts so deposited may be invested in Eligible Investments (as
described in the Agreement) maturing no later than one Business Day prior to the
date on which the amount on deposit therein is required to be deposited in the
Distribution Account or on such Distribution Date if approved by the Rating
Agencies and the Certificate Insurer. A "Distribution Date" is the 25th day of
each
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month, or if such day is not a Business Date, then the next succeeding Business
Day, commencing in January 2001.
The Trustee will establish an account (the "Distribution Account") into
which will be deposited amounts withdrawn from the Collection Account for
distribution to Certificateholders on a Distribution Date. The Distribution
Account will be an Eligible Account. Amounts on deposit therein may be invested
in Eligible Investments maturing on or before the Business Day prior to the
related Distribution Date.
An "Eligible Account" is a segregated account that is (i) maintained with a
depository institution whose debt obligations at the time of any deposit therein
have the highest short-term debt rating by the Rating Agencies and whose
accounts are fully insured by either the Savings Association Insurance Fund
("SAIF") or the Bank Insurance Fund ("BIF") of the Federal Deposit Insurance
Corporation established by such fund with a minimum long-term unsecured debt
rating of "A1" by Moody's and "A" by S&P, and which is any of (a) a federal
savings and loan association duly organized, validly existing and in good
standing under the applicable banking laws of any state, (b) an institution duly
organized, validly existing and in good standing under the applicable banking
laws of any state, (c) a national banking association duly organized, validly
existing and in good standing under the federal banking laws or (d) a principal
subsidiary of a bank holding company, and in each case of (a)--(d), approved in
writing by the Certificate Insurer, (ii) a segregated trust account maintained
with the corporate trust department of a federal or state chartered depository
institution or trust company, having capital and surplus of not less than
$100,000,000, acting in its fiduciary capacity or (iii) otherwise acceptable to
each Rating Agency and the Certificate Insurer as evidenced by a letter from
each Rating Agency and the Certificate Insurer to the Trustee, without reduction
or withdrawal of their then current ratings of the Certificates.
Eligible Investments are specified in the Agreement and are limited to
investments which meet the criteria of the Rating Agencies from time to time as
being consistent with their then current ratings of the Certificates.
ADVANCES
Not later than two Business Days prior to each Distribution Date, the Master
Servicer will remit to the Trustee for deposit in the Distribution Account an
amount, to be distributed on the related Distribution Date, equal to the sum of
the interest accrued on each Mortgage Loan through the related due date for such
Mortgage Loan but not received by the Master Servicer as of the close of
business on the eighteenth day of the related month (the "Determination Date")
(net of the Servicing Fee) (the "Monthly Advance"). Such obligation of the
Master 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 Master Servicer
will pay all reasonable and customary "out-of-pocket" costs and expenses
incurred in the performance of its servicing obligations, including, but not
limited to, the cost of (i) the preservation, restoration and protection of the
Mortgaged Properties, (ii) any enforcement or judicial proceedings, including
foreclosures, and (iii) the management and liquidation of Mortgaged Properties
acquired in satisfaction of the related Mortgage. Each such expenditure will
constitute a "Servicing Advance".
The Master Servicer's right to reimbursement for Servicing Advances is
limited to late collections on the related Mortgage Loan, including Liquidation
Proceeds, released mortgaged property proceeds, Insurance Proceeds and such
other amounts as may be collected by the Master Servicer from the related
Mortgagor or otherwise relating to the Mortgage Loan in respect of which such
unreimbursed amounts are owed. The Master Servicer's right to reimbursement for
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 Master Servicer's right to such reimbursements is prior to
the rights of Certificateholders.
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Notwithstanding the foregoing, the Master Servicer is not required to make
any Monthly Advance or Servicing Advance if in the good faith judgment and sole
discretion of the Master Servicer, the Master Servicer determines that such
advance will not be ultimately recoverable from collections received from the
Mortgagor in respect of the related Mortgage Loan or other recoveries in respect
of such Mortgage Loan (a "Nonrecoverable Advance"). However, if any Servicing
Advance or Monthly Advance made by the Master Servicer is determined by the
Master Servicer to be nonrecoverable from such sources, the amount of such
Nonrecoverable Advance may be reimbursed to the Master Servicer from other
amounts on deposit in the Collection Account.
DISTRIBUTION DATES
On each Distribution Date, the holders of the Class A Certificates will be
entitled to receive, from amounts then on deposit in the Distribution Account,
to the extent of funds available therefor in accordance with the priorities and
in the amounts described below under "Priority of Distributions," an aggregate
amount equal to the sum of (a) the Class Interest Distribution for (as defined
herein) each Class of Class A Certificates and (b) the Class A Principal
Distribution. Distributions will be made (i) in immediately available funds to
holders of Class A Certificates holding Certificates, the aggregate principal
balance of which is at least $1,000,000, by wire transfer or otherwise, to the
account of such Certificateholder at a domestic bank or other entity having
appropriate facilities therefor, if such Certificateholder has so notified the
Trustee in accordance with the Agreement, or (ii) by check mailed to the address
of the person entitled thereto as it appears on the register (the "Certificate
Register") maintained by the Trustee as registrar (the "Certificate Registrar").
DEPOSITS TO THE DISTRIBUTION ACCOUNT
No later than the second Business Day prior to each Distribution Date, the
following amounts in respect of the previous Due Period shall be deposited into
the Distribution Account and shall constitute the "Available Funds" for such
Distribution Date: (i) 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);
(ii) 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); (iii) the Purchase Price for repurchased Defective Mortgage
Loans with respect to the Mortgage Loans and any related Substitution Adjustment
Amounts; (iv) payments from the Master Servicer in connection with (a) Monthly
Advances, (b) Prepayment Interest Shortfalls, (c) Net Simple Interest Shortfalls
and (d) the termination of the Trust with respect to the Mortgage Loans as
provided in the Agreement; and (v) any amounts paid under the Policy.
PRIORITY OF DISTRIBUTIONS
On each Distribution Date the Trustee shall withdraw from the Distribution
Account the Available Funds, and make the following disbursements and transfers
as described below and to the extent of Available Funds (except that amounts
paid under the Policy shall only be available for distribution to Class A
Certificateholders):
(i) to the Trustee, the Trustee fee for such Distribution Date and to
the Certificate Insurer, the amount owing to the Certificate Insurer under
the Insurance Agreement for the premium;
(ii) concurrently to the holders of the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates,
Class A-5 Certificates, Class A-6 Certificates and Class A-7 Certificates,
an amount equal to the related Class Interest Distribution for the
Class A-1 Certificates, Class A-2 Certificates, Class A-3 Certificates,
Class A-4 Certificates, Class A-5 Certificates, Class A-6 Certificates and
Class A-7 Certificates for such Distribution Date;
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(iii) to the holders of the Class A Certificates then entitled to
distributions of principal as set forth below, an amount equal to the
Class A Principal Distribution Amount (other than the portion thereof
representing Distributable Excess Spread) for such Distribution Date
concurrently as follows:
(a) to the holders of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates and Class A-6 Certificates, such group of Classes' PRO RATA
share (based on the aggregate of the Class Principal Balances immediately
prior to such Distribution Date of all such Classes of Class A
Certificates) of the amount distributable pursuant to this clause (iii)
as follows:
(1) to the Class A-6 Certificateholders, the Class A-6 Principal
Distribution Amount; and
(2) any amount remaining after the distribution in clause (1)
above, sequentially, to the holders of the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4
Certificates, Class A-5 Certificates and Class A-6 Certificates, in
that order, until the Class A Principal Balance of each such
Class of Class A Certificates has been reduced to zero;
(b) to the holders of the Class A-7 Certificates, such Class's PRO
RATA share (based on the Class Principal Balance immediately prior to
such Distribution Date of such Class of Class A Certificates) of the
amount distributable pursuant to this clause (iii);
(iv) to the Certificate Insurer, the amount owing to the Certificate
Insurer under the Insurance Agreement for reimbursement for prior draws made
on the Policy;
(v) to the extent of Available Funds remaining, the Distributable Excess
Spread for such Distribution Date shall be distributed concurrently as
follows;
(a) to the holders of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates and Class A-6 Certificates, such group of Classes' PRO RATA
share (based on the aggregate Class Principal Balances immediately prior
to such Distribution Date of all such Classes of Class A Certificates) of
the amount distributable pursuant to this clause (v) as follows:
sequentially, to the holders of the Class A-1 Certificates, Class A-2
Certificates, Class A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates and Class A-6 Certificates, in that order, until the
respective Class A Principal Balance of each such Class is reduced to
zero; and
(b) to the holders of the Class A-7 Certificates, such Class's PRO
RATA share (based on the aggregate Class Principal Balance immediately
prior to such Distribution Date of such Class of Class A Certificates) of
the amount distributable pursuant to this clause (v);
(vi) to the Master Servicer, the amount of any accrued and unpaid
Servicing Fee;
(vii) to the Certificate Insurer, any other amounts owing to the
Certificate Insurer under the Insurance Agreement;
(viii) to the Master Servicer, the amount of Nonrecoverable Advances not
previously reimbursed; and
(ix) to the Class R Certificateholders, the balance.
So long as an Insurer Default has not occurred or is not continuing, the
Class A Principal Distribution on any Distribution Date will be allocated on a
PRO RATA basis between (1) the Class A-1 Certificates, Class A-2 Certificates,
Class A-3 Certificates, Class A-4 Certificates, Class A-5 Certificates and
Class A-6 Certificates and (2) the Class A-7 Certificates, in each case, as
described in subsections (iii) and (v) above. On each Distribution Date prior to
the Distribution Date in January 2004, the Class A-6 Principal Distribution
Amount will be zero. On any Distribution Date during the continuance of an
Insurer Default,
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the Class A Principal Distribution will be distributed to each Class of Class A
Certificates outstanding on a pro rata basis in accordance with the Class A
Principal Balance of each such Class immediately prior to such Distribution
Date.
THE CERTIFICATE RATE
The "Certificate Rate" on any Distribution Date with respect to: the
Class A-1 Certificates will be 7.26% per annum, the Class A-2 Certificates will
be 6.96% per annum, the Class A-3 Certificates will be 7.11% per annum, the
Class A-4 Certificates will be 7.32% per annum, the Class A-5 Certificates will
be 7.71% per annum, the Class A-6 Certificates will be 7.25% per annum and the
Class A-7 Certificates will be 7.31% per annum.
