<PAGE>
Filed Pursuant to Rule 424(b)(5)
Registration Statement No. 333-39325
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED DECEMBER 3, 1997)
$125,000,000
FIRST GREENSBORO HOME EQUITY LOAN TRUST 1997-2
$47,500,000 6.78% CLASS A-1 CERTIFICATES
$29,500,000 6.66% CLASS A-2 CERTIFICATES
$48,000,000 7.01% CLASS A-3 CERTIFICATES
FIRST GREENSBORO HOME EQUITY, INC.
SPONSOR AND MASTER SERVICER
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
The First Greensboro Home Equity Loan Pass-Through Certificates, Series
1997-2 (the 'Certificates') will consist of (i) the Class A-1 Certificates, the
Class A-2 Certificates and the Class A-3 Certificates (collectively, the 'Class
A Certificates'), and (ii) a residual Class of Certificates (the 'Class R
Certificates'). Only the Class A Certificates are offered hereby.
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE
CERTIFICATES, SEE 'RISK FACTORS' BEGINNING ON PAGE S-19 HEREIN, 'PREPAYMENT AND
YIELD CONSIDERATIONS' BEGINNING ON PAGE S-41 HEREIN AND 'RISK FACTORS' BEGINNING
ON PAGE 9 IN THE PROSPECTUS.
The Certificates represent undivided ownership interests in a pool of
nonconforming, fixed rate and adjustable rate home equity loans (the 'Home
Equity Loans') held by First Greensboro Home Equity Loan Trust 1997-2 (the
'Trust'), which are secured by first and second lien mortgages or deeds of trust
primarily on one- to four-family residential properties. The Class A
Certificates also represent undivided ownership interests in all interest and
principal due under the Home Equity Loans on or after the related Cut-Off Date,
security interests in the properties which secure the related Home Equity Loans
(the 'Properties'), the Insurance Policy, funds on deposit in certain trust
accounts, and certain other property.
Simultaneously with the issuance of the Certificates, the Sponsor will
obtain from Financial Security Assurance Inc. (the 'Certificate Insurer') a
certificate guaranty insurance policy (the 'Insurance Policy') in favor of the
Trustee. The Insurance Policy will require the Certificate Insurer to make
certain Insured Payments (as defined herein) on the Class A Certificates.
[LOGO] FSA
(continued on following page)
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THE CLASS A CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY AND DO
NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE SPONSOR,
THE SELLER OR THE MASTER SERVICER, EXCEPT AS DESCRIBED HEREIN, THE
CERTIFICATE INSURER OR ANY OF THEIR AFFILIATES. NEITHER THE
CLASS A CERTIFICATES NOR THE HOME EQUITY LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
- ------------------------
The Class A Certificates will be offered by Donaldson, Lufkin & Jenrette
Securities Corporation (the 'Underwriter') from time to time to the public in
negotiated transactions or otherwise at varying prices to be determined at the
time of the related sale. The net proceeds to the Depositor from the sale of the
Class A Certificates are anticipated to be approximately $124,355,390.63 plus
accrued interest from December 1, 1997, before deducting expenses payable by the
Depositor, estimated to be $368,853.00. The Class A Certificates are offered by
the Underwriter subject to prior sale when, as and if issued to and accepted by
it and subject to approval of certain legal matters by counsel for the
Underwriter. The Underwriter reserves the right to withdraw, cancel or modify
such offer and to reject orders in whole or in part. It is expected that
delivery of the Class A Certificates in book-entry form will be made through the
facilities of The Depository Trust Company ('DTC') on or about December 15, 1997
(the 'Closing Date').
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS DECEMBER 3, 1997
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The aggregate outstanding Loan Balance of the Home Equity Loans, as of
the Cut-Off Date, transferred to the Trust on the Closing Date (the "Initial
Home Equity Loans") was $117,794,842.52 (the "Initial Aggregate Loan Balance"),
of which approximately 94.61% by principal balance are secured by first liens
and the remainder are secured by second liens and of which approximately 93.68%
by principal balance are fixed rate Home Equity Loans and 6.32% by principal
balance are adjustable rate Home Equity Loans. Additional Home Equity Loans (the
"Subsequent Home Equity Loans") may be purchased by the Trust from time to time
after the Closing Date during the Funding Period from funds on deposit in the
pre-funding account (the "Pre-Funding Account"). On the Closing Date aggregate
cash amounts of approximately $7,205,157.48 and approximately $146,035.17,
respectively, from the proceeds of the sale of the Class A Certificates will be
deposited with the Trustee in the Pre-Funding Account and the capitalized
interest account (the "Capitalized Interest Account"), respectively. The Home
Equity Loans were or will be originated or purchased by First Greensboro Home
Equity, Inc. (the "Sponsor" and "Master Servicer"), sold to First Greensboro
Capital Corporation (the "Seller") in the ordinary course of the Sponsor's
business and will be resold to the Depositor as of the Cut-Off Date pursuant to
the Pooling and Servicing Agreement. It is anticipated that all of the Home
Equity Loans will be serviced by the Master Servicer. The Trust will be created
pursuant to a Pooling and Servicing Agreement (the "Pooling and Servicing
Agreement") to be dated as of December 1, 1997 among the Sponsor, the Seller,
the Master Servicer, DLJ Mortgage Acceptance Corp. (the "Depositor"), The Chase
Manhattan Bank, as Trustee (the "Trustee") and Ocwen Federal Bank FSB, as Backup
Master Servicer (the "Backup Master Servicer").
Distributions of principal and interest will be made to holders (the
"Owners") of the Certificates on the 25th day of each month (or, if such day is
not a business day, the next following business day) beginning January 1998
(each, a "Payment Date"). Interest will be passed through on each Payment Date
to the Owners of the Class A Certificates based on the related Certificate
Principal Balance (as defined herein) at the Pass-Through Rate applicable to
such Class of Certificates. The Pass-Through Rate for each Class of Class A
Certificates is set out on the cover hereof.
The Class A Certificates will be irrevocably guaranteed as to the
payment of interest due to the Class A Certificateholders on each Payment Date
and as to the ultimate payment of the related Certificate Principal Balance, in
each case pursuant to the terms of the certificate guaranty insurance policy
(the "Insurance Policy") issued by Financial Security Assurance Inc. (the
"Certificate Insurer").
It is a condition to issuance that the Class A Certificates be rated
"Aaa" by Moody's Investors Service, Inc. and "AAA" by Standard & Poor's Ratings
Services, a division of The McGraw-Hill Companies, Inc.
The yield to investors on the Class A Certificates sold at prices other
than par may be extremely sensitive to the rate and timing of principal payments
(including prepayments, repurchases, defaults and liquidations) on the Home
Equity Loans, which may vary over time. See "Prepayment and Yield
Considerations" herein and "Risk Factors" and "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
As more fully described herein, an election will be made to treat the
assets of the Trust Estate as a real estate mortgage investment conduit (a
"REMIC") for federal income tax purposes. The Class A Certificates will
constitute "regular interests" in the REMIC and the Class R Certificates will
constitute the "residual interests" in the REMIC. See "Certain Federal Income
Tax Consequences" herein and in
S-2
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the Prospectus.
Prior to their issuance, there has been no market for the Class A
Certificates nor can there be any assurance that one will develop, or if it does
develop, that it will provide liquidity, or that it will continue for the life
of the Class A Certificates. The Underwriter intends, but is not obligated, to
make a market in the Class A Certificates.
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A CERTIFICATES, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
The Trust is subject to optional termination under the limited
circumstances described herein. See "The Pooling and Servicing Agreement -
Optional Termination" herein. Exercise of the optional termination by the Master
Servicer may result in an early retirement of the Class A Certificates.
The Class A Certificates offered by this Prospectus Supplement will be
part of a separate series of Certificates being offered by the Depositor
pursuant to its Prospectus dated December 3, 1997, of which this Prospectus
Supplement is a part and which accompanies this Prospectus Supplement. The
Prospectus contains important information regarding this offering which is not
contained herein, and prospective investors are urged to read the Prospectus and
this Prospectus Supplement in full.
As provided herein under "The Certificate Insurer-Incorporation of
Certain Documents by Reference," the Depositor will provide without charge to
any person to whom this Prospectus Supplement is delivered, upon oral or written
request of such person, a copy of any or all financial statements incorporated
herein by reference. Requests for such copies should be directed as provided
under "The Certificate Insurer-Incorporation of Certain Documents by Reference"
herein.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
CLASS A CERTIFICATES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE
STABILIZING AND THE PURCHASE OF CERTIFICATES TO COVER SHORT POSITIONS.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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TABLE OF CONTENTS
Prospectus Supplement
Page
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SUMMARY OF TERMS................................................................................................S-6
RISK FACTORS...................................................................................................S-19
THE SPONSOR AND MASTER SERVICER................................................................................S-25
General.....................................................................................................S-25
Credit and Underwriting Guidelines..........................................................................S-26
The Underwriting Process....................................................................................S-29
Servicing...................................................................................................S-30
THE SELLER.....................................................................................................S-31
THE BACKUP MASTER SERVICER.....................................................................................S-31
THE DEPOSITOR..................................................................................................S-32
USE OF PROCEEDS................................................................................................S-32
THE HOME EQUITY LOAN POOL......................................................................................S-32
General.....................................................................................................S-32
Interest Payments on the Home Equity Loans..................................................................S-40
Conveyance of Subsequent Home Equity Loans..................................................................S-41
PREPAYMENT AND YIELD CONSIDERATIONS............................................................................S-41
General.....................................................................................................S-41
Mandatory Prepayment........................................................................................S-42
Prepayment and Yield Scenarios for Class A Certificates.....................................................S-42
Payment Lag Feature of Class A Certificates.................................................................S-46
FORMATION OF THE TRUST AND TRUST PROPERTY......................................................................S-46
ADDITIONAL INFORMATION.........................................................................................S-47
DESCRIPTION OF THE CLASS A CERTIFICATES........................................................................S-47
General.....................................................................................................S-47
Payment Dates...............................................................................................S-47
Distributions...............................................................................................S-48
Pre-Funding Account.........................................................................................S-51
Capitalized Interest Account................................................................................S-51
Book Entry Registration of the Class A Certificates.........................................................S-52
Assignment of Rights........................................................................................S-54
THE CERTIFICATE INSURER........................................................................................S-54
General.....................................................................................................S-54
Reinsurance.................................................................................................S-55
Ratings of Claims-Paying Ability............................................................................S-55
Capitalization..............................................................................................S-55
Incorporation of Certain Documents by Reference.............................................................S-56
Insurance Regulation........................................................................................S-56
CREDIT ENHANCEMENT.............................................................................................S-56
Insurance Policy............................................................................................S-56
Overcollateralization Provisions............................................................................S-58
THE POOLING AND SERVICING AGREEMENT............................................................................S-60
Covenant of the Sponsor to Take Certain Actions with Respect to the Home Equity Loans in Certain SituationsS-60
Assignment of Home Equity Loans.............................................................................S-62
Servicing and Sub-Servicing.................................................................................S-63
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Removal and Resignation of Master Servicer..................................................................S-69
The Trustee.................................................................................................S-69
Reporting Requirements......................................................................................S-69
Removal of Trustee for Cause................................................................................S-71
Governing Law...............................................................................................S-71
Amendments..................................................................................................S-72
Termination of the Trust....................................................................................S-72
Optional Termination........................................................................................S-72
CERTAIN FEDERAL INCOME TAX CONSEQUENCES........................................................................S-73
REMIC Elections.............................................................................................S-73
CERTAIN STATE TAX CONSIDERATIONS...............................................................................S-74
ERISA CONSIDERATIONS...........................................................................................S-74
RATINGS........................................................................................................S-76
LEGAL INVESTMENT CONSIDERATIONS................................................................................S-76
UNDERWRITING...................................................................................................S-76
REPORT OF EXPERTS..............................................................................................S-77
CERTAIN LEGAL MATTERS..........................................................................................S-77
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS...................................................................S-78
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SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of the definitions of certain
capitalized terms.
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Issuer: First Greensboro Home Equity Loan Trust 1997-2 (the "Trust").
Certificates Offered: $125,000,000 First Greensboro Home Equity Loan Pass-Through Certificates,
Series 1997-2, to be issued in the following Classes (each, a "Class"):
Initial Certificate Pass-Through
Principal Balance Rate Class
----------------- ------------- -----
$47,500,000 6.78% Class A-1 Certificates
$29,500,000 6.66% Class A-2 Certificates
$48,000,000 7.01%(1) Class A-3 Certificates
-------------------
(1) For each Accrual Period after the Master Servicer Optional Termination Date, the
Pass-Through Rate for this Class will be 7.26% per annum.
Depositor: DLJ Mortgage Acceptance Corp. (the "Depositor"), a Delaware corporation.
Sponsor and Master Servicer: First Greensboro Home Equity, Inc. (the "Sponsor" and the "Master Servicer"), a
North Carolina corporation. The Sponsor's and Master Servicer's principal
executive offices are located at 4830 Koger Boulevard, Greensboro, North
Carolina 27407.
Backup Master Servicer: Ocwen Federal Bank FSB (the "Backup Master Servicer"), a federally chartered
savings bank. The Backup Master Servicer's principal executive offices are
located at 1675 Palm Beach Lakes Boulevard, West Palm Beach, Florida 33401 and its
telephone number is (561) 681-8000.
Trustee: The Chase Manhattan Bank, a New York banking corporation, as trustee (the
"Trustee"). The Trustee shall receive a fee equal to 0.0125% per annum, payable
monthly, at one-twelfth the annual rate on the aggregate Loan Balance of the Home
Equity Loans as of the first day of the related Remittance Period.
Cut-Off Date: With respect to (i) each Initial Home Equity Loan, December 1, 1997 and (ii) with
respect to each Subsequent Home Equity Loan, the later of (x) the close of
business of the first day of the month in which such Subsequent Home Equity Loan
was transferred to the Trust (each such date, a "Subsequent Transfer Date")
and (y) the date of origination if any
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such Home Equity Mortgage Loan is originated in the month of the related
Subsequent Transfer Date (the "Cut-Off Date").
Closing Date: On or about December 15, 1997.
Description of the
Certificates Offered: The Class A Certificates represent fractional undivided interests in the Trust and
have the rights described in the Pooling and Servicing Agreement dated as of
December 1, 1997 among the Depositor, the Sponsor, the Master Servicer, the Trustee
and the Backup Master Servicer (the "Pooling and Servicing Agreement").
The Trust assets will include a pool of nonconforming, home equity loans
transferred to the Trust on the Closing Date (the "Initial Home Equity Loans"),
additional nonconforming, fixed rate and adjustable rate home equity loans
transferred to the Trust during the Funding Period (the "Subsequent Home
Equity Loans," and, together with the Initial Home Equity Loans, the "Home
Equity Loans"), all interest and principal due under the respective Home
Equity Loans on or after the related Cut-Off Date, security interests in the
properties securing such Home Equity Loans (the "Properties"), amounts
on deposit in the Certificate Account, Pre-Funding Account and Capitalized
Interest Account, and certain other property. In addition to the foregoing,
the Sponsor shall cause the Certificate Insurer to deliver the Insurance Policy
to the Trustee for the benefit of the Owners of the Class A Certificates. See
"Formation of the Trust and Trust Property" herein.
Other Certificates: In addition to the Class A Certificates, the Trust will issue, pursuant to the
Pooling and Servicing Agreement, a residual Class of Certificates (the "Class R
Certificates") which will represent an undivided ownership interest in the Trust.
The Class A Certificates and the Class R Certificates are herein referred to
as the "Certificates." Only the Class A Certificates are offered hereby.
Denominations: The Class A Certificates are issuable in minimum denominations of an original
principal amount of $25,000 and integral multiples of $1,000 in excess thereof.
The Initial Home
Equity Loans: The Initial Home Equity Loans consist of 2,150 nonconforming home equity
loans, of which 2,073 are fixed rate home equity loans and 77 are adjustable rate
home equity loans, and the Notes relating thereto. The Initial Home Equity
Loans are secured by first and second lien mortgages or deeds of trust primarily on
one-to-four family residential properties located in 24 states. No Combined
Loan-to-Value Ratio relating to any Initial Home Equity Loan exceeded 95.00%
as of the Cut-Off Date except for 90 loans with an aggregate Loan Balance of
$1,827,498.83 (or approximately 1.55% of the Initial Aggregate Loan Balance of
the Initial Home Equity Loans), which had a Combined Loan-to-Value Ratio
not greater than 100%. None of the Initial Home Equity Loans are insured by
pool mortgage insurance policies or primary
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mortgage insurance policies; however, certain distributions due to the owners of
the Class A Certificates are insured by the Certificate Insurer pursuant to the
Insurance Policy. See "Credit Enhancement--Insurance Policy" herein.
The Home Equity Loans are not guaranteed by the Depositor, the Sponsor, the Seller,
the Master Servicer, the Backup Master Servicer, the Trustee or any of their
affiliates.
As of the Cut-Off Date, the average Loan Balance of the Initial Home Equity Loans
was $54,788.30. The minimum and maximum Loan Balances of the Initial Home Equity
Loans as of the Cut-Off Date were $4,987.94 and $211,500.00, respectively. As of the
Cutoff Date, the interest rates (the "Coupon Rates") of the Initial Home Equity
Loans ranged from 7.950% to 18.000%; the weighted average Coupon Rate of the Initial
Home Equity Loans was approximately 11.092%; the weighted average Combined
Loan-to-Value Ratio of the Initial Home Equity Loans was approximately 78.21%; the
weighted average remaining term to maturity of the Initial Home Equity Loans was
approximately 281 months; and the remaining terms to maturity of the Initial Home
Equity Loans ranged from 46 months to 360 months. As of the Cut-Off Date,
approximately 94.61% of the aggregate Loan Balance of the Initial Home Equity Loans
were secured by first mortgages and approximately 5.39% of the aggregate Loan
Balance of the Initial Home Equity Loans were secured by second mortgages. Initial
Home Equity Loans containing "balloon" payments represented not more than
approximately 2.37% of the aggregate Loan Balance of the Initial Home Equity Loans.
No Initial Home Equity Loan will mature later than January 1, 2028. See "The Home
Equity Loan Pool--Home Equity Loans" herein.
As of the Cut-off Date, the weighted average remaining period to the next interest
rate adjustment date for the adjustable rate Initial Home Equity Loans was
approximately 22 months; each adjustable rate Initial Home Equity Loan will have an
initial payment adjustment 24 months after the first payment date, an initial cap of
3.00% above the related initial Coupon Rate (except for 4 loans with an aggregate
Loan Balance as of the Cut-Off Date of $350,500.00 that adjust 6 months after the
first payment date and have an initial cap of 1.00% above the related initial Coupon
Rate) and a semi-annual rate adjustment cap of 1.00% above the then current interest
rate for such adjustable rate Initial Home Equity Loan. The weighted average Coupon
Rate of the adjustable rate Initial Home Equity Loans was approximately 10.184% per
annum. The adjustable rate Initial Home Equity Loans had a weighted average gross
margin as of the Cut-off Date of approximately 7.416%. The initial gross margin for
the adjustable rate Initial Home Equity Loans ranged from 5.350% to 10.280%. The
interest rates borne by the adjustable rate Initial Home Equity Loans as of the
Cut-off Date ranged from 7.950% per annum to 13.100% per annum. As of the Cut-off
Date, the maximum
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rates at which interest may accrue on the adjustable rate Initial Home Equity Loans
(the "Maximum Rates") ranged from 13.950% per annum to 19.100% per annum. The
adjustable rate Initial Home Equity Loans had a weighted average Maximum Rate as of
the Cut-off Date of approximately 16.184% per annum. As of the Cut-off Date, the
minimum rates at which interest may accrue on the adjustable rate Initial Home
Equity Loans (the "Minimum Rates") ranged from 7.950% per annum to 13.100% per
annum. As of the Cut-off Date, the weighted average Minimum Rate on the Initial Home
Equity Loans was approximately 10.184% per annum.
In addition to the Initial Home Equity Loans acquired by the Trust on the Closing
Date, the Trust may acquire up to approximately $7,205,157.48 aggregate Loan Balance
in Subsequent Home Equity Loans. The Subsequent Home Equity Loans, if available,
will be originated or purchased by the Sponsor, sold by the Sponsor to the Seller
and by the Seller to the Depositor and then sold by the Depositor to the Trust. The
Subsequent Home Equity Loans, as well as all Home Equity Loans, must conform to
certain specified characteristics. See "--Pre-Funding Feature" below.
Pre-Funding Feature: On the Closing Date, approximately $7,205.157.48 (the "Original Pre-Funded
Amount") will be deposited with the Trustee and used by the Trust to purchase the
Subsequent Home Equity Loans. The Trust will be obligated, subject to the
satisfaction of certain conditions described herein, to purchase the
Subsequent Home Equity Loans from time to time during the Funding Period,
subject to the availability thereof. In connection with each purchase of a
Subsequent Home Equity Loan, the Trust Fund will be required to pay to the
Depositor a cash purchase price equal to the Loan Balance thereof as of the
related Cut-Off Date from the Pre-Funding Account. The Trust Fund may
purchase the Subsequent Home Equity Loans only from the Depositor and not from any
other person and the Depositor may purchase the Subsequent Home Equity Loans
only from the Seller and not from any other person. See "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
The "Funding Period" is the period from the Closing Date until the earliest of (i)
the date on which the amount on deposit in the Pre-Funding Account is less than
$50,000, (ii) the date on which a Master Servicer Termination Event occurs under the
Pooling and Servicing Agreement or (iii) February 28, 1998. The Original Pre-Funded
Amount, as reduced from time to time by the amount thereof applied to the purchase
of Subsequent Home Equity Loans is referred to herein as the "Pre-Funded Amount."
Any Pre-Funded Amount remaining in the Pre-Funding Account at the end of the Funding
Period will be distributed to the Class A Certificateholders as an additional
distribution of principal on the Payment Date which follows the end of the Funding
Period.
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Capitalized Interest Account: On the Closing Date, a portion of the proceeds of the sale of the Class A
Certificates will be required to be deposited in an account (the "Capitalized
Interest Account") in the name of the Trustee on behalf of the Trust. The
amount deposited therein will be used, as necessary, by the Trustee during the
Funding Period to fund the negative carry on the Pre-Funded Amount. Any
amounts remaining in the Capitalized Interest Account on the Payment Date
which follows the end of the Funding Period and not used for such purpose on such
Payment Date are required to be paid directly to the Seller on such Payment
Date.
Final Scheduled Payment
Date: The "Final Scheduled Payment Date" for each Class of Class A Certificates is as set
forth below, although it is anticipated that the actual final Payment Date for each
Class of Class A Certificates will occur significantly earlier than the related
Final Scheduled Payment Date. See "Prepayment and Yield Considerations" herein.
Final Scheduled
Class Payment Date
----- ---------------
Class A-1 Certificates April 25, 2012
Class A-2 Certificates July 25, 2017
Class A-3 Certificates February 25, 2028
Class A Distributions: On the 25th day of each month, or if such a day is not a Business Day, then the
next succeeding Business Day, commencing January 1998 (each such day being a
"Payment Date"), the Trustee will be required to distribute to the Owners of the
Class A Certificates of record as of the last day of the calendar month
preceding the month in which such Payment Date occurs, or, in the case of the
January 1998 Payment Date, the Closing Date (the "Record Date"), the "Class A
Distribution Amount" which shall be the sum of (x) Current Interest and (y) the
Class A Principal Distribution Amount. Such amounts shall be allocated to the
Class A Certificates in the manner described below.
A "Business Day" is any day other than a Saturday or Sunday or a day on which
banking institutions in New York, New York or Greensboro, North Carolina are
authorized or obligated by law or executive order to be closed.
For each Payment Date, Current Interest will be due with respect to the related
Class of Class A Certificates. "Current Interest" with respect to each Class of
Class A Certificates means, with respect to any Payment Date: (i) the aggregate
amount of interest accrued at the related Pass-Through Rate during the calendar
month immediately preceding the month in which such Payment Date occurs (the
"Accrual Period") on the Certificate Principal Balance of the related Class A
Certificates, subject to a reduction in the event of (a) Prepayment Interest
Shortfalls (defined herein), to the extent not covered by the Servicing Fee and (b)
Relief Act Shortfalls (defined herein), plus (ii) the Preference Amount as it
relates
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to interest previously paid on such Class of the Class A Certificates prior to such
Payment Date, plus (iii) the Carry-Forward Amount, if any, with respect to such
Class of Class A Certificates. All calculations of interest on the Class A
Certificates will be made on the basis of a 360-day year assumed to consist of
twelve 30-day months.
Allocations of Interest
and Principal: The Class A Distribution Amount for each Payment Date (to the extent funds are
available therefor) shall be allocated among the Class A Certificates in the
following amounts and in the following order of priority:
(i) First, to the Owners of the Class A Certificates, the related Current Interest
for such Class of Class A Certificates on a pro rata basis (based on each such Class
A Certificate's Current Interest) without any priority among such Class A
Certificates; and
(ii) Second, to the Owners of the Class A Certificates, the Class A Principal
Distribution Amount (as defined below under this heading) shall be distributed as
follows: first, to the Owners of the Class A-1 Certificates until the Class A-1
Certificate Principal Balance is reduced to zero; second, to the Owners of the Class
A-2 Certificates until the Class A-2 Certificate Principal Balance is reduced to
zero; and third, to the Owners of the Class A-3 Certificates until the Class A-3
Certificate Principal Balance is reduced to zero.
The Owners of the Class A Certificates will be entitled to receive on each Payment
Date, in the manner and priority set forth herein, to the extent funds are available
therefor after the Current Interest is distributed to the Owners of such Class A
Certificates, a monthly distribution in reduction of the related Certificate
Principal Balance in the amount described herein.
The Class A Certificates are "sequential pay" classes such that the Owners of the
Class A-3 Certificates will receive no payments of principal until the Class A-2
Certificate Principal Balance has been reduced to zero, and the Owners of the Class
A-2 Certificates will receive no payments of principal until the Class A-1
Certificate Principal Balance has been reduced to zero. Notwithstanding the
foregoing, in the event that a Certificate Insurer Default has occurred, and during
the time such default is continuing, if there is a Subordination Deficit, the Class
A Principal Distribution Amount shall be distributed pro rata to the Owners of all
Classes of the Class A Certificates.
On each Payment Date, distributions in reduction of the Certificate Principal
Balance of the related Class of Class A Certificates will be made in the amounts
described herein. The "Class A Principal Distribution Amount" for each Payment Date
shall be the lesser of:
(a) the Total Available Funds (as defined herein), minus the Expense Fee, plus any
Insured Payment with respect to the Class A Certificates,
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minus the Current Interest for such Payment Date with respect to the Class A
Certificates; and
(b) the excess, if any, of
(i) the sum of:
(A) the Preference Amount with respect to principal owed to each
Owner of Class A Certificates that remains unpaid as of such Payment
Date;
(B) the principal portion of all scheduled monthly payments on the
Home Equity Loans due on or prior to the related Due Date thereof, to
the extent actually received by the Trustee during the related
Remittance Period and any Prepayments made by the Mortgagors and
actually received by the Trustee during the related Remittance
Period;
(C) the balance of each Home Equity Loan (the "Loan Balance") that
was repurchased by the Sponsor or the Seller or purchased by the
Master Servicer on or prior to the related Monthly Remittance Date,
to the extent such Loan Balance is actually received by the Trustee
during the related Remittance Period;
(D) any Substitution Amounts (i.e. the excess, if any, of the Loan
Balance of a Home Equity Loan being replaced over the outstanding
principal balance of a replacement Home Equity Loan plus accrued and
unpaid interest) delivered by the Sponsor or the Seller on the
related Monthly Remittance Date in connection with a substitution of
a Home Equity Loan (to the extent such Substitution Amounts relate to
principal), to the extent such Substitution Amounts are actually
received by the Trustee on the related Remittance Date;
(E) all Net Liquidation Proceeds actually collected by or on behalf
of the Master Servicer with respect to the Home Equity Loans during
the related Remittance Period (to the extent such Net Liquidation
Proceeds relate to principal), to the extent such Net Liquidation
Proceeds are actually received by the Trustee during the related
Remittance Period;
(F) the amount of any Subordination Deficit for such Payment Date;
(G) the principal portion of the proceeds received by the Trustee
upon termination of the Trust (to the extent such
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proceeds relate to principal);
(H) with respect to the Payment Date immediately following the last
day of the Funding Period, all amounts remaining on deposit in the
Pre-Funding Account to the extent not used to purchase Subsequent
Home Equity Loans during such Funding Period; and
(I) the amount of any Subordination Increase Amount (as defined
herein) for such Payment Date to the extent of any Net Monthly Excess
Cashflow available for such purpose;
over
(ii) the amount of any Subordination Reduction Amount (as defined herein)
for such Payment Date.
The "Preference Amount" is any amount previously distributed to an Owner on a Class
A Certificate that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy Code
(Title 11 of the United States Code).
The "Remittance Period" with respect to any Monthly Remittance Date is the calendar
month immediately preceding such Monthly Remittance Date. A "Monthly Remittance
Date" is any date on which funds on deposit in the Principal and Interest Account
are remitted to the Certificate Account, which is the 18th day of each month, or if
such day is not a Business Day, the preceding Business Day, commencing in January
1998.
A "Subordination Deficit" with respect to a Payment Date is the amount, if any, by
which (x) the Class A Certificate Principal Balance after taking into account all
distributions to be made on such Payment Date (except for any Insured Payment and
any distributions from amounts in the Pre-Funding Account), exceeds (y) the
aggregate Loan Balance as of the close of business on the last day of the related
Remittance Period (plus any amounts remaining in the Pre-Funding Account on the last
day of the related Remittance Period).
Delinquency Advances and
Compensating Interest: Subject to the Master Servicer's determination, in its reasonable business
judgment, that any proposed Delinquency Advance not be recoverable, the Master
Servicer shall be required to remit to the Trustee for deposit to the
Certificate Account out of the Master Servicer's own funds any delinquent
payment of interest with respect to each delinquent Home Equity Loan, which
payment was not received on or prior to the related Monthly Remittance Date and
was not theretofore advanced by the Master Servicer. Such amounts of the Master
Servicer's own funds so deposited are "Delinquency Advances." Such Delinquency
Advances are reimbursable to the Master Servicer, as provided in the Pooling and
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Servicing Agreement. To the extent that the Master Servicer previously has
made Delinquency Advances with respect to a Home Equity Loan that the Master
Servicer subsequently determines to be nonrecoverable, the Master Servicer
shall be entitled to reimbursement from the Trust. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
If a prepayment in full of a Home Equity Loan or a Prepayment of at least six times
a Mortgagor's Monthly Payment occurs during any calendar month, any difference
between the interest collected from the Mortgagor in connection with such payoff and
the full month's interest at the Coupon Rate that would be due on the related due
date for such Home Equity Loan (such difference, the "Compensating Interest") (but
not in excess of the aggregate Servicing Fee for the related Remittance Period),
will be required to be deposited to the Principal and Interest Account (or if such
difference is an excess, the Master Servicer shall retain such excess) on the next
succeeding Monthly Remittance Date by the Master Servicer and shall be included in
the Monthly Remittance Amount to be made available to the Trustee on the next
succeeding Monthly Remittance Date.
Servicing Advances: Subject to the Master Servicer determination, in its reasonable business
judgment, that any proposed advance not be recoverable, the Master Servicer will
be required to pay all "out of pocket" costs and expenses incurred in the
performance of its servicing obligations, including, but not limited to, (i)
expenditures in connection with a foreclosed Home Equity Loan prior to the
liquidation thereof, including, without limitation, expenditures for real
estate property taxes, hazard insurance premiums, property restoration or
preservation ("Preservation Expenses"), (ii) the cost of any enforcement or
judicial proceedings, including foreclosures and (iii) the cost of the
management and liquidation of Property acquired in satisfaction of the related
Mortgage. Such costs and expenses will constitute "Servicing Advances." The
Master Servicer may recover a Servicing Advance from the Trust as provided
under the Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreement--Servicing and Sub-Servicing" herein.
Monthly Servicing Fee: The Master Servicer will retain a fee (the "Servicing Fee") equal to 0.50% per
annum, payable monthly at one-twelfth the annual rate of the then outstanding
principal balance of each Home Equity Loan serviced as of the first day of each
Remittance Period. The Master Servicer will also be able to retain late fees,
prepayment charges, and certain other amounts and charges as additional servicing
compensation. The Master Servicer will compensate the Backup Master Servicer out of
the Servicing Fee.
Credit Enhancement: The credit enhancement provided for the benefit of the Owners of the Class A
Certificates consists of (x) the overcollateralization mechanics which utilize the
internal cash flows of the Trust and (y) the Insurance
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Policy.
Overcollateralization. The credit enhancement provisions of the Trust result in a
limited acceleration of the Class A Certificates (in the aggregate) relative to the
amortization of the Home Equity Loans in the early months of the transaction. The
accelerated amortization is achieved by the application of certain excess interest
to the payment in reduction of the applicable Certificate Principal Balance. This
acceleration feature creates overcollateralization (i.e., the excess of the
aggregate outstanding Loan Balance of the Home Equity Loans over the Class A
Certificate Principal Balance) of the Class A Certificates. Once the required level
of overcollateralization is reached, and subject to the provisions described in the
next paragraph, the acceleration feature will cease.
The Pooling and Servicing Agreement provides that, subject to certain floors, caps
and triggers, the required level of overcollateralization may increase or decrease
over time. An increase would result in a temporary period of accelerated
amortization of the Class A Certificates to increase the actual level of
overcollateralization to its required level; a decrease would result in a temporary
period of decelerated amortization to reduce the actual level of
overcollateralization to its required level.
As a result of the "sequential pay" feature of the Class A Certificates, any such
accelerated principal will be paid to that Class of the Class A Certificates then
entitled to receive distributions of principal.
See "Prepayment and Yield Considerations," "Credit Enhancement--
Overcollateralization Provisions" herein and "Credit Support" in the Prospectus.
Certificate Insurance Policy. Financial Security Assurance Inc. (the "Certificate
Insurer") will issue a certificate guaranty insurance policy (the "Insurance
Policy") pursuant to which it will irrevocably and unconditionally guarantee payment
on each Payment Date to the Trustee for the benefit of the holders of each Class of
Class A Certificates of an amount equal to the related Current Interest and any
Subordination Deficit for such Payment Date. The amount of the actual payment, if
any, made by the Certificate Insurer to the Owners of the Class A Certificates under
the Insurance Policy on each Payment Date (the "Insured Payment") is the sum
(without duplication) of (i) any shortfall in the amount required to pay the related
Subordination Deficit for such Payment Date from a source other than the Insurance
Policy, (ii) any shortfall in the amount required to pay the related Current
Interest for such Payment Date from a source other than the Insurance Policy and
(iii) any shortfall in the amount required to pay the related Preference Amount for
such Payment Date from a source other than the Insurance Policy. The effect of the
Insurance Policy is to guaranty the timely payment of interest on, and the ultimate
payment of the principal amount
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of, each Class of Class A Certificates. Notwithstanding the foregoing, the
Certificate Insurer is permitted at its sole option, but is not required, to pay any
losses in connection with the liquidation of a Home Equity Loan in accordance with
the Insurance Policy.
Except upon the occurrence of a Certificate Insurer Default, the Certificate Insurer
shall have the right to exercise certain rights of the Owners of the Class A
Certificates, as specified in the Pooling and Servicing Agreement, without any
consent of such Owners; and such Owners may exercise such rights only with the prior
written consent of the Certificate Insurer, except as provided in the Pooling and
Servicing Agreement. In addition, to the extent of unreimbursed payments under the
Insurance Policy, the Certificate Insurer will be subrogated to the rights of the
Owners of the Class A Certificates on which such Insured Payments were made. In
connection with each Insured Payment on a Class A Certificate, the Trustee, as
attorney-in-fact for the Owner thereof, will be required to assign to the
Certificate Insurer the rights of such Owner with respect to the related Class A
Certificate to the extent of such Insured Payment. "Certificate Insurer Default" is
defined under the Pooling and Servicing Agreement as (x) the failure by the
Certificate Insurer to make a required payment under the Insurance Policy or (y) the
bankruptcy or insolvency of the Certificate Insurer.
The Certificate Insurer is a New York monoline insurance company engaged
exclusively in the business of writing financial guaranty insurance,
principally in respect of asset-backed and other collateralized securities
offered in domestic and foreign markets. The Certificate Insurer's claims
paying ability is rated "Aaa" by Moody's Investors Services, Inc. ("Moody's") and
"AAA" by each of Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. ("Standard & Poor's"), Fitch Investors Service, L.P.
("Fitch"), Nippon Investors Service, Inc. and Standard & Poor's
(Australia) Pty. Ltd. See "The Certificate Insurer" herein.
Book-Entry Registration of
the Class A Certificates: Each Class of Class A Certificates will initially be issued in book-entry
form. Persons acquiring beneficial ownership interests in such Class A
Certificates ("Beneficial Owners") may elect to hold their interests through The
Depository Trust Company ("DTC"). Transfers within DTC will be in
accordance with the usual rules and operating procedures thereof. So long as the
Class A Certificates are Book-Entry Certificates (as defined herein), such
Certificates will be evidenced by one or more Certificates registered in the name
of Cede & Co. ("Cede"), as the nominee of DTC. The Class A Certificates will
initially be registered in the name of Cede. The interests of the Owners of such
Certificates will be represented by book-entries on the records of DTC and
participating members thereof. No Beneficial Owner will be entitled to receive a
definitive certificate representing such person's interest, except in the event
that Definitive Certificates (as defined herein) are issued under the
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limited circumstances described herein. All references in this Prospectus
Supplement to any Class A Certificates reflect the rights of Beneficial Owners only
as such rights may be exercised through DTC and its participating
organizations for so long as such Class A Certificates are held by DTC. See
"Description of the Class A Certificates--Book-Entry Registration of the Class A
Certificates" herein, and "Description of the Certificates--Book-Entry
Registration" in the Prospectus.
Optional Termination: The Master Servicer will have the right to purchase all the Home Equity Loans on
any Monthly Remittance Date (each, a "Master Servicer Optional Termination Date")
when the aggregate Loan Balance of the Home Equity Loans as of the end of the
preceding Remittance Period has declined to 10% or less of the Initial Aggregate
Loan Balance plus the aggregate outstanding Loan Balance of the Subsequent
Home Equity Loans as of their respective Cut-Off Dates (such sum, the "Maximum
Collateral Amount"). See "The Pooling and Servicing Agreement--Optional
Termination" herein.
Ratings: It is a condition of issuance of the Class A Certificates that the Class A
Certificates receive ratings of "AAA" by Standard & Poor's, and "Aaa" by
Moody's. Standard & Poor's and Moody's are referred to herein collectively as the
"Rating Agencies." A security rating is not a recommendation to buy, sell or hold
securities, and may be subject to revision or withdrawal at any time by the
assigning entity. No Rating Agency is obligated to maintain any rating on any
Certificate, and, accordingly, there can be no assurance that the rating
assigned to any Class of Certificate upon initial issuance thereof will not be
lowered or withdrawn at any time thereafter. See "Ratings" herein.
Federal Tax Aspects: For federal income tax purposes, an election will be made to treat certain
assets of the Trust Estate as a "real estate mortgage investment conduit"
("REMIC"). Each Class of the Class A Certificates will be designated as a
"regular interest" in the REMIC and such Certificates will be treated as debt
instruments of the REMIC for federal income tax purposes. The Class R
Certificates will be designated as the sole "residual interest" in the REMIC.
Owners of the Class A Certificates, including Owners that generally report income on
the cash method of accounting, will be required to include interest on the Class A
Certificates in income in accordance with the accrual method of accounting. In
addition, the Class A Certificates may be considered to have been issued with
original issue discount or at a premium. Any such original issue discount will be
includible in the income of the Owner as it accrues under a method taking into
account the compounding of interest and using the Prepayment Assumption described
herein. Premium may be deductible by the Owner either as it accrues or when
principal is received. No representation is made as to whether the Home Equity Loans
will prepay at the assumed rate, or any
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other rate. See "Prepayment and Yield Considerations" herein. In general, as a
result of the qualification of the Class A Certificates as regular interests in a
REMIC, the Class A Certificates will be treated as assets described in Section
7701(a)(19)(C) of the Internal Revenue Code of 1986, as amended (the "Code") in the
same proportion that the assets in the REMIC consist of qualifying assets under such
sections. In addition, interest on the Class A Certificates will be treated as
"interest on obligations secured by mortgages on real property" under Section 856(c)
of the Code to the extent that such Class A Certificates are treated as "real estate
assets" under Section 856(c) of the Code. For further information regarding the
federal income tax consequences of investing in the Class A Certificates, see
"Certain Federal Income Tax Consequences" herein and in the Prospectus.
ERISA Considerations: Subject to the considerations discussed under "ERISA Considerations" herein, the
Class A Certificates may be purchased by employee benefit or other retirement
arrangements which are subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA") or Section 4975 of the Code. See "ERISA Considerations"
herein and in the Prospectus.
Legal Investment
Considerations: Although the Class A Certificates are expected to be rated "AAA" by Standard &
Poor's and "Aaa" by Moody's, the Class A Certificates will not constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") because the Home Equity Loans include second
liens. Accordingly, many institutions with legal authority to invest in
comparably rated securities based on first home equity loans may not be
legally authorized to invest in the Class A Certificates. See "Legal
Investment Considerations" herein.
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RISK FACTORS
Prospective investors in the Class A Certificates should consider,
among other things, the following risk factors (as well as the factors set forth
under "Risk Factors" in the Prospectus) in connection with the purchase of the
Class A Certificates.
Limited Liquidity. There is currently no secondary market for the Class
A Certificates. The Underwriter currently intends to make a market in the Class
A Certificates, but it is under no obligation to do so. There can be no
assurance that a secondary market will develop or, if a secondary market does
develop, that it will provide the holders of Class A Certificates with liquidity
of investment or that it will continue for the life of the Class A Certificates.
Limited Operating History. The Sponsor began originating home equity
loans in 1989. Prior to June 1997, the Sponsor sold all of its home equity loans
in whole loan transactions on a servicing released basis and consequently, the
Master Servicer does not have any significant historical loss and delinquency
data relating to its home equity loan portfolio that may be referred to for
purposes of estimating the future delinquency and loss experience of mortgage
loans similar to the Home Equity Loans being sold to the Trust.
Servicing Risk. The servicing of home equity loans of the type
originated or purchased by the Sponsor requires special skill and diligence. The
Master Servicer has very limited experience servicing home equity loans. In
addition, the Master Servicer is not a FNMA-approved servicer of conventional
mortgage loans. Under the terms of the Pooling and Servicing Agreement, the
Master Servicer will be responsible for the servicing of all the Home Equity
Loans and will directly service all of the Home Equity Loans. Any failure of the
Master Servicer to adequately service the Home Equity Loans may result in a
higher default rate which may result in accelerated prepayment on the Class A
Certificates. In addition, the Pooling and Servicing Agreement provides that the
rights and obligations of the Master Servicer terminate each calendar quarter
unless (x) renewed by the Certificate Insurer for successive quarterly periods
or (y) a Certificate Insurer Default has occurred and is continuing. The Sponsor
anticipates that the Certificate Insurer will agree to grant continuous renewals
so long as no Master Servicer Termination Event has occurred. If the Master
Servicer is terminated, servicing of the Home Equity Loans will be transferred
to the Backup Master Servicer or, unless a Certificate Insurer Default has
occurred and is continuing, to another successor Master Servicer selected by the
Certificate Insurer. See "The Pooling and Servicing Agreement - Removal and
Resignation of Master Servicer" herein. During and immediately following a
servicing transfer, interruptions in servicing may occur and the Home Equity
Loans may suffer a higher default rate which may result in accelerated
prepayment on the Class A Certificates.
Underwriting Standards. The Sponsor's underwriting standards generally
are less stringent than those of FNMA or FHLMC with respect to a borrower's
capacity, collateral and in certain other respects. The Home Equity Loans
originated or acquired by the Sponsor will have been made to borrowers that
typically have limited access to traditional mortgage financing for a variety of
reasons, such as impaired past credit experience, limited credit history,
insufficient home equity value, or a high level of debt-to-income ratios. As a
result of this approach to underwriting, the Home Equity Loans in the Trust are
likely to experience higher rates of delinquencies, defaults and foreclosures
than home equity mortgage loans underwritten in a more traditional manner.
In addition, borrowers often have financing needs in excess of the
amount that the Sponsor's first lien mortgage underwriting guidelines described
under "The Sponsor and Master Servicer" herein would otherwise permit the
Sponsor to finance. In such circumstances, the Sponsor frequently offers a
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"piggyback" second lien mortgage in addition to the Sponsor's first lien
mortgage to finance such excess amount up to a maximum Combined
Loan-to-Value-Ratio of 125%, and, with respect to any Home Equity Loans conveyed
to the Trust, up to a maximum Combined Loan-to-Value Ratio of 100%. Although the
Trust Estate does not contain any such "piggyback" second lien mortgages secured
by the same Properties that secure first lien mortgages that are included in the
Trust Estate, approximately 57.08% of the aggregate Loan Balance of the Initial
Home Equity Loans that are secured by first lien mortgages are subject to
piggyback second lien mortgages. As a result, although the weighted average
Combined Loan-to-Value Ratio of the Initial Home Equity Loans as of the Cutoff
Date is approximately 78.21%, borrowers with piggyback second lien mortgages may
have little or no equity in their homes. It is expected that borrowers of such
nonconforming home equity loans with little or no equity in their homes will
have a higher incidence of default than borrowers of such nonconforming loans
with substantial equity in their homes. Any increased prepayments on the Home
Equity Loans resulting therefrom will be borne by the Certificateholders.
Property Characteristics. The Sponsor originates nonconforming home
equity loans secured by one-to-four-family residences, including townhomes and
condominiums. The Sponsor's systems do not track the type of property securing
its home equity loans and, consequently, there is no distribution provided
herein of the type of Properties securing the Home Equity Loans. Certain
property types such as single-family detached homes are generally considered
better collateral than other types, such as townhomes, because of relative
stability in resale value, the nature of the related Borrower, and other
factors. There can be no assurance that the Properties securing the Home Equity
Loans are not disproportionately comprised of less desirable property types.
However, the Sponsor believes that a substantial majority of the Initial Home
Equity Loans are secured by single-family detached homes. It is expected that
borrowers with respect to less desirable property types will have a higher
incidence of default than borrowers with respect to more desirable property
types. Any increased prepayments on the Home Equity Loans resulting therefrom
will be borne by the Certificateholders.
The Subsequent Home Equity Loans and the Pre-Funding Account. If the
principal amount of eligible Subsequent Home Equity Loans available during the
Funding Period and sold by the Depositor to the Trust is less than 100% of the
Original Pre-Funded Amount, a prepayment of principal to the Holders of the
Class A Certificates will occur as described herein. In addition, any conveyance
of Subsequent Home Equity Loans is subject to the following conditions, among
others: (i) each such Subsequent Home Equity Loan must satisfy the
representations and warranties specified in the agreement pursuant to which such
Subsequent Home Equity Loans are transferred from the Seller to the Depositor
and from the Depositor to the Trust (each a "Subsequent Transfer Agreement") and
in the Pooling and Servicing Agreement; (ii) the Seller will not select such
Subsequent Home Equity Loans in a manner that it believes is adverse to the
interests of the Certificateholders; (iii) the Seller will deliver or cause to
be delivered certain opinions of counsel with respect to the validity of the
conveyance of such Subsequent Home Equity Loans; and (iv) as of each Cut-Off
Date applicable thereto, the Home Equity Loans, including the Subsequent Home
Equity Loans to be conveyed by the Depositor to the Trust as of such Cut-Off
Date, will satisfy the criteria described herein under "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
To the extent that amounts on deposit in the Pre-Funding Account have
not been fully applied to the purchase of Subsequent Home Equity Loans by the
Trust Estate by the end of the Funding Period, the Holders of the Class A
Certificates entitled to receive principal on the related Payment Date will
receive a prepayment of principal in an amount equal to the amount remaining in
the Pre-Funding Account on the Payment Date following the end of the Funding
Period. Although no assurances can be given, the Seller and Sponsor expect that
the principal amount of Subsequent Home Equity Loans sold to the Depositor for
sale to the Trust will require the application of substantially all amounts on
deposit in the Pre-
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Funding Account and that there will be no material principal prepayment to the
Holders of the Class A Certificates from the Pre-Funding Account.
Each Subsequent Home Equity Loan must satisfy the eligibility criteria
referred to above at the time of its addition. Following the transfer of
Subsequent Home Equity Loans to the Trust, the Seller anticipates that the
aggregate characteristics of the Home Equity Loans will not vary significantly
from those of the Initial Home Equity Loans. See "The Home Equity Loan
Pool--Conveyance of Subsequent Home Equity Loans" herein.
Yield Considerations Relating to Excess Cash. Net Monthly Excess
Cashflow will be distributed in reduction of the applicable Certificate
Principal Balance on each Payment Date to the extent the then applicable
Specified Subordinated Amount exceeds the Subordinated Amount (assuming
application of 100% of principal collections received during such Remittance
Period but prior to the application of any Subordination Increase Amount) for
such Payment Date. 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 Net
Monthly Excess Cashflow is distributed in reduction of the applicable
Certificate Principal Balance. If the actual rate of such Net Monthly Excess
Cashflow 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
Net Monthly Excess Cashflow 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 Net Monthly Excess Cashflow on any Payment Date will be affected by
the actual amount of interest received, collected or recovered in respect of the
Home Equity Loans during the related Remittance Period and such amount will be
influenced by changes in the weighted average of the Coupon Rates of the Home
Equity Loans resulting from prepayments and liquidations of Home Equity Loans
and adjustments in the Coupon Rate of the adjustable rate Home Equity Loans. The
amount of Net Monthly Excess Cashflow distributions applied in reduction of the
applicable Certificate Principal Balance on each Payment Date will be based on
the then applicable Specified Subordinated Amount, which may increase or
decrease during the period any Class of Class A Certificates remains
outstanding. Any increase in the Specified Subordinated Amount may result in an
accelerated rate of amortization of the Class A Certificates until the
Subordinated Amount equals such Specified Subordinated Amount and any decrease
in the Specified Subordinated Amount will result in a decelerated rate of
amortization of the Class A Certificates until the Subordinated Amount equals
the Specified Subordinated Amount.
Sensitivity to Prepayments. At least 90% of the Initial Home Equity
Loans may be prepaid by the related Mortgagors in whole or in part, at any time
without payment of any prepayment fee or penalty. In addition, a substantial
portion of the Initial Home Equity Loans contain due-on-sale provisions which,
to the extent enforced by the Master Servicer, will result in prepayment of such
Home Equity Loans. See "Prepayment and Yield Considerations" herein and "Certain
Legal Aspects of the Loans--Enforceability of Prepayment and Late Payment Fees"
in the Prospectus. The rate of prepayments on home equity loans is sensitive to
prevailing interest rates. Generally, if prevailing interest rates fall
significantly below the interest rates on the fixed rate Home Equity Loans, the
fixed rate Home Equity Loans are likely to be subject to higher prepayment rates
than if prevailing rates remain at or above the interest rates on the fixed rate
Home Equity Loans. In addition, in a declining interest rate environment,
adjustable rate home equity loans could be subject to higher prepayment rates
because of the availability of fixed rate home equity loans at the lower
interest rates. Conversely, if prevailing interest rates rise significantly, the
rate of prepayments on fixed rate and adjustable rate Home Equity Loans is
likely to decrease. In addition, repurchases or purchases from the Trust of Home
Equity Loans required or permitted to be made by the Sponsor, the Seller and the
Master Servicer under the Pooling and Servicing Agreement will have the same
effect on the holders of the related Class of
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Certificates as a prepayment of the related Home Equity Loans. Further, since
substantially all of the adjustable rate Home Equity Loans have initial payment
adjustment dates two years after the related first payment date and an initial
rate adjustment cap of 3% above the related initial Coupon Rate, borrowers under
adjustable rate Home Equity Loans may be more likely either to prepay
voluntarily or to default as a result of the potential for significantly higher
payments following such initial adjustment.
The average life of each Class of Class A Certificates, and, if
purchased at other than par, the yields realized by Owners of the Class A
Certificates will be sensitive to levels of payment (including prepayments
relating to the Home Equity Loans (the "Prepayments")) on the Home Equity Loans.
In general, the yield on a Class of Class A Certificates that is purchased at a
premium from the outstanding principal amount thereof will be adversely affected
by a higher than anticipated level of Prepayments of the Home Equity Loans and
enhanced by a lower than anticipated level. Conversely, the yield on a Class of
Class A Certificates that is purchased at a discount from the outstanding
principal amount thereof will be enhanced by a higher than anticipated level of
Prepayments and adversely affected by a lower than anticipated level. See
"Prepayment and Yield Considerations" herein.
Prepayments, liquidations, repurchases and purchases of the Home Equity
Loans will result in distributions to Certificateholders of principal amounts
that would otherwise be distributed over the remaining terms of the Home Equity
Loans. 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 it is
purchased at a premium or discount and the degree to which the timing of payment
thereon is sensitive to prepayments, liquidations, repurchases and purchases of
Home Equity Loans. In the case of any Certificate purchased at a discount, an
investor should consider the risk that a slower than anticipated rate of
principal payments on the Home Equity Loans could result in an actual yield to
such investor that is lower than the anticipated yield and, in the case of any
Certificate purchased at a premium, the risk that a faster than anticipated rate
of prepayments, liquidations, repurchases and purchases could result in an
actual yield to such investor that is lower than the anticipated yield. Further,
there can be no assurance that Certificateholders will be able to reinvest
distributions in respect of prepayments, liquidations, repurchases and purchases
of the Home Equity Loans in securities or other instruments that have a yield
comparable to that of the related Class of Class A Certificates.
Nature of Collateral; Junior Liens. An overall decline in the
residential real estate market, the general condition of a Property, or other
factors, could adversely affect the values of the Properties such that the
outstanding balances of the Home Equity Loans, together with any senior liens on
the Properties, equal or exceed the value of the Properties. A decline in the
value of a Property would affect the interest of the Trust in the Property
before having any effect on the interest of the related first mortgagee, and
could cause the Trust's interest in the Property to be extinguished. If such a
decline occurs, the actual rates of delinquencies, foreclosures and losses on
the Home Equity Loans could be higher than those currently experienced in the
mortgage lending industry in general. In addition, adverse economic conditions
(which may or may not affect real property values) may affect the timely payment
by borrowers of scheduled payments of principal and interest on the Home Equity
Loans and, accordingly, the actual rates of delinquencies, foreclosures and
losses with respect to the Trust.
Because 5.39% of the Initial Home Equity Loans (by Initial Aggregate
Loan Balance) are secured by second liens subordinate to the rights of the
mortgagee or beneficiary under the related first mortgage or deed of trust, the
proceeds from any liquidation, insurance or condemnation proceedings with
respect to such Home Equity Loans will be available to satisfy the outstanding
balance of a junior lien Home Equity Loan only to the extent that the claims of
such first mortgagee or beneficiary have been satisfied in full, including any
related foreclosure costs. In addition, a second mortgagee may not foreclose on
the property securing a second mortgage unless it forecloses subject to the
first mortgage, in
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which case it must either pay the entire amount due on the first mortgage to the
first mortgagee at or prior to the foreclosure sale or undertake the obligation
to make payments on the first mortgage in the event the mortgagor is in default
thereunder. In servicing second mortgages in its portfolio, the Master Servicer
generally will satisfy the first mortgage at or prior to the foreclosure sale.
The Master Servicer may also advance funds to keep the first mortgage current
until such time as the Master Servicer satisfies the first mortgage. The Trust
will have no source of funds (and may not be permitted under the REMIC
provisions of the Code) to satisfy the first mortgage or make payments due to
the first mortgagee. The Master Servicer generally will be required to advance
such amounts in accordance with the Pooling and Servicing Agreement. See "The
Pooling and Servicing Agreement--Servicing and Sub-Servicing" herein.
Risks Associated with Geographic Concentration of Properties. 35.52%
and 21.15% of the Initial Home Equity Loans (in each case by Initial Aggregate
Loan Balance) are secured by Properties located in North Carolina and Virginia
respectively. Adverse economic conditions in North Carolina or Virginia (which
may not affect real property values) may affect the timely payment by borrowers
of scheduled payments of principal and interest on such Home Equity Loans and,
accordingly, the actual rates of delinquencies, foreclosures and losses on such
Home Equity Loans could be higher than those currently experienced in the
mortgage lending industry in general.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the Sponsor. 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 Home Equity Loans. The Sponsor will be required
to repurchase any Home Equity Loans which, at the time of origination, did not
comply with applicable federal and state laws and regulations. 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 Trust to collect all or part of the principal of or interest on
the Home Equity Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Sponsor to damages and
administrative enforcement. See "Certain Legal Aspects of Loans" in the
Prospectus.
The Home Equity Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z
promulgated thereunder, which require certain disclosures to the
borrowers regarding the terms of the Home Equity Loans;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use
and reporting of information related to the borrower's credit
experience.
In addition, a portion of the Home Equity Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act"), which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, which is the
implementing regulation of the Truth-in-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to
non-purchase money home equity loans with high interest rates or high upfront
fees and charges. In general, home equity loans within the purview of the Riegle
Act have annual percentage rates over 10% greater than the yield
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on Treasury Securities of comparable maturity and/or fees and points which
exceed the greater of 8% of the total loan amount or $400. The provisions of the
Riegle Act apply on a mandatory basis to all applicable home equity loans
originated on or after October 1, 1995. These provisions can impose specific
statutory liabilities upon creditors who fail to comply with their provisions
and may affect the enforceability of the related loans. In addition, any
assignee of the creditor would generally be subject to all claims and defenses
that the consumer could assert against the creditor, including, without
limitation, the right to rescind the home equity loan. The Sponsor will
represent and warrant in the Pooling and Servicing Agreement that each Home
Equity Loan was originated in compliance with all applicable laws including the
Truth-in-Lending Act, as amended.
Violations of certain provisions of these federal laws may limit the
ability of the Sponsor to collect all or part of the principal of or interest on
the Home Equity Loans and, in addition, could subject the Sponsor or the Seller
to damages and administrative enforcement. The Sponsor will be required to
repurchase any Home Equity Loans which, at the time of origination did not
comply with such federal laws or regulations. See "Certain Legal Aspects of
Loans" in the Prospectus.