The "Interest Period" means, with respect to each Distribution Date and the
Class A Certificates, the period from the first day of the calendar month
preceding the month of such Distribution Date through the last day of such
calendar month. Interest on the Class A Certificates in respect of any
Distribution Date will accrue during the related Interest Period on the basis of
a 360-day year consisting of twelve 30-day months.
INTEREST
On each Distribution Date, to the extent of funds available therefor in
accordance with the priorities described above under "--Priority of
Distributions," interest will be distributed to each Class of Class A
Certificates in an amount equal to the related Class Interest Distribution. For
each Distribution Date and each Class of Class A Certificates, the "Class
Interest Distribution" is the sum of (a) interest at the related Certificate
Rate that accrued during the related Interest Period on the related Class A
Principal Balance, immediately prior to such Distribution Date less such Class'
pro rata share of any shortfalls in interest due to the application of the
Soliders' and Sailors' Civil Relief Act of 1940, as amended (the "Civil Relief
Act", and any such shortfall, a "Civil Relief Act Interest Shortfall") for such
Distribution Date (the "Class Monthly Interest Distributable Amount") and
(b) any Class Interest Carryover Shortfall. As to any Distribution Date and
Class of Class A Certificates, the "Class Interest Carryover Shortfall" is the
sum of (a) the excess of the sum of (A) the related Class Monthly Interest
Distributable Amount for the preceding Distribution Date and (B) any outstanding
Class Interest Carryover Shortfall with respect to such Class on such preceding
Distribution Date, over the amount in respect of interest that is actually
distributed to such Class on such preceding Distribution Date plus (b) interest
on such excess, to the extent permitted by law, at the related Certificate Rate
for the related Interest Period.
On each Distribution Date, the Class Interest Distribution for each Class of
Class A Certificates will be distributed on an equal priority and any shortfall
in the amount required to be distributed as interest thereon to each such
Class will be allocated between such Classes pro rata based on the amount which
would have been distributed to each such Class in the absence of such shortfall.
PRINCIPAL
On each Distribution 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 holders of Class A
Certificates then entitled to distributions of principal in an amount equal to
the lesser of (A) the Aggregate Class A Principal Balance and (B) the Class A
Principal Distribution Amount for such Distribution Date. "Class A Principal
Distribution Amount" means, with respect to any Distribution Date, the sum of
the Class A Monthly Principal Distributable Amount for such Distribution Date
and any Class A Principal Shortfall Amount for such Distribution Date.
"Class A Monthly Principal Distributable Amount" means, with respect to any
Distribution Date, to the extent of funds available therefor as described herein
the amount equal to the sum of the following
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amounts (without duplication) with respect to the immediately preceding Due
Period (as defined below): (i) each payment of principal on a Mortgage Loan
received by the Master Servicer during such Due Period, including all full and
partial principal prepayments, (ii) the Principal Balance as of the end of the
immediately preceding Due Period of each Mortgage Loan that became a Liquidated
Mortgage Loan for the first time during the related Due Period, (iii) the
portion of the Purchase Price allocable to principal of all repurchased
Defective Mortgage Loans with respect to such Due Period, (iv) any Substitution
Adjustment Amounts received on or prior to the previous Determination Date and
not yet distributed and (v) the amount, if any, required to be distributed on
such Distribution Date to satisfy the required level of overcollateralization
for such Distribution Date (the "Distributable Excess Spread").
"Class A Principal Shortfall Amount" means for any Distribution Date, the
amount, if any, by which the Aggregate Class A Principal Balance exceeds the
Pool Principal Balance at the end of the related Due Period after giving effect
to all distributions of amounts on deposit in the Distribution Account available
to pay the Class A Monthly Principal Distributable Amount (exclusive of
Distributable Excess Spread) and draws under the Policy for such Distribution
Date.
"Class A-6 Principal Distribution Amount" for any Distribution Date will be
the product of (i) the applicable Class A-6 Principal Payment Percentage for
such Distribution Date and (ii) the Class A-6 Pro Rata Principal Distribution
Amount for such Distribution Date. In no event shall the Class A-6 Principal
Distribution Amount exceed the Class A-6 Principal Balance.
"The Class A-6 Principal Payment Percentage" for each Distribution Date
shall be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATES CLASS A-6 PRINCIPAL PAYMENT PERCENTAGE
------------------ --------------------------------------
<S> <C>
January 2001-December 2003........... 0%
January 2004-December 2005........... 45%
January 2006-December 2006........... 80%
January 2007-December 2007........... 100%
January 2008 and thereafter.......... 300%
</TABLE>
The "Class A-6 Pro Rata Principal Distribution Amount" for any Distribution
Date will be an amount equal to the product of (x) a fraction, the numerator of
which is the Class A Principal Balance of the Class A-6 Certificates immediately
prior to such Distribution Date and the denominator of which is the Aggregate
Class A Principal Balance immediately prior to such Distribution Date and (y)
the amount to be distributed on such Distribution Date as described in
subsection (iii) under "--Priority of Distributions" above.
If the required level of overcollateralization is reduced below the then
existing amount of overcollateralization (described below) or if the required
level of overcollateralization is satisfied, the amount of the Class A Monthly
Principal Distributable Amount will be correspondingly reduced by the amount of
such reduction or by the amount necessary such that the overcollateralization
will not exceed the required level of overcollateralization after giving effect
to the distribution in respect of principal to be made on such Distribution
Date.
The application of Excess Spread as described below is intended to create
overcollateralization to provide a source of additional cashflow to cover losses
on the Mortgage Loans. A draw on the Policy in respect of principal will not be
made until the Aggregate Class A Principal Balance exceeds the Pool Principal
Balance. See "--The Policy" herein. Accordingly, there may be Distribution Dates
on which Class A Certificateholders receive little or no distributions in
respect of principal.
On each Distribution Date, net losses realized in respect of Liquidated
Mortgage Loans (to the extent such amount is not covered by Available Funds)
will reduce the amount of overcollateralization, if any.
"Due Period" means, with respect to any Determination Date or Distribution
Date, the calendar month immediately preceding such Determination Date or
Distribution Date, as the case may be.
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A "Liquidated Mortgage Loan" as to any Distribution Date, is a Mortgage Loan
with respect to which the Master Servicer has determined, in accordance with the
servicing procedures specified in the 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. "Liquidation Proceeds" with
respect to a Mortgage Loan are the proceeds received in connection with the
liquidation of any Mortgage Loan. With respect to a Mortgage Loan, "Net
Liquidation Proceeds" are the excess of Liquidation Proceeds over the expenses
associated with the related liquidation.
"Excess Spread" means, with respect to any Distribution Date, the positive
excess, if any, of (x) Available Funds for such Distribution Date over (y) the
portion thereof required to be distributed pursuant to subclauses (i) through
(iv) as set forth under the heading "--Priority of Distributions" on such
Distribution Date.
An "Insurer Default" will occur in the event the Certificate Insurer fails
to make a payment required under the Policy or if certain events of bankruptcy
or insolvency occur with respect to the Certificate Insurer.
THE POLICY
The following information has been supplied by the Certificate Insurer for
inclusion in this Prospectus Supplement. Accordingly, the Depositor does not
make any representation as to the accuracy and completeness of such information.
The Certificate Insurer, in consideration of the payment of the premium and
subject to the terms of the Policy, thereby unconditionally and irrevocably
guarantees to any Owner that an amount equal to each full and complete Insured
Payment will be received by the Trustee, or its successor, as trustee for the
Owners (the "Trustee"), on behalf of the Owners from the Certificate Insurer,
for distribution by the Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. The Certificate Insurer's obligations under the
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
Trustee, whether or not such funds are properly applied by the Trustee. Insured
Payments shall be made only at the time set forth in the Policy and no
accelerated Insured Payments shall be made regardless of any acceleration of the
Class A Certificates, unless such acceleration is at the sole option of the
Certificate Insurer.
Notwithstanding the foregoing paragraph, the Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, the REMIC or the
Trustee for withholding taxes, if any (including interest and penalties in
respect of any such liability).
The Certificate Insurer will pay any Insured Payment that is a Preference
Amount on the Distribution Date next following receipt on a Business Day of
(i) a certified copy of the order requiring the return of a preference payment,
(ii) an opinion of counsel satisfactory to the Certificate Insurer that such
order is final and not subject to appeal, (iii) an assignment in such form as is
reasonably required by the Certificate Insurer, irrevocably assigning to the
Certificate Insurer all rights and claims of the Owner relating to or arising
under the Class A Certificates against the debtor which made such preference
payment or otherwise with respect to such preference payment and
(iv) appropriate instruments to effect the appointment of the Certificate
Insurer as agent for such Owner in any legal proceeding related to such
preference payment, such instruments being in a form satisfactory to the
Certificate 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 Class A Certificates to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
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The Certificate Insurer will pay any other amount payable under the Policy
no later than 12:00 noon New York City time on the later of the Distribution
Date on which the related Deficiency Amount is due or the second Business Day
following receipt of a Notice (as described below); provided that if such Notice
is received after 12:00 noon New York City time on such Business Day, it will be
deemed to be received on the following Business Day. If any such Notice given
under the Policy is not in proper form or is otherwise insufficient for the
purpose of making claim under the Policy it shall be deemed not to have been
received for purposes of this paragraph, and the Certificate Insurer shall
promptly so advise the Trustee and the Trustee may submit an amended Notice.
Insured Payments due under the Policy unless otherwise stated therein will
be disbursed to the 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 Trustee for the payment of such Insured Payment and legally available
therefor.
As used in the Policy, the following terms shall have the following
meanings:
"AGREEMENT" means the Pooling and Servicing Agreement, dated as of
November 1, 2000, among the Depositor, the Seller, and Master Servicer and
the Trustee, as trustee, without regard to any amendment or supplement
thereto unless such amendment or supplement has been approved in writing by
the Certificate Insurer.
"BUSINESS DAY" means any day other than (i) a Saturday, a Sunday or
(ii) a day on which the Certificate Insurer or banking institutions in New
York City, Boston, Massachusetts, Pennsylvania or the city in which the
corporate trust office of the Trustee under the Agreement is located are
authorized or obligated by law or executive order to close.
"DEFICIENCY AMOUNT" means for any Distribution Date, the sum of (A) the
excess, if any, of (i) the Class Monthly Interest Distributable Amount for
each Class of Class A Certificates plus any Class Interest Carryover
Shortfall for each Class of Class A Certificates over (ii) funds on deposit
in the Distribution Account available to be distributed therefor on such
Distribution Date (less the Trustee Fee, the premium payable to the
Certificate Insurer and any undistributed preference amounts) and (B) the
Guaranteed Principal Amount.