Risks Associated with Certain Origination Fees. Fees earned on the
origination of loans, placement of related insurance and other services provided
by the Sponsor are often paid by the borrower out of related loan proceeds. From
time to time, in the ordinary course of their businesses, originators of home
equity loans have been named in legal actions brought by mortgagors challenging
the amount or method of imposing or disclosing such fees. To date, no such
action has been decided against the Sponsor. If such an action against the
Sponsor with respect to any Home Equity Loan were successful, a court might
require that the principal balances of the related Home Equity Loans be reduced
by the amount of contested fees or charges. Any such reductions could result in
substantial Realized Losses during one or more Accrual Periods, potentially
requiring accelerated distributions in reduction of the Certificate Principal
Balance of one or more Classes of Class A Certificates.
Risk Associated with the Certificate Insurer. If the protection
afforded by over-collateralization is insufficient and if, upon the occurrence
of a Subordination Deficit, the Certificate Insurer is unable to meet its
obligations under the Certificate Insurance Policy, then the Owners of the Class
A Certificates could experience a loss on their investment.
Book Entry Registration. Because transfers and pledges of Class A
Certificates may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Class A Certificates may be reduced to the extent that some investors are
unwilling to hold Class A Certificates in book entry form in the name of
Clearing Agency Participants and the ability to pledge Class A Certificates may
be limited due to lack of a physical certificate. Beneficial Owners of Class A
Certificates may, in certain cases, experience delay in the receipt of payments
of principal and interest because such payments will be forwarded by the Trustee
to the Clearing Agency who will then forward payment to the Clearing Agency
Participants who will thereafter forward payment to Beneficial Owners. In the
event of the insolvency of the Clearing Agency or of a Clearing Agency
Participant in whose name Class A Certificates are recorded, the ability of
Beneficial Owners to obtain timely payment and (if the limits of applicable
insurance coverage by the Securities Investor Protection Corporation are
exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Class A Certificates may be impaired.
Limited Nature of Ratings. It is a condition to the issuance of the
Class A Certificates that each Class of Class A Certificates be rated "Aaa" by
Moody's and "AAA" by Standard & Poor's. See "Summary of Terms--Ratings" herein.
A security rating is not a recommendation to buy, sell or hold securities and
may be subject to revision or withdrawal at any time. No person is obligated to
maintain the rating on any Class A Certificate, and, accordingly, there can be
no assurance that the ratings
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assigned to any Class of Class A Certificates will not be lowered or withdrawn
by a Rating Agency at any time thereafter. In the event any rating is revised or
withdrawn, the liquidity of the related Class A Certificates may be adversely
affected. The rating of the Class A Certificates will depend primarily on the
creditworthiness of the Certificate Insurer. Any reduction in the rating
assigned to the claims-paying ability of the Certificate Insurer below the
rating initially given to the related Class A Certificates would likely result
in a reduction in the rating of the Class A Certificates. See "Ratings" herein.
THE SPONSOR AND MASTER SERVICER
General
First Greensboro Home Equity, Inc., a North Carolina corporation is a
specialty consumer finance company founded in 1989 that engages in originating,
purchasing and selling primarily nonconforming home equity loans, both directly
and through a wholly owned subsidiary, Miracle Mortgage Inc., d.b.a. New World
Mortgage ("New World" and, together with First Greensboro Home Equity, Inc.,
"First Greensboro" or the "Company"), acquired by First Greensboro Home Equity,
Inc. in October 1997. Since inception, First Greensboro has focused on lending
to individuals who have substantial equity in their homes but have impaired or
limited credit histories. The Company's loans to these borrowers are made for
such purposes as debt consolidation, refinancing, home improvement or
educational expenses. Substantially all of the Company's loans are secured by
first or second mortgage liens on one-to-four family residences, have
amortization schedules ranging from 5 years to 30 years. Although the Company's
home equity loans primarily bear interest at fixed rates, New World offers
variable rate and fixed rate home equity loans and First Greensboro Home Equity,
Inc. has begun underwriting variable rate home equity loans since its
acquisition of New World.
First Greensboro originates home equity loans primarily through First
Greensboro Home Equity, Inc.'s retail network of 45 branch offices located in
twelve states in the Southeast and Midwest regions operated under the First
Greensboro name and through New World's five branch offices located in Utah and
Idaho. In addition, the Company also obtains loans on a wholesale basis from
approved mortgage brokers and purchases loans on a correspondent basis from
selected financial institutions. The Company's strategy is to utilize these
different origination channels to generate growth in the volume of loans
originated or purchased while diversifying its sources of loans and maintaining
emphasis on its underwriting standards. First Greensboro Home Equity, Inc.'s
total loan originations and purchases increased from $139.7 million in 1995 to
$246.9 million in 1996 and were $250.5 million during the nine months ended
September 30, 1997. Of First Greensboro Home Equity, Inc.'s total loan
production during the first nine months of 1997, 79.2% were originated through
First Greensboro Home Equity, Inc.'s branch office network, 18.3% were purchased
through brokers and 2.5% were purchased from financial institutions. The
acquisition of New World was made in furtherance of the Company's growth and
diversification strategy. In addition to allowing the Company to enter the new
markets of Utah and Idaho with an established operation and experienced
personnel, the Company expects New World to generate significant increases in
loan volume. In the nine months ended September 30, 1997, New World's
originations and purchases of home equity loans equaled $57.7 million. The
Company also evaluates products that it believes are complementary to its
existing loan offerings and that may enable it to utilize its experience in the
nonconforming home equity loan sector to achieve additional growth. In
furtherance of this strategy, the Company acquired a conforming loan broker in
1996 to originate loans for customers that could qualify for conventional bank
financing and it currently is expanding into the origination and purchase of
Title I home improvement loans insured by the United States Department of
Housing and Urban Development.
The Company's customers generally place a premium on a high degree of
personalized service and fast response to their loan applications. As a result,
the Company endeavors, consistent with its
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underwriting guidelines, to grant preliminary approval of applications within 24
hours of receipt and complete the funding of loans within 14 to 21 days of
preliminary approval, whether the loan application originates through its retail
network or from a broker or financial institution. In addition, the Company's
branch personnel, underwriting staff and loan processors follow loans through
each step in the application and closing process.
First Greensboro believes that the depth and experience of its
management team enables it to compete effectively. The five members of the
Company's senior management team average over 16 years of experience in the
consumer finance and/or mortgage lending business. In addition, in October 1996,
Centura Banks, Inc. ("Centura"), a bank holding company with over $6.3 billion
in total assets and headquartered in Rocky Mount, North Carolina, purchased 49%
of the outstanding common stock of the Company. The Company's board of directors
consists of four members of First Greensboro's senior management, four persons
affiliated with Centura and one unaffiliated member who is president of another
mortgage bank.
As of November 15, 1997, First Greensboro had 546 full and part-time
employees. The Company's headquarters are located at 4830 Koger Blvd. in
Greensboro, North Carolina 27407 and its telephone number is (910) 855-4925.
Credit and Underwriting Guidelines
Loans are underwritten in accordance with First Greensboro's
underwriting guidelines. The underwriting process is intended to assess the
prospective mortgagor's willingness and ability to repay the loan and the value
and adequacy of the real property security as collateral for the loan. While
First Greensboro's primary consideration in underwriting a mortgage loan is the
mortgagor's employment stability and debt-to-income ratio, the value of the
mortgaged property relative to the amount of the mortgage loan is also a
critical factor. In addition, the Company considers, among other things, a
mortgagor's credit history and repayment ability, as well as the type and use of
the mortgaged property.
First Greensboro's loan program includes (i) a full documentation
("Full Documentation") program, (ii) a stated income from the application
("Stated 1003") program which was developed as a streamlined documentation
program but is also used for wage earners who have a second job paying cash and
(iii) a non-income qualified ("NIQ") program for prospective self-employed
mortgagors whose income shown on their application cannot be verified with tax
returns. Under each of these programs, the Company reviews the loan applicant's
source of income, calculates the amount of income from sources indicated on the
loan application or similar documentation, reviews the credit history of the
applicant, calculates the debt- to-income ratio to determine the applicant's
ability to repay the loan, reviews the type and use of the property being
financed and reviews the property for compliance with its underwriting
standards.
Loan applications are evaluated by members of the Company's
underwriting department and applicants with less favorable evaluations generally
are offered loans with higher interest rates and lower Loan-to-Value Ratios. The
following is a general description of the loan criteria used by First
Greensboro's underwriting staff:
"A" Risk. Under the "A" risk category, the Company offers several
different products to prospective mortgagors. The standard "A" risk
product is the "A-80" (for 80% Loan-to-Value Ratio) which allows a
maximum of up to one 30-day late payment on the prospective mortgagor's
existing mortgage in the last 12 months, installment and revolving
credit having no more than one 30-day late on major credit ($750 or
more) and three 30-day lates, and one 60-day late on minor credit (less
than $750) in the last 24 months. Bankruptcies must be discharged for
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at least two years with re-established good credit. Prospective
mortgagors are generally required to have remained in the same line of
work for the previous two years. The prospective mortgagor's mortgage
history generally must be current on his or her credit report. Other
delinquent collections indicated on the credit report cannot exceed
$1,000 and judgments, liens or charge-offs are generally not
acceptable.
Other products in the "A" risk category are similar to the
A-80 product with the interest rate and Loan-to-Value Ratio being the
main variables. Credit requirements tighten on "A" risk products with
greater than 80% Loan-to-Value Ratios generally to no derogatory
ratings on mortgages and major credit with minor credit remaining the
same as the A-80 product. Under this category, the maximum
Loan-to-Value Ratio is 95% for first lien mortgage loans and the
maximum Combined Loan-to-Value Ratio generally is 100% for second lien
mortgage loans.
"A" risk products range from minimum loan amounts of $15,000
with respect to first lien mortgages and $1,000 with respect to second
lien mortgages to a maximum of $650,000. Bankruptcies generally are not
allowed for the higher Loan-to-Value Ratio products in the "A" risk
category. NIQ and Stated 1003 products permit Loan-to-Value Ratios of
80% and 70%, respectively.
"B" Risk. Under the "B" risk category, the most widely used product is
the 80% Loan-to-Value Ratio loan, the "B-80." Mortgage credit history
generally may have a maximum of three 30-day late payments in the last
twelve months on the existing mortgage and up to six 60-day cumulative
derogatories in the last two years on revolving and installment debt.
Bankruptcies must have been discharged for at least two years with
re-established good credit. Prospective mortgagors are generally
required to have been employed in their current position for at least
one year and to have at least two years of experience within the same
field of employment. Other delinquent collections indicated on the
credit report generally cannot exceed $2,000 and judgments, liens or
charge-offs over $500 generally are not permitted within the previous
24 months.
There are also 75% and 85% Loan-to-Value Ratio products in the
"B" risk category. Like the "A" risk product, credit requirements
tighten on products with Loan-to-Value Ratios exceeding 80% while
requirements are less stringent for products with Loan-to-Value Ratios
less than 80%. The NIQ and Stated 1003 products have 80% Loan-to-Value
Ratios. The minimum loan amount under this product category is $10,000
with respect to first lien mortgages and $1,000 with respect to second
lien mortgages and the maximum loan amount is $400,000.
"C" Risk. The Company has five products under the "C" risk category,
with the most widely used product being the "C-80," the 80%
Loan-to-Value Ratio product. There may be a maximum of four 30-day, one
60-day and no 90-day delinquent payments on the prospective mortgagor's
mortgage history in the last 12 months. Installment and revolving
credit can only have four 90-day derogatories in the last 24 months.
Bankruptcies must have been discharged for at least one year with
re-established good credit. Prospective mortgagors are generally
required to have been employed in their current position for at least
one year and to generally have at least two years of experience within
the same field of employment. Stand-alone second mortgages cannot have
any 60-day delinquent payments on the present mortgage and must be
current on the credit report.
The C-75 product allows a maximum of four 30-day, two 60-day
and one 90-day delinquent payment(s) on the prospective mortgagor's
existing mortgage in the last twelve months. Installment and revolving
debt may have up to eight 90-day derogatory ratings in the previous two
years. The C-70 product has the same characteristics as the C-75 but
has a lower
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interest rate. The NIQ and Stated 1003 products have maximum
Loan-to-Value Ratios of 65% and 60%, respectively. The minimum loan
amount for the "C" risk category is $10,000 with respect to first lien
mortgages and $1,000 with respect to second lien mortgages and the
maximum loan amount is $250,000.
"D" Risk. Under the "D" risk category, the Company has three
different products with the 65% Loan-to-Value Ratio product, the
"D-65," being the most prevalent. The prospective mortgagor can be as
much as 120 days past due and his or her mortgage and his or her
ratings for installment and revolving credit usually are poor. Only
active bankruptcies are not permitted. The amount of equity the
prospective mortgagor is allowed to cash-out cannot exceed 10% of the
loan amount or $10,000, whichever is less. Prospective mortgagors are
generally required to have been employed in their current position for
at least six months and to have at least one year of experience within
the same field of employment and a two-year employment history.
The "D-70" (70% Loan-to-Value Ratio) product has the same
characteristics as the D-65 product except for the prospective
mortgagor's mortgage history; existing mortgages cannot be more than 60
days past due. The "D-55" (55% Loan-to-Value Ratio) is primarily a loan
based on the prospective mortgagor's home equity that can be used to
buy the prospective mortgagor out of bankruptcy or foreclosure. This
product allows a cash-out of equity to clear the title only.
No stand alone second mortgages are allowed on "D" risk
products nor are NIQ or Stated 1003 products available in this risk
category. Loan amounts can range from $10,000 to $150,000.
Piggyback Second Mortgage. Borrowers often have financial needs in
excess of the amount that First Greensboro's first lien mortgage
underwriting guidelines would otherwise permit First Greensboro to
finance. As a result, a "piggyback" second lien mortgage loan with a
Combined Loan-to-Value Ratio as high as 125% and, with respect to any
Home Equity Loans conveyed to the Trust, up to a maximum Combined
Loan-to-Value Ratio of 100%, may be made to a prospective mortgagor to
whom the Company is making a first mortgage loan, usually under
circumstances where the Company believes that such prospective
mortgagor is a good credit risk but does not have sufficient equity to
complete the transaction. A majority of the first lien mortgages in the
Trust Estate are subject to piggyback second lien mortgages. See "Risk
Factors-Underwriting Standards" herein.
Exceptions. The Company will originate loans outside of its
underwriting guidelines in certain circumstances where sufficient
compensating factors indicate originating the loan is warranted and the
loan is approved by a supervisory employee. On a case by case basis, it
may determine that the prospective mortgagor warrants a risk category
upgrade, a debt service-to-income ratio exception, a pricing exception,
a Loan-to-Value Ratio exception or an exception from certain
requirements of a particular risk category (collectively called an
"upgrade" or "exception"). An upgrade or exception may be allowed if
the application reflects certain compensating factors, among others;
low Loan-to-Value Ratio; pride of ownership; stable employment; an "A"
mortgage history; and the subject property's condition. Accordingly,
the Company may classify certain mortgage applications that, in the
absence of such compensating factors, would satisfy only the criteria
of a less favorable risk category. The compensating factors are
documented in the loan file.
The permitted Loan-to-Value Ratio is reduced by 10% for each
product in the "A" and "B" risk categories for loans secured by
non-owner occupied properties, and loans are generally
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not permitted in the "C" and "D" risk categories with this type of
security. Debt-to-income ratios range from 42% to 55% depending on the
risk category and residual income left to the prospective mortgagor.
The Company also generally increases the applicable interest rate by
approximately 50 basis points for non-owner-occupied properties. Rural
properties may have a 10% reduction in permitted Loan-to-Value ratio,
determined on a case by case basis. Under all of the foregoing
programs, all documentation must be no more than 45 days old at the
time of the underwriting and closing of the related loan. Credit
reports must be no more than 30 days old
The collateral securing the Company's loans are generally one-
to four-family residences, including townhomes and condominiums. In
most cases, the Company reduces its permitted Loan-to-Value Ratio for
loans secured by condominiums by 10%. Loans secured by townhomes have a
maximum permitted Loan-to-Value Ratio of 85%. Manufactured homes are
not accepted as collateral except for doublewide manufactured homes
with masonry skirting.
The Underwriting Process
The Company's loan application process is conducted by the Company's
branch officers and approved mortgage brokers who compile information necessary
for the Company's underwriting department to evaluate the loan. The approval
process generally is coordinated over the telephone with applications and credit
reports obtained by branch officers or brokers usually sent by facsimile
transmission to the underwriting department at one of the Company's offices.
Branch officers communicate with the Company's retail underwriting staff, which
consists of 29 underwriters and loan processors located in Greensboro, North
Carolina and Orem, Utah, and mortgage brokers work with the Company's wholesale
underwriting staff of 13 underwriters and processors located in Greensboro,
North Carolina and Orem, Utah. A retail or wholesale underwriter reviews the
applicant's credit history, based on the information contained in the
application as well as reports available from credit reporting bureaus, to see
if the credit history is acceptable given the Company's underwriting guidelines.
Based on this review, the proposed terms of the loan are then communicated to
the branch officer or broker responsible for the application who in turn
discusses the proposal with the loan applicant. If the applicant accepts the
proposed terms, a branch officer or broker will gather additional information
necessary for the closing and funding of the loan.
The Company's underwriting criteria require it to verify the income of
each borrower. Under the Full Documentation Program, salaried borrowers and wage
earners are generally required to submit two current pay stubs and W-2 forms for
the most recent past two years and the Company also performs a verbal
verification of employment prior to closing the mortgage loan. Income for
self-employed borrowers is verified by examination of copies of tax returns for
the two most recent years and a current year-to-date income statement or bank
statements for the borrower's business for the last six months. Under the NIQ
program, a standard form of verification of income is not required; however, the
borrower's application must show reasonable assets in relation to the stated
income and verification that the borrower has been self-employed for two years
is obtained by examination of copies of tax returns for the two most recent
years. Under the Stated 1003 program, W-2 forms and pay stubs are not required
but the borrower must have reasonable assets in relation to the stated income,
income must be reasonable and consistent with the borrower's profession and his
or her employment must be verbally verified. In computing income, the Company
has developed specific guidelines for inclusion of various sources of income if
the borrower can demonstrate an earnings history. For example, rental income is
allowed if the borrower can produce tax returns and rental agreements showing
receipt of this income.
As part of its underwriting guidelines, the Company has developed a
list of approved credit repositories for each of its geographic markets that it
believes provides the most accurate borrower credit profile. A credit report
from one approved repositories is required for pre-approval and at least two
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reports are required prior to closing. These credit reports are the primary
means utilized to verify each borrower's mortgage and other debt payment
histories.
The Company places a strong emphasis on establishing the adequacy of
the collateral for loans. Prior to closing any loan, the Company requires an
appraisal of the collateral property by a Company approved independent licensed
appraiser. The Company selects appraisers based upon a review of sample
appraisals, professional experience, education, and by contacting clients of the
appraiser and reviewing the appraiser's experience with the particular types of
properties that secure the Company's loans. In the case of loans purchased on a
wholesale basis from financial institutions, if the original appraisal was
performed by an appraiser that is not Company approved, then the Company obtains
an additional appraisal from an approved appraiser or requires that an approved
appraiser review the original appraisal. The Company generally has a minimum
property value of $40,000 for all loans. However, the Company will accept
properties of lower values based on compensating factors such as low
Loan-to-Value Ratios and particularly strong appraisals as evidenced by closely
related comparable sales.
Upon completion of the underwriting processing, the closing of the loan
is scheduled with a Company-approved closing attorney or agent. The closing
attorney or agent is responsible for completing the loan closing transaction in
accordance with applicable law and the Company's operating procedures. Title
insurance, insuring the Company's interest as mortgagee, is required on all
loans as is evidence of adequate homeowner's insurance naming the Company as an
additional insured.
Servicing
The servicing department of the Master Servicer, First Greensboro Home
Equity, Inc. is located in Greensboro, North Carolina and was established in
1992 to service new accounts before sale on a servicing released basis as well
as to service a limited number of retained loans.
The Master Servicer is responsible for all recorded documents,
insurance records, customer inquiries, and all aspects of collections including
bankruptcy, foreclosure and ultimately the disposition of REO (real estate
owned) properties. The Master Servicer currently utilizes the "LSAMS" computer
servicing system to bridge, notate, and track all loans.
Initial contact with a borrower is usually made through a welcome call
placed five to ten days prior to the initial due date of a mortgage. The call is
made to ensure that the borrower is in receipt of his or her coupon book, that
all the information contained in the book is correct and to answer any questions
regarding loan closing.
The Master Servicer's servicing philosophy is to reach delinquent
borrowers by telephone when possible in order to prompt a borrower to remit
payment. Since no grace period is associated with the mortgages, collectors are
instructed to begin a calling effort to all delinquent accounts five or more
days past due. "LSAMS" has the capability of automatically assigning past due
accounts into a loan collector's "auto queue" and prompts a collector to place a
telephone call to such accounts. All activity with an account is logged on
"LSAMS" so that any servicing personnel may retrieve all collections history and
use it in all borrower contact.Mail is sent when a borrower cannot be contacted
by telephone.
When an account becomes thirty days past due, loss mitigation is
initiated. Loss mitigation consists of the following: Collectors will send
thirty day demand notices to any account which is thirty days past due and has
not made any arrangements or has failed to satisfy arrangements to bring such
account current. Field calls, which may also serve as property inspections, when
feasible will be conducted at forty-five days past due. When an account reaches
fifty days past due, a pre-foreclosure letter is sent to the borrower. This
letter serves a ten day notice of the intent to hire an attorney and begin
S-30
<PAGE>
foreclosure proceedings.
For those loans in which collection and loss mitigation efforts have
been exhausted without success, the foreclosure manager will determine the best
course of action given current market value and reason for borrower default such
as foreclosure action or "DIL" ("deed in lieu of foreclosure"). Should
foreclosure action be taken, the foreclosure department is then responsible for
the loan and tracking its progression through the foreclosure process including
placing the case with the appropriate attorney, tracking sale date, bids, and
fees incurred. Since regulations and practices for foreclosure and foreclosure
sale vary greatly from state to state, attorneys are retained on a regional or
state basis to ensure state laws and practices are followed. The foreclosure
department currently has a list of approved attorneys for use in connection with
defaulted loans which it utilizes as the need arises. "LSAMS" is also utilized
with foreclosure accounts to track account activity.
Once title to a property is obtained, REO personnel in the servicing
department handle all aspects of disposing of the property. REO personnel are
responsible for placing the property with a real estate agent and tracking the
property through liquidation.
The bankruptcy personnel in the servicing department file claims for
all bankruptcy accounts. The bankruptcy personnel track all creditor meetings,
hearing dates and disbursement dates. In addition, if a borrower makes mortgage
payments outside the bankruptcy court plan, telephone contact is reestablished
with the borrower. Again, "LSAMS" is utilized to track account activity.
In servicing junior lien loans in its portfolio, the Company intends to
satisfy each such senior mortgage at or prior to the foreclosure sale only to
the extent that it determines any amount so paid will be recoverable from future
payments and collections on such junior lien loans or otherwise. In servicing
junior lien loans, the Company intends to advance funds to keep the senior lien
current in the event the mortgagor is in default thereunder until such time as
the Company satisfies the senior lien by sale of the mortgaged property, but
only to the extent that it determines such advances will be recoverable from
future payments and collections on that junior lien or otherwise.
The Master Servicer does not have any significant historical loss and
delinquency data relating to its home equity loan portfolio.
THE SELLER
The Seller, First Greensboro Capital Corporation is a Tennessee
corporation. The principal executive offices of the Seller are located at 5909
Shelby Oak, Suite 137, Memphis, Tennessee 38139.
THE BACKUP MASTER SERVICER
Ocwen Federal Bank FSB, a federally chartered savings bank, with its
home office in Fort Lee, New Jersey and its executive offices at 1675 Palm Beach
Lakes Boulevard, West Palm Beach, Florida 33401 ( telephone number: (561)
681-8000) will serve as the Backup Master Servicer for the Home Equity Loans
pursuant to the Pooling and Servicing Agreement (in such capacity, the "Backup
Master Servicer"). The Backup Master Servicer is a wholly owned subsidiary of
Ocwen Financial Corporation, a public financial services holding company. As of
September 30, 1997, the Backup Master Servicer had approximately $2.548 billion
in assets, approximately $2.276 billion in liabilities and approximately $272
million in equity. As of September 30, 1997, the Backup Master Servicer's
tangible and leveraged capital ratio was approximately 10.48% and its risk based
capital ratio was approximately 13.99%. For the year ended December 31, 1996,
the Backup Master Servicer's income from continuing operations was approximately
$49 million.
S-31
<PAGE>
The major business of the Backup Master Servicer has been the
acquisition and servicing of non-performing and sub-performing single family,
multi-family and commercial mortgage loan portfolios acquired from the
Resolution Trust Corporation, from private investors, and most recently, from
HUD through HUD's auction of defaulted FHA Loans.
THE DEPOSITOR
The Depositor, DLJ Mortgage Acceptance Corp. was incorporated in the State
of Delaware on April 14, 1988. The Depositor maintains its principal offices at
277 Park Avenue, New York, New York 10172.
USE OF PROCEEDS
The Seller will sell the Initial Home Equity Loans to the Depositor and
the Depositor will sell the Initial Home Equity Loans to the Trust concurrently
with the delivery of the Certificates. Net proceeds from the sale of the Class A
Certificates will be applied by the Depositor to the purchase of the Initial
Home Equity Loans from the Seller and to make the initial deposits into the
Pre-Funding Account and Capitalized Interest Account. Such net proceeds will
(together with the Class R Certificates) represent the purchase price to be paid
by the Trust to the Depositor and by the Depositor to the Seller for the Initial
Home Equity Loans and to fund the Pre-Funding Account and Capitalized Interest
Account.
THE HOME EQUITY LOAN POOL
General
The statistical information presented in this Prospectus Supplement
concerning the pool of Home Equity Loans is based on the pool of Initial Home
Equity Loans as of the Cut-Off Date.
This subsection describes generally certain characteristics of the Home
Equity Loans. Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are measured by the aggregate principal balance of the
related Initial Home Equity Loans as of the Cut-Off Date.
The Initial Home Equity Loans to be transferred by the Depositor to the
Trust on the Closing Date will consist of 2,150 home equity loans, of which
2,073 are fixed rate home equity loans and 77 are adjustable rate home equity
loans, evidenced by promissory notes (the "Notes") secured by first and second
lien deeds of trust, security deeds or mortgages, which are located in 24
states. The aggregate outstanding Loan Balance of the fixed rate Initial Home
Equity Loans as of the Cutoff Date is $110,346,813.55 or 93.68% of the aggregate
Loan Balance of the Initial Home Equity Loans; the aggregate outstanding Loan
Balance of the adjustable rate Initial Home Equity Loans as of the Cutoff Date
is $7,448,028.97 or 6.32% of the aggregate Loan Balance of the Initial Home
Equity Loans. The Properties securing the Home Equity Loans consist primarily of
one-to-four family residential properties. The Properties may be owner-occupied
and non-owner occupied investment properties (which includes second and vacation
homes). All of the Initial Home Equity Loans were originated or purchased on or
after September 30, 1996. Initial Home Equity Loans aggregating 94.61% of the
aggregate Loan Balances of the Initial Home Equity Loans as of the Cut-Off Date
(the "Initial Aggregate Loan Balance") are secured by first liens on the related
properties, and the remaining Initial Home Equity Loans are secured by second
liens on the related properties. No Combined Loan-to-Value Ratio relating to any
Initial Home Equity Loan exceeded 95.00% as of the Cut-Off Date except for 90
loans with an aggregate Loan Balance of $1,827,498.83 (or 1.55% of the Initial
Aggregate Loan Balance of the Initial Home
S-32
<PAGE>
Equity Loans), which had a Combined Loan-to-Value Ratio not greater than 100%.
None of the Initial Home Equity Loans are insured by pool mortgage insurance
policies or primary mortgage insurance policies; however, certain distributions
due to the owners of the Class A Certificates are insured by the Certificate
Insurer pursuant to the Insurance Policy. See "Credit Enhancement--Insurance
Policy" herein.
The "Loan-to-Value Ratios" shown below were calculated based upon the
lesser of the appraised values of the Properties at the time of origination (the
"Appraised Values") or the sales price of such Property if such Property was
sold within 12 months of the time of loan origination. In a limited number of
circumstances, and within the Sponsor's underwriting guidelines, the Sponsor
discounts the Appraised Value of Properties (when calculating maximum
Loan-to-Value Ratios) where the Properties are unique, have a high value or
where the comparables are not within FNMA guidelines. The purpose for making
these reductions is to value the Properties more conservatively than would
otherwise be the case if the appraisal were accepted as written. The "Combined
Loan-to-Value Ratio" of a Home Equity Loan is the ratio, expressed as a
percentage, equal to the sum of any outstanding senior liens mortgage balance
plus the original balance of the Home Equity Loan divided by the lesser of the
Appraised Value or the sales price of such Property if such Property was sold
within 12 months of the time of loan origination. In the instance where more
than one appraisal was performed on the subject property, the lesser of the two
values was used to determine the Loan-to-Value Ratio and the Combined
Loan-to-Value Ratio. See "Risk Factors--Underwriting Standards" herein.
No assurance can be given that values of the Properties have remained
or will remain at their levels on the dates of origination of the related Home
Equity Loans. If the residential real estate market has experienced or should
experience an overall decline in property values such that the outstanding
balances of the Home Equity Loans, together with the outstanding balances of any
first mortgage, become equal to or greater than the value of the Properties, the
actual rates of delinquencies, foreclosures and losses could be higher than
those now generally experienced in the mortgage lending industry.
As of the Cut-Off Date, the average Loan Balance of the Initial Home
Equity Loans was $54,788.30. The minimum and maximum Loan Balances of the
Initial Home Equity Loans as of the Cut-Off Date were $4,987.94 and $211,500.00,
respectively. The weighted average Coupon Rate of the Initial Home Equity Loans
was 11.092%; the Coupon Rate of the Initial Home Equity Loans ranged from 7.950%
to 18.000%; the weighted average Combined Loan-to-Value Ratio of the Initial
Home Equity Loans was 78.21%; the weighted average remaining term to maturity of
the Initial Home Equity Loans was 281 months; the original terms to maturity of
the Initial Home Equity Loans ranged from 48 months to 360 months; and the
remaining terms to maturity of the Initial Home Equity Loans ranged from 46
months to 360 months. As of the Cut-Off Date, 94.61% of the aggregate Loan
Balance of the Initial Home Equity Loans were secured by first mortgages and
5.39% of the aggregate Loan Balance of the Initial Home Equity Loans were
secured by second mortgages. Initial Home Equity Loans containing "balloon"
payments represented not more than 2.37% of the aggregate Loan Balance of the
Initial Home Equity Loans. No Initial Home Equity Loan will mature later than
January 1, 2028. As of the Cut-Off Date, no Initial Home Equity Loan was more
than 30 days past due. However, investors in the Class A Certificates should be
aware that 37.12% of the Initial Home Equity Loans by Initial Aggregate Loan
Balance had a first monthly payment due on or after November 1, 1997 and it was
not possible for such Initial Home Equity Loans to be more than 30 days past due
as of the Cut-Off Date.
The adjustable rate Initial Home Equity Loans bear interest rates
relating to payments that on the first payment date after a period of 24 months
(except for 4 loans with an aggregate Loan Balance of $350,500.00 that adjust
six months following the first payment date and have an initial cap of 1.00%
above the related initial Coupon Rate) following the related first payment date
adjust based on the six-month London Interbank Offered Rate based on quotations
of major banks as published in The Wall Street Journal. The adjustable rate
Initial Home Equity Loans have semi-annual interest rate and
S-33
<PAGE>
payment adjustment frequencies after the first interest rate adjustment date. As
of the initial Cut-off Date, the weighted average remaining period to the next
interest rate adjustment date for the adjustable rate Initial Home Equity Loans
was approximately 22 months.
Each adjustable rate Initial Home Equity Loan has a semi-annual rate
adjustment cap of 1.00% above the then current interest rate for such adjustable
rate Initial Home Equity Loan. In addition, each adjustable rate Initial Home
Equity Loan that has an initial payment adjustment date that is two years from
its first payment date will have an initial rate adjustment cap of 3.00% above
the related initial Coupon Rate. As of the Cut-off Date, the weighted average
Coupon Rate of the adjustable rate Initial Home Equity Loans was approximately
10.184% per annum. The adjustable rate Initial Home Equity Loans had a weighted
average gross margin as of the Cut-off Date of approximately 7.416%. The gross
margin for the adjustable rate Initial Home Equity Loans ranged from
approximately 5.350% to 10.280%. The interest rates borne by the adjustable rate
Initial Home Equity Loans as of the Cut-off Date ranged from approximately
7.950% per annum to approximately 13.100% per annum. As of the Cut-off Date, the
maximum rates at which interest may accrue on the adjustable rate Initial Home
Equity Loans (the "Maximum Rates") ranged from 13.950% per annum to 19.100% per
annum. The adjustable rate Initial Home Equity Loans had a weighted average
Maximum Rate as of the Cut-off Date of approximately 16.184% per annum. As of
the Cut-off Date, the minimum rates at which interest may accrue on the
adjustable rate Initial Home Equity Loans (the "Minimum Rates") ranged from
approximately 7.950% per annum to approximately 13.100% per annum. As of the
Cut-off Date, the weighted average Minimum Rate on the Initial Home Equity Loans
was approximately 10.184% per annum.
The sum of the percentages on the following tables may not equal 100%
due to rounding.
S-34
<PAGE>
Geographic Distribution of Properties
The geographic distribution of the Initial Home Equity Loans by state,
as of the Cut-Off Date, was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
State Home Equity Loans Loan Balance Loan Balance
- ----- ----------------- ------------ ------------
<S> <C> <C> <C>
North Carolina 741 $ 41,839,531.86 35.52%
Virginia 457 24,912,789.56 21.15
Arkansas 227 9,184,439.93 7.80
South Carolina 128 6,791,740.23 5.77
Utah 82 6,623,996.06 5.62
Georgia 105 6,521,786.13 5.54
Tennessee 80 4,809,029.57 4.08
Oklahoma 85 3,649,537.78 3.10
Missouri 52 2,464,785.40 2.09
Illinois 38 1,959,496.90 1.66
Florida 32 1,646,175.69 1.40
Idaho 16 1,197,928.28 1.02
Other (1) 107 6,193,605.13 5.26
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
- -----------
(1) Includes 12 other states (none of which have a concentration of Initial Home
Equity Loans in excess of 1.00% of the Initial Aggregate Loan Balance).
Combined Loan-to-Value Ratios
The original Combined Loan-to-Value ratios as of the origination dates
of the Initial Home Equity Loans as of the Cut-Off Date were distributed as
follows:
<TABLE>
<CAPTION>
Range of Number of Initial Initial Aggregate % of Initial Aggregate
Original CLTV's Home Equity Loans Loan Balance Loan Balance
- --------------- ----------------- ------------ ------------
<S> <C> <C> <C>
15.01% to 20.00% 7 $ 109,039.87 0.09%
20.01 to 25.00 7 130,057.17 0.11
25.01 to 30.00 9 233,934.23 0.20
30.01 to 35.00 16 421,721.54 0.36
35.01 to 40.00 18 693,707.79 0.59
40.01 to 45.00 16 488,671.17 0.41
45.01 to 50.00 34 1,078,402.69 0.92
50.01 to 55.00 23 979,572.20 0.83
55.01 to 60.00 43 2,057,614.68 1.75
60.01 to 65.00 60 2,593,453.91 2.20
65.01 to 70.00 156 7,401,998.90 6.28
70.01 to 75.00 262 13,717,969.63 11.65
75.01 to 80.00 960 56,124,331.17 47.65
80.01 to 85.00 303 21,886,409.65 18.58
85.01 to 90.00 103 6,766,990.58 5.74
90.01 to 95.00 43 1,283,468.51 1.09
95.01 to 100.00 90 1,827,498.83 1.55
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
S-35
<PAGE>
Coupon Rates
The Coupon Rates borne by the Notes relating to the Initial Home Equity
Loans as of the Cut-Off Date were distributed as follows as of the Cut-Off Date:
<TABLE>
<CAPTION>
Range of Number of Initial Initial Aggregate % of Initial Aggregate
Coupon Rates Home Equity Loans Loan Balance Loan Balance
------------ ----------------- ------------ ------------
<S> <C> <C> <C>
7.000% to 8.000% 2 $ 158,050.00 0.13%
8.001 to 9.000 129 9,942,025.78 8.44
9.001 to 10.000 499 29,555,030.83 25.09
10.001 to 11.000 444 28,233,137.55 23.97
11.001 to 12.000 403 22,195,996.84 18.84
12.001 to 13.000 339 16,121,756.32 13.69
13.001 to 14.000 158 6,357,418.28 5.40
14.001 to 15.000 81 2,691,553.76 2.28
15.001 to 16.000 69 1,714,023.34 1.46
16.001 to 17.000 19 586,544.01 0.50
17.001 to 18.000 7 239,305.81 0.20
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Loan Balances
The distribution of the outstanding principal amounts of the Initial Home
Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Loan Balances Home Equity Loans Loan Balance Loan Balance
------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Up to $25,000.00 323 $ 5,590,199.54 4.75%
25,000.01 to 50,000.00 720 27,891,214.56 23.68
50,000.01 to 75,000.00 715 43,493,717.52 36.92
75,000.01 to 100,000.00 222 19,155,792.81 16.26
100,000.01 to 125,000.00 100 11,167,941.02 9.48
125,000.01 to 150,000.00 45 6,060,705.51 5.15
150,000.01 to 175,000.00 11 1,764,677.42 1.50
175,000.01 to 200,000.00 11 2,042,250.64 1.73
200,000.01 to 225,000.00 3 628,343.50 0.53
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
S-36
<PAGE>
Distribution by Original Term
The distribution of the original term to maturity of the Initial Home
Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Original Months Number of Initial Initial Aggregate % of Initial Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
----------- ----------------- ------------ ------------
<S> <C> <C> <C>
1 to 60 14 $ 502,117.10 0.43%
61 to 120 93 2,879,963.58 2.44
121 to 180 560 21,707,049.44 18.43
181 to 240 370 19,183,306.49 16.29
241 to 300 581 34,443,319.95 29.24
301 to 360 532 39,079,085.96 33.18
----- ---------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Distribution of Months Since Origination
The distribution of the number of months since the date of origination of
the Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Months Number of Initial Initial Aggregate % of Initial Aggregate
Since Origination Home Equity Loans Loan Balance Loan Balance
- ----------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Zero 936 $ 52,573,104.95 44.63%
1 to 2 883 47,198,534.03 40.07
3 to 4 341 17,365,904.97 14.74
5 to 6 16 267,133.45 0.23
7 to 8 15 250,506.67 0.21
9 to 10 7 96,664.11 0.08
11 to 12 1 30,250.00 0.03
13 to 14 1 12,744.34 0.01
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
S-37
<PAGE>
Distribution of Remaining Term to Maturity
The distribution of the number of months remaining to maturity of the
Initial Home Equity Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Months Remaining Number of Initial Initial Aggregate % of Initial Aggregate
to Maturity Home Equity Loans Loan Balance Loan Balance
----------- ----------------- ------------ ------------
<S> <C> <C> <C>
1 to 60 14 $ 502,117.10 0.43%
61 to 120 93 2,879,963.58 2.44
121 to 180 560 21,707,049.44 18.43
181 to 240 370 19,183,306.49 16.29
241 to 300 581 34,443,319.95 29.24
301 to 360 532 39,079,085.96 33.18
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Occupancy Status
The occupancy status of the Properties securing the Initial Home Equity
Loans as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Occupancy Status Home Equity Loans Loan Balance Loan Balance
- ---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Owner Occupied 2,077 $114,027,998.54 96.80%
Non Owner Occupied 73 3,766,843.98 3.20
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Distribution by Lien Position
The lien position of the Initial Home Equity Loans as of the Cut-Off Date
was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Lien Position Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
First Lien 1,871 $111,440,809.50 94.61%
Second Lien 279 6,354,033.02 5.39
----- -------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
S-38
<PAGE>
Distribution By Documentation Type
The documentation types of the Initial Home Equity Loans as of the Cut-Off
Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Documentation Type Home Equity Loans Loan Balance Loan Balance
- ------------------ ----------------- ------------ ------------
<S> <C> <C> <C>
Full Documentation 2,075 $112,560,620.84 95.56%
NIQ 61 4,478,109.62 3.80
Stated 1003 14 756,112.06 0.64
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Distribution By Credit Grade
The credit grade of the Initial Home Equity Loans pursuant to the Sponsor's
underwriting guidelines as of the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Credit Grade Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
A 1,093 $ 62,195,029.18 52.80%
B 621 35,711,334.14 30.32
C 344 16,579,051.59 14.07
D 92 3,309,427.61 2.81
----- --------------- ------
Total: 2,150 $117,794,842.52 100.00%
===== =============== ======
</TABLE>
Distribution of Adjustable Rate Initial Home Equity Loans By Gross Margins
The gross margins of the adjustable rate Initial Home Equity Loans as of
the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Gross Margins Home Equity Loans Loan Balance Loan Balance
- ------------- ----------------- ------------ ------------
<S> <C> <C> <C>
5.001% to 5.500% 3 $ 307,050.00 4.12%
5.501 to 6.000 8 781,000.00 10.49
6.001 to 6.500 8 712,558.16 9.57
6.501 to 7.000 6 494,606.38 6.64
7.001 to 7.500 11 1,011,606.89 13.58
7.501 to 8.000 19 1,993,229.83 26.76
8.001 to 8.500 15 1,376,846.67 18.49
8.501 to 9.000 4 524,608.84 7.04
9.001 to 9.500 1 99,522.20 1.34
9.501 to 10.000 1 35,000.00 0.47
10.001 to 10.500 1 112,000.00 1.50
--- -------------- ------
Total: 77 $7,448,028.97 100.00%
== ============= ======
</TABLE>
S-39
<PAGE>
Distribution of Adjustable Rate Initial Home Equity Loans By Maximum Rate
The Maximum Rates of the adjustable rate Initial Home Equity Loans as of
the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Maximum Rate Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
13.501% to 14.000% 1 $ 134,500.00 1.81%
14.001 to 14.500 1 81,600.00 1.10
14.501 to 15.000 6 829,261.19 11.13
15.001 to 15.500 7 538,577.26 7.23
15.501 to 16.000 17 1,815,405.47 24.37
16.001 to 16.500 14 1,208,656.31 16.23
16.501 to 17.000 16 1,633,320.94 21.93
17.001 to 17.500 8 726,252.80 9.75
17.501 to 18.000 4 300,557.38 4.04
18.001 to 18.500 1 101,147.62 1.36
18.501 to 19.000 1 35,000.00 0.47
19.001 to 19.500 1 43,750.00 0.59
--- ------------- ------
Total: 77 $7,448,028.97 100.00%
== ============= ======
</TABLE>
Distribution of Adjustable Rate Initial Home Equity Loans By Minimum Rate
The Minimum Rates of the adjustable rate Initial Home Equity Loans as of
the Cut-Off Date was as follows:
<TABLE>
<CAPTION>
Number of Initial Initial Aggregate % of Initial Aggregate
Minimum Rate Home Equity Loans Loan Balance Loan Balance
- ------------ ----------------- ------------ ------------
<S> <C> <C> <C>
7.501% to 8.000% 1 $ 134,500.00 1.81%
8.001 to 8.500 1 81,600.00 1.10
8.501 to 9.000 6 829,261.19 11.13
9.001 to 9.500 7 538,577.26 7.23
9.501 to 10.000 17 1,815,405.47 24.37
10.001 to 10.500 14 1,208,656.31 16.23
10.501 to 11.000 16 1,633,320.94 21.93
11.001 to 11.500 8 726,252.80 9.75
11.501 to 12.000 4 300,557.38 4.04
12.001 to 12.500 1 101,147.62 1.36
12.501 to 13.000 1 35,000.00 0.47
13.001 to 13.500 1 43,750.00 0.59
--- ------------ ------
Total: 77 $7,448,028.97 100.00%
== ============ ======
</TABLE>
Interest Payments on the Home Equity Loans
All of the Home Equity Loans will provide that interest is charged to
the obligor (the "Mortgagor") thereunder, and payments are due from such
Mortgagors as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Home
Equity Loans either earlier or later than the scheduled due dates thereof will
not affect the amortization schedule or the relative application of such
payments to principal and interest.
S-40
<PAGE>
Conveyance of Subsequent Home Equity Loans
The Pooling and Servicing Agreement permits the Trust to acquire
approximately $7,205,157.48 in aggregate Loan Balance of Subsequent Home Equity
Loans. Accordingly, the statistical characteristics of the Home Equity Loans
will vary as of any subsequent Cut-Off Date upon the acquisition of Subsequent
Home Equity Loans.
The obligation of the Trust to purchase Subsequent Home Equity Loans on
a Subsequent Transfer Date is subject to the following requirements, among
others, individually or in the aggregate, as applicable:
<TABLE>
<S> <C>
Delinquent........................................................... none greater than 30 days
Remaining Term to Maturity.......................................... no more than 360 months
Lifetime Minimum Rate................................................ at least 8.00%
Minimum Coupon Rate.................................................. at least 8.00%
Percentage of First Lien Mortgages with Piggyback Second
Lien Mortgages......................................... up to 52.00%
Weighted Average Coupon Rate......................................... at least 11.08%
Percentage of Second Lien Mortgages.................................. up to 5.60%
Piggyback Second Lien Mortgages...................................... none
Weighted Average Combined Loan-to-Value Ratio........................ less than 78.20%
Original Loan Balance................................................ each less than $214,600
Balloon Loans........................................................ less than 2.50%
Percentage Fixed Rate................................................ at least 94.00%
</TABLE>
PREPAYMENT AND YIELD CONSIDERATIONS
General
The weighted average life of, and, if purchased at other than par, the
yield to maturity on, a Class A Certificate will relate to the rate of payment
of principal of the Home Equity Loans, including, for this purpose, Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases of
Home Equity Loans by the Sponsor. At least 90% of the Initial Home Equity Loans
may be prepaid by the related Mortgagors, in whole or in part, at any time
without payment of any prepayment fee or penalty. The actual rate of principal
prepayments on pools of home equity loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of home equity loans at any time because of
specific factors relating to the home equity loans in the particular pool,
including, among other things, the age of the home equity loans, the geographic
locations of the properties securing the loans and the extent of the mortgagors'
equity in such properties, and changes in the mortgagors' housing needs, job
transfers and unemployment.
As with fixed rate obligations generally, the rate of prepayment on a
pool of home equity loans with fixed rates is affected by prevailing market
rates for home equity 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 home equity 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. As is the case with fixed rate home equity
S-41
<PAGE>
loans, adjustable rate home equity loans may be subject to a greater rate of
principal prepayments in a declining interest rate environment. For example, if
prevailing interest rates fall appreciably, adjustable rate home equity loans
are likely to be subject to a higher prepayment rate than if prevailing interest
rates remain constant because the availability of fixed rate home equity loans
at competitive interest rates may encourage mortgagors to refinance their
adjustable rate home equity loans to "lock in" a lower fixed interest rate.
In addition to the foregoing factors affecting the weighted average
life of the Class A Certificates, the overcollateralization provisions of the
Trust result in a limited acceleration of the Class A Certificates relative to
the amortization of the Home Equity Loans in early months of the transaction.
The accelerated amortization is achieved by the application of certain excess
interest to the payment of the applicable Certificate Principal Balance. This
acceleration feature creates overcollateralization which results from the excess
of the aggregate Loan Balance of the Home Equity Loans over the Class A
Certificate Principal Balance. Once the required level of overcollateralization
is reached, the acceleration feature will cease, unless necessary to maintain
the required level of overcollateralization. The Pooling and Servicing Agreement
will provide that based upon certain collateral performance tests, the required
overcollateralization may increase or decrease.
Mandatory Prepayment
In the event that at the end of the Funding Period, not all of the
Original Pre-Funded Amount has been used to acquire Subsequent Home Equity
Loans, then the Holders of the Class A Certificates then entitled to receive
principal will receive an additional prepayment in an amount equal to the
remaining Pre-Funded Amount in the Pre-Funding Account.
Although no assurances can be given, the Seller and the Sponsor expect
that the Loan Balance of Subsequent Home Equity Loans sold to the Trust will
require the application of substantially all the amount on deposit in the
Pre-Funding Account and that there should be no material principal prepaid to
the Holders of the Class A Certificates in respect to the Original Pre-Funded
Amount.
Prepayment and Yield Scenarios for Class A Certificates
As indicated above, if purchased at other than par (disregarding, for
purposes of this discussion, the effects on an investor's yield resulting from
the timing of the settlement date and those considerations discussed below under
"Payment Lag Feature of Certificates"), the yield to maturity on a Class of
Class A Certificates will be affected by the rate of the payment of principal of
the Home Equity Loans. If the actual rate of payments on the Home Equity Loans
is slower than the rate anticipated by an investor who purchases a Class of
Class A Certificates at a discount, the actual yield to such investor will be
lower than such investor's anticipated yield. If the actual rate of payments on
the Home Equity Loans is faster than the rate anticipated by an investor who
purchases a Class of Class A Certificates at a premium, the actual yield to such
investor will be lower than such investor's anticipated yield.
The Final Scheduled Payment Date for each Class of Class A Certificates
is as set forth in the "Summary of Terms" hereof. The Final Scheduled Payment
Dates for the Class A-1 and Class A-2 Certificates are the dates on which the
"Initial Certificate Principal Balance" set forth in the "Summary of Terms"
hereof for the related Class of Class A Certificates as of the Closing Date less
all amounts previously distributed to the Owners on account of principal (such
amount as to any Class of Class A Certificates and as of any time, the related
"Certificate Principal Balance" and as to the Class A Certificates collectively,
the "Class A Certificate Principal Balance") would be reduced to zero, assuming
that no Prepayments are received on the Home Equity Loans, that scheduled
monthly payments of principal and interest on the Home Equity Loans are timely
received and that no Net Monthly Excess Cashflow will be used to make
accelerated payments of principal (i.e., no Subordination Increase Amounts) to
the Owners of the related Class A Certificates. The Final Scheduled Payment Date
for the Class A-3 Certificates is the Payment Date in the month following the
Remittance Period in which the
S-42
<PAGE>
Loan Balances of all Home Equity Loans have been reduced to zero assuming that
the Home Equity Loans pay in accordance with their terms. The weighted average
lives of the Class A Certificates are likely to be shorter than would be the
case if payments actually made on the Home Equity Loans conformed to the
foregoing assumptions, and the final Payment Dates with respect to the Class A
Certificates could occur significantly earlier than the Final Scheduled Payment
Dates because (i) Prepayments are likely to occur, (ii) the Master Servicer may
cause a termination of the Trust when the aggregate outstanding Loan Balance of
the Home Equity Loans is less than or equal to 10% of the Maximum Collateral
Amount thereof and (iii) Subordination Increase Amounts will likely be paid on
the Class A Certificates.
"Weighted average life" refers to the average amount of time that will
elapse from the date of issuance of a security until each dollar of principal of
such security will be repaid to the investor. The weighted average life of the
related Class A Certificates will be influenced by the rate at which principal
of the Home Equity Loans is paid, which may be in the form of scheduled
amortization or prepayments (for this purpose, the term "prepayment" includes
Prepayments and liquidations due to default).
Prepayments on home equity 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 a pool of home equity loans for the life of such home equity loans. A
100% Prepayment Assumption assumes constant prepayment rates ("CPR") of 4% per
annum of the then outstanding principal balance of the Home Equity Loans in the
first month of the life of such Home Equity Loans and an additional 1.455%
(precisely 16%/11ths) per annum in each month thereafter until the twelfth
month. Beginning in the twelfth month and in each month thereafter during the
life of such Home Equity Loans, 100% Prepayment Assumption assumes a constant
prepayment rate of 20% per annum each month. As used in the table below, 0%
Prepayment Assumption assumes prepayment rates equal to 0% of the Prepayment
Assumption; i.e., no prepayments. Correspondingly, 100% Prepayment Assumption
assumes prepayment rates equal to 100% 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 home equity loans, including the Home Equity Loans. The Sponsor
believes that no existing statistics of which it is aware provide a reliable
basis for Owners of Class A Certificates to predict the amount or the timing of
receipt of prepayments on the Home Equity Loans.
Since the tables were prepared on the basis of the assumptions in the
following paragraph, there are discrepancies between the characteristics of the
actual Home Equity Loans and the characteristics of the Home Equity Loans
assumed in preparing the tables. Any such discrepancy may have an effect upon
the percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Class A Certificates set forth in the tables. In addition,
since the actual Home Equity 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 Home
Equity Loans consist of pools of loans with level-pay and balloon
characteristics, as set forth below, (ii) the Closing Date for the Certificates
occurs on December 15, 1997, (iii) distributions on the Certificates are made on
the 25th day of each month regardless of the day on which the Payment Date
actually occurs, commencing in January 1998 in accordance with the priorities
described herein, (iv) the Expense Fee is equal to the amount described in the
Pooling and Servicing Agreement, (v) the Home Equity Loans' prepayment rates are
a multiple of the applicable Prepayment Assumption, (vi) prepayments include 30
day's interest thereon, (vii) the optional termination is not exercised except
as indicated, (viii) the "Specified Subordinated Amount" (as defined under
"Credit Enhancement--Overcollateralization Provisions") is set initially as
S-43
<PAGE>
specified in the Pooling and Servicing Agreement and thereafter decreases in
accordance with the provisions of the Pooling and Servicing Agreement, (ix) all
of the Home Equity Loans are sold to the Trust as of the Closing Date; (x) the
scheduled monthly payments of principal and interest on the Home Equity Loans
will be timely delivered on the first day of each Remittance Period (with no
defaults) commencing on December 1, 1997; (xi) each Class of Class A
Certificates has the respective Pass-Through Rate and Initial Certificate
Principal Balance as set forth herein; (xii) the Coupon Rate for each adjustable
rate Home Equity Loan is adjusted on its next adjustment date and on subsequent
adjustment dates which occur on six month intervals following the initial
adjustment date to equal the sum of the applicable gross margin and the
six-month London Interbank Offered Rate (such sum being subject to the
applicable periodic rate adjustment caps and floors and lifetime rate caps and
floors); and (xiii) the six-month London Interbank Offered Rate remains constant
at 5.90625%.
<TABLE>
<CAPTION>
Number of Remaining Remaining Original
Months to Term to Amortization Amortization Initial Subsequent
Amortization Next Rate Principal Coupon Maturity Term Term Gross Maximum Minimum Rate Periodic
Loans Method Change(2) Balance Rate (Months) (Months) (Months) Margin Rate Rate Cap Rate Cap
----- ------ --------- ------- ---- -------- -------- -------- ------ ---- ---- --- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Level Pay $ 3,930,772.60 11.2661 110 110 111
Loans
Initial Level Pay $18,362,131.88 11.4064 179 179 180
Loans
Initial Level Pay $19,183,306.49 11.3805 239 239 240
Loans
Initial Level Pay $34,443,319.95 11.2711 299 299 300
Loans
Initial Level Pay $31,631,056.99 10.7542 359 359 360
Loans
Initial Balloon $ 2,769,225.64 10.8435 176 358 360
Loans
Initial Level 21 $ 139,050.64 9.6943 357 357 360 7.6105 15.6943 9.6943 3.0000 1.0000
Loans Pay(1)
Initial Level 22 $ 1,426,415.19 10.3987 358 358 360 7.6006 16.3987 10.3987 3.0000 1.0000
Loans Pay(1)
Initial Level 23 $ 2,214,484.64 10.2186 359 359 360 7.5261 16.2186 10.2186 3.0000 1.0000
Loans Pay(1)
Initial Level 24 $ 3,668,078.50 10.0988 360 360 360 7.2707 16.0988 10.0988 3.0000 1.0000
Loans Pay(1)
Subsequent Level Pay $ 240,433.59 11.2661 111 111 111
Subsequent Level Pay $ 1,123,156.57 11.4064 180 180 180
Subsequent Level Pay $ 1,173,385.36 11.3805 240 240 240
Subsequent Level Pay $ 2,106,794.65 11.2711 300 300 300
Subsequent Level Pay $ 1,934,776.96 10.7542 360 360 360
Subsequent Balloon $ 171,036.74 10.8435 180 360 360
Subsequent Level 24 $ 455,573.61 10.1843 360 360 360 7.4161 16.1843 10.1843 3.0000 1.0000
Pay(1)
- ----------
</TABLE>
(1) Adjustable rate Home Equity Loans.
(2) Corresponding payment changes in the month following the rate change.
The following tables set forth the percentages of the initial principal
amount of the Class A Certificates that would be outstanding after each of the
dates shown, based on prepayment rates equal to 0%, 50%, 75%, 100%, 150% and
200% of the Prepayment Assumption. The percentages have been rounded to the
nearest 1%.