"GUARANTEED PRINCIPAL AMOUNT" means (a) for any Distribution Date (other
than the Distribution Date in December 2030) the amount, if any, by which
the Aggregate Class A Principal Balance exceeds the Pool Principal Balance
at the end of the previous month (after giving effect to all distributions
of principal on the Class A Certificates on such Distribution Date) and
(b) on the Distribution Date in December 2030 (after giving effect to all
other distributions of principal on the Class A Certificates on such
Distribution Date), an amount equal to the Aggregate Class A Principal
Balance.
"INSURED PAYMENT" means as of any Distribution Date, (i) any Deficiency
Amount and (ii) any Preference Amount.
"NOTICE" means the telephonic or telegraphic notice, promptly confirmed
in writing by facsimile, substantially in the form of Exhibit A attached to
the Policy, the original of which is subsequently delivered by registered or
certified mail, from the Trustee specifying the Insured Payment which shall
be due and owing on the applicable Distribution Date.
"OWNER" means each Certificateholder (as defined in the Agreement) who,
on the applicable Distribution Date, is entitled under the terms of the
applicable Class A Certificates to payment thereunder.
"PREFERENCE AMOUNT" means any amount previously distributed to an Owner
on the Class A Certificates that is deemed to be preferential transfer and
is therefore recoverable and sought to be recovered as a voidable preference
by a trustee in bankruptcy pursuant to the United States
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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.
Capitalized terms used in the Policy and not otherwise defined in the Policy
shall have the respective meanings set forth in the Agreement as of the date of
execution of the Policy, without giving effect to any subsequent amendment or
modification to the Agreement unless such amendment or modification has been
approved in writing by the Certificate Insurer.
The 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 Policy is not covered by the Property/Casualty
Insurance Security Fund specified in Article 76 of the New York Insurance Law.
The Policy is not cancelable for any reason. The premium on the Policy is
not refundable for any reason including payment, or provision being made for
payment, prior to the maturity of the Class A Certificates.
OVERCOLLATERALIZATION PROVISIONS
The Agreement requires that, on each Distribution Date, the Excess Spread
may be applied on such Distribution Date as an accelerated payment of principal
on the Class or Classes of Class A Certificates then entitled to a distribution
as described in clause (v) under the heading "--Priority of Distributions"
above. This has the effect of accelerating the amortization of the Class A
Certificates relative to the amortization of the Mortgage Loans.
The required level of overcollateralization will be satisfied as of each
Distribution Date when the aggregate of the Principal Balances of the Mortgage
Loans at the end of the related Due Period exceeds the related Aggregate
Class A Principal Balance by an amount specified in the 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 Agreement. In addition, the required level of
overcollateralization may be decreased, in the sole discretion of the
Certificate Insurer and with the prior consent of each Rating Agency, as low as
zero, which would have the effect of reducing the amortization of the Class A
Certificates below what it otherwise would have been.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution to the Certificateholders, the Trustee
will forward each Certificateholder a statement, based upon information
furnished by the Master Servicer, setting forth among other items with respect
to each Distribution Date:
(i) the aggregate amount of the distribution to each Class of
Certificateholders on such Distribution Date;
(ii) the amount of distribution set forth in paragraph (i) above in
respect of interest and the amount thereof in respect of any Class Interest
Carryover Shortfall, and the amount of any Class Interest Carryover
Shortfall remaining;
(iii) the amount of distribution set forth in paragraph (i) above in
respect of principal and the amount thereof in respect of the Class A
Principal Shortfall Amount, and any remaining Class A Principal Shortfall
Amount;
(iv) the amount of Excess Spread and the amount applied as a
distribution of Distributable Excess Spread on the Certificates;
(v) the Guaranteed Principal Amount for such Distribution Date;
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(vi) the amount paid under the Policy for such Distribution Date in
respect of the Class Interest Distribution to each Class of Certificates;
(vii) the Servicing Fee;
(viii) the Pool Principal Balance as of the close of business on the
last day of the preceding Due Period;
(ix) the Aggregate Class A Principal Balance after giving effect to
payments allocated to principal above;
(x) the amount of overcollateralization as of the close of business on
the Distribution Date, after giving effect to distributions of principal on
such Distribution Date;
(xi) the number and aggregate Principal Balances of the Mortgage Loans
as to which the minimum monthly payment is delinquent for 30-59 days, 60-89
days and 90 or more days, respectively, as of the end of the preceding Due
Period;
(xii) the book value of any real estate which is acquired by the Trust
through foreclosure or grant of deed in lieu of foreclosure;
(xiii) the aggregate amount of prepayments received on the Mortgage
Loans during the previous Due Period; and
(xiv) the weighted average Loan Rate on the Mortgage Loans as of the
first day of the month prior to the Distribution Date.
In the case of information furnished pursuant to clauses (ii) and
(iii) above, the amounts shall be expressed as a dollar amount per Certificate
with a $1,000 denomination.
Within 60 days after the end of each calendar year, the Trustee will forward
to each Person, if requested in writing by such Person, who was a
Certificateholder during the prior calendar year a statement containing the
information set forth in clauses (ii) and (iii) above aggregated for such
calendar year.
The Trustee may make available the monthly Trustee's Remittance Report
through its Corporate Trust home page on the internet, which is located at
"corporatetrust.statestreet.com." Information can be accessed by clicking the
"Investor Information & Reporting" button and selecting the appropriate
transaction. In addition, if the Depositor so directs the Trustee, and on terms
acceptable to the Trustee, the Trustee may make certain other information and
reports related to the Mortgage Loans and the Trust available through its
Corporate Trust home page.
LAST SCHEDULED DISTRIBUTION DATE
The last scheduled Distribution Date for each Class of Class A Certificates
is excepted to be as follows:
<TABLE>
<CAPTION>
DISTRIBUTION DATE
CLASS IN
----- -----------------
<S> <C>
A-1........................................................ February 2015
A-2........................................................ February 2015
A-3........................................................ February 2015
A-4........................................................ October 2022
A-5........................................................ December 2030
A-6........................................................ February 2015
A-7........................................................ December 2030
</TABLE>
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It is expected that the actual last Distribution Date for each Class of
Class A Certificates will occur significantly earlier than such last scheduled
Distribution Dates. See "PREPAYMENT AND YIELD CONSIDERATIONS."
Such last scheduled Distribution Dates for the Class A-1 Certificates,
Class A-2 Certificates, Class A-3 Certificates, Class A-4 Certificates,
Class A-6 Certificates and Class A-7 Certificates are based on a 0% Prepayment
Assumption with the assumption that no Distributable Excess Spread is used to
make accelerated payments of principal to the holders of the related Class A
Certificates and the assumptions set forth above under "PREPAYMENT AND YIELD
CONSIDERATIONS--Weighted Average Lives." The last scheduled Distribution Date
for the Class A-5 Certificates has been calculated assuming that the Certificate
Insurer makes the payment of the outstanding Aggregate Class A Principal Balance
on the Distribution Date in December 2030.
COLLECTION AND OTHER SERVICING PROCEDURES ON MORTGAGE LOANS
The Master Servicer will make reasonable efforts to collect all payments
called for under the Mortgage Loans and will, consistent with the Agreement,
follow such collection procedures as it follows from time to time with respect
to the home equity loans in its servicing portfolio comparable to the Mortgage
Loans. Consistent with the above, the Master 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 Master 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 Master Servicer's
policies with respect to the home equity mortgage loans it owns or services.
With respect to Mortgage Loans that are junior in priority to a first lien on a
Mortgaged Property, the Master Servicer has the power under certain
circumstances to consent to a new mortgage lien on such Mortgaged Property
having priority over such Mortgage Loan in connection with the refinancing of
such first lien.
HAZARD INSURANCE
The Master Servicer will not monitor whether or not the related obligor
under a Mortgage Loan maintains, or cause any obligor to maintain, fire and
hazard insurance with extended coverage customary in the area where the
Mortgaged Property is located. The Master Servicer has obtained a blanket policy
insuring against fire and hazards of extended coverage on all of the Mortgage
Loans and has named the Master Servicer and the Trust as loss payees. The
insurance carrier has the right to cancel such policy at any time. In the event
of any such cancellation, the Master Servicer will use commercially reasonable
efforts to obtain a comparable insurance policy at comparable cost. See "RISK
FACTORS--Master Servicer does not Monitor Maintenance of Hazard Insurance."
REALIZATION UPON DEFAULTED MORTGAGE LOANS
The Master Servicer will foreclose upon or otherwise comparably convert to
ownership Mortgaged Properties securing such of the Mortgage Loans as come into
default when, in accordance with applicable servicing procedures under the
Agreement, no satisfactory arrangements can be made for the collection of
delinquent payments. In connection with such foreclosure or other conversion,
the Master Servicer will follow such practices as it deems necessary or
advisable and as are in keeping with its general mortgage servicing activities,
provided the Master 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 Master Servicer will be reimbursed out of Liquidation
Proceeds for advances of its own funds as liquidation expenses before any Net
Liquidation Proceeds are distributed to Certificateholders.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Due Period, the Master Servicer will receive from
interest payments in respect of the Mortgage Loans a portion of such interest
payments as a monthly servicing fee (the "Servicing Fee") in the amount equal to
0.50% per annum (the "Servicing Fee Rate") on the Principal Balance of each
Mortgage Loan as of the first day of each such Due Period. All assumption fees,
late payment charges, net Simple Interest Excess for such Due Period and other
fees and charges, to the extent collected from borrowers, will be retained by
the Master Servicer as additional servicing compensation.
The Master 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 Master Servicer from the
related Mortgagor or otherwise relating to the Mortgage Loan in respect of which
such unreimbursed amounts are owed. The Master Servicer's 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 Master Servicer's right to such reimbursements
is prior to the rights of Certificateholders. However, if any Servicing Advance
or Monthly Advance is determined by the Master Servicer to be non-recoverable
from such sources, the amount of such non-recoverable advances may be reimbursed
to the Master Servicer from other amounts on deposit in the Collection Account.
Not later than two Business Days prior to each Distribution Date, the Master
Servicer is required to remit to the 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 Civil Relief Act,
or as a result of any reduction of the monthly payment due on such Mortgage Loan
as a result of a bankruptcy proceeding (a "Debt Service Reduction")), 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 Servicing Fee for the most recently ended Due Period.