S-44
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE(1)
Class A-1 Class A-2 Class A-3
=================================== ===================================== ==========================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Payment
Date 0% 50% 75% 100% 150% 200% 0% 50% 75% 100% 150% 200% 0% 50% 75% 100% 150% 200%
---- -- --- --- ---- ---- ---- -- --- --- ---- ---- ---- -- --- --- ---- ---- ----
Initial 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
12/25/1998 87 70 61 53 35 18 100 100 100 100 100 100 100 100 100 100 100 100
12/25/1999 82 41 22 3 0 0 100 100 100 100 50 0 100 100 100 100 100 100
12/25/2000 78 16 0 0 0 0 100 100 83 44 0 0 100 100 100 100 89 60
12/25/2001 73 0 0 0 0 0 100 90 39 0 0 0 100 100 100 99 61 35
12/25/2002 68 0 0 0 0 0 100 58 5 0 0 0 100 100 100 78 42 21
12/25/2003 62 0 0 0 0 0 100 29 0 0 0 0 100 100 85 61 29 12
12/25/2004 56 0 0 0 0 0 100 5 0 0 0 0 100 100 71 47 20 6
12/25/2005 48 0 0 0 0 0 100 0 0 0 0 0 100 90 58 37 13 3
12/25/2006 40 0 0 0 0 0 100 0 0 0 0 0 100 78 48 28 8 1
12/25/2007 32 0 0 0 0 0 100 0 0 0 0 0 100 68 39 22 5 0
12/25/2008 24 0 0 0 0 0 100 0 0 0 0 0 100 58 32 17 3 0
12/25/2009 15 0 0 0 0 0 100 0 0 0 0 0 100 50 26 13 2 0
12/25/2010 4 0 0 0 0 0 100 0 0 0 0 0 100 43 21 9 1 0
12/25/2011 0 0 0 0 0 0 88 0 0 0 0 0 100 36 16 7 0 0
12/25/2012 0 0 0 0 0 0 59 0 0 0 0 0 100 29 12 4 0 0
12/25/2013 0 0 0 0 0 0 45 0 0 0 0 0 100 24 10 3 0 0
12/25/2014 0 0 0 0 0 0 30 0 0 0 0 0 100 20 7 2 0 0
12/25/2015 0 0 0 0 0 0 14 0 0 0 0 0 100 17 5 1 0 0
12/25/2016 0 0 0 0 0 0 0 0 0 0 0 0 98 14 4 0 0 0
12/25/2017 0 0 0 0 0 0 0 0 0 0 0 0 86 11 3 0 0 0
12/25/2018 0 0 0 0 0 0 0 0 0 0 0 0 78 80 2 0 0 0
12/25/2019 0 0 0 0 0 0 0 0 0 0 0 0 69 60 1 0 0 0
12/25/2020 0 0 0 0 0 0 0 0 0 0 0 0 58 50 0 0 0 0
12/25/2021 0 0 0 0 0 0 0 0 0 0 0 0 47 30 0 0 0 0
12/25/2022 0 0 0 0 0 0 0 0 0 0 0 0 35 20 0 0 0 0
12/25/2023 0 0 0 0 0 0 0 0 0 0 0 0 29 10 0 0 0 0
12/25/2024 0 0 0 0 0 0 0 0 0 0 0 0 23 00 0 0 0 0
12/25/2025 0 0 0 0 0 0 0 0 0 0 0 0 16 00 0 0 0 0
12/25/2026 0 0 0 0 0 0 0 0 0 0 0 0 8 00 0 0 0 0
12/25/2027 0 0 0 0 0 0 0 0 0 0 0 0 0 00 0 0 0 0
Weighted
Average
Life to
Maturity
Years)(2) 7.24 1.82 1.37 1.13 0.88 0.74 15.95 5.40 3.86 3.00 2.09 1.62 4.04 13.20 9.96 7.83 5.31 3.90
Weighted
Average
Life to
Call
Years)(2) 7.24 1.82 1.37 1.13 0.88 0.74 15.95 5.40 3.86 3.00 2.09 1.62 23.67 12.24 9.12 7.08 4.77 3.50
</TABLE>
- -------------------
(1) The percentages in the tables have been rounded to the nearest 1%.
(2) The weighted average life of a Class of Class A Certificates is
determined by (i) multiplying the amount of each principal payment by the
number of years from the date of issuance to the related Payment Date,
(ii) adding the results, and (iii) dividing the sum by the initial
respective Certificate Balance for such Class of Class A Certificates.
S-45
<PAGE>
Payment Lag Feature of Class A Certificates
Pursuant to the Pooling and Servicing Agreement, an amount equal to
Mortgagor payments with respect to each Home Equity Loan (net of the Servicing
Fee) received or deemed to be received by the Master Servicer during each
Remittance Period is to be remitted to the Trustee on or prior to the related
Monthly Remittance Date; the Trustee will not be required to distribute any such
amounts to the Owners until the next succeeding Payment Date. As a result, the
monthly distributions to the Owners generally reflect Mortgagor payments during
the prior Remittance Period, and the first Payment Date will not occur until
January 25, 1998. Thus, the effective yield to the Owners will be below that
otherwise produced by the related Pass-Through Rate because the distribution of
the Class A Distribution Amount in respect of any given month will not be made
until on or about the 25th day of the following month.
FORMATION OF THE TRUST AND TRUST PROPERTY
The Trust will be created and established pursuant to the Pooling and
Servicing Agreement. The Sponsor has transferred the Initial Home Equity Loans
to the Seller and will transfer the Subsequent Home Equity Loans to the Seller,
in the ordinary course of its business. The Seller will convey without recourse
the Home Equity Loans to the Depositor, the Depositor will convey without
recourse the Home Equity Loans to the Trust and the Trust will issue the Class A
Certificates and the Class R Certificates to the Owners thereof.
The property of the Trust shall include all (a) the Home Equity Loans
together with the related Home Equity Loan documents and the Seller's interest
in any Property which secures a Home Equity Loan and all payments thereon and
proceeds of the conversion, voluntary or involuntary, of the foregoing, (b) such
amounts as may be held by the Trustee in the Certificate Account, Pre-Funding
Account, Capitalized Interest Account and any other accounts held by the Trustee
for the Trust together with investment earnings on such amounts and such amounts
as may be held by the Master Servicer in the Principal and Interest Account, if
any, exclusive of investment earnings thereon (except as otherwise provided)
whether in the form of cash, instruments, securities or other properties and (c)
proceeds of all the foregoing (including, but not by way of limitation, all
proceeds of any mortgage insurance, hazard insurance and title insurance policy
relating to the Home Equity Loans, cash proceeds, accounts, accounts receivable,
notes, drafts, acceptances, chattel paper, checks, deposit accounts, rights to
payment of any and every kind, and other forms of obligations and receivables
which at any time constitute all or part of or are included in the proceeds of
any of the foregoing) to pay the Certificates as specified in the Pooling and
Servicing Agreement (collectively, the "Trust Estate"). In addition to the
foregoing, the Sponsor shall cause the Certificate Insurer to deliver the
Insurance Policy to the Trustee for the benefit of the Owners of the Class A
Certificates.
The Class A Certificates will not represent an interest in or an
obligation of, nor will the Home Equity Loans be guaranteed by, the Depositor,
the Sponsor, the Seller, the Master Servicer, the Backup Master Servicer or any
of their affiliates; however, certain distributions due to the Owners of the
Class A Certificates are insured by the Certificate Insurer.
Prior to its formation the Trust will have had no assets or
obligations. Upon formation, the Trust will not engage in any business activity
other than acquiring, holding and collecting payments on the Home Equity Loans,
issuing the Certificates and distributing payments thereon. The Trust will not
acquire any receivables or assets other than the Home Equity Loans and the
rights appurtenant thereto. To the extent that borrowers make scheduled payments
under the Home Equity Loans, the Trust will have sufficient liquidity to make
distributions on the Certificates. As the Trust does not have any operating
history and will not engage in any business activity other than issuing the
Certificates and
S-46
<PAGE>
making distributions thereon, there has not been included any historical or pro
forma ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Initial Home
Equity Loans and the Properties is based upon the pool as constituted at the
opening of business on the Cut-Off Date. Prior to the issuance of the Class A
Certificates, Initial Home Equity Loans may be removed from the pool as a result
of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Sponsor
deems such removal necessary or appropriate and other Initial Home Equity Loans
may be added to the pool prior to the issuance of the Class A Certificates.
DESCRIPTION OF THE CLASS A CERTIFICATES
General
Each Class A Certificate will represent certain undivided, fractional
ownership interests in the Trust Estate created and held pursuant to the Pooling
and Servicing Agreement, subject to the limits and the priority of distribution
described therein.
Payment Dates
On each Payment Date, the Owners of the Classes of Class A Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the related
Certificate Principal Balance of such Class of Class A Certificates is reduced
to zero, the aggregate Class A Distribution Amount as of such Payment Date
allocated among each Class of Class A Certificates as described below.
Distributions will be made in immediately available funds to Owners of Class A
Certificates by wire transfer or otherwise, to the account of such Owner at a
domestic bank or other entity having appropriate facilities therefor, if such
Owner has so notified the Trustee at least five Business Days prior to the
Record Date, or by check mailed to the address of the person entitled thereto as
it appears on the register (the "Register") maintained by the Trustee as
registrar (the "Registrar"). Beneficial Owners may experience some delay in the
receipt of their payments due to the operations of DTC. See "Description of the
Class A Certificates--Book Entry Registration of the Class A Certificates"
herein and "Description of the Certificates--Book Entry Registration" in the
Prospectus.
The Pooling and Servicing Agreement will provide that an Owner, upon
receiving the final distribution on such Owner's Certificate, will be required
to send such Certificate to the Trustee. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed cancelled for all
purposes of the Pooling and Servicing Agreement and the Insurance Policy.
Each Owner of record of the related Class of Class A Certificates will
be entitled to receive such Owner's Percentage Interest in the amounts due such
Class on such Payment Date. The "Percentage Interest" of a Class A Certificate
as of any date of determination will be equal to the percentage obtained by
dividing the principal balance of such Class A Certificate as of the Cut-Off
Date by the Certificate Principal Balance for the related Class of the Class A
Certificates as of the Cut-Off Date.
S-47
<PAGE>
Distributions
Upon receipt, the Trustee will be required to deposit into the
Certificate Account, (i) any Insured Payments, (ii) the proceeds of any
liquidation of the assets of the Trust and (iii) all remittances made to the
Trustee by or on behalf of the Master Servicer.
The Pooling and Servicing Agreement establishes a pass-through rate on
each Class of Class A Certificates (each, a "Pass-Through Rate") as set forth in
the Summary herein under "Certificates Offered." The "Expense Fee" will equal
the sum of the Trustee Fee and the amounts payable to the Certificate Insurer as
premium on the Insurance Policy (the "Premium Amount").
On each Payment Date, the Trustee is required to make the following
disbursements and transfers from monies then on deposit in the Certificate
Account as specified below in the following order of priority of each such
transfer and disbursement:
(i) first, on each Payment Date from amounts then on deposit in
the Certificate Account, (A) to the Trustee, the Trustee Fee
and (B) provided that no Certificate Insurer Default has
occurred and is continuing, the Premium Amount for such
Payment Date to the Certificate Insurer;
(ii) second, on each Payment Date, the Trustee shall allocate an
amount equal to the sum of (x) the Total Monthly Excess Spread
with respect to such Payment Date plus (y) any Subordination
Reduction Amount with respect to such Payment Date (such sum
being the "Total Monthly Excess Cashflow" with respect to such
Payment Date) in the following order of priority:
(A) first, such Total Monthly Excess Cashflow shall be
allocated to the payment of the Class A Principal
Distribution Amount (excluding any Subordination
Increase Amount) pursuant to clause (iv)(B) below in
an amount equal to the amount, if any, by which (x)
the Class A Principal Distribution Amount (excluding
any Subordination Increase Amount) exceeds (y) the
Available Funds for such Payment Date (net of the
Expense Fee and Current Interest) (the amount of such
difference being an "Available Funds Shortfall"); and
(B) second, any portion of the Total Monthly Excess
Cashflow remaining after the allocation described in
clause (A) above shall be paid to the Certificate
Insurer in respect of amounts owed on account of any
Reimbursement Amount (as defined in the Pooling and
Servicing Agreement) owed to the Certificate Insurer;
(iii) third, the amount, if any, of the Total Monthly Excess
Cashflow on a Payment Date remaining after the allocations and
payments described in clause (ii) above, net of any
Subordination Reduction Amount, is the "Net Monthly Excess
Cashflow" for such Payment Date and is required to be applied
in the following order or priority:
(A) first, such Net Monthly Excess Cashflow shall be used
to reduce to zero, through the payment of a
Subordination Increase Amount to the Owners of the
Class A Certificates pursuant to clause (iv)(B)
below, an amount, if any, equal to the excess of the
Specified Subordinated Amount over the Subordinated
Amount (assuming application of 100% of principal
collections received during such
S-48
<PAGE>
Remittance Period but prior to the application
of any Subordination Increase Amount) as of such
Payment Date; and
(B) second, any Net Monthly Excess Cashflow remaining
after the applications and payments described in
clause (A) above shall be paid to the Master Servicer
to the extent of any unreimbursed Delinquency
Advances, unreimbursed Servicing Advances and
unreimbursed Compensating Interest;
(iv) fourth, following the making by the Trustee of all
allocations, transfers and disbursements described above from
amounts (including any related Insured Payment) then on
deposit in the Certificate Account, the Trustee shall
distribute:
(A) to the Owners of the Class A Certificates, the
Current Interest for each Class (including the
proceeds of any Insured Payments made by the
Certificate Insurer) on a pro rata basis based on
each such Class A Certificate's Current Interest
without any priority among the Class A
Certificates;
(B) to the Owners of Class A Certificates, the Class A
Principal Distribution Amount shall be distributed
as follows:(i) first, to the Owners of the Class
A-1 ----- Certificates until the Class A-1
Certificate Principal Balance is reduced to zero;
(ii) second, to the Owners of the Class A-2
Certificates until the Class A-2 ------
Certificate Principal Balance is reduced to zero;
and (iii) third, to the Owners of ----- the Class
A-3 Certificates until the Class A-3 Certificate
Principal Balance is reduced to zero; provided,
however, during the continuance of a Certificate
Insurer Default, if there is a Subordination
Deficit, then the Class A Principal Distribution
Amount shall be distributed pro rata to the Owners
of the Class A Certificates;
(C) to the Trustee, as reimbursement for all
unreimbursable expenses incurred in connection
with duties and obligations under the Pooling and
Servicing Agreement;
(v) fifth, following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then
on deposit in the Certificate Account, the Trustee shall
distribute any amounts owing to the Backup Master Servicer at
such time, if any, that the Backup Master Servicer becomes the
Master Servicer, as certified by the Backup Master Servicer as
Master Servicer; and
(vi) sixth, following the making by the Trustee of all allocations,
transfers and disbursements described above, from amounts then
on deposit in the Certificate Account, the Trustee shall
distribute to the Owners of the Class R Certificates, the
remaining distributable amounts as specified in the Pooling
and Servicing Agreement, for such Payment Date.
The Trustee Fee and the Premium Amount as of each Payment Date will be
as set out in the Pooling and Servicing Agreement.
"Current Interest" with respect to each Class of Class A Certificates
means, with respect to any Payment Date (i) the aggregate amount of interest
accrued during the preceding Accrual Period on the Certificate Principal Balance
of the related Class A Certificates subject to a reduction in the event of (a)
Prepayment Interest Shortfalls, to the extent not covered by the Servicing Fee
and (b) shortfalls resulting
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from the Soldiers' and Sailors' Civil Relief Act of 1940 ("Relief Act
Shortfalls") plus (ii) the Preference Amount as it relates to interest
previously paid on such Class of the Class A Certificates prior to such Payment
Date, plus (iii) the Carry Forward Amount, if any, with respect to such Class of
Class A Certificates.
The "Class A Principal Distribution Amount" for each Payment Date shall
be the lesser of: (a) the Total Available Funds, minus the Expense Fee, plus any
Insured Payment with respect to the Class A Certificates, minus the Current
Interest for such Payment Date with respect to the Class A Certificates; and (b)
the excess, if any, of (i) the sum of: (A) the Preference Amount with respect to
principal owed to each Owner of Class A Certificates that remains unpaid as of
such Payment Date; (B) the principal portion of all scheduled monthly payments
on the Home Equity Loans due on or prior to the related Due Date thereof, to the
extent actually received by the Trustee during the related Remittance Period and
any Prepayments made by the Mortgagors and actually received by the Trustee
during the related Remittance Period; (C) the aggregate Loan Balance that was
repurchased by the Sponsor or the Seller or purchased by the Master Servicer on
or prior to the related Monthly Remittance Date, to the extent such Loan Balance
is actually received by the Trustee during the related Remittance Period; (D)
any Substitution Amounts (i.e. the excess, if any, of the Loan Balance of a Home
Equity Loan being replaced over the outstanding principal balance of a
replacement Home Equity Loan plus accrued and unpaid interest) delivered by the
Sponsor or the Seller on the related Monthly Remittance Date in connection with
a substitution of a Home Equity Loan (to the extent such Substitution Amounts
relate to principal), to the extent such Substitution Amounts are actually
received by the Trustee on the related Remittance Date; (E) all Net Liquidation
Proceeds actually collected by or on behalf of the Master Servicer with respect
to the Home Equity Loans during the related Remittance Period (to the extent
such Net Liquidation Proceeds relate to principal), to the extent such Net
Liquidation Proceeds are actually received by the Trustee during the related
Remittance Period; (F) the amount of any Subordination Deficit for such Payment
Date; (G) the principal portion of the proceeds received by the Trustee upon
termination of the Trust (to the extent such proceeds relate to principal); (H)
with respect to the Payment Date immediately following the last day of the
Funding Period, all amounts remaining on deposit in the Pre-Funding Account to
the extent not used to purchase Subsequent Home Equity Loans during such Funding
Period; and (I) the amount of any Subordination Increase Amount (as defined
herein) for such Payment Date to the extent of any Net Monthly Excess Cashflow
available for such purpose; over (ii) the amount of any Subordination Reduction
Amount (as defined herein) for such Payment Date.
The "Carry-Forward Amount" with respect to any Class of Class A
Certificates is the amount as of any Payment Date, equal to the sum of (i) the
amount, if any, by which (x) the Current Interest for such Class exceeded (y)
the amount of the actual distribution in respect of interest on such Class of
Class A Certificates, made to the Owners of such Class of Class A Certificates
on such immediately preceding Payment Date and (ii) 30 days interest on such
excess at the related Pass-Through Rate for such Class of Class A Certificates.
"Available Funds" as to each Payment Date is the amount on deposit in
the Certificate Account on such Payment Date (net of Total Monthly Excess
Cashflow and disregarding the amounts of any Insured Payments to be made on such
Payment Date and inclusive of any investment earnings on eligible investments
therein).
"Total Available Funds" as to each Payment Date is the sum of (x) the
amount on deposit in the Certificate Account (net of Total Monthly Excess
Cashflow) on such Payment Date and (y) any amounts of Total Monthly Excess
Cashflow to be applied on such Payment Date (disregarding the amount of any
Insured Payment to be made on such Payment Date).
The Trustee or Paying Agent shall (i) receive as attorney-in-fact of
each Owner of Class A
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Certificates any Insured Payment from the Certificate Insurer and deposit such
amounts into the Certificate Account and (ii) disburse the same to each Owner of
Class A Certificates. The Pooling and Servicing Agreement will provide that to
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee or Paying Agent), to the Owners of
such Class A Certificates the Certificate Insurer will be subrogated to the
rights of such Owners of Class A Certificates with respect to such Insured
Payments, and shall receive reimbursement for such Insured Payment as provided
in the Pooling and Servicing Agreement, but only from the sources and in the
manner provided in the Pooling and Servicing Agreement for the payment of the
Class A Distribution Amount to Owners of Class A Certificates, if any; such
subrogation and reimbursement to have no effect on the Certificate Insurer's
obligations under the Insurance Policy.
The Pooling and Servicing Agreement provides that the term "Available
Funds" does not include Insured Payments and does not include any amounts that
cannot be distributed to the Owners of Class A Certificates, if any, by the
Trustee as a result of proceedings under the United States Bankruptcy Code.
Each Owner of a Class A Certificate will be required promptly to notify
the Trustee in writing upon the receipt of a court order relating to a
Preference Amount and will be required to enclose a copy of such order with such
notice to the Trustee.
Pre-Funding Account
On the Closing Date, the Original Pre-Funded Amount will be deposited
in the Pre-Funding Account, which account shall be in the name of and maintained
by the Trustee and shall be part of the Trust Estate. During the Funding Period,
the Pre-Funded Amount will be maintained in the Pre-Funding Account. The
Original Pre-Funded Amount will be reduced during the Funding Period by the
amount thereof used to purchase Subsequent Home Equity Loans in accordance with
the Pooling and Servicing Agreement. Any Pre-Funded Amount remaining at the end
of the Funding Period will be distributed to the Class A Certificates on the
Payment Date after the expiration of the Funding Period in reduction of the
Class A Certificate Principal Balance, thus resulting in a principal prepayment
of such Class A Certificates.
Amounts on deposit in the Pre-Funding Account will be invested in the
investments permitted by the Pooling and Servicing Agreement (the "Eligible
Investments"). All interest and any other investment earnings on amounts on
deposit in the Pre-Funding Account will be deposited in the Capitalized Interest
Account prior to each Payment Date during the related Funding Period. The
Pre-Funding Account will not be an asset of the REMIC.
Capitalized Interest Account
On the Closing Date cash will be deposited in the Capitalized Interest
Account, which account shall be in the name of and maintained by the Trustee and
shall be part of the Trust Estate. The amount on deposit in the Capitalized
Interest Account, including reinvestment income, taxes thereon and amounts
deposited thereto from the Pre-Funding Account, will be used by the Trustee to
fund the excess, if any, of (i) the sum of the amount of interest accruing at
the weighted average applicable Pass-Through Rates on the amount by which the
aggregate Certificate Principal Balance of the Class A Certificates exceeds the
aggregate Loan Balance of the Home Equity Loans plus the Trustee Fee accruing on
such excess balance over (ii) the amount of any reinvestment income on monies on
deposit in the Pre-Funding Account; such amounts on deposit will be so applied
by the Trustee on the January and February 1998 Payment Date to fund such
excess, if any. Any amounts remaining in the Capitalized Interest Account at the
end of the Funding Period and not needed for such purpose will be paid to the
Seller and will not thereafter be available for distribution to the holders of
the Class A Certificates. The Capitalized Interest
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Account will not be an asset of the REMIC.
Book Entry Registration of the Class A Certificates
The Class A Certificates will be book-entry Certificates (the
"Book-Entry Certificates"). Persons acquiring beneficial ownership interests in
such Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-
Entry Certificates directly through DTC participants of such system
("Participants"), or indirectly through organizations which are Participants.
The Book-Entry Certificates will be issued in one or more certificates per Class
of Class A Certificates which in the aggregate equal the principal balance of
such Class A Certificates and will initially be registered in the name of Cede &
Co., the nominee of DTC. Investors may hold such beneficial interests in the
Book-Entry Certificates in minimum denominations representing principal amounts
of $25,000 and in integral multiples of $1,000 in excess thereof. Except as
described below, no 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
"Owner" of such Book-Entry Certificates will be Cede & Co., as nominee of DTC.
Beneficial Owners will not be Owners as that term is used in the Pooling and
Servicing Agreement. Beneficial Owners are only permitted to exercise their
rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry 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).
Beneficial Owners will receive all distributions of principal of, and
interest on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such 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 such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive
certificates representing their respective interests in the Class A
Certificates, except under the limited circumstances described below. Unless and
until Definitive Certificates are issued, Beneficial 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 such Class A Certificates, by book-entry
transfer, through DTC for the account of the purchasers of such Class A
Certificates, which account is maintained with their respective Participants.
Under the Rules and in accordance with DTC's normal procedures, transfers of
ownership of such Class A Certificates will be executed through DTC and the
accounts of the respective Participants at DTC will be debited and credited.
Similarly, the Participants and indirect participants will make debits or
credits, as the case may be, on their records on behalf of the selling and
purchasing Beneficial Owners.
Transfers between Participants will occur in accordance with DTC rules.
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<PAGE>
DTC, which is a New York-chartered limited purpose trust company,
performs services for its Participants ("DTC 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.
Distributions on the Book-Entry Certificates will be made on each
Payment 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 payment 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. 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 provided by the Master Servicer
to Cede, as nominee of DTC, may be made available 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 Pooling and Servicing 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. 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 a 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, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Class A Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
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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 Owners
under the Pooling and Servicing Agreement.
Although DTC has agreed to the foregoing procedures in order to
facilitate transfers of Certificates among Participants of DTC, it is under no
obligation to perform or continue to perform such procedures and such procedures
may be discontinued at any time.
Assignment of Rights
An Owner may pledge, encumber, hypothecate or assign all or any part of
its right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above. Notwithstanding the foregoing, the Pooling and Servicing
Agreement provides that the Certificate Insurer will, in connection with the
subrogation of the Certificate Insurer to the rights of the Owners of the Class
A Certificates in an amount equal to Insured Payments for which the Certificate
Insurer has not received reimbursement, be considered to be an "Owner" to the
extent (but only to the extent) of such rights.
THE CERTIFICATE INSURER
The information set forth in this section has been provided by the
Certificate Insurer. No representation is made by the Underwriter, the Sponsor,
the Seller, the Master Servicer, the Backup Master Servicer, the Depositor or
any of their affiliates as to the accuracy or completeness of such information
or any information related to the Certificate Insurer incorporated by reference
herein.
General
The Certificate Insurer is a monoline insurance company incorporated in
1984 under the laws of the State of New York. The Certificate Insurer is
licensed to engage in financial guaranty insurance business in all 50 states,
the District of Columbia and Puerto Rico.
The Certificate Insurer and its subsidiaries are engaged exclusively in
the business of writing financial guaranty insurance, principally in respect of
securities offered in domestic and foreign markets. In general, financial
guaranty insurance consists of the issuance of a guaranty of scheduled payments
of an issuer's securities --thereby enhancing the credit rating of those
securities --in consideration for the payment of a premium to the insurer. The
Certificate Insurer and its subsidiaries principally insure asset-backed,
collateralized and municipal securities. Asset-backed securities are generally
supported by residential mortgage loans, consumer or trade receivables,
securities or other assets having an ascertainable cash flow or market value.
Collateralized securities include public utility first mortgage bonds and
sale/leaseback obligation bonds. Municipal securities consist largely of general
obligation bonds, special revenue bonds and other special obligations of state
and local governments. The Certificate Insurer insures both newly issued
securities sold in the primary market and outstanding securities sold in the
secondary market that satisfy the Certificate Insurer's underwriting criteria.
The Certificate Insurer is a wholly owned subsidiary of Financial
Security Assurance Holdings Ltd. ("Holdings"), a New York Stock Exchange listed
company. Major shareholders of Holdings include Fund American Enterprises
Holdings, Inc., US WEST Capital Corporation and The Tokyo Marine and Fire
Insurance Co., Ltd. No shareholder of Holdings is obligated to pay any debt of
the Certificate Insurer or any claim under any insurance policy issued by the
Certificate Insurer or to make any additional contribution to the capital of the
Certificate Insurer.
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The principal executive offices of the Certificate Insurer are located
at 350 Park Avenue, New York, New York 10022, and its telephone number at that
location is (212) 826-0100.
Reinsurance
Pursuant to an intercompany agreement, liabilities on financial
guaranty insurance written or reinsured from third parties by the Certificate
Insurer or any of its domestic operating insurance company subsidiaries are
reinsured among such companies on an agreed-upon percentage substantially
proportional to their respective capital, surplus and reserves, subject to
applicable statutory risk limitations. In addition, the Certificate Insurer
reinsures a portion of its liabilities under certain of its financial guaranty
insurance policies with other reinsurers under various quota share treaties and
on a transaction-by-transaction basis. Such reinsurance is utilized by the
Certificate Insurer as a risk management device and to comply with certain
statutory and rating agency requirements; it does not alter or limit the
Certificate Insurer's obligations under any financial guaranty insurance policy.
Ratings of Claims-Paying Ability
The Certificate Insurer's claims-paying ability is rated "Aaa" by
Moody's and "AAA" by Standard & Poor's, Fitch, Nippon Investors Service Inc. and
Standard & Poor's (Australia) Pty. Ltd. Such ratings reflect only the views of
the respective rating agencies, are not recommendations to buy, sell or hold
securities and are subject to revision or withdrawal at any time by such rating
agencies.
Capitalization
The following table sets forth the capitalization of the Certificate
Insurer and its wholly owned subsidiaries on the basis of generally accepted
accounting principles as of September 30, 1997 (in thousands):
<TABLE>
<CAPTION>
September 30, 1997
(Unaudited)
-----------
<S> <C>
Deferred Premium Revenue (net of
prepaid reinsurance premiums)................ $ 402,891
--------
Shareholder's Equity:
Common Stock................................. 15,000
Additional Paid-In Capital................... 646,620
Unrealized Gain on Investments
(net of deferred income taxes) .............. 20,808
Accumulated Earnings......................... 212,033
-------
Total Shareholder's Equity.......................... 894,461
-------
Total Deferred Premium Revenue and
Shareholder's Equity......................... $1,297,352
</TABLE>
For further information concerning the Certificate Insurer, see the
Consolidated Financial Statements of the Certificate Insurer and subsidiaries,
and the notes thereto incorporated herein by reference. Copies of the statutory
quarterly and annual statements filed with the State of New York Insurance
Department by the Certificate Insurer are available upon request to the State of
New York Insurance Department.
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Incorporation of Certain Documents by Reference
The consolidated financial statements of the Certificate Insurer and
subsidiaries included as an exhibit to the Annual Report on Form 10-K for the
period ended December 31, 1996 and the unaudited financial statements of the
Certificate Insurer and subsidiaries for the quarters ended March 31, 1997, June
30, 1997 and September 30, 1997 included as an exhibit to the Quarterly Reports
on Form 10-Q for the periods ended March 31, 1997, June 30, 1997 and September
30, 1997, each of which have been filed with the Securities and Exchange
Commission by Holdings, are hereby incorporated by reference in this Prospectus
Supplement.
All financial statements of the Certificate Insurer and subsidiaries
included in documents filed by Holdings pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus Supplement and prior to the
termination of the offering of the Class A Certificates shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the respective dates of filing such documents.
The Depositor will provide without charge to any person to whom this
Prospectus Supplement is delivered, upon oral or written request of such person,
a copy of any or all of the foregoing financial statements incorporated by
reference. Requests for such copies should be directed to the Secretary, DLJ
Mortgage Acceptance Corp., 277 Park Avenue, New York, New York 10172.
Insurance Regulation
The Certificate Insurer is licensed and subject to regulation as a
financial guaranty insurance corporation under the laws of the State of New
York, its state of domicile. In addition, the Certificate Insurer and its
insurance subsidiaries are subject to regulation by insurance laws of the
various other jurisdictions in which they are licensed to do business. As a
financial guaranty insurance corporation licensed to do business in the State of
New York, the Certificate Insurer is subject to Article 69 of the New York
Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and the
volume of transactions ("aggregate risks") that may be underwritten by each such
insurer. Other provisions of the New York Insurance Law, applicable to non-life
insurance companies such as the Certificate Insurer, regulate, among other
things, permitted investments, payment of dividends, transactions with
affiliates, mergers, consolidations, acquisitions or sales of assets and
incurrence of liability for borrowings.
The Certificate Insurer does not accept any responsibility for the
accuracy or completeness of this Prospectus Supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of information regarding the Certificate Insurer set forth or
incorporated under the heading "The Certificate Insurer" herein.
CREDIT ENHANCEMENT
Insurance Policy
Simultaneously with the issuance of the Certificates, the Certificate
Insurer will issue the Insurance Policy to the Trustee for the benefit of the
Owners pursuant to which it will irrevocably and unconditionally guaranty
payment on each Payment Date to the Trustee for the benefit of the Owners of the
Class A Certificates of an amount equal to the Current Interest plus any
Subordination Deficit for
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such Payment Date calculated in accordance with the original terms of the Class
A Certificates when issued and without regard to any amendment or modification
of the Class A Certificates or the Pooling and Servicing Agreement except
amendments or modifications to which the Certificate Insurer has given its prior
written consent. The amount of the Insured Payment, if any, made by the
Certificate Insurer to the Owners of the Class A Certificates under the
Insurance Policy on each Payment Date is the sum (without duplication) of (i)
any shortfall in the amount required to pay the Subordination Deficit for such
Payment Date from a source other than the Insurance Policy, (ii) any shortfall
in the amount required to pay Current Interest for such Payment Date from a
source other than the Insurance Policy and (iii) any shortfall in the amount
required to pay the Preference Amount from a source other than the Insurance
Policy. The effect of the Insurance Policy is to guaranty the timely payment of
interest on, and the ultimate principal amount of, all Classes of the Class A
Certificates. Notwithstanding the foregoing, the Certificate Insurer is
permitted at its sole option, but is not required, to pay any losses in
connection with the liquidation of a Home Equity Loan in accordance with the
Insurance Policy.
Payment of claims under the Insurance Policy will be made by the
Certificate Insurer following Receipt by the Certificate Insurer of the
appropriate notice for payment on the later to occur of (a) 12:00 noon, New York
City time, on the second Business Day following Receipt of such notice for
payment, and (b) 12:00 noon, New York City time, on the relevant Payment Date.
If any payment of an amount guaranteed by the Certificate Insurer
pursuant to the Insurance Policy is avoided as a preference payment under
applicable bankruptcy, insolvency, receivership or similar law the Certificate
Insurer will pay such amount out of the funds of the Certificate Insurer on the
later of (a) the date when due to be paid pursuant to the Order referred to
below or (b) the first to occur of (i) the fourth Business Day following Receipt
by the Certificate Insurer from the Trustee of (A) a certified copy of the order
(the "Order") of the court or other governmental body which exercised
jurisdiction to the effect that an Owner of a Class A Certificate is required to
return principal or interest distributed with respect to a Class A Certificate
during the term of the Insurance Policy because such distributions were
avoidable preferences under applicable bankruptcy law, (B) a certificate of the
Owner of the Class A Certificate that the Order has been entered and is not
subject to any stay, and (C) an assignment duly executed and delivered by the
Owner of the Class A Certificate, in such form as is reasonably required by the
Certificate Insurer and provided to the Owner of the Class A Certificate by the
Certificate Insurer, irrevocably assigning to the Certificate Insurer all rights
and claims of the Owner of the Class A Certificate relating to or arising under
the Certificates against the debtor which made such preference payment or
otherwise with respect to such preference payment, or (ii) the date of Receipt
by the Certificate Insurer from the Trustee of the items referred to in clauses
(A), (B) and (C) above if, at least four Business Days prior to such date of
Receipt, the Certificate Insurer shall have Received written notice from the
Trustee that such items were to be delivered on such date and such date was
specified in such notice. Such payment shall be disbursed to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order
and not to the Trustee or any Owner of a Class A Certificate directly (unless an
Owner of a Class A Certificate has previously paid such amount to the receiver,
conservator, debtor-in-possession or trustee in bankruptcy named in the Order,
in which case such payment shall be disbursed to the Trustee for distribution to
such Owner of the Class A Certificate upon proof of such payment reasonably
satisfactory to the Certificate Insurer).
The terms "Receipt" and "Received," with respect to the Insurance
Policy, means actual delivery to the Certificate Insurer and to its fiscal agent
appointed by the Certificate Insurer at its option, if any, prior to 12:00 p.m.,
New York City time, on a Business Day; delivery either on a day that is not a
Business Day or after 12:00 p.m., New York City time, shall be deemed to be
Receipt on the next succeeding Business Day. If any notice or certificate given
under the Insurance Policy by the Trustee is not in proper form or is not
properly completed, executed or delivered, it shall be deemed not to have
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been Received, and the Certificate Insurer or the fiscal agent shall promptly so
advise the Trustee and the Trustee may submit an amended notice.
Under the Insurance Policy, "Business Day" means any day other than (i)
a Saturday or Sunday or (ii) a day on which banking institutions in The City of
New York, New York are authorized or obligated by law or executive order to be
closed.
The Certificate Insurer's obligations under the Insurance Policy in
respect of Insured Payments shall be discharged to the extent funds are
transferred to the Trustee as provided in the Insurance Policy, whether or not
such funds are properly applied by the Trustee.
The Certificate Insurer shall be subrogated to the rights of each Owner
of a Class A Certificate to receive payments of principal and interest, as
applicable, with respect to distributions on the Class A Certificates to the
extent of any payment by the Certificate Insurer under the Insurance Policy. To
the extent the Certificate Insurer makes Insured Payments, either directly or
indirectly (as by paying through the Trustee), to the Owners of the Class A
Certificate, the Certificate Insurer will be subrogated to the rights of the
Owners of the Class A Certificates, as applicable, with respect to such Insured
Payment, shall be deemed to the extent of the payments so made to be a
registered Owner of a Class A Certificate for purposes of payment and shall
receive all future Class A Distribution Amounts until all such Insured Payments
by the Certificate Insurer have been fully reimbursed, provided that the Owners
of the Class A Certificate have received the full amount of the Class A
Distribution Amount.
Claims under the Insurance Policy will rank equally with any other
unsecured and unsubordinated obligations of the Certificate Insurer except for
certain obligations in respect of tax and other payments to which preference is
or may become afforded by statute. The terms of the Insurance Policy cannot be
modified, altered or affected by any other agreement or instrument, or by the
merger, consolidation or dissolution of the Sponsor. The Insurance Policy by its
terms may not be canceled or revoked. The Insurance Policy is governed by the
laws of the State of New York.
The Insurance Policy is not covered by the Property/Casualty Insurance
Security Fund specified in Article 76 of the New York Insurance Law. The
Insurance Policy is not covered by the Florida Insurance Guaranty Association
created under Part II of Chapter 631 of the Florida Insurance Code. In the event
the Certificate Insurer were to become insolvent, any claims arising under the
Insurance Policy are excluded from coverage by the California Insurance Guaranty
Association, established pursuant to Article 14.2 of Chapter 1 of part 2 of
Division 1 of the California Insurance Code.
Pursuant to the terms of the Pooling and Servicing Agreement, unless a
Certificate Insurer Default exists, the Certificate Insurer shall be deemed to
be the Owner of Class A Certificates for certain purposes (other than with
respect to payment on the Certificates), will be entitled to exercise all rights
of the Owners of the Class A Certificate thereunder, without the consent of such
Owners and the Owners of the Class A Certificate may exercise such rights only
with the prior written consent of the Certificate Insurer. In addition, the
Certificate Insurer will have certain additional rights as a third party
beneficiary to the Pooling and Servicing Agreement.
Overcollateralization Provisions
Overcollateralization Resulting from Cash Flow Structure. The Pooling
and Servicing Agreement requires that, on each Payment Date, Net Monthly Excess
Cashflow be applied on such Payment Date as an accelerated payment of principal
on the related Class(es) of Class A Certificates, but only to the limited extent
hereafter described. "Net Monthly Excess Cashflow" equals the excess of (i) the
excess, if any of (x) the interest which is collected on the Home Equity Loans
during a Remittance
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Period (net of the Expense Fee, the Servicing Fee and of certain miscellaneous
administrative amounts) plus any Delinquency Advances and Compensating Interest
over (y) Current Interest (the difference between (x) and (y) is the "Total
Monthly Excess Spread"), over (ii) the portion of the Total Monthly Excess
Cashflow that is used to cover shortfalls in Available Funds on such Payment
Date.
The application of Net Monthly Excess Cashflow has the effect of
accelerating the amortization of the Class A Certificates relative to the
amortization of the Home Equity Loans. To the extent that any Net Monthly Excess
Cashflow is not so used, the Pooling and Servicing Agreement provides that it
will be used to reimburse the Master Servicer and the Trustee with respect to
any amounts owing to it, and, thereafter, paid to the Owners of the Class R
Certificates.
Pursuant to the Pooling and Servicing Agreement, the Net Monthly Excess
Cashflow will be applied as an accelerated payment of principal on the Class A
Certificates until the Subordinated Amount has increased to the level required.
"Subordinated Amount" means, with respect to each Payment Date, the excess, if
any, of (x) the sum of (i) the aggregate Loan Balances of the Home Equity Loans
as of the close of business on the last day of the preceding Remittance Period
and (ii) the amount in the Pre-Funding Account as of the close of business on
the last day of the preceding Remittance Period (exclusive of any earnings on
amounts on deposit in the Pre-Funding Account) over (y) the Class A Certificate
Principal Balance as of such Payment Date (after taking into account the payment
of the Class A Principal Distribution Amount on such Payment Date). Any amount
of Net Monthly Excess Cashflow actually applied as an accelerated payment of
principal is a "Subordination Increase Amount." The required level of the
Subordinated Amount with respect to a Payment Date is the "Specified
Subordinated Amount." The Pooling and Servicing Agreement generally provides
that the Specified Subordinated Amount may, over time, decrease, or increase,
subject to certain floors, caps and triggers including triggers that allow the
Specified Subordinated Amount to decrease or "step down" based on the
performance on the Home Equity Loans with respect to certain tests specified in
the Pooling and Servicing Agreement based on delinquency rates and cumulative
losses. In addition, Net Monthly Excess Cashflow will be applied to the payment
in reduction of principal of the Class A Certificates during the period that the
Home Equity Loans are unable to meet certain tests specified in the Pooling and
Servicing Agreement based on delinquency rates and cumulative losses.
In the event that the Specified Subordinated Amount is permitted to
decrease or "step down" on a Payment Date in the future, the Pooling and
Servicing Agreement provides that a portion of the principal which would
otherwise be distributed to the Owners of the related Class A Certificates on
such Payment Date shall be distributed to the Owners of the Class R Certificates
over the period specified in the Pooling and Servicing Agreement. This has the
effect of decelerating the amortization of the Class A Certificates relative to
the amortization of the Home Equity Loans and of reducing the related
Subordinated Amount. With respect to any Payment Date, the excess, if any, of
(x) the Subordinated Amount on such Payment Date after taking into account all
distributions to be made on such Payment Date (except for any distributions of
related Subordination Reduction Amounts as described in this sentence) over (y)
the Specified Subordinated Amount is the "Excess Subordinated Amount" for such
Payment Date. If, on any Payment Date, the Excess Subordinated Amount is, or,
after taking into account all other distributions to be made on such Payment
Date would be, greater than zero (i.e., the Subordinated Amount is or would be
greater than the Specified Subordinated Amount), then any amounts relating to
principal which would otherwise be distributed to the Owners of the Class A
Certificates on such Payment Date shall instead be distributed to the Owners of
the Class R Certificates (to the extent available therefor) in an amount equal
to the lesser of (x) the Excess Subordinated Amount and (y) the amount available
for distribution on account of principal with respect to the Class A
Certificates on such Payment Date; such amount being the "Subordination
Reduction Amount" with respect to the related Payment Date.
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The Pooling and Servicing Agreement provides generally that, on any
Payment Date all amounts collected on account of principal (other than any such
amount applied to the payment of a Subordination Reduction Amount) during the
prior Remittance Period will be distributed to the Owners of the related Class A
Certificates on such Payment Date. If any Home Equity Loan became a Liquidated
Loan during such prior Remittance Period, the Net Liquidation Proceeds related
thereto and allocated to principal may be less than the principal balance of the
related Home Equity Loan; the amount of any such insufficiency is a "Realized
Loss." In addition, the Pooling and Servicing Agreement provides that the
principal balance of any Home Equity Loan which becomes a Liquidated Loan shall
thenceforth equal zero. The Pooling and Servicing Agreement does not contain any
requirement that the amount of any Realized Loss be distributed to the Owners of
the related Class A Certificates on the Payment Date which immediately follows
the event of loss; i.e., the Pooling and Servicing Agreement does not require
the current recovery of losses. However, the occurrence of a Realized Loss will
reduce the Subordinated Amount, which to the extent that such reduction causes
the Subordinated Amount to be less than the Specified Subordinated Amount
applicable to the related Payment Date, will require the payment of a
Subordination Increase Amount on such Payment Date (or, if insufficient funds
are available on such Payment Date, on subsequent Payment Dates, until the
Subordinated Amount equals the Specified Subordinated Amount). The effect of the
foregoing is to allocate losses to the Owners of the Class R Certificates by
reducing, or eliminating entirely, payments of Total Monthly Excess Spread and
Subordination Reduction Amounts which such Owners would otherwise receive.
Overcollateralization and the Insurance Policy. The Pooling and
Servicing Agreement defines a "Subordination Deficit" with respect to a Payment
Date to be the amount, if any, by which (x) the Class A Certificate Principal
Balance with respect to such Payment Date, after taking into account all
distributions to be made on such Payment Date (except for any Insured Payment),
exceeds (y) the aggregate Loan Balances of the Home Equity Loans as of the close
of business on the last day of the prior Remittance Period. The Pooling and
Servicing Agreement requires the Trustee to make a claim for an Insured Payment
under the Insurance Policy not later than the third Business Day prior to any
Payment Date as to which the Trustee has determined that a Subordination Deficit
will occur for the purpose of applying the proceeds of such Insured Payment as a
payment of principal to the Owners of the related Class A Certificates on such
Payment Date. The Insurance Policy is thus similar to the subordination
provisions described above insofar as the Insurance Policy guarantees ultimate,
rather than current, payment of the amounts of any Realized Losses to the Owners
of the Class A Certificates. Investors in the Class A Certificates should
realize that, under extreme loss or delinquency scenarios applicable to the Home
Equity Loan Pool, they may temporarily receive no distributions of principal
when they would otherwise be entitled thereto under the principal allocation
provisions described herein. Nevertheless, the exposure to risk of loss of
principal of the Owners of the Class A Certificates depends in part on the
ability of the Certificate Insurer to satisfy its obligations under the
Insurance Policy. In that respect and to the extent that the Certificate Insurer
satisfies such obligations, the Owners of the Class A Certificates are insulated
from shortfalls in Available Funds that may arise.
THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
Covenant of the Sponsor to Take Certain Actions with Respect to the Home Equity
Loans in Certain Situations
Pursuant to the Pooling and Servicing Agreement, upon the discovery by
the Depositor, the Sponsor, the Certificate Insurer, the Master Servicer, any
Sub-Servicer, any Owner, the Custodian or the
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Trustee that the representations and warranties set forth under "Loan
Underwriting Procedures and Standards- Representations and Warranties" in the
Prospectus are untrue in any material respect as of the Closing Date with the
result that the interests of the Owners or of the Certificate Insurer are
materially and adversely affected, the party discovering such breach is required
to give prompt written notice to the other parties.
Upon the earliest to occur of the Sponsor 's discovery, its receipt of
notice of breach from any of the other parties or such time as a situation
resulting from an existing statement which is untrue materially and adversely
affects the interests of the Owners or the Certificate Insurer, the Sponsor will
be required promptly to cure such breach in all material respects or the Sponsor
shall on or prior to the second Monthly Remittance Date next succeeding such
discovery, such receipt of notice or such time (i) substitute in lieu of each
Home Equity Loan which has given rise to the requirement for action by the
Sponsor a "Qualified Replacement Mortgage" (as such is defined in the Pooling
and Servicing Agreement) and deliver an amount equal to the excess, if any, of
the Loan Balance of the Home Equity Loan being replaced over the outstanding
principal balance of the replacement Home Equity Loan plus interest (the
"Substitution Amount") to the Trustee on behalf of the Trust as part of the
Monthly Remittance remitted by the Master Servicer on such Monthly Remittance
Date or (ii) purchase such Home Equity Loan from the Trust at a purchase price
equal to the Loan Purchase Price (as defined below) thereof. Notwithstanding any
provision of the Pooling and Servicing Agreement to the contrary, with respect
to any Home Equity Loan which is not in default or as to which no default is
imminent, no such repurchase or substitution will be made unless the Sponsor
obtains for the Trustee and the Certificate Insurer an opinion of counsel
experienced in federal income tax matters and acceptable to the Trustee and the
Certificate Insurer to the effect that such a repurchase or substitution would
not constitute a Prohibited Transaction for the REMIC or otherwise subject the
REMIC to tax and would not jeopardize the status of the REMIC as such (a "REMIC
Opinion"), addressed to the Trustee and the Certificate Insurer and acceptable
to the Trustee and the Certificate Insurer. The Sponsor shall also deliver an
Officer's Certificate to the Trustee and the Certificate Insurer concurrently
with the delivery of a Qualified Replacement Mortgage stating that such Home
Equity Loan meets the requirements of a Qualified Replacement Mortgage and that
all other conditions to the substitution thereof have been satisfied. Any Home
Equity Loan as to which repurchase or substitution was delayed pursuant to the
Pooling and Servicing Agreement shall be repurchased or substituted for (subject
to compliance with the provisions of the Pooling and Servicing Agreement) upon
the earlier of (a) the occurrence of a default or imminent default with respect
to such Home Equity Loan and (b) receipt by the Trustee and the Certificate
Insurer of a REMIC Opinion. In connection with any breach of a representation,
warranty or covenant or defect in documentation giving rise to such repurchase
or substitution obligation, the Sponsor agrees that it shall, at its expense,
furnish the Trustee and the Certificate Insurer either a REMIC Opinion or an
opinion of counsel rendered by independent counsel that the effects described in
a REMIC Opinion may occur as a result of any such repurchase or substitution.
The obligation of the Sponsor to so substitute or repurchase any Home Equity
Loan as to which a representation of warranty is untrue in any material respect
and has not been remedied constitutes the sole remedy available to the Owners,
the Trustee and the Certificate Insurer.
"Loan Purchase Price" means an amount equal to the Loan Balance of such
Home Equity Loan as of the date of purchase (assuming that the Monthly
Remittance Amount remitted by the Master Servicer on such Monthly Remittance
Date has already been remitted), plus all accrued and unpaid interest on such
Home Equity Loan at the Coupon Rate to but not including the Monthly Remittance
Date in the Remittance Period of such purchase together with (without
duplication) the aggregate amount of (i) all unreimbursed Delinquency Advances
and Servicing Advances theretofore made with respect to such Home Equity Loan,
(ii) all Delinquency Advances which the Master Servicer has theretofore failed
to remit with respect to such Home Equity Loan and (iii) all reimbursed
Delinquency Advances to the
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extent that such reimbursement is not made from the Mortgagor or from
Liquidation Proceeds from the respective Home Equity Loan.
Assignment of Home Equity Loans
On the Closing Date, with respect to the Initial Home Equity Loans and
on the related Subsequent Transfer Date, with respect to the Subsequent Home
Equity Loans, the Seller will transfer, assign, set over and otherwise convey
without recourse to the Depositor and the Depositor will transfer, assign, set
over and otherwise convey without recourse to the Trustee in trust for the
benefit of the Owners all right, title and interest of the Seller in and to each
such Home Equity Loan and all its right, title and interest in and to principal
and interest due on each such Home Equity Loan from and after the Cut-Off Date;
provided, however, that the Seller will reserve and retain all its right, title
and interest in and to principal (including Prepayments) and interest due on
each Home Equity Loan prior to the Cut-Off Date (whether or not received prior
to the Cut-Off Date). Purely as a protective measure and not to be construed as
contrary to the parties intent that the transfer on the Closing Date or
Subsequent Transfer Date, as applicable, is a sale, the Seller will also been
deemed to have granted to the Depositor and the Depositor will also been deemed
to have granted to the Trustee a security interest in the Trust Estate in the
event that the transfer of the Trust Estate is deemed to be a loan and not a
sale.
In connection with the transfer and assignment of the Home Equity Loans
on the Closing Date, or the Subsequent Transfer Date, as applicable, the Seller
will be required to:
(i) deliver without recourse to the Trustee or an affiliate of
the Trustee (the "Custodian") on behalf of the Trustee on the Closing
Date or the Subsequent Transfer Date, as the case may be, identified in
the Schedule of Home Equity Loans (A) the original Notes, endorsed in
blank or to the order of the Trustee, (B) (I) the original title
insurance commitment or a copy thereof certified as a true copy by the
closing agent or the Sponsor, or if available, the original title
insurance policy or a copy certified by the issuer of the title
insurance policy or (II) the attorney's opinion of title, (C) originals
or copies of all intervening assignments, if any, certified as true
copies by the closing agent or the Sponsor, showing a complete chain of
title from origination to the Trustee, including warehousing
assignments, if recorded, (D) originals of all assumption and
modification agreements, if any and (E) either: (1) the original
Mortgage, with evidence of recording thereon (if such original Mortgage
has been returned to Sponsor from the applicable recording office) or a
copy (if such original Mortgage has not been returned to Sponsor from
the applicable recording office) of the Mortgage certified as a true
copy by the closing agent or the Sponsor or (2) a copy of the Mortgage
certified by the public recording office in those instances where the
original recorded Mortgage has been lost or retained by the recording
office;
(ii) cause, within 60 days following the Closing Date or the
Subsequent Transfer Date, as the case may be, assignments of the
Mortgages to "The Chase Manhattan Bank, as Trustee of First Greensboro
Home Equity Loan Trust 1997-2 under the Pooling and Servicing Agreement
dated as of December 1, 1997" to be submitted for recording in the
appropriate jurisdictions; provided, however, that the Seller shall not
be required to prepare any assignment of Mortgage for a Mortgage with
respect to which the original recording information has not yet been
received from the recording office; provided, further, that the Seller
shall not be required to record an assignment of a Mortgage if the
Seller furnishes to the Trustee, the Certificate Insurer and the Rating
Agencies, on or before the Closing Date or the Subsequent Transfer
Date, as the case may be, with respect to the Home Equity Loans, at the
Seller's expense, an opinion of counsel with respect to the relevant
jurisdiction that such recording is not required to perfect the
Trustee's interests in the related Mortgages Loans (in form
satisfactory to the Trustee, the
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Certificate Insurer and the Rating Agencies); and
(iii) deliver the title insurance policy, the original Mortgages and
such recorded assignments, together with originals or duly certified
copies of any and all prior assignments (other than unrecorded
warehouse assignments), to the Custodian on behalf of the Trustee
within 15 days of receipt thereof by the Seller (but in any event, with
respect to any Mortgage as to which original recording information has
been made available to the Seller, within one year after the Closing
Date or the Subsequent Transfer Date, as the case may be).
The Trustee will agree, for the benefit of the Owners, to cause the
Custodian to review each File within 45 days after the Closing Date or the
Subsequent Transfer Date, as the case may be (or the date of receipt of any
documents delivered to the Trustee after the Closing Date), to ascertain that
all required documents (or certified copies of documents) have been executed and
received.
If the Custodian on behalf of the Trustee during such 45-day period
finds any document constituting a part of a File which is not properly executed,
has not been received, is unrelated to the Home Equity Loans or that any Home
Equity Loan does not conform in a material respect to the description thereof as
set forth in the Schedule of Home Equity Loans, the Custodian on behalf of the
Trustee will be required to promptly notify the Depositor, the Seller, the
Sponsor, the Owners and the Certificate Insurer. The Seller and Sponsor will
agree in the Pooling and Servicing Agreement to use reasonable efforts to remedy
a material defect in a document constituting part of a File of which it is so
notified by the Custodian on behalf of the Trustee. If, however, within 90 days
after such notice to it respecting such defect the Seller shall not have
remedied the defect and the defect materially and adversely affects the interest
in the related Home Equity Loan of the Owners or the Certificate Insurer, the
Seller or Sponsor will be required on the next succeeding Monthly Remittance
Date to (or will cause an affiliate of the Seller to) (i) substitute in lieu of
such Home Equity Loan a Qualified Replacement Mortgage and deliver the
Substitution Amount to the Trustee on behalf of the Trust as part of the Monthly
Remittance remitted by the Master Servicer on such Monthly Remittance Date or
(ii) purchase such Home Equity Loan at a purchase price equal to the Loan
Purchase Price thereof, which purchase price shall be delivered to the Trust
along with the Monthly Remittance remitted by the Master Servicer on such
Monthly Remittance Date.
In addition to the foregoing, the Custodian on behalf of the Trustee
has agreed to make a review during the 12th month after the Closing Date
indicating the current status of the exceptions previously indicated on the Pool
Certification (the "Final Certification"). After delivery of the Final
Certification, the Custodian, on behalf of the Trustee and the Master Servicer
shall provide to Certificate Insurer no less frequently than monthly updated
certifications indicating the then current status of exceptions, until all such
exceptions have been eliminated.
Servicing and Sub-Servicing
The Sponsor will also serve as the Master Servicer of each Home Equity
Loan. On the date of issuance of the Certificates, it is anticipated that all of
the Home Equity Loans will be serviced by the Master Servicer. The Master
Servicer may not assign its obligations under the Pooling and Servicing
Agreement, in whole or in part, unless it shall have first obtained the written
consent of the Trustee and the Certificate Insurer, which consent is required
not to be unreasonably withheld; provided, however, that any assignee must meet
the eligibility requirements for a successor Master Servicer set forth in the
Pooling and Servicing Agreement.
The Certificates will not represent an interest in or obligation of,
nor are the Home Equity Loans guaranteed by, the Depositor, the Sponsor, the
Seller, the Master Servicer or Backup Master Servicer,
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except as described herein, or any of their affiliates.
First Greensboro Home Equity, Inc. is not a FNMA-approved servicer of
conventional mortgage loans. The Master Servicer (other than the Backup Master
Servicer as successor Master Servicer) is required to service the Home Equity
Loans in accordance with the Pooling and Servicing Agreement, the terms of the
respective Home Equity Loans, and the servicing standards set forth in FNMA's
Servicing Guide (the "FNMA Guide"); provided, however, that to the extent such
standards, such obligations or the FNMA Guide is amended by FNMA after the date
of the Pooling and Servicing Agreement and the effect of such amendment would be
to impose upon the Master Servicer any material additional costs or other
burdens relating to such servicing obligations, the Master Servicer may, at its
option, determine not to comply with such amendment in accordance with the
servicing standards set forth in the Pooling and Servicing Agreement. The Backup
Master Servicer, as the successor Master Servicer, is required to service the
Home Equity Loans in accordance with the Pooling and Servicing Agreement, the
terms of the respective Home Equity Loans and in the same manner in which it
services and administers similar mortgage loans for its own portfolio, giving
due consideration to customary and usual standards of practice of prudent
mortgage lenders and loan servicers administering similar mortgage loans.
The Master Servicer may retain from the interest portion of each
monthly payment, the Servicing Fee. In addition, the Master Servicer will be
entitled to retain additional servicing compensation in the form of prepayment
charges, release fees, bad check charges, assumption fees, late payment charges,
prepayment penalties, or any other servicing-related fees, Net Liquidation
Proceeds not required to be deposited in the Principal and Interest Account
pursuant to the Pooling and Servicing Agreement, and similar items. The Master
Servicer shall pay the fees of the Backup Master Servicer out of the Servicing
Fee.
When a borrower prepays all of a Home Equity Loan, the borrower pays
interest on the amount prepaid only to the date of prepayment and accordingly,
an interest shortfall (a "Prepayment Interest Shortfall") may result. In order
to mitigate the effect of any such shortfall in interest distributions to
holders of Class A Certificates on any Payment Date, the Servicing Fee otherwise
payable to the Master Servicer for such month shall, to the extent of such
shortfall, be deposited by the Master Servicer in the Principal and Interest
Account for distribution to holders of Class A Certificates on such Payment
Date. Any such deposit by the Master Servicer will be reflected in the
distributions to holders of Class A Certificates made on the related Payment
Date.
The Master Servicer is required to make reasonable efforts to collect
all payments called for under the terms and provisions of the Home Equity Loans,
and, to the extent such procedures are consistent with the Pooling and Servicing
Agreement and the terms and provisions of any applicable insurance policy, to
follow collection procedures consistent with the applicable servicing standards.
Consistent with the foregoing, the Master Servicer may in its discretion waive
or permit to be waived any late payment charge, prepayment charge, assumption
fee or any penalty interest in connection with the prepayment of a Home Equity
Loan or any other fee or charge which the Master Servicer would be entitled to
retain as additional servicing compensation. In the event the Master Servicer
consents to the deferment of the due dates for payments due on a Note, the
Master Servicer will nonetheless be required to make payment of any required
Delinquency Advances with respect to the interest payments so extended to the
same extent as if the interest portion of such installment were due, owing and
delinquent and had not been deferred.