If less than a full month has elapsed between the interest paid to date and
the next payment on a Simple Interest Loan, the amount of interest actually paid
by the Mortgagor will be less than a full month's interest on the Principal
Balance of such Mortgage Loan (any such shortfall, a "Simple Interest
Shortfall"). Conversely, if more than a full month has elapsed between the
interest paid to date and the next payment on a Simple Interest Loan, the amount
of interest actually paid by the Mortgagor will be greater than a full month's
interest on the Principal Balance of such Mortgage Loan (any such excess, a
"Simple Interest Excess"). To the extent that, for any Due Period, the aggregate
of Simple Interest Shortfalls exceeds the aggregate of Simple Interest Excesses,
a "Net Simple Interest Shortfall" will result.
In addition, after applying the Servicing Fee to cover any Prepayment
Interest Shortfalls with respect to a Due Period, the Master Servicer shall
apply any remaining Servicing Fee to cover any Net Simple Interest Shortfall
with respect to that Due Period by remitting such amount to the Trustee (with no
right of reimbursement).
The Servicing Fee will not be reduced to cover shortfalls in interest
collections resulting from partial prepayments on the Mortgage Loans, Debt
Service Reductions or the application of the Civil Relief Act.
EVIDENCE AS TO COMPLIANCE
The Agreement provides for delivery on or before the last day of the fifth
month following the end of the Master Servicer's fiscal year, beginning in 2001,
to the Trustee, the Depositor, the Certificate Insurer and the Rating Agencies
of an annual statement signed by an officer of the Master Servicer to the effect
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that the Master Servicer has fulfilled its material obligations under the
Agreement throughout the preceding fiscal year, except as specified in such
statement.
On or before the last day of the fifth month following the end of the Master
Servicer's fiscal year, beginning in 2001, the Master Servicer will furnish a
report prepared by a firm of nationally recognized independent public
accountants (who may also render other services to the Master Servicer or the
Depositor) to the Trustee, the Depositor, the Certificate 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 Master Servicer's fiscal year ends on December 31.
CERTAIN MATTERS REGARDING THE DEPOSITOR, SELLER AND MASTER SERVICER
The Agreement provides that the Master Servicer may not resign from its
obligations and duties thereunder, except in connection with a permitted
transfer of servicing, unless (i) such duties and obligations are no longer
permissible under applicable law as evidenced by an opinion of counsel delivered
to the Certificate Insurer or (ii) upon the satisfaction of the following
conditions: (a) the Master Servicer has proposed a successor servicer to the
Trustee in writing and such proposed successor servicer is reasonably acceptable
to the Trustee; (b) the Rating Agencies have confirmed to the Trustee that the
appointment of such proposed successor servicer as the Master Servicer will not
result in the reduction or withdrawal of the then current rating of the
Certificates; and (c) such proposed successor servicer is reasonably acceptable
to the Certificate Insurer. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's obligations
and duties under the Agreement.
The Master Servicer may perform any of its duties and obligations under the
Agreement through one or more subservicers or delegates, which may be affiliates
of the Master Servicer. Notwithstanding any such arrangement, the Master
Servicer will remain liable and obligated to the Trustee and the
Certificateholders for the Master Servicer's duties and obligations under the
Agreement, without any diminution of such duties and obligations and as if the
Master Servicer itself were performing such duties and obligations. Initially,
MLN is expected to act as the subservicer with respect to the Mortgage Loans.
The Agreement provides that the Master Servicer will indemnify the Trust and
the Trustee from and against, among other things, any loss, liability, expense,
damage or injury suffered or sustained as a result of the Master Servicer's
willful misconduct, bad faith or negligence in connection with the servicing and
administration of the Mortgage Loans. The Agreement provides that neither the
Depositor, the Seller nor the Master Servicer nor their directors, officers,
employees or agents will be under any other liability to the Trust, the Trustee,
the Certificateholders or any other person for any action taken or for
refraining from taking any action pursuant to the Agreement. However, neither
the Depositor, the Seller nor the Master Servicer will be protected against any
liability which would otherwise be imposed by reason of willful misconduct, bad
faith or gross negligence of the Depositor, the Seller or the Master Servicer,
as the case may be, in the performance of its duties under the Agreement or by
reason of reckless disregard of its obligations thereunder. In addition, the
Agreement provides that the Master Servicer will not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
servicing responsibilities under the Agreement. The Master Servicer and any
director or officer or employee or agent of the Master Servicer shall be
indemnified by the Trust against a loss, liability or expense incurred in
connection with any legal action relating to the Agreement or the Certificates,
other than 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 Agreement) and any loss, liability or expense
incurred by reason of its willful misfeasance, bad faith or negligence in the
performance of its duties under the Agreement or by reason of its reckless
disregard of obligations and duties under the Agreement. The
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Master Servicer may, in its sole discretion, undertake any such legal action
which it may deem necessary or desirable with respect to the Agreement and the
rights and duties of the parties thereto and the interest of the
Certificateholders thereunder.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer shall be a party, or any corporation
succeeding to the business of the Master Servicer shall be the successor of the
Master Servicer under the Agreement, without the execution or filing of any
paper or any further act on the part of any of the parties to the Agreement,
anything in the Agreement to the contrary notwithstanding.
EVENTS OF DEFAULT
"Events of Default" will consist of: (i) (A) any failure by the Master
Servicer to make any required Monthly Advance or (B) any other failure of the
Master Servicer to deposit in the Collection Account or Distribution Account any
deposit required to be made under the Agreement, which other failure continues
unremedied for two Business Days after the giving of written notice of such
failure to the Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or Certificateholders holding Certificates
evidencing a Percentage Interest in the Trust of at least 25%; (ii) any failure
by the Master Servicer duly to observe or perform in any material respect any
other of its covenants or agreements in the Agreement which continues unremedied
for 30 days after the giving of written notice of such failure to the Master
Servicer by the Trustee, or to the Master Servicer and the Trustee by the
Certificate Insurer or any Certificateholders holding Certificates evidencing a
Percentage Interest in the Trust of at least 25%; (iii) any failure by the
Master 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 Master Servicer by the Trustee, or to the Master Servicer and the
Trustee by the Certificate Insurer or any Certificateholders holding
Certificates evidencing a Percentage Interest in the Trust of at least 25%; (iv)
certain events of insolvency, readjustment of debt, marshalling of assets and
liabilities or similar proceedings relating to the Master Servicer and certain
actions by the Master Servicer indicating insolvency, reorganization or
inability to pay its obligations (an "Insolvency Event"); (v) so long as the
Seller is an affiliate of the Master 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 Agreement;
(vi) the loss and delinquency performance of the Mortgage Loans exceeding
certain levels specified in the Agreement; and (vii) failure to meet certain
regulatory capital requirements.
RIGHTS UPON AN EVENT OF DEFAULT
So long as an Event of Default remains unremedied, either the Trustee,
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, with the consent of the Certificate Insurer,
or the Certificate Insurer may terminate all of the rights and obligations of
the Master Servicer under the Agreement and in and to the Mortgage Loans,
whereupon the Trustee will succeed to all the responsibilities, duties and
liabilities of the Master Servicer under the Agreement and will be entitled to
similar compensation arrangements. In the event that the Trustee would be
obligated to succeed the Master 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 Agreement and having a net worth of at least $50,000,000
and acceptable to the Certificate Insurer to act as successor to the Master
Servicer under the Agreement. Pending such appointment, the Trustee will be
obligated to act in such capacity unless prohibited by law. Such successor will
be entitled to receive the same compensation that the Master Servicer would
otherwise have received (or such lesser compensation as the Trustee and such
successor may agree). A receiver or conservator for the Master Servicer may be
empowered to prevent the termination and replacement of the Master Servicer if
the only Event of Default that has occurred is an Insolvency Event.
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AMENDMENT
The Agreement may be amended from time to time by the Seller, the Master
Servicer, the Depositor and the Trustee and with the consent of the Certificate
Insurer, but without the consent of the Certificateholders, to cure any
ambiguity, to correct or supplement any provisions therein which may be
inconsistent with any other provisions of the Agreement, to add to the duties of
the Depositor or the Master Servicer to comply with any requirements imposed by
the Internal Revenue Code or any regulation thereunder, or to add or amend any
provisions of the Agreement as required by the Rating Agencies in order to
maintain or improve any rating of the Class A Certificates (it being understood
that, after obtaining the ratings in effect on the Closing Date, neither the
Depositor, the Seller, the Trustee, the Certificate Insurer nor the Master
Servicer is obligated to obtain, maintain, or improve any such rating) or to add
any other provisions with respect to matters or questions arising under the
Agreement which shall not be inconsistent with the provisions of the Agreement,
provided that such action will not, as evidenced by an opinion of counsel,
materially and adversely affect the interests of any Certificateholder or the
Certificate Insurer; provided, that any such amendment will not be deemed to
materially and adversely affect the Certificateholders and no such opinion will
be required to be delivered if the person requesting such amendment obtains a
letter from the Rating Agencies stating that such amendment would not result in
a downgrading of the then current rating of the Class A Certificates. The
Agreement may also be amended from time to time by the Seller, the Master
Servicer, the Depositor, and the Trustee, with the consent of Certificateholders
evidencing at least 51% of the Percentage Interests of each Class affected
thereby (or 51% of the Percentage Interests of all Classes if all Classes are
affected) and the Certificate Insurer for the purpose of adding any provisions
to or changing in any manner or eliminating any of the provisions of the
Agreement or of modifying in any manner the rights of the Certificateholders,
provided that no such amendment will (i) reduce in any manner the amount of, or
delay the timing of, collections of payments on the Certificates or
distributions or payments under the Policy which are required to be made on any
Certificate without the consent of the Certificateholder or (ii) reduce the
aforesaid percentage required to consent to any such amendment, without the
consent of the holders of all Class A Certificates then outstanding.
Notwithstanding the foregoing, the provisions of the Agreement relating to
overcollateralization may be modified such that the required
overcollateralization may be reduced or eliminated by the Certificate Insurer
without the consent of the Certificateholders so long as an Insurer Default does
not exist.
TERMINATION; PURCHASE OF MORTGAGE LOANS
The Trust will terminate on the Distribution Date following the later of
(A) payment in full of all amounts owing to the Certificate Insurer unless the
Certificate Insurer shall otherwise consent and (B) the earliest of (i) the
Distribution Date on which the Aggregate Class A Principal Balance has been
reduced to zero, (ii) the final payment or other liquidation of the last
Mortgage Loan in the Trust, (iii) the optional purchase by the Class R
Certificateholder of the Mortgage Loans, as described below, and (iv) the
Distribution Date on which the Policy will be available to pay the outstanding
Aggregate Class A Principal Balance.