The Master Servicer is required to create, or cause to be created, in
the name of the Trustee, at one or more depository institutions, which
institutions may be affiliates of the Master Servicer, a principal and interest
account maintained as a trust account in the trust department of such
institution (the "Principal and Interest Account"). All funds in the Principal
and Interest Account are required to be held
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(i) uninvested, or (ii) invested in Eligible Investments (as defined in the
Pooling and Servicing Agreement). Any investment of funds in the Principal and
Interest Account must mature or be withdrawable at par on or prior to the
immediately succeeding Monthly Remittance Date. Any investment earnings on funds
held in the Principal and Interest Account are for the account of, and any
losses therein are also for the account of, and must be promptly replenished by,
the Master Servicer.
The Master Servicer is required to deposit, or cause to be deposited,
to the Principal and Interest Account, within one business day following
receipt, all principal and interest due on the Home Equity Loans on or after the
Cut-Off Date, including any Prepayments, the proceeds of any liquidation of a
Home Equity Loan net of expenses and unreimbursed Delinquency Advances ("Net
Liquidation Proceeds"), any income from REO Properties and Delinquency Advances,
but net of (i) Net Liquidation Proceeds to the extent that such Net Liquidation
Proceeds exceed the sum of (a) the Loan Balance of the related Home Equity Loan
immediately prior to liquidation, (b) accrued and unpaid interest on such Home
Equity Loan (net of the Servicing Fee) to the date of such liquidation and (c)
any Realized Losses during the related Remittance Period, (ii) principal
(including Prepayments) collected and interest due on the Home Equity Loans
prior to the Cut-Off Date excluding payments received and applied prior to the
Cut-Off Date which are applicable to periods on and after the Cut-Off Date,
(iii) reimbursements for Delinquency Advances and Servicing Advances to the
extent provided below, and (iv) reimbursement for amounts deposited in the
Principal and Interest Account representing payments of principal and/or
interest on a Note by a Mortgagor which are subsequently returned by a
depository institution as unpaid (all such net amounts being referred to herein
as the "Daily Collections").
The Master Servicer may make withdrawals for its own account from the
Principal and Interest Account for the following purposes:
(i) on each Monthly Remittance Date, to pay itself the
Servicing Fee;
(ii) to withdraw investment earnings on amounts on deposit
in the Principal and Interest Account;
(iii) to withdraw amounts that have been deposited to the
Principal and Interest Account in error;
(iv) to reimburse itself for unrecovered Delinquency
Advances and Servicing Advances;
(v) to clear and terminate the Principal and Interest
Account following the termination of the Trust; and
(vi) to reimburse the Master Servicer for expenses incurred
by or reimbursable to the Master Servicer to the extent provided
in the Pooling and Servicing Agreement
The Master Servicer will remit to the Trustee for deposit in the
Certificate Account the Daily Collections allocable to a Remittance Period not
later than the related Monthly Remittance Date, and Loan Purchase Prices and
Substitution Amounts two Business Days following the related repurchase or
substitution, as the case may be.
On each Monthly Remittance Date, the Master Servicer shall be required
to remit to the Trustee for deposit to the Certificate Account out of the Master
Servicer's own funds any delinquent payment of interest with respect to each
delinquent Home Equity Loan, which payment was not received on or prior to the
related Monthly Remittance Date and was not theretofore advanced by the Master
Servicer. Such
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amounts of the Master Servicer's own funds so deposited are "Delinquency
Advances." The Master Servicer may reimburse itself on any Business Day for any
Delinquency Advances paid from the Master Servicer's own funds, from collections
on any Home Equity Loan that are not required to be distributed on the Payment
Date occurring during the month in which such reimbursement is made (such amount
to be replaced on future dates to the extent necessary) or from the Certificate
Account out of Net Monthly Excess Cashflow.
Notwithstanding the foregoing, in the event that the Master Servicer
determines in its reasonable business judgment in accordance with the servicing
standards of the Pooling and Servicing Agreement that any proposed Delinquency
Advance if made would not be recoverable, the Master Servicer shall not be
required to make such Delinquency Advances with respect to such Home Equity
Loan. To the extent that the Master Servicer previously has made Delinquency
Advances with respect to a Home Equity Loan that the Master Servicer
subsequently determines to be nonrecoverable, the Master Servicer shall be
entitled to reimbursement for such aggregate unreimbursed Delinquency Advances
as provided above or may withdraw such amounts from the Principal and Interest
Account. The Master Servicer shall give written notice of such determination as
to why such amount is or would or may withdraw such amounts from the principal
and Interest Account be nonrecoverable to the Trustee and the Certificate
Insurer.
The Master Servicer will be required to pay all "out of pocket" costs
and expenses incurred in the performance of its servicing obligations,
including, but not limited to, (i) expenditures in connection with a foreclosed
Home Equity Loan prior to the liquidation thereof, including, without
limitation, expenditures for real estate property taxes, hazard insurance
premiums, property restoration or preservation ("Preservation Expenses"), (ii)
the cost of any enforcement or judicial proceedings, including foreclosures and
(iii) the cost of the management and liquidation of Property (including broker's
fees) acquired in satisfaction of the related Mortgage, except to the extent
that the Master Servicer in its reasonable business judgment determines that any
such proposed amount would not be recoverable. Such costs and expenses will
constitute "Servicing Advances." The Master Servicer may recover a Servicing
Advance to the extent permitted by the Home Equity Loans or, if not theretofore
recovered from the Mortgagor on whose behalf such Servicing Advance was made,
from Liquidation Proceeds realized upon the liquidation of the related Home
Equity Loan or from certain amounts on deposit in the Certificate Account as
provided in the Pooling and Servicing Agreement. In the event a Servicing
Advance previously made is deemed to be nonrecoverable, the Master Servicer may
withdraw such amounts from the Principal and Interest Account.
A full month's interest at the Coupon Rate will be due on the
outstanding Loan Balance of each Home Equity Loan as of the beginning of each
Remittance Period. If a prepayment in full of a Home Equity Loan or a Prepayment
of at least six times a Mortgagor's Monthly Payment occurs during any calendar
month, any difference between the interest collected from the Mortgagor in
connection with such payoff and the full month's interest at the Coupon Rate
that would be due on the related due date for such Home Equity Loan (such
difference, the "Compensating Interest") (but not in excess of the aggregate
Servicing Fee for the related Remittance Period), will be required to be
deposited to the Principal and Interest Account (or if such difference is an
excess, the Master Servicer shall retain such excess) on the next succeeding
Monthly Remittance Date by the Master Servicer and shall be included in the
Monthly Remittance Amount to be made available to the Trustee on the next
succeeding Monthly Remittance Date.
The Master Servicer, and in the absence of the exercise thereof by the
Master Servicer, the Certificate Insurer will have the right and the option, but
not the obligation, to purchase for its own account any Home Equity Loan which
becomes delinquent as to three consecutive monthly installments or any Home
Equity Loan as to which enforcement proceedings have been brought by the Master
Servicer; provided, that the Master Servicer must, if it elects to purchase such
Home Equity Loans,
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purchase the most delinquent Home Equity Loans first unless the Certificate
Insurer otherwise consents, provided, however, that the Master Servicer may not
purchase any such Home Equity Loan unless the Master Servicer has delivered to
the Certificate Insurer and the Trustee, at the Master Servicer's expense, an
opinion of counsel acceptable to the Certificate Insurer and the Trustee to the
effect that such a purchase would not constitute a Prohibited Transaction for
the REMIC or otherwise subject the REMIC to tax and would not jeopardize the
status of the REMIC as such. The purchase price for any such Home Equity Loan is
equal to the Loan Purchase Price thereof, which purchase price shall be
deposited in the Principal and Interest Account.
The Master Servicer is required to cause to be liquidated any Home
Equity Loan relating to a Property as to which ownership has been effected in
the name of the Master Servicer on behalf of the Trust and which has not been
liquidated within 35 months of such effecting of ownership at such price as the
Master Servicer deems necessary to comply with this requirement, or within such
period of time as may, in the opinion of counsel nationally recognized in
federal income tax matters, be permitted under the Code.
The Master Servicer will be required to cause hazard insurance to be
maintained with respect to the related Property and to advance sums on account
of the premiums therefor if not paid by the Mortgagor if permitted by the terms
of such Home Equity Loan.
The Master Servicer will have the right under the Pooling and Servicing
Agreement (upon receiving the consent of the Certificate Insurer) to accept
applications of Mortgagors for consent to (i) partial releases of Mortgages,
(ii) alterations and (iii) removal, demolition or division of Properties. No
application for approval may be considered by the Master Servicer unless: (i)
the provisions of the related Note and Mortgage have been complied with; (ii)
the loan-to-value ratio and debt-to-income ratio after any release does not
exceed the loan-to-value ratio and debt-to-income ratio of such Note on the
Cut-Off Date and any increase in the loan-to-value shall not exceed 5% unless
approved in writing by the Certificate Insurer; and (iii) the lien priority of
the related Mortgage is not affected.
The Master Servicer shall not agree to any modification, waiver or
amendment of any provision of any Home Equity Loan unless, in the Master
Servicer's good faith judgment, such modification, waiver or amendment would
minimize the loss that might otherwise be experienced with respect to such Home
Equity Loan and only in the event of a payment default with respect to such Home
Equity Loan or in the event that a payment default with respect to such Home
Equity Loan is reasonably foreseeable by the Master Servicer; provided, however,
that no such modification, waiver or amendment shall extend the maturity date of
such Home Equity Loan beyond January 31, 2028. Notwithstanding anything set
forth in the Pooling and Servicing Agreement to the contrary, the Master
Servicer shall be permitted to modify, waive or amend any provision of a Home
Equity Loan if required by statute or a court of competent jurisdiction to do
so.
The Master Servicer shall provide written notice to the Trustee and the
Certificate Insurer prior to the execution of any modification, waiver or
amendment of any provision of any Home Equity Loan; provided that if the
Certificate Insurer does not object in writing to the modification, waiver or
amendment specified in such notice within 5 Business Days after its receipt
thereof, the Master Servicer may effectuate such modification, waiver or
amendment and shall deliver to the Custodian, on behalf of the Trustee for
deposit in the related File, an original counterpart of the agreement relating
to such modification, waiver or amendment, promptly following the execution
thereof.
The Master Servicer, with the consent of the Certificate Insurer,
except as provided below, will be permitted under the Pooling and Servicing
Agreement to enter into servicing agreements (the "Sub-Servicing Agreements")
with other qualified servicers (the "Sub-Servicers") for any servicing and
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administration of Home Equity Loans with any institution that (x) is in
compliance with the laws of each state necessary to enable it to perform its
obligations under such Sub-Servicing Agreement, (y) has experience servicing
home equity loans that are similar to the Home Equity Loans and (z) has equity
of not less than $5,000,000 (as determined in accordance with generally accepted
accounting principles).
With the consent of the Certificate Insurer, the Master Servicer may
enter into Sub-Servicing Agreements with Sub-Servicers with respect to the
servicing of the Home Equity Loans; provided that the Master Servicer will not
need the consent of the Certificate Insurer to enter into Sub-Servicing
Agreement with an affiliate of the Master Servicer. Notwithstanding any
Sub-Servicing Agreement, the Master Servicer will not be relieved of its
obligations under the Pooling and Servicing Agreement and the Master Servicer
will be obligated to the same extent and under the same terms and conditions as
if it alone were servicing and administering the Home Equity Loans. The Master
Servicer shall be entitled to enter into any agreement with a Sub-Servicer for
indemnification of the Master Servicer by such Sub-Servicer and nothing
contained in such Sub-Servicing Agreement shall be deemed to limit or modify the
Pooling and Servicing Agreement.
The Master Servicer (except the Trustee if it is required to succeed
the Master Servicer under the Pooling and Servicing Agreement) has agreed to
indemnify and hold the Trustee and the Certificate Insurer harmless against any
and all claims, losses, penalties, fines, forfeitures, legal fees and related
costs, judgments, and any other costs, fees and expenses that the Trustee and
the Certificate Insurer may sustain in any way related to the failure of the
Master Servicer to perform its duties and service the Home Equity Loans in
compliance with the terms of the Pooling and Servicing Agreement except as may
be limited in the Pooling and Servicing Agreement. The Master Servicer shall
immediately notify the Trustee and the Certificate Insurer if a claim is made by
a third party with respect to the Pooling and Servicing Agreement, and the
Master Servicer shall assume the defense of any such claim and pay all expenses
in connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Master Servicer, the Trustee, the Certificate Insurer and/or the Backup Master
Servicer in respect of such claim. The Trustee shall reimburse the Master
Servicer from amounts otherwise distributable on the Class R Certificates (and
if the Backup Master Servicer is the Master Servicer, from the Principal and
Interest Amount) for all amounts advanced by it pursuant to the preceding
sentence, except when a final nonappealable adjudication determines that the
claim relates directly to the failure of the Master Servicer to perform its
duties in compliance with the Pooling and Servicing Agreement. The
indemnification provisions shall survive the termination of the Pooling and
Servicing Agreement and the payment of the outstanding Certificates.
The Master Servicer will be required to deliver to the Trustee, the
Certificate Insurer, and the Rating Agencies on or before April 30 of each year,
commencing in 1998: (1) an officers' certificate stating, as to each signer
thereof, that (i) a review of the activities of the Master Servicer during such
preceding calendar year and of performance under the Pooling and Servicing
Agreement has been made under such officers' supervision, and (ii) to the best
of such officers' knowledge, based on such review, the Master Servicer has
fulfilled all its obligations under the Pooling and Servicing Agreement for such
year, or, if there has been a default in the fulfillment of all such obligation,
specifying each such default known to such officers and the nature and status
thereof including the steps being taken by the Master Servicer to remedy such
default and (2) a letter or letters of a firm of independent, nationally
recognized certified public accountants reasonably acceptable to the Certificate
Insurer stating that such firm has examined the Master Servicer's overall
servicing operations in accordance with the requirements of the Uniform Single
Attestation Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
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Removal and Resignation of Master Servicer
The Certificate Insurer (or, the Owners, with the consent of the
Certificate Insurer) will have the right, pursuant to the Pooling and Servicing
Agreement, to remove the Master Servicer upon the occurrence of certain events
(collectively, the "Master Servicer Termination Events") including, without
limitation: (a) certain acts of bankruptcy or insolvency on the part of the
Master Servicer; (b) certain failures on the part of the Master Servicer to
perform its obligations under the Pooling and Servicing Agreement (including
certain performance tests related to the delinquency rate and cumulative losses
of the Home Equity Loans); or (c) the failure to cure material breaches of the
Master Servicer's representations in the Pooling and Servicing Agreement.
The Master Servicer is not permitted to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement except upon
determination that its duties thereunder are no longer permissible under
applicable law or are in material conflict by reason of applicable law with any
other activities carried on by it, the other activities of the Master Servicer
so causing such conflict being of a type and nature carried on by the Master
Servicer on the date of the Pooling and Servicing Agreement. Any such
determination permitting the resignation of the Master Servicer is required to
be evidenced by an opinion of counsel to such effect which shall be delivered,
and reasonably acceptable, to the Trustee and the Certificate Insurer.
Upon removal or resignation of the Master Servicer, subject to the
right of the Certificate Insurer to direct the Trustee to assign such duties to
another party acceptable to the Certificate Insurer, the Backup Master Servicer
shall assume the duties of Master Servicer. Any successor (including the Backup
Master Servicer) other than an affiliate of First Greensboro Home Equity, Inc.
is required to be a housing and home finance institution, bank or mortgage
servicing institution which has been designated as an approved seller-servicer
by FNMA or FHLMC for first and second lien home equity loans having equity of
not less than $5,000,000 as determined in accordance with generally accepted
accounting principles, and which is acceptable to the Certificate Insurer and
shall assume all or any part of the responsibilities, duties or liabilities of
the Master Servicer.
No removal or resignation of the Master Servicer will become effective
until the Backup Master Servicer or a successor Master Servicer shall have
assumed the Master Servicer's responsibilities and obligations in accordance
with the Pooling and Servicing Agreement.
The Trustee
The Chase Manhattan Bank, a New York banking corporation, having its
principal corporate trust office at 450 West 33rd Street, New York, New York
10001, will be named as Trustee under the Pooling and Servicing Agreement.
Reporting Requirements
On each Payment Date the Trustee will be required to report in writing
(based on information provided to the Trustee by the Master Servicer) to each
Owner, the Rating Agencies and the Certificate Insurer:
(i) the amount of the distribution with respect to the Class A
Certificates, and the Class R Certificates (based on a Certificate in
the original principal amount of $1,000);
(ii) the amount of such distributions allocable to principal
on the Home Equity Loans, separately identifying the aggregate amount
of any prepayments in full or Prepayments or
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other recoveries of principal included therein (based on a Certificate
in the original principal amount of $1,000)and any Subordination
Increase Amount;
(iii) the amount of such distribution allocable to interest on
the Home Equity Loans (based on a Certificate in the original principal
amount of $1,000);
(iv) if the distribution (net of any Insured Payment) to the
Owners of any Class of the Class A Certificates on such Payment Date
was less than the related Class A Distribution Amounts on such Payment
Date and the related Class A Carry-Forward Amount resulting therefrom;
(v) the amount of any Insured Payment included in the amounts
distributed to the Owners of Class A Certificates on such Payment Date;
(vi) the principal amount of each Class of Class A Certificate
(based on a Certificate in the original principal amount of $1,000)
which will be Outstanding after giving effect to any payment of
principal on such Payment Date;
(vii) the Subordinated Amount, Specified Subordinated Amount
and Subordination Deficit, if any, remaining after giving effect to all
distributions and transfers on such Payment Date;
(viii) based upon information furnished by the Sponsor such
information as may be required by Section 6049(d)(7)(C) of the Code and
the regulations promulgated thereunder to assist the Owners in
computing their market discount;
(ix) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution;
(x) the weighted average Coupon Rate of the Home Equity
Loans;
(xi) such other information as the Certificate Insurer or any
Owner may reasonably request with respect to delinquent Home Equity
Loans;
(xii) during the Funding Period, the Loan Balance of the
Subsequent Home Equity Loans added to the Trust during the related Due
Period; and
(xiii) during the Funding Period, the remaining Pre-Funded
Amount as of the last day of the Due Period.
Certain obligations of the Trustee to provide information to the Owners
are conditioned upon such information being received from the Master Servicer.
In addition, on the Business Day preceding each Payment Date the
Trustee will be required to distribute to each Owner, the Certificate Insurer
and the Rating Agencies, together with the information described above, the
following information prepared by the Master Servicer and furnished to the
Trustee for such purpose;
(a) the number and aggregate principal balances of Home Equity
Loans (i) 30-59 days delinquent, (ii) 60-89 days delinquent, (iii) 90
or more days delinquent, as of the close of business on the last day of
the Remittance Period immediately preceding the Payment Date,
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(iv) the numbers and aggregate Loan Balances of all Home Equity Loans
as of such Payment Date, after giving effect to any payment of
principal on such Payment Date, as of the close of business on the
last day of the Remittance Period immediately preceding the Payment
Date, and (v) the percentage that each of the amounts represented by
clauses (i), (ii) and (iii)represent as a percentage of the
respective amounts in clause (iv);
(b) the status and the number and dollar amounts of all Home
Equity Loans in foreclosure proceedings as of the close of business on
the last day of the Remittance Period immediately preceding such
Payment Date;
(c) the number of Mortgagors and the Loan Balances of the
related Mortgages involved in bankruptcy proceedings as of the close of
business on the last day of the Remittance Period immediately preceding
such Payment Date;
(d) the existence and status of any Properties as to which
title has been taken in the name of, or on behalf of the Trustee, as of
the close of business of the last day of the Remittance Period
immediately preceding the Payment Date;
(e) the book value of any real estate acquired through
foreclosure or grant of a deed in lieu of foreclosure as of the close
of business on the last day of the Remittance Period immediately
preceding the Payment Date;
(f) the cumulative Realized Losses incurred on the Home Equity
Loans from the Closing Date to and including the Remittance Period
immediately preceding the Payment Date; and
(g) the amount of Net Liquidation Proceeds realized on the
Home Equity Loans during the Remittance Period immediately preceding
the Payment Date.
Removal of Trustee for Cause
The Trustee may be removed upon the occurrence of any one of the
following events (whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment, decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case
(i) the Certificate Insurer or (ii) with the prior written consent of the
Certificate Insurer (which is required not to be unreasonably withheld), the
Depositor and the Owners of a majority of the Percentage Interests represented
by the Class A Certificates or, if there are no Class A Certificates then
outstanding, by a majority of the Percentage Interests represented by the Class
R Certificates, may appoint a successor trustee.
Governing Law
The Pooling and Servicing Agreement and each Certificate will be
construed in accordance with and governed by the laws of the State of New York
applicable to agreements made and to be performed therein.
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Amendments
The Trustee, the Depositor, the Sponsor, the Master Servicer and the
Backup Master Servicer with the consent of the Certificate Insurer may, at any
time and from time to time and without notice to or the consent of the Owners,
amend the Pooling and Servicing Agreement, and the Trustee will be required to
consent to such amendment, for the purposes of (i) if accompanied by an
approving opinion of counsel experienced in federal income tax matters, removing
the restriction against the transfer of a Class R Certificate to a Disqualified
Organization (as such term is defined in the Code), (ii) complying with the
requirements of the Code including any amendments necessary to maintain REMIC
status, (iii) curing any ambiguity, (iv) correcting or supplementing any
provisions therein which are inconsistent with any other provisions therein, or
(v) for any other purpose, provided that in the case of clause (v), (A) the
Sponsor delivers an opinion of counsel acceptable to the Trustee that such
amendment will not adversely affect in any material respect the interest of the
Owners and (B) such amendment will not result in a withdrawal or reduction of
the rating of the Class A Certificates without regard to the Certificate
Insurance Policy. Notwithstanding anything to the contrary, no such amendment
shall (a) change in any manner the amount of, or delay the timing of, payments
which are required to be distributed to any Owner without the consent of the
Owner of such Certificate, (b) change the percentages of Percentage Interest
which are required to consent to any such amendments, without the consent of the
Owners of all Certificates of the Class or Classes affected then Outstanding or
(c) which affects in any manner the terms or provisions of the Certificate
Insurance Policy.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
Termination of the Trust
The Pooling and Servicing Agreement will provide that the Trust will
terminate upon the payment to the Owners of all Certificates from amounts other
than those available under the Insurance Policy of all amounts required to be
paid to such Owners upon the later to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Home Equity
Loan, (b) the disposition of all property acquired in respect of any Home Equity
Loan remaining in the Trust Estate and (c) at any time when a Qualified
Liquidation of the Trust Estate is effected as described below. To effect a
termination pursuant to clause (c) above, the Owners of all Certificates then
outstanding will be required to furnish to the Trustee an opinion of counsel
experienced in federal income tax matters acceptable to the Certificate Insurer
and the Trustee to the effect that such liquidation constitutes a Qualified
Liquidation.
Optional Termination
By Master Servicer. At its option, the Master Servicer may on any
Monthly Remittance Date when the aggregate outstanding Loan Balance of the Home
Equity Loans is 10% or less of the Maximum Collateral Amount purchase from the
Trust all (but not fewer than all) remaining Home Equity Loans, in whole only,
and other property acquired by foreclosure, deed in lieu of foreclosure, or
otherwise then constituting the Trust Estate, and thereby effect early
retirement of the Certificates.
Termination Upon Loss of REMIC Status. Following a final determination
by the Internal Revenue Service or by a court of competent jurisdiction, in
either case from which no appeal is taken within the permitted time for such
appeal, or if any appeal is taken, following a final determination of such
appeal from which no further appeal can be taken, to the effect that the REMIC
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Certificate
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Insurer or the Owners of a majority in Percentage Interests represented by the
Class A Certificates then Outstanding with the consent of the Certificate
Insurer may direct the Trustee on behalf of the Trust to adopt a plan of
complete liquidation, as contemplated by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following section discusses certain of the material anticipated
federal income tax consequences of the purchase, ownership and disposition of
the Class A Certificates. Such section must be considered only in connection
with "Certain Federal Income Tax Consequences" in the Prospectus. The discussion
herein and in the Prospectus is based upon laws, regulations, rulings and
decisions now in effect, all of which are subject to change. The discussion
below and in the Prospectus does not purport to deal with all federal tax
consequences applicable to all categories of investors, some of which may be
subject to special rules. Investors should consult their own tax advisors in
determining the federal, state, local and any other tax consequences to them of
the purchase, ownership and disposition of the Class A Certificates.
REMIC Elections
An election will be made to treat certain assets of the Trust as a
REMIC for federal income tax purposes. The Class A Certificates will be
designated as regular interests in the REMIC (the "Regular Certificates" or the
"REMIC Regular Certificates"), and the Class R Certificates will be designated
as the residual interest in the REMIC (the "Residual Certificates" or the "REMIC
Residual Certificates").
Because the REMIC Regular Certificates will be considered REMIC regular
interests, they generally will be taxable as debt obligations under the Internal
Revenue Code of 1986, as amended (the "Code"), and interest paid or accrued on
the Regular Certificates, including original issue discount with respect to any
Regular Certificates issued with original issue discount, will be taxable to
Certificateholders in accordance with the accrual method of accounting. Some or
all of the Classes of Regular Certificates may be subject to the original issue
discount provisions. See "Certain Federal Income Tax
Consequences--REMICs--Taxation of Owners of REMIC Regular Certificates--Original
Issue Discount" in the Prospectus. In addition, certain Classes of Regular
Certificates may be treated as issued with a premium. See "Certain Federal
Income Tax Consequences--REMICs--Taxation of Owners of REMIC Regular
Certificates--Premium" in the Prospectus.
The prepayment assumption that will be used in determining the rate of
accrual of original issue discount is 100% Prepayment Assumption. See
"Prepayment and Yield Considerations" herein for a description of the prepayment
assumption model. However, no representation is made as to the rate at which
prepayments actually will occur.
The Class A Certificates will be treated as assets described in Section
7701(a)(19)(c) of the Code for domestic building and loan associations, and
"real estate assets" for real estate investment trusts (REITs), subject to the
limitations described in "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus. Similarly, interest on such Class A Certificates will be
considered "interest on obligations secured by mortgages on real property" for
REITs, subject to the limitations described in "Certain Federal Income Tax
Consequences--REMICs--Characterization of Investments in REMIC Certificates" in
the Prospectus.
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CERTAIN STATE TAX CONSIDERATIONS
Because the income tax laws of the states vary, it is impractical to
predict the income tax consequences to the Certificateholders in all of the
state taxing jurisdictions in which they are subject to tax. Certificateholders
are urged to consult their own tax advisors with respect to state and local
income and franchise taxes.
ERISA CONSIDERATIONS
A fiduciary of a pension, profit-sharing, retirement or other employee
benefit plan subject to Title I of ERISA, should consider the fiduciary
standards under ERISA in the context of the plan's particular circumstances
before authorizing an investment of a portion of such plan's assets in the Class
A Certificates. Accordingly, pursuant to Section 404 of ERISA, such fiduciary
should consider among other factors: (i) whether the investment is for the
exclusive benefit of plan participants and their beneficiaries; (ii) whether the
investment satisfies the applicable diversification requirements; (iii) whether
the investment is in accordance with the documents and instruments governing the
plan; and (iv) whether the investment is prudent, considering the nature of the
investment. Fiduciaries of plans also should consider ERISA's prohibition on
improper delegation of control over, or responsibility for, plan assets.
In addition, benefit plans subject to ERISA, as well as individual
retirement accounts or certain types of Keogh plans not subject to ERISA but
subject to Section 4975 of the Code and any entity whose source of funds for the
purchase of Class A Certificates includes plan assets by reason of a plan or
account investing in such entity (each, a "Plan"), are prohibited from engaging
in a broad range of transactions involving Plan assets and persons having
certain specified relationships to a Plan ("parties in interest" and
"disqualified persons"). Such transactions are treated as "prohibited
transactions" under Sections 406 and 407 of ERISA and excise taxes are imposed
upon such persons by Section 4975 of the Code.
An investment in Class A Certificates by a Plan might result in the assets
of the Trust being deemed to constitute Plan assets, which in turn might mean
that certain aspects of such investment, including the operation of the Trust,
might be prohibited transactions under ERISA and the Code. Neither ERISA nor the
Code defines the term "plan assets." Under Section 2510.3- 101 of the United
States Department of Labor ("DOL") regulations (the "Regulation"), a Plan's
assets may include an interest in the underlying assets of an entity (such as a
trust) for certain purposes, including the prohibited transaction provisions of
ERISA and the Code, if the Plan acquires an "equity interest" in such entity,
unless certain exceptions apply. The Depositor believes that the Class A
Certificates will give Certificateholders an equity interest in the Trust for
purposes of the Regulation and can give no assurance that the Class A
Certificates will qualify for any of the exceptions under the Regulation. As a
result, the assets of the Trust may be considered the assets of any Plan which
acquires a Class A Certificate.
The DOL has issued an individual exemption, Prohibited Transaction
Exemption ("PTE") 90-83, Exemption Application No. D-8346, 55 Fed. Reg. 50250
(1990), to Donaldson, Lufkin and Jenrette Securities Corporation (the
"Exemption"). The Exemption generally exempts from the application of the
prohibited transaction provisions of Section 406 of ERISA and the excise taxes
imposed on such prohibited transactions pursuant to Section 4975(a) and (b) of
the Code and Section 502(i) of ERISA certain transactions relating to the
initial purchase, holding and subsequent resale by Plans of certificates in
pass-through trusts that consist of certain receivables, loans and other
obligations that meet the conditions and requirements set forth in the
Exemption. The assets covered by the Exemption include mortgage loans such as
the Home Equity Loans. The Depositor believes that the Exemption will apply to
the acquisition, holding and resale of the Class A Certificates by a Plan and
that all conditions of the Exemption other than those within the control of the
investors have been or will be met.