Subject to provisions in the Agreement concerning adopting a plan of
complete liquidation, the Class R Certificateholder may, at its option,
terminate the Agreement on any date on which the Pool Principal Balance is less
than 5% of the Cut-Off Date Principal Balance of all the Mortgage Loans by
purchasing, on the next succeeding Distribution Date, all of the outstanding
Mortgage Loans at a price equal to the outstanding Pool Principal Balance
(subject to reduction as provided in the Agreement if the purchase price is
based in part on the appraised value of any REO Property included in the Trust
and such appraised value is less than the Principal Balance of the related
Mortgage Loan) and accrued and unpaid interest thereon at the weighted average
of the Loan Rates through the end of the Due Period preceding the final
Distribution Date together with all amounts due and owing to the Certificate
Insurer (such amount, the "Termination Price"). If the Termination Price is
reduced because it is based in part on the appraised value of REO Property in
the Trust and the Certificate Insurer fails to perform its obligation
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under the Policy, the Termination Price to be distributed to Certificateholders
on the final Distribution Date may be insufficient to pay the outstanding Class
Principal Balance of each Class A Certificate and accrued and unpaid interest
thereon. To the extent the Class R Certificateholder does not exercise its
option to terminate the Agreement as described above, the Certificate Insurer
shall have the right to terminate the Agreement at the Termination Price. Any
such purchase shall be accomplished by deposit into the Distribution Account of
the purchase price specified above.
OPTIONAL PURCHASE OF DEFAULTED MORTGAGE LOANS
The Master Servicer has the option, but is not obligated, to purchase from
the Trust any Mortgage Loan 90 days or more delinquent at the Purchase Price, up
to a maximum of 5% of the original Pool Principal Balance.
THE TRUSTEE
State Street Bank and Trust Company, a Massachusetts trust company, has been
named Trustee pursuant to the Agreement.
The Trustee may have normal banking relationships with the Depositor, the
Seller and the Master Servicer.
The Trustee may resign at any time, in which event the Depositor will be
obligated to appoint a successor Trustee, as approved by the Certificate Insurer
and the Master Servicer. The Depositor and, in certain instances, the Master
Servicer may also remove the Trustee if the Trustee ceases to be eligible to
continue as such under the Agreement or if the Trustee becomes insolvent. Upon
becoming aware of such circumstances, the Depositor will be obligated to appoint
a successor Trustee, as approved by the Certificate Insurer and the Master
Servicer (such Master Servicer approval not to be unreasonably withheld). Any
resignation or removal of the Trustee and appointment of a successor Trustee
will not become effective until acceptance of the appointment by the successor
Trustee.
No holder of a Certificate will have any right under the Agreement to
institute any proceeding with respect to the Agreement unless such holder
previously has given to the Trustee written notice of default and unless
Certificateholders holding Certificates evidencing at least 51% of the
Percentage Interests in the Trust, have made written requests upon the Trustee
to institute such proceeding in its own name as Trustee thereunder and have
offered to the Trustee reasonable indemnity and the Trustee for 60 days has
neglected or refused to institute any such proceeding. The Trustee will be under
no obligation to exercise any of the trusts or powers vested in it by the
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Trustee reasonable security or indemnity
against the cost, expenses and liabilities which may be incurred therein or
thereby.
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DESCRIPTION OF THE PURCHASE AGREEMENT
The Mortgage Loans to be transferred to the Trust by the Depositor will be
purchased by the Depositor from Sovereign Bank (in such capacity, the "Seller")
pursuant to the mortgage loan purchase agreement to be entered into between the
Depositor, as purchaser of the Mortgage Loans, and the Seller, as seller of the
Mortgage Loans (the "Purchase Agreement"). Under the Purchase Agreement, the
Seller will agree to transfer the Mortgage Loans to the Depositor. Pursuant to
the Agreement, the Mortgage Loans will be immediately transferred by the
Depositor to the Trust, and the Depositor will assign its rights in, to and
under the Purchase Agreement, to the Trust.
In the Purchase Agreement the Seller will make representations and
warranties similar to those representations and warranties made by the Seller in
the Agreement. In the event of a breach of any such representations and
warranties which has a material adverse effect on the interests of the
Certificateholders or the Certificate Insurer, the Seller will be required to
repurchase or substitute for the Mortgage Loans as described herein under
"DESCRIPTION OF THE CERTIFICATES--Assignment of Mortgage Loans."
The Seller has also agreed to indemnify the Depositor and the Trust from and
against certain losses, liabilities and expenses (including reasonable
attorneys' fees) suffered or sustained pursuant to the Purchase Agreement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Trustee or the Master Servicer may file reports or other documents, on
behalf of the Trust, pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended. Those reports or documents filed
after the date of this Prospectus and Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates are deemed incorporated
by reference into and a part of this Prospectus and Prospectus Supplement. You
should read each of the Prospectus Supplement and the Prospectus. Any statement
in this document or in a document deemed to be incorporated by reference shall
be deemed to be modified or superseded for purposes of this Prospectus and
Prospectus Supplement to the extent that a statement contained in any other
subsequently filed document which is also deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
part of this Prospectus and Prospectus Supplement.
USE OF PROCEEDS
The net proceeds to be received from the sale of the Certificates will be
applied by the Depositor towards the purchase of the Mortgage Loans from the
Seller.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
An election will be made to treat the Trust as a "real estate mortgage
investment conduit" ("REMIC") for federal income tax purposes under the Internal
Revenue Code of 1986, as amended (the "Code"). In the opinion of Brown & Wood
LLP, counsel to the Trust and the Underwriters, the Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates (the
"Residual Certificates") will constitute the sole class of residual interests in
the REMIC. See "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the REMIC
and its Holders" in the Prospectus.
The Class A Certificates generally will be treated as debt instruments
issued by the REMIC for federal income tax purposes. Income on such Certificates
must be reported under an accrual method of accounting.
The Class A Certificates may, depending on their issue price, be issued with
original issue discount ("OID") for federal income tax purposes. Holders of such
Certificates issued with OID will be required to
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include OID in income as it accrues under a constant yield method, in advance of
the receipt of cash attributable to such income. The OID Regulations do not
contain provisions specifically interpreting Code Section 1272(a)(6) which
applies to prepayable securities such as the Class A Certificates. Until the
Treasury issues guidance to the contrary, the Trustee intends to base its OID
computation on Code Section 1272(a)(6) and the OID Regulations as described in
the Prospectus. However, because no regulatory guidance currently exists under
Code Section 1272(a)(6), there can be no assurance that such methodology
represents the correct manner of calculating OID.
The yield used to calculate accruals of OID with respect to the Class A
Certificates with OID will be the original yield to maturity of such
Certificates, determined by assuming that the Mortgage Loans will prepay in
accordance with 100% of the Prepayment Assumption. No representation is made as
to the actual rate at which the Mortgage Loans will prepay.
Prepayments on mortgage loans are commonly measured relative to a prepayment
standard or model. The Prepayment Assumption model used in this Prospectus
Supplement is based on a Constant Prepayment Rate ("CPR"). CPR represents a
constant rate of prepayment on the Mortgage Loans each month relative to the
aggregate outstanding principal balance of the Mortgage Loans. CPR does not
purport to be either an historical description of the prepayment experience of
any pool of mortgage loans or a prediction of the anticipated rate of prepayment
of any pool of mortgage loans, including the Mortgage Loans, and there is no
assurance that the Mortgage Loans will prepay at the specified CPR. The
Depositor does not make any representation about the appropriateness of the CPR
model.
The Class A Certificates will be treated as regular interests in a REMIC
under section 860G of the Code. Accordingly, the Offered Certificates will be
treated as (i) assets described in section 7701(a)(19)(C) of the Code, and (ii)
"real estate assets" within the meaning of section 856(c)(4) of the Code, in
each case to the extent described in the Prospectus. Interest on the Class A
Certificates will be treated as interest on obligations secured by mortgages on
real property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that the Class A Certificates are treated as real estate assets. See
"CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" in the Prospectus.
BACKUP WITHHOLDING
Certain Certificate Owners may be subject to backup withholding at the rate
of 31% with respect to interest paid on the Class A Certificates if the
Certificate Owners, upon issuance, fail to supply the Trustee or their broker
with their taxpayer identification number, furnish an incorrect taxpayer
identification number, fail to report interest, dividends, or other "reportable
payments" (as defined in the Code) properly, or, under certain circumstances,
fail to provide the Trustee or their broker with a certified statement, under
penalty of perjury, that they are not subject to backup withholding.
The Trustee will be required to report annually to the IRS, and to each
Class A Certificateholder of record, the amount of interest paid (and OID
accrued, if any) on the Class A Certificates (and the amount of interest
withheld for federal income taxes, if any) for each calendar year, except as to
exempt holders (generally, holders that are corporations, certain tax-exempt
organizations or nonresident aliens who provide certification as to their status
as nonresidents). As long as the only "Class A Certificateholder" of record is
Cede, as nominee for DTC, Certificate Owners and the IRS will receive tax and
other information including the amount of interest paid on such Certificates
owned from Participants and Indirect Participants rather than from the Trustee.
(The Trustee, however, will respond to requests for necessary information to
enable Participants, Indirect Participants and certain other persons to complete
their reports.) Each non-exempt Certificate Owner will be required to provide,
under penalty of perjury, a certificate on IRS Form W-9 containing his or her
name, address, correct federal taxpayer identification number and a statement
that he or she is not subject to backup withholding. Should a nonexempt
Certificate Owner fail to provide the required certification, the Participants
or Indirect Participants (or the Paying Agent) will be required to withhold 31%
of the interest (and principal) otherwise payable to the
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holder, and remit the withheld amount to the IRS as a credit against the
holder's federal income tax liability.
Such amounts will be deemed distributed to the affected Certificate Owner
for all purposes of the Certificates, the Agreement and the Policy.
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
REMIC Certificate Owners are strongly urged to consult their own tax advisor
with respect to the New Withholding Regulations.
FEDERAL INCOME TAX CONSEQUENCES TO FOREIGN INVESTORS
The following information describes the United States federal income tax
treatment of holders that are not United States persons ("Foreign Investors").
The term "Foreign Investor" means any person other than (i) a citizen or
resident of the United States, (ii) a corporation or partnership (including an
entity treated as a corporation or partnership for United States federal income
tax purposes) organized in or under the laws of the United States or any state
thereof including the District of Columbia (other than a partnership that is not
treated as a United States person under any applicable Treasury regulations),
(iii) an estate the income of which is includible in gross income for United
States federal income tax purposes, regardless of its source or (iv) a trust if
a court within the United States is able to exercise primary supervision over
the administration of the trust and one or more United States persons have
authority to control all substantial decisions of the trust. Notwithstanding
clause (iv), to the extent provided in the regulations, certain trusts in
existence on August 20, 1996 and treated as United States persons prior to such
date that elect to continue to be so treated also shall be considered United
States persons.
The Code and Treasury regulations generally subject interest paid to a
Foreign Investor to a withholding tax at a rate of 30% (unless such rate were
changed by an applicable treaty). The withholding tax, however, is eliminated
with respect to certain "portfolio debt investments" issued to Foreign
Investors. Portfolio debt investments include debt instruments issued in
registered form for which the United States payor receives a statement that the
beneficial owner of the instrument is a Foreign Investor. The Class A
Certificates will be issued in registered form, therefore if the information
required by the Code is furnished (as described below) and no other exceptions
to the withholding tax exemption are applicable, no withholding tax will apply
to the Class A Certificates.
For the Class A Certificates to constitute portfolio debt investments exempt
from the United States withholding tax, the withholding agent must receive from
the Certificate Owner an executed IRS Form W-8 or substantially similar form
signed under penalty of perjury by the Certificate Owner stating that the
Certificate Owner is a Foreign Investor and providing such Certificate Owner's
name and address. The statement must be received by the withholding agent in the
calendar year in which the interest payment is made, or in either of the two
preceding calendar years.
A Certificate Owner that is a nonresident alien or foreign corporation will
not be subject to United States federal income tax on gain realized on the sale,
exchange, or redemption of such Class A Certificate, provided that (i) such gain
is not effectively connected with a trade or business carried on by the
Certificate Owner in the United States, (ii) in the case of a Certificate Owner
that is an individual, such Certificate Owner is not present in the United
States for 183 days or more during the taxable year in which such sale,
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exchange or redemption occurs and (iii) in the case of gain representing accrued
interest, the conditions described in the immediately preceding paragraph are
satisfied.
As described above, the New Withholding Regulations were published in the
Federal Register on October 14, 1997, and 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 Foreign Investors are strongly urged to consult their own
tax advisor with respect to the New Withholding Regulations.
STATE TAXES
The Depositor makes no representations regarding the tax consequences of
purchase, ownership or disposition of the Class A Certificates under the tax
laws of any state. Investors considering an investment in the Class A
Certificates should consult their own tax advisors regarding such tax
consequences.
All investors should consult their own tax advisors regarding the Federal,
state, local or foreign income tax consequences of the purchase, ownership and
disposition of the Certificates.
ERISA CONSIDERATIONS
Any fiduciary which proposes to cause a pension plan, employee benefit or
other plan that is subject to Title I of ERISA or Section 4975 of the Code (a
"Plan") to acquire any of the Class A Certificates should consult with its
counsel with respect to the potential consequences under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), and Section 4975 of the Code
of the Plans acquisition and ownership of such Certificates. The Certificates
will constitute "equity interests" within the meaning of the Plan Assets
Regulation, and it is not expected that an exception under those regulations
will apply. See "ERISA CONSIDERATIONS" in the Prospectus.
The U.S. Department of Labor has granted to Lehman Brothers Inc. ("Lehman
Brothers") Prohibited Transaction Exemption 91-14 (the "Exemption") which
exempts from the application of the prohibited transaction rules transactions
relating to (1) the acquisition, sale and holding by Plans of certain
certificates representing an undivided interest in certain asset-backed
pass-through trusts, with respect to which Lehman Brothers or any of its
affiliates is the sole underwriter or the manager or co-manager of the
underwriting syndicate; and (2) the servicing, operation and management of such
asset-backed pass-through trusts, provided that the general conditions and
certain other conditions set forth in the Exemption are satisfied. The Exemption
will apply to the acquisition, holding and resale of the Class A Certificates by
a Plan provided that certain conditions (some of which are described below) are
met.
Among the conditions which must be satisfied for the Exemption to apply are
the following:
(1) The acquisition of the Class A Certificates by a Plan is on terms
(including the price for such Certificates) that are at least as favorable
to the investing Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) The rights and interests evidenced by the Class A Certificates
acquired by the Plan are not subordinated to the rights and interests
evidenced by other certificates of the Trust, unless the Trust contains only
certain types of assets, (a "Designated Transaction");
(3) The Class A Certificates acquired by the Plan have received a
rating at the time of such acquisition that is in one of the three highest
generic rating categories (four, in a Designated Transaction) from S&P,
Moody's or Fitch, Inc.;
(4) The sum of all payments made to and retained by the Underwriters in
connection with the distribution of the Class A Certificates represents not
more than reasonable compensation for underwriting such Certificates; the
sum of all payments made to and retained by the Seller pursuant to the sale
of the Mortgage Loans to the Trust represents not more than the fair market
value of such
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Mortgage Loans; the sum of all payments made to and retained by the Master
Servicer represent not more than reasonable compensation for the Master
Servicer's services under the Agreement and reimbursement of the Master
Servicer's reasonable expenses in connection therewith;
(5) The Trustee is not an affiliate of any Underwriter, the Seller, the
Master Servicer, the Certificate Insurer, any borrower whose obligations
under one or more Mortgage Loans constitute more than 5% of the aggregate
unamortized principal balance of the assets in the Trust, or any of their
respective affiliates (together with the Trustee, the "Restricted Group");
and
(6) The Plan investing in the Class A Certificates is an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Securities and
Exchange Commission under the Securities Act of 1933, as amended.
The Underwriters believe that the Exemption will apply to the acquisition
and holding of the Class A Certificates by Plans and that all conditions of the
Exemption other than those within the control of the investors will be met. Any
Plan fiduciary considering whether to purchase any Class A Certificates on
behalf of a Plan should consult with its counsel regarding the applicability of
the fiduciary responsibility and prohibited transaction provisions of ERISA and
the Code to such investment. Among other things, before purchasing any Class A
Certificates, a fiduciary of a Plan subject to the fiduciary responsibility
provisions of ERISA or to the prohibited transaction provisions of ERISA or the
Code should make its own determination as to the availability of the exemptive
relief provided in the Exemption, and also consider the availability of any
other prohibited transaction exemptions. A Plan fiduciary should also consult
with counsel regarding the application of the Plan Assets Regulation to an
investment in Class A Certificates.
LEGAL INVESTMENT CONSIDERATIONS
Although, as a condition to their issuance, the Class A Certificates will be
rated in the highest rating category of the Rating Agencies, the Class A
Certificates will not constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"), because not all
of the Mortgages securing the Mortgage Loans are first mortgages. Accordingly,
many institutions with legal authority to invest in comparably rated securities
based on first mortgage loans may not be legally authorized to invest in the
Class A Certificates, which because they evidence interests in a pool that
includes junior mortgage loans are not "mortgage related securities" under
SMMEA. See "LEGAL INVESTMENT" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement,
dated December 4, 2000 (the "Underwriting Agreement"), among the Depositor and
the Underwriters named below (the "Underwriters"), the Depositor has agreed to
sell to the Underwriters and the Underwriters have agreed to purchase from the
Depositor the principal amount of the Class A Certificates set forth opposite
their respective names.
<TABLE>
<CAPTION>
CLASS A-1 CLASS A-2 CLASS A-3 CLASS A-4 CLASS A-5 CLASS A-6 CLASS A-7
UNDERWRITER CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES CERTIFICATES
----------- ------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Lehman Brothers
Inc................ $37,859,500 $ 7,971,500 $20,373,000 $16,036,000 $16,432,000 $11,000,000 $ 75,000,000
Salomon Smith Barney
Inc................ 37,859,500 7,971,500 20,373,000 16,036,000 16,432,000 11,000,000 75,000,000
----------- ----------- ----------- ----------- ----------- ----------- ------------
Total................ $75,719,000 $15,943,000 $40,746,000 $32,072,000 $32,864,000 $22,000,000 $150,000,000
=========== =========== =========== =========== =========== =========== ============
</TABLE>
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The Depositor has been advised that the Underwriters propose initially to
offer the Class A Certificates to the public at the respective offering prices
set forth on the cover hereof and to certain dealers at such prices less a
selling concession not to exceed the percentage of the Certificate denomination
set forth below, and that the Underwriters may allow and such dealers may
reallow a reallowance discount not to exceed the percentage of the Certificate
denomination set forth below:
<TABLE>
<CAPTION>
CLASS OF CERTIFICATES SELLING CONCESSION REALLOWANCE DISCOUNT
--------------------- ------------------ --------------------
<S> <C> <C>
Class A-1................................................. 0.090% 0.045%
Class A-2................................................. 0.105% 0.053%
Class A-3................................................. 0.135% 0.068%
Class A-4................................................. 0.210% 0.105%
Class A-5................................................. 0.240% 0.120%
Class A-6................................................. 0.195% 0.098%
Class A-7................................................. 0.150% 0.075%
</TABLE>
Until the distribution of the Class A Certificates is completed, the rules
of the Commission may limit the ability of the Underwriters and certain selling
group members to bid for and purchase such Classes of Class A Certificates. As
an exception to these rules, the Underwriters are permitted to engage in certain
transactions that stabilize the prices of the Class A Certificates. Such
transactions consist of bids of purchase for the purpose of pegging, fixing or
maintaining the price of such Classes of Class A Certificates.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases.
Neither the Depositor nor the 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 Class A Certificates.
In addition, neither the Depositor nor 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 Depositor has been advised by the Underwriters that they intend to make
a market in the Class A Certificates; however, they 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 Class A Certificates will develop.
The Depositor is an affiliate of Lehman Brothers Inc.
The Underwriting Agreement provides that the Depositor will indemnify the
Underwriters against certain civil liabilities, including liabilities under the
Act.
If you initially receive an electronic copy of the Prospectus and Prospectus
Supplement from an Underwriter, you will receive a paper copy of the Prospectus
and Prospectus Supplement upon request to the Underwriter. Upon receipt of a
qualifying request, the Underwriter will promptly deliver a paper copy of the
Prospectus and Prospectus Supplement to you free of charge.
EXPERTS
The financial statements of Financial Guaranty Insurance Company as of
December 31, 1999 and 1998 and for each of the years in the three-year period
ended December 31, 1999, are incorporated by reference herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, incorporated by reference in this prospectus
supplement upon the authority of said firm as experts in accounting and
auditing.
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LEGAL MATTERS
Certain legal matters with respect to the Class A Certificates will be
passed upon for the Depositor by Brown & Wood LLP, New York, New York and for
the Underwriters by Brown & Wood LLP, New York, New York. Certain legal matters
will be passed upon for the Seller by Stevens & Lee, A Professional Corporation,
Reading, Pennsylvania.
RATINGS
It is a condition to the issuance of the Class A Certificates that they
receive ratings of "AAA" by S&P and "Aaa" by Moody's.
A securities rating addresses the likelihood of the receipt by Class A
Certificateholders of distributions on the Mortgage Loans. The rating takes into
consideration the characteristics of the Mortgage Loans and the structural,
legal and tax aspects associated with the Class A Certificates. The ratings on
the Class A Certificates do not, however, constitute statements regarding the
likelihood or frequency of prepayments on the Mortgage Loans or the possibility
that Class A Certificateholders might realize a lower than anticipated yield.
The ratings assigned to the Class A Certificates will depend primarily upon
the creditworthiness of the Certificate Insurer. Any reduction in a rating
assigned to the financial strength of the Certificate Insurer below the ratings
initially assigned to the Class A Certificates may result in a reduction of one
or more of the ratings assigned to the Class A Certificates.
A securities rating is not a recommendation to buy, sell or hold securities
and may be subject to revision or withdrawal at any time by the assigning rating
organization. Each securities rating should be evaluated independently of
similar ratings on different securities.
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INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERMS PAGE
----- -----------
<S> <C>
Accredited Investor......................................... S-64
Aggregate Class A Principal Balance......................... S-38
Agreement................................................... S-38, S-51
Available Funds............................................. S-46
Balloon Loans............................................... S-19
Balloon Payment............................................. S-23
Beneficial Owner............................................ S-39
BIF......................................................... S-45
Book-Entry Certificates..................................... S-39
Business Day................................................ S-51
Certificate Insurer......................................... S-14
Certificate Owners.......................................... S-39
Certificate Rate............................................ S-48
Certificate Register........................................ S-46
Certificate Registrar....................................... S-46
Certificateholder........................................... S-38, S-39
Certificates................................................ S-38
Civil Relief Act............................................ S-48
Civil Relief Act Interest Shortfall......................... S-48
Class....................................................... S-38
Class A Certificateholder................................... S-61
Class A Certificates........................................ S-38
Class A Monthly Principal Distributable Amount.............. S-48
Class A Principal Balance................................... S-38
Class A Principal Distribution Amount....................... S-48
Class A Principal Shortfall Amount.......................... S-49
Class A-6 Principal Distribution Amount..................... S-49
Class A-6 Principal Payment Percentage...................... S-49
Class A-6 Pro Rata Principal Distribution Amount............ S-49
Class Interest Carryover Shortfall.......................... S-48
Class Interest Distribution................................. S-48
Class Monthly Interest Distributable Amount................. S-48
Class R Certificates........................................ S-38
Clearstream................................................. S-39
CLTV........................................................ S-30
Closing Date................................................ S-23
Code........................................................ S-60
Collection Account.......................................... S-44
Commission.................................................. S-23
Consumer Asset Finance Division............................. S-17
Cooperative................................................. S-41
CPR......................................................... S-33, S-61
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
----- -----------
<S> <C>
Cut-Off Date................................................ S-23
Cut-Off Date Principal Balance.............................. S-23
Debt Service Reduction...................................... S-55
Defective Mortgage Loans.................................... S-44
Deficiency Amount........................................... S-51
Definitive Certificate...................................... S-39
Depositor................................................... S-38
Designated Transaction...................................... S-63
Detailed Description........................................ S-23
Determination Date.......................................... S-45
Distributable Excess Spread................................. S-49
Distribution Account........................................ S-45
Distribution Date........................................... S-44
DTC......................................................... S-39
Due Period.................................................. S-49
Eligible Account............................................ S-45
Eligible Substitute Mortgage Loan........................... S-44
ERISA....................................................... S-63
Euroclear................................................... S-39
Euroclear Operator.......................................... S-41
Euroclear Participants...................................... S-41
European Depositaries....................................... S-39
Events of Default........................................... S-57
Excess Spread............................................... S-50
Exemption................................................... S-63
Financial Intermediary...................................... S-39
Fitch....................................................... S-16
Fleet/Bank Boston........................................... S-17
Foreign Investors........................................... S-62
GE Capital.................................................. S-14
Global Securities........................................... A-I-I
Guaranteed Principal Amount................................. S-51
HOEPA....................................................... S-24
Insolvency Event............................................ S-57
Insured Payment............................................. S-51
Insurer Default............................................. S-50
Interest Period............................................. S-48
Lehman Brothers............................................. S-63
Liquidated Mortgage Loan.................................... S-50
Liquidation Proceeds........................................ S-50
Loan Rates.................................................. S-23
Master Servicer............................................. S-38
MLN......................................................... S-20
Monthly Advance............................................. S-45
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
----- -----------
<S> <C>
Moody's..................................................... S-16
Mortgage File............................................... S-43
Mortgage Loan Schedule...................................... S-43
Mortgage Loans.............................................. S-23
Mortgage Notes.............................................. S-23
Mortgage Pool............................................... S-23
Net Simple Interest Shortfall............................... S-55
Net Liquidation Proceeds.................................... S-50
New England Acquisition..................................... S-17
New Withholding Regulations................................. S-62
Nonrecoverable Advance...................................... S-46
Notice...................................................... S-51
OID......................................................... S-60
Owner....................................................... S-51
Participants................................................ S-39
Percentage Interest......................................... S-38
Plan........................................................ S-63
Policy...................................................... S-38
Pool Principal Balance...................................... S-23
Preference Amount........................................... S-51
Prepayment Assumption....................................... S-33
Prepayment Interest Shortfall............................... S-55
Principal Balance........................................... S-23
Prospectus.................................................. S-38
Prospectus Supplement....................................... S-23
Purchase Agreement.......................................... S-38, S-60
Purchase Price.............................................. S-43
Related Documents........................................... S-43
Relevant Depositary......................................... S-39
REMIC....................................................... S-60
Residual Certificates....................................... S-60
Restricted Group............................................ S-64
Rules....................................................... S-39
S&P......................................................... S-16
SAIF........................................................ S-45
Seller...................................................... S-38, S-60
Servicing Advance........................................... S-45
Servicing Fee............................................... S-55
Servicing Fee Rate.......................................... S-55
Simple Interest Excess...................................... S-55
Simple Interest Loans....................................... S-24
Simple Interest Shortfall................................... S-55
SMMEA....................................................... S-64
Statistic Calculation Date.................................. S-23
Statistic Calculation Date Pool Principal Balance........... S-23
Statistic Calculation Date Principal Balance................ S-23
Statistic Calculation Mortgage Loan......................... S-23
Statistic Calculation Pool.................................. S-23
Substitution Adjustment..................................... S-44
</TABLE>
S-69
<PAGE>
<TABLE>
<CAPTION>
TERMS PAGE
----- -----------
<S> <C>
Termination Price........................................... S-58
Terms and Conditions........................................ S-41
Trust....................................................... S-3
Trustee..................................................... S-38, S-50
Underwriters................................................ S-64
Underwriting Agreement...................................... S-64
U.S. Person................................................. A-I-4
Weighted Average Life....................................... S-32
</TABLE>
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<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered Sovereign Bank
Home Equity Loan Asset-Backed Certificates, Series 2000-1 (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Clearstream 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
Clearstream 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 Certificates
issues.
Secondary cross-market trading between Clearstream or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Clearstream and Euroclear (in such
capacity) and as DTC Participants.
Although DTC, Euroclear and Clearstream are expected to follow the
procedures described below in order to facilitate transfers of interests in the
Global Securities among participants of DTC, Euroclear and Clearstream, they are
under no obligation to perform or continue to perform such procedures, and such
procedures may be discontinued at any time. Neither the Issuer nor the Trustee
will have any responsibility for the performance by DTC, Euroclear and
Clearstream or their respective participants or indirect participants of their
respective obligations under the rules and procedures governing their
obligations.
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, Clearstream 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
Certificates issues. Investor securities custody accounts will be credited with
their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Clearstream 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 Certificates issues in same-day funds.
Trading between Clearstream and/or Euroclear Participants. Secondary market
trading between Clearstream Participants or Euroclear Participants will be
settled using the procedures applicable to conventional eurobonds in same-day
funds.
Trading between DTC seller and Clearstream or Euroclear purchaser. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Clearstream Participant or a Euroclear Participant, the
purchaser will send instructions to Clearstream or Euroclear through a
Clearstream Participant or Euroclear Participant at least one business day prior
to settlement. Clearstream or Euroclear will instruct the respective Depositary,
as the case may be, to receive the Global Securities against payment. Payment
will include interest accrued on the Global Securities from and including the
last coupon payment date to and excluding the settlement date, on the basis of
either the actual number of days in such accrual period and a year assumed to
consist of 360 days or a 360-day year of 12 30-day months as applicable to the
related class of Global Securities. For transactions settling on the 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 Clearstream 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 Clearstream or Euroclear cash debt will be valued
instead as of the actual settlement date.
Clearstream 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 Clearstream or Euroclear. Under
this approach, they may take on credit exposure to Clearstream or Euroclear
until the Global Securities are credited to their accounts one day later.
As an alternative, if Clearstream or Euroclear has extended a line of credit
to them, Clearstream Participants or Euroclear Participants can elect not to
preposition funds and allow that credit line to be drawn upon the finance
settlement. Under this procedure, Clearstream 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 Clearstream 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 Clearstream Participants
or Euroclear Participants. The sale proceeds will be available to the DTC seller
on the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Clearstream or Euroclear Seller and DTC Purchaser. Due to
time zone differences in their favor, Clearstream 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 Clearstream or
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Euroclear through a Clearstream Participant or Euroclear Participant at least
one business day prior to settlement. In these cases Clearstream or Euroclear
will instruct the respective Depositary, as appropriate, to deliver the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of either the
actual number of days in such accrual period and a year assumed to consist of
360 days or a 360-day year of 12 30-day months as applicable to the related
class of Global Securities. For transactions settling on the 31st of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Clearstream Participant or Euroclear Participant the following day, and receipt
of the cash proceeds in the Clearstream 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 Clearstream 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 Clearstream
Participant's or Euroclear Participant's account would instead be valued as of
the actual settlement date.
Finally, day traders that use Clearstream or Euroclear and that purchase
Global Securities from DTC Participants for delivery to Clearstream 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 Clearstream or Euroclear for one day (until the
purchase side of the day trade is reflected in their Clearstream 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 Clearstream 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 Clearstream Participant
or Euroclear Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through
Clearstream or Euroclear (or through DTC if the holder has an address outside
the U.S.) will be subject to the 30% U.S. withholding tax that generally applies
to payments of interest (including original issue discount) on registered debt
issued by U.S. Persons, unless (i) each clearing system, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business in the chain of intermediaries between such beneficial owner and the
U.S. entity required to withhold tax complies with applicable certification
requirements and (ii) such beneficial owner takes one of the following steps to
obtain an exemption or reduced tax rate:
Exemption for non-U.S. Persons (Form W-8 BEN). 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 BEN (Certificate of Foreign Status).
If the information shown on Form W-8 BEN changes, a new Form W-8 BEN must be
filed within 30 days of such change.
Exemption for non-U.S. Persons with effectively connected income (Form
W-8ECI). 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
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from the withholding tax by filing Form W-8ECI (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 W-8 BEN). Non-U.S. Persons that are Certificate Owners residing in a
country that has a tax treaty with the United States can obtain an exemption or
reduced tax rate (depending on the treaty terms) by filing Form W-8 BEN
(Ownership, Exemption or Reduced Rate Certificate). If the treaty provides only
for a reduced rate, withholding tax will be imposed at that rate unless the
filer alternatively files Form W-8. Form W-8 BEN may be filed by the Certificate
Owners or his agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Certificate Owner of a
Global Security or, in the case of a Form W-8 BEN or a Form W-8ECI 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-8ECI and Form W- 8 BEN are effective for three
calendar years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United States,
(ii) a corporation or partnership organized in or under the laws of the United
States, any state thereof or the District of Columbia, (iii) an estate the
income of which is includible in gross income for United States tax purposes,
regardless of its source, or (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States 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. 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
November 29, 2000
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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.
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
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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
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
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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.
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.
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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, 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.
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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
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
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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.
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.
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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 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;
(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;
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(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.
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.
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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.
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.
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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 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;
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(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.
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.
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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 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;
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(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
(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 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.
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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
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
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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,
(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.
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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.
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;
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(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
(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;
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(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.
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
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liability in the event of partial loss 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
(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,
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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 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.
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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,
(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
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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,
- the mortgage note endorsed without recourse to the order of the trustee or
in blank,
- the original mortgage with evidence of recording indicated thereon,
(except for any mortgage not returned from the public recording office, in
which case a copy of that mortgage will be delivered, together with a
certificate that the original of that mortgage was delivered to the
recording office) and
- 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."
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
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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 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.
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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.
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
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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;
(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.
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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 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
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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;
(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
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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.
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
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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.
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 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
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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 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:
- the primary assets that are security for the related notes
- the terms of the related notes, and
- 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
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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.
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
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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.
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
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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 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
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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 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.
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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, 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,
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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 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
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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.
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
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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.
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
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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 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
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to the April 1, 1983 deadline. In addition, even where Title V is not so
rejected, any state is authorized by the law to adopt a provision limiting
discount points or other charges on mortgage loans covered by Title V.
THE HOME IMPROVEMENT CONTRACTS
GENERAL
The home improvement contracts, other than those home improvement contracts
that are unsecured or secured by mortgages on real estate 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 deficiency judgements, and in many cases the
defaulting borrower would have no assets with which to pay a judgement.
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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 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
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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.
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
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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 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
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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.
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)(4)(A) and
interest on securities will be considered "interest on
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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."
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
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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.
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
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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 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
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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 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
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Security that is acquired at a premium will be deemed to have made an election
to amortize bond premium with respect to all debt instruments having amortizable
bond premium that such holder owns or acquires. The election to accrue interest,
discount and premium on a constant yield method with respect to a Debt Security
is irrevocable.
TAXATION OF THE REMIC AND ITS HOLDERS
GENERAL. In the opinion of Brown & Wood LLP, special counsel to the
depositor, if 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)(5)(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;
(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.
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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 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.
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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 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.
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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 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."
The IRS has issued proposed Treasury regulations that would add to the
conditions necessary to ensure that a transfer of a noneconomic residual
interest would be respected for federal income tax purposes. The proposed
additional condition provides that the transfer of a noneconomic residual
interest will not qualify under this safe harbor unless the present value of the
anticipated tax liabilities associated with holding the residual interest does
not exceed the present value of the sum of: (i) any consideration given to the
transferee to acquire the interest (the inducement payment), (ii) future
distributions on the interest, and (iii) any anticipated tax savings associated
with holding the interest as the REMIC generates losses. For purposes of this
calculation, the present value is calculated using a discount rate equal to the
lesser of the applicable federal rate and the transferee's cost of borrowing.
The proposed effective date for the changes is February 4, 2000.
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.
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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 (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.
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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 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
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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 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
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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 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, 2000, 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
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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 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.
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INTEREST INCOME ON THE NOTES. Based on the above assumptions, except as
discussed in the following paragraph, the notes will not be considered issued
with OID. The stated interest thereon will be taxable to a noteholder as
ordinary interest income when received or accrued in accordance with such
noteholder's method of tax accounting. Under the OID regulations, a holder of a
note issued with a DE MINIMIS amount of OID must include such OID in income, on
a pro rata basis, as principal payments are made on the note. It is believed
that any prepayment premium paid as a result of a mandatory redemption will be
taxable as contingent interest when it becomes fixed and unconditionally
payable. A purchaser who buys a note for more or less than its principal amount
will generally be subject, respectively, to the premium amortization or market
discount rules of the Code.
A holder of a note that has a fixed maturity date of not more than one year
from the issue date of 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 BEN 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 BEN 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 percent, unless reduced or eliminated pursuant
to an applicable tax treaty. The New Regulations which make certain
modifications to the withholding and information reporting
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rules described above. The New Regulations will generally be effective for
payments made after December 31, 2000, 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, 2000, 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 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.
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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 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.
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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 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
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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 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
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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, BEN 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 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, 2000, 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, 2000, 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, became effective on September 1, 1997 and created a new
elective statutory vehicle for the issuance of mortgage-backed and asset-backed
securities. On February 4, 2000, the IRS and Treasury Department issued proposed
Treasury regulations on FASITs. The regulations generally would not be effective
until final regulations are filed with the federal register. However, it appears
that certain anti-abuse rules would apply as of February 4, 2000. 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.
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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. Moreover,
the qualification as a FASIT of any trust for which a FASIT election is made (a
"FASIT Trust") depends on the trust's ability to satisfy the requirements of the
FASIT provisions on an ongoing basis, including, without limitation, the
requirements of any final Treasury regulations that may be promulgated in the
future under the FASIT provisions or as a result of any change in applicable
law. Thus, no assurances can be made regarding the qualification as a FASIT of
any FASIT Trust for which a FASIT election is made at any particular time after
the issuance of securities by the FASIT Trust.
ASSET COMPOSITION
In order for a trust fund, or one or more designated pools of assets held by
a trust fund, to be eligible for FASIT status, substantially all of the assets
of the trust fund, or the designated pool, must consist of "permitted assets" as
of the close of the third month beginning after the closing date and at all
times thereafter (the "FASIT Qualification Test"). Permitted assets include
(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
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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 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."
ANTI-ABUSE RULE. Under proposed Treasury regulations, the Commissioner of
Internal Revenue (the "Commissioner") may make appropriate adjustments with
regard to the FASIT and any arrangement or transaction involving the FASIT if a
principal purpose of forming or using the FASIT is to achieve results
inconsistent with the intent of the FASIT provisions and the FASIT regulations.
This determination would be based on all of the facts and circumstances,
including a comparison of the purported business purpose for a transaction and
the claimed tax benefits resulting from the transaction.
CONSEQUENCES OF THE FAILURE OF THE FASIT TRUST TO QUALIFY AS A FASIT. If a
FASIT Trust fails to comply with one or more of the Code's ongoing requirements
for FASIT status during any taxable year, proposed Treasury regulations provide
that its FASIT status would be lost for that year and the FASIT Trust will be
unable to elect FASIT status without the Commissioner's approval. If FASIT
status is lost, under proposed Treasury regulations the entity classification of
the former FASIT (the "New Arrangement") is determined under general federal
income tax principles. The holder of the FASIT Ownership Security is treated as
exchanging the New Arrangement's assets for an amount equal to their value and
gain recognized is treated as gain from a prohibited transaction that is subject
to the 100 percent tax, without exception. Loss, if any, is disallowed. In
addition, the holder of the FASIT Ownership Security must recognize cancellation
of indebtedness income, on a regular interest by regular interest basis, in an
amount equal to the adjusted issue price of each FASIT Regular Note outstanding
immediately before the cessation over its fair market value. If the holder of
the FASIT Ownership Security has a continuing economic interest in the New
Arrangement, the characterization of this interest is determined under general
federal income tax principles. Holder of FASIT Regular Notes are treated as
exchanging their Notes for interests in the New Arrangement, the classification
of which is determined under general federal income tax principles. Gain is
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recognized to the extent the new interest either does not qualify as debt or
differs either in kind or extent. The basis of the interest in the New
Arrangement equals the basis in the FASIT Regular Note increased by any gain
recognized on the exchange.
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
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)(B) 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.
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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 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.
Under proposed Treasury regulations, if a non-U.S. person holds (either
directly or through a vehicle which itself is not subject to U.S. federal income
tax such as a partnership or a trust) a FASIT Regular Security and a "conduit
debtor" pays or accrues interest on a debt instrument held by such FASIT, any
interest received or accrued by the non-U.S. person FASIT Regular Securityholder
is treated as received or
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accrued from the conduit debtor. The proposed Treasury regulations state that a
debtor is a conduit debtor if the debtor is a U.S. person or the United States
branch of a non-U.S. person and the non-U.S. person regular interest holder is
(1) a "10 percent shareholder" of the debtor, (2) a "controlled foreign
corporation" and the debtor is a related person with respect to the controlled
foreign corporation or (3) related to the debtor. As set forth above, the
proposed Treasury regulations would not be effective until final regulations are
filed with the federal register.
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 Section 4975 of 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 and Section 4975 of the Code prohibit 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 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
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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 an entity is 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 entity in which it has invested.
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.
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. or Fitch, 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
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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 Exemption, 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.
(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 under the pooling and servicing agreement 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:
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(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 or
Fitch for at least one year prior to the Plan's acquisition of securities;
and
(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.
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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 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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$369,344,000
SOVEREIGN BANK HOME EQUITY
LOAN TRUST 2000-1
HOME EQUITY LOAN
ASSET-BACKED CERTIFICATES
SERIES 2000-1
SOVEREIGN BANK,
AS SELLER AND MASTER SERVICER
LEHMAN ABS CORPORATION,
AS DEPOSITOR
------------------------
PROSPECTUS SUPPLEMENT
DECEMBER 4, 2000
------------------------
LEHMAN BROTHERS SALOMON SMITH BARNEY