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The Exemption sets forth six general conditions that must be satisfied for
a transaction involving the acquisition of the Class A Certificates by a Plan to
be eligible for the exemptive relief thereunder:
(1) the acquisition of the Class A Certificates by a Plan is on terms
(including the price for the Class A 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 Class A Certificates acquired
by a Plan are not subordinated to the rights and interest evidenced by other
certificates of the Trust;
(3) the Class A Certificates acquired by the Plan have received a rating at
the time of such acquisition that is in one of the three highest generic rating
categories from any one of four rating entities;
(4) the Trustee is not an affiliate of any other member of the "Restricted
Group", which consists of the Underwriter, the Depositor, the Trustee, the
Master Servicer, Backup Master Servicer, the Sub-Servicers, the Sponsor, the
insurer and any obligor with respect to the Home Equity Loans included in the
Trust constituting more than 5% of the aggregate unamortized principal balance
of the assets of the Trust as of the date of initial issuance of the Class A
Certificates, and any affiliate of such parties.
(5) the sum of all payments made to and retained by the Underwriter in
connection with the offering of the Class A Certificates represents not more
than reasonable compensation for placing the Class A Certificates. The sum of
all payments made to and retained by the Master Servicer represents not more
than the reasonable compensation for the Master Servicer's services under the
Pooling and Servicing Agreement and reimbursement of the Master Servicer's
reasonable expenses in connection therewith; and
(6) the Plan investing in the Class A Certificates must be an "accredited
investor" as defined in Rule 501(a)(1) of Regulation D of the Commission under
the Securities Act of 1933, as amended (the "Securities Act").
Because the rights and interests evidenced by the Class A Certificates
acquired by a Plan are not subordinated to the rights and interests evidenced by
other certificates of the Trust, the second general condition set forth above is
satisfied. It is a condition of the issuance of the Class A Certificates that
they be rated in the highest rating category by a nationally recognized rating
agency and thus the third general condition should be satisfied. The Depositor
and the Master Servicer expect that the fourth general condition set forth above
will be satisfied with respect to the Class A Certificates. A fiduciary of a
Plan contemplating purchasing a Class A Certificate must make its own
determination that the first, fifth and sixth general conditions set forth above
will be satisfied with respect to the Class A Certificates.
If the general conditions of the Exemption are satisfied, the Exemption may
provide relief from the restrictions imposed by Sections 406(a) and 407(a) of
ERISA as well as the excise taxes imposed by Section 4975(a) and (b) of the Code
by reason of Section 4975(c)(1)(A) through (D) of the Code, in connection with
the direct or indirect sale, exchange, transfer or holding of the Class A
Certificates by a Plan. However, no exemption is provided from the restrictions
of Sections 406(a)(1)(E), 406(a)(2) and 407 of ERISA for the acquisition or
holding of a Class A Certificate on behalf of an "Excluded Plan" by any person
who has discretionary authority or renders investment advice with respect to the
assets of such Excluded Plan. For purposes of the Class A Certificates an
Excluded Plan is a Plan sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide relief
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from the restrictions imposed by Sections 406(b)(1) and (b)(2) and 407(a) of
ERISA and the taxes imposed by Section 4975(a) and (b) of the Code by reason of
Section 4975(c)(1)(E) of the Code in connection with the direct or indirect
sale, exchange, transfer or holding of Class A Certificates in the initial
issuance of Class A Certificates between the Depositor or the Underwriter and a
Plan other than an Excluded Plan when the person who has discretionary authority
or renders investment advice with respect to the investment of Plan assets in
the Class A Certificates is (a) an obligor with respect to 5% or less of the
fair market value of the Home Equity Loans or (b) an affiliate of such person.
The Exemption also may provide relief from the restriction imposed by
Sections 406(a) and 407(a) of ERISA and the taxes imposed by Section
4975(c)(1)(A) through (D) of the Code if such restrictions are deemed to
otherwise apply merely because a person is deemed to be a party in interest or a
disqualified person with respect to an investing Plan by virtue of providing
services to a Plan (or by virtue of having certain specified relationships to
such a person) solely as a result of such Plan's ownership of Class A
Certificates.
Before purchasing a Class A Certificate, a fiduciary of a Plan should
itself confirm (a) that the Class A Certificates constitute "certificates" for
purposes of the Exemption and (b) that the specific conditions set forth in
Section II of the Exemption and the other requirements set forth in the
Exemption will be satisfied.
Any Plan fiduciary considering whether to purchase a Class A Certificate 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.
RATINGS
It is a condition of the issuance of the Class A Certificates that the
Class A Certificates receive ratings of "AAA" by Standard & Poor's and "Aaa" by
Moody's. The ratings assigned to the Class A Certificates will be based
primarily on the claims-paying ability of the Certificate Insurer. Explanations
of the significance of such ratings may be obtained from Moody's, 99 Church
Street, New York, New York and Standard & Poor's, 25 Broadway, New York, New
York 10004. Such ratings will be the views only of such rating agencies. There
is no assurance that any such ratings will continue for any period of time or
that such ratings will not be revised or withdrawn. Any such revision or
withdrawal of such ratings may have an adverse effect on the market price of the
Class A Certificates. A security rating is not a recommendation to buy, sell or
hold securities. See "Risk Factors -- Limited Nature of Ratings" herein.
LEGAL INVESTMENT CONSIDERATIONS
Although the Class A Certificates are expected to be rated "AAA" by
Standard & Poor's and "Aaa" by Moody's, the Class A Certificates will not
constitute "mortgage related securities" for purposes of SMMEA because a portion
of the Home Equity Loans represent second liens. Accordingly, many institutions
with legal authority to invest in comparably rated securities based on first
home equity loans may not be legally authorized to invest in the Class A
Certificates.
UNDERWRITING
Subject to the terms of the Underwriting Agreement dated December 3,
1997 (the " Underwriting Agreement") between the Underwriter and the Depositor,
the Depositor will agree to sell to the Underwriter and the Underwriter will
agree to purchase the Class A Certificates upon issuance, subject to the
satisfaction of certain conditions precedent. The Class A Certificates will be
offered by the Underwriter when as and if
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issued and sold by the Depositor to the Underwriter, subject to the prior sale
or withdrawal, cancellation or modification of the offer without notice, and the
right of the Underwriter to reject any subscription, in whole or in part.
The Underwriter has informed the Depositor that it proposes to offer
the Class A Certificates for sale from time to time in one or more negotiated
transactions, or otherwise, at varying prices to be determined, in each case, at
the time of the related sale. The Underwriter may effect such transactions by
selling the Class A Certificates to or through dealers, and such dealers may
receive compensation in the form of underwriting discounts, concessions or
commissions from the Underwriter. In connection with the sale of the Class A
Certificates, the Underwriter may be deemed to have received compensation from
the Depositor in the form of underwriting compensation. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Class A
Certificates may be deemed to be underwriters and any commissions received by
them and any profit on the resale of the Class A Certificates by them may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter against certain liabilities, including liabilities under
applicable securities laws, or contribute to payments the Underwriter may be
required to make in respect thereof. The Underwriter is an affiliate of the
Depositor.
No Class A Certificate will have an established trading market when
issued. The Underwriter may, from time to time, act as a broker or purchase and
sell Class A Certificates in the secondary market, but the Underwriter is under
no obligation to do so and there can be no assurance that there will be a
secondary market for the Class A Certificates or liquidity in the secondary
market if one does develop.
In connection with the offering, the Underwriter may engage in
transactions that stabilize, maintain or otherwise affect the price of the Class
A Certificates. Specifically, the Underwriter may overallot the offering,
creating a short position in the Class A Certificates for its own account. The
Underwriter may bid for and purchase Class A Certificates in the open market to
cover such short positions. In addition, the Underwriter may bid for and
purchase Class A Certificates in the open market to stabilize the price of the
Class A Certificates. These activities may stabilize or maintain the market
price of the Class A Certificates above independent market levels. The
Underwriter is not required to engage in these activities, and may end these
activities at any time.
REPORT OF EXPERTS
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1996 and 1995 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1996, incorporated by
reference in this Prospectus Supplement, have been incorporated herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Depositor by Schell Bray Aycock Abel &
Livingston P.L.L.C., Greensboro, North Carolina. Certain legal matters relating
to insolvency issues and certain federal income tax matters concerning the
Certificates will be passed upon for the Sponsor and the Depositor by Stroock &
Stroock & Lavan LLP, New York, New York. Certain legal matters relating to the
validity of the issuance of the Certificates will be passed upon for the
Underwriter by Stroock & Stroock & Lavan LLP, New York, New York.
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INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
Accrual Period.....................................10
Appraised Values...................................33
Available Funds....................................50
Backup Servicer.....................................2
Beneficial Owners..................................16
Book-Entry Certificates............................52
Business Day.......................................10
Capitalized Interest Account........................2
Carry-Forward Amount...............................50
Cede...............................................16
Certificate Account................................47
Certificate Insurer.................................1
Certificate Insurer Default........................16
Certificate Principal Balance......................42
Certificates........................................1
Class...............................................6
Class A Certificate Principal Balance..............42
Class A Distribution Amount........................10
Class A Principal Distribution Amount..............11
Class R Certificates................................1
Closing Date........................................1
Code...............................................73
Combined Loan-to-Value Ratio.......................33
Compensating Interest..............................14
Coupon Rates........................................8
CPR................................................43
Current Interest...................................10
Custodian..........................................62
Daily Collections..................................65
Definitive Certificate.............................52
Delinquency Advances...............................13
Depositor...........................................2
DOL................................................74
DTC.................................................1
DTC Participants...................................53
Eligible Investments...............................51
ERISA..............................................18
Excluded Plan......................................75
Exemption..........................................74
Expense Fee........................................48
Final Determination................................72
Final Scheduled Payment Date.......................10
Financial Intermediary.............................52
Fitch..............................................16
FNMA Guide.........................................64
Funding Period......................................9
Home Equity Loans...................................1
Initial Aggregate Loan Balance......................2
Initial Home Equity Loans...........................2
Insurance Policy....................................1
Insured Payment....................................15
Loan Balance.......................................12
Loan Purchase Price................................61
Loan-to-Value Ratios...............................33
Master Servicer.....................................2
Master Servicer Optional Termination Date..........17
Master Servicer Termination Events.................69
Maximum Collateral Amount..........................17
Maximum Rates.......................................9
Minimum Rates.......................................9
Monthly Remittance Date............................13
Moody's............................................16
Mortgagor..........................................40
Net Liquidation Proceeds...........................65
Net Monthly Excess Cashflow........................48
New World..........................................25
Notes..............................................32
Original Pre-Funded Amount..........................9
Owners..............................................2
Participants.......................................52
Pass-Through Rate..................................48
Payment Date........................................2
Percentage Interest................................47
Plan...............................................74
Pooling and Servicing Agreement.....................7
Preference Amount..................................13
Pre-Funded Amount...................................9
Pre-Funding Account.................................2
Premium Amount.....................................48
Prepayment Assumption..............................43
Prepayment Interest Shortfall......................64
Prepayments........................................22
Preservation Expenses..............................14
Principal and Interest Account.....................64
Properties..........................................1
PTE................................................74
Qualified Replacement Mortgage.....................61
Rating Agencies....................................17
Realized Loss......................................60
Record Date........................................10
Register...........................................47
Registrar..........................................47
Regular Certificates...............................73
Regulation.........................................74
Relief Act Shortfalls..............................50
REMIC...............................................2
REMIC Opinion......................................61
REMIC Regular Certificates.........................73
REMIC Residual Certificates........................73
Remittance Period..................................13
Residual Certificates..............................73
Restricted Group...................................75
Riegle Act.........................................23
Rules..............................................52
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Securities Act.....................................75
Servicing Fee......................................14
SMMEA..............................................18
Specified Subordinated Amount......................43
Sponsor.............................................2
Standard & Poor's..................................16
Subordinated Amount................................59
Subordination Deficit..............................13
Subordination Increase Amount......................59
Subordination Reduction Amount.....................59
Subsequent Home Equity Loans........................2
Subsequent Transfer Agreement......................20
Substitution Amount................................61
Total Available Funds..............................50
Total Monthly Excess Cashflow......................48
Total Monthly Excess Spread........................59
Trust...............................................1
Trust Estate.......................................46
Trustee.............................................2
Underwriter.........................................1
Underwriting Agreement.............................76
Weighted average life..............................43
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<PAGE>
PROSPECTUS
December 3, 1997
DLJ Mortgage Acceptance Corp.
Depositor
Mortgage Pass-Through Certificates
(Issuable in Series)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates") which may be sold from time to time under this Prospectus and
related Prospectus Supplement in one or more series (each a "Series") by DLJ
Mortgage Acceptance Corp. (the "Depositor"). Capitalized terms not otherwise
defined herein have the meanings specified in the Glossary attached hereto.
Each Certificate of a Series will evidence a beneficial ownership
interest in assets deposited into a trust (a "Trust Fund") by the Depositor
pursuant to a Pooling and Servicing Agreement executed by the Depositor, the
Trustee and the Master Servicer for such Series specified in the related
Prospectus Supplement. The Trust Fund will consist of Mortgage Assets, which may
include Mortgage Loans or participation interests therein, Manufactured Home
Loans or participation interests therein, Agency Securities, Private
Mortgage-Backed Securities or any combination of the foregoing and other assets,
including any insurance policies, reserve funds or other forms of credit support
specified in the related Prospectus Supplement. Manufactured Home Loans and the
Mortgage Loans in the Trust Fund for a Series will have been originated by
various financial institutions and other entities engaged generally in the
business of originating and/or servicing housing loans and will have been
acquired by the Depositor from one or more Sellers on or prior to the Closing
Date. Some of the Mortgage Loans or Manufactured Home Loans may have been
originated by an affiliate of the Depositor. The Mortgage Loans and the
Manufactured Home Loans may include (without limitation) fixed rate or
adjustable rate Conventional Loans, FHA Loans or VA Loans and may provide for
graduated equity, graduated payment, balloon payment, "buy-down" or other
payment features, and may call for payments from the obligors other than
monthly, as specified in the related Prospectus Supplement, Mortgage Loans
underlying or comprising the Mortgage Assets will be secured by property
consisting of single family (one-to-four family) attached or detached
residential housing or multifamily residential rental properties or
cooperatively owned properties consisting of five or more attached or detached
dwelling units. Mortgage Loans that are Cooperative Loans will be secured by
assignments of shares and a proprietary lease or occupancy agreement on a
cooperative apartment. Manufactured Home Loans underlying or comprising the
Mortgage Assets will be secured by property consisting of a Manufactured Home.
See "The Trust Funds" herein. Manufactured Home Loans and the Mortgage Loans (or
participation interests therein) will be serviced by various servicers under the
supervision of the Master Servicer or by the Master Servicer directly as
specified in the related Prospectus Supplement. The Master Servicer's and any
Servicer's obligations will be limited to its contractual, supervisory and/or
servicing obligations and such other obligations as are specified in the related
Prospectus Supplement. See "Servicing of Loans" herein.
Each Series of Certificates will consist of one or more Classes, and
any Class may include subclasses. If a Series includes multiple Classes, such
Classes may vary with respect to the amount, percentage and timing of
distributions of principal, interest or both and one or more Classes may be
subordinated to other Classes with respect to distributions of principal,
interest or both as described herein and in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Mortgage Assets held
under the Pooling and Servicing Agreement may be divided into one or more Asset
Groups and the Certificates of each separate Class will evidence beneficial
ownership of each corresponding Asset Group. See "Description of the
Certificates" herein.
Distribution of principal and interest of the Certificates of each
Series will be made on each Distribution Date for a Series. The rate of
reduction of the aggregate principal balance of each Class of a Series will
depend principally upon the rate of payment (including prepayments) with respect
to the Loans comprising or underlying the Mortgage Assets. A rate of prepayment
lower or higher than anticipated may affect yield on Certificates of a Series in
the manner described herein and in the related Prospectus Supplement. Under
certain limited circumstances described herein and in the related Prospectus
Supplement, the Mortgage Assets may be purchased by the entity specified in the
related Prospectus Supplement and the related Trust Fund terminated prior to the
maturity of the Mortgage Assets or the Final Scheduled Distribution Date of the
Certificates of the related Series. See "Description of the Certificates" and
"Yield, Prepayment and Maturity Considerations" herein.
The Depositor's only obligations with respect to any Series will be
pursuant to certain representations and warranties, if any, set forth in the
related Pooling and Servicing Agreement as described herein or in the related
Prospectus Supplement. See "The Pooling and Servicing Agreements" herein.
If specified in the related Prospectus Supplement, one or more separate
elections may be made to treat the Trust Fund for a Series as a "Real Estate
Mortgage Investment Conduit" (a "REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Considerations" herein.
For a discussion of significant matters affecting investment in the
Certificates, see "Risk Factors," which begins on page 9.
----------------------
PROCEEDS OF THE ASSETS IN THE TRUST FUND ARE THE SOLE SOURCE OF
PAYMENTS ON THE CERTIFICATES. THE CERTIFICATES DO NOT REPRESENT AN INTEREST IN
OR OBLIGATION OF THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR AFFILIATES.
NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE LOANS OR MORTGAGE
SECURITIES WILL BE GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, THE MASTER SERVICER OR ANY OF THEIR
AFFILIATES."
----------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Certificates of a Series offered hereby and by the related Prospectus
Supplement may be made through one or more different methods, including
offerings through Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Depositor, as more fully described herein and in the related
Prospectus Supplement. See "Plan of Distribution" herein.
The Certificates are offered when, as and if delivered to and accepted
by the Underwriters subject to prior sale, withdrawal or modification of the
offer without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
Donaldson, Lufkin & Jenrette
Securities Corporation
<PAGE>
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Certificates
offered hereby and thereby or an offer of such Certificates to any person in any
state or other jurisdiction in which such offer would be unlawful. The delivery
of this Prospectus at any time does not imply that information herein is correct
as of any time subsequent to its date; however, if any material change occurs
while this Prospectus is required by law to be delivered, this Prospectus will
be amended or supplemented accordingly.
Until 90 days after the date of each Prospectus Supplement, all dealers
effecting transactions in the Certificates offered hereby, whether or not
participating in the distribution thereof, may be required to deliver this
Prospectus and the related Prospectus Supplement. This delivery requirement is
in addition to the obligation of dealers to deliver a Prospectus Supplement and
Prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission
(the "Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661; and New York Regional Office, Seven World Trade
Center, New York, New York 10048. Copies of such material can also be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund are
required under the Pooling and Servicing Agreement to be forwarded to
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, such reports will not be examined and reported on by an independent
public accountant. See "The Pooling and Servicing Agreements--Reports to
Certificateholders" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Depositor on behalf of the
Trust Fund referred to in the accompanying Prospectus Supplement with the
Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), after the date of such
Prospectus Supplement and prior to the termination of any offering of the
Certificates issued by such Trust Fund shall be deemed to be incorporated by
reference in this Prospectus and to be a part of this Prospectus from the date
of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein (or in the accompanying Prospectus Supplement) or in
any other subsequently filed document which also is or is deemed to be
incorporated by reference modifies or replaces such statement. Any such
statement so modified or superseded shall not be deemed, except as modified or
superseded, to constitute a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge
to each person to whom this Prospectus is delivered, on the written or oral
request of such person, a copy of any or all of the documents referred to above
that have been or may be incorporated by reference in this Prospectus (not
including exhibits to the information that is incorporated by reference unless
such exhibits are specifically incorporated by reference into the information
that this Prospectus incorporates). Such requests should be directed to: DLJ
Mortgage Acceptance Corp., 277 Park Avenue, New York, New York 10172, Attention:
N. Dante LaRocca.
2
<PAGE>
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the Prospectus
Supplement with respect to the Series offered thereby and to the terms and
provisions of the related Pooling and Servicing Agreement executed by the
Depositor, the Master Servicer and the Trustee as specified in the related
Prospectus Supplement. All capitalized terms not otherwise defined in this
Prospectus or the related Prospectus Supplement for a Series have the respective
meanings assigned to them in the Glossary attached hereto.
<TABLE>
<S> <C>
Securities Offered....................... The Mortgage Pass-Through Certificates (the "Certificates") are
issuable from time to time in separate Series pursuant to separate
Pooling and Servicing Agreements. Each Certificate of a Series
will evidence a beneficial ownership interest in the Trust Fund
for such Series, or in an Asset Group specified in the related
Prospectus Supplement.
The Certificates of a Series will evidence interests in the
related Trust Fund only and will not be guaranteed by any
governmental agency, by the Depositor, the Trustee, the Master
Servicer or by any of their respective affiliates, or unless
otherwise specified in the related Prospectus Supplement, by any
other person or entity. See "Risk Factors" and "Credit Support"
herein.
Each Series of Certificates will consist of one or more Classes.
If a Series consists of multiple Classes, the respective Classes
may differ with respect to the amount, percentage and timing of
distributions of principal, interest or both. Additionally, one or
more Classes may consist of Subordinate Certificates which are
subordinated to other Classes of Certificates with respect to the
right to receive distributions of principal, interest, or both
under the circumstances and in such amounts as described herein
and in the related Prospectus Supplement. Unless otherwise
specified in the related Prospectus Supplement, any Class of
Certificates of a Series will be offered hereby and by such
Prospectus Supplement only if rated by at least one Rating Agency
in one of its four highest rating categories. See "Description of
the Certificates--General," "Credit Support--Subordinated
Certificates" and "Risk Factors" herein.
Depositor................................ DLJ Mortgage Acceptance Corp., a Delaware corporation
(the "Depositor"), is a limited purpose corporation organized
primarily for the purpose of investing in the Mortgage Assets for
each Trust Fund. All of the outstanding capital stock of the
Depositor is owned by Donaldson, Lufkin & Jenrette, Inc. See "The
Depositor."
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Master Servicer.......................... The entity named as Master Servicer in the related Prospectus
Supplement. See "The Pooling and Servicing Agreements."
Trustee.................................. The Trustee with respect to a Series will be specified in the
related Prospectus Supplement.
Interest Distributions................... Interest Distributions on the Certificates of a Series will be
made from amounts available therefor in the related Certificate
Account on each Distribution Date at the applicable Pass-Through
Rate or Certificate Rate specified in (or, with respect to
Floating Interest Certificates, determined in the manner set forth
in) the related Prospectus Supplement. The Pass-Through Rate on
Certificates of a Series may be variable and change with changes
in the mortgage rate or pass-through rates of the Mortgage Assets
included in the related Trust Fund and/or as prepayments occur
with respect to such Mortgage Assets.
Principal Weighted Certificates may not be entitled to receive any
interest distributions or may be entitled to receive only nominal
interest distributions.
Compound Interest Certificates will not receive distributions of
interest but interest accruing with respect to the principal
balance of such compound Interest Certificates will be added to
such principal balance on each Distribution Date until the Accrual
Termination Date. Following the Accrual Termination Date, interest
distributions with respect to such Compound Interest Certificates
will be made on the basis of their Compound Value.
A Multiple Class Series may include one or more Classes of
Floating Interest Certificates. With respect to any such Class of
Floating Interest Certificates, the related Prospectus Supplement
will set forth: (a) the initial Floating Rate (or manner of
determining the initial Floating Rate); (b) the method by which
the Floating Rate will be determined from time to time; (c) the
periodic intervals at which such determination will be made; and
(d) the Maximum Floating Rate and the Minimum Floating Rate, if
any. See "Description of the Certificates" and "Yield, Prepayment
and Maturity Considerations" herein.
Principal Distributions.................. Principal distributions on the Certificates of a Series will be
made from amounts available therefor in the related Certificate
Account on each Distribution Date in an aggregate amount
determined as specified in the related Prospectus Supplement.
Principal distributions will be allocated among the respective
Classes of a Series in the manner and in the priority set forth in
the related Prospectus Supplement.
</TABLE>
4
<PAGE>
<TABLE>
<S> <C>
Interest Weighted Certificates may not be entitled to any
principal distributions or may be entitled to receive only nominal
principal distributions.
See "Description of the Certificates" and "Yield, Prepayment and
Maturity Considerations" herein.
Funding Account......................... If so specified in the related Prospectus Supplement, a portion of
the proceeds of the sale of one or more Classes of Certificates of
a series or a portion of collections on the Loans in respect of
principal may be deposited in a segregated account to be applied
to acquire additional Loans, subject to the limitations set forth
herein under "Description of the Certificates--Funding Account."
Monies on deposit in the Funding Account and not applied to
acquire such additional Loans within the time set forth in the
related Pooling and Servicing Agreement or other applicable
agreement may be treated as principal and applied in the manner
described in the related Prospectus Supplement.
Optional Termination..................... If so specified in the related Prospectus Supplement, the
Depositor, the Master Servicer, or such other entity that is
specified in the related Prospectus Supplement, may, at its
option, cause an early termination of the related Trust Fund by
repurchasing all of the Mortgage Assets remaining in the Trust
Fund on or after a specified date, or on or after such time as the
aggregate unpaid principal balance of the Mortgage Assets is less
than the percentage specified in the related Prospectus
Supplement. See "Description of the Certificates--Optional
Termination."
The Trust Fund........................... The Trust Fund for a Series will consist of Private
Mortgage-Backed Securities, Agency Securities, Mortgage Loans or
participation interests therein, Manufactured Home Loans or
participation interests therein, or any combination of the
foregoing (the "Mortgage Assets"), together with certain accounts,
reserve funds, insurance policies and related agreements specified
in the related Prospectus Supplement. (Mortgage Loans and
Manufactured Home Loans are referred to herein as "Loans.") If so
specified in the related Prospectus Supplement, the Mortgage
Assets may be divided into Asset Groups and the Certificates of
separate Classes will evidence beneficial interests of a
corresponding Asset Group. The Trust Fund for a Series will also
include the Collection Account, the Certificate Account, and may
include certain policies of insurance relating to the Mortgage
Assets, and various forms of credit support, all as specified in
the related Prospectus. See "The Trust Funds--Collection Account
and Certificate Account" and "Credit Support" and "Description of
Mortgage and Other Insurance" herein.
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Credit Support........................... Credit support in the form of reserve funds, subordination,
overcollateralization, insurance policies, letters of credit or
other types of credit support may be provided with respect to the
Mortgage Assets or with respect to one or more Classes of
Certificates of a Series. If the Mortgage Assets are divided into
separate Asset Groups, the beneficial ownership of which is
evidenced by a separate Class or Classes of a Series, credit
support may be provided by a cross-support feature which requires
that distributions be made with respect to Certificates evidencing
beneficial ownership of one Asset Group prior to distributions to
Subordinate Certificates evidencing a beneficial ownership
interest in another Asset Group within the Trust Fund.
The type, characteristics and amount of credit support will be
determined based on the characteristics of the Loans underlying or
comprising the Mortgage Assets and other factors and will be
established on the basis of requirements of each Rating Agency
rating the Certificates of such Series. The protection against
losses provided by such credit support will be limited. See
"Credit Support" and "Risk Factors" herein.
Servicing of Loans....................... The Master Servicer identified in the related Prospectus
Supplement will service the Loans directly or administer and
supervise the performance by Servicers of their duties and
responsibilities under separate servicing agreements (the
"Servicing Agreements") entered into between the Master Servicer
and such Servicers. Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer and each Servicer must
be approved by either FNMA or FHLMC as a seller/servicer of
Mortgage Loans and, in the case of FHA Loans, approved by HUD as
an FHA mortgagee. Each Servicer will be obligated under its
Servicing Agreement to perform customary servicing functions.
Advances with respect to delinquent payments of principal or
interest on a Loan will be made by the Master Servicer or the
Servicers only to the extent described in the related Prospectus
Supplement. Such advances will be intended to provide liquidity
only and, unless otherwise specified in the related Prospectus
Supplement, will be reimbursable to the Master Servicer or the
Servicer, as the case may be, from scheduled payments of principal
and interest, late collections, or from the proceeds of
liquidation of the related Loans, from other recoveries relating
to such Loans (including any insurance proceeds or payments from
other forms of credit support). See "Servicing of Loans."
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Federal Income Tax Considerations......... If an election is made for treatment of the Trust Fund as a
REMIC or as REMICs under the Internal Revenue Code of 1986 (the
"Code"), one or more Classes of Certificates will be REMIC
"Regular Interests" and one Class will be REMIC "Residual
Interests" in the related REMIC. If a REMIC election will not be
made for a Trust Fund, the federal income consequences of the
purchase, ownership and disposition of the related Certificates
will be set forth in the related Prospectus Supplement.
Investors are advised to consult their tax advisors and to review
"Certain Federal Income Tax Considerations" herein and in the
related Prospectus Supplement. See "Certain Federal Income Tax
Considerations."
ERISA Considerations..................... A fiduciary of any employee benefit plan subject to the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code should carefully review with its own legal
advisors whether the purchase or holding of Certificates could
give rise to a transaction prohibited or otherwise impermissible
under ERISA or the Code. See "ERISA Considerations."
Legal Investment......................... At the date of issuance, as to each Series, it will be a
requirement for issuance of any Series that the Certificates
offered by this Prospectus and such 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
Certificates of each Series offered hereby and by the related
Prospectus Supplement will be as set forth in the related
Prospectus Supplement. Unless otherwise specified in the related
Prospectus Supplement, Certificates of each Series offered by this
Prospectus and such Prospectus Supplement will constitute
"mortgage related securities" under the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated by at
least one Rating Agency in one of its two highest categories and,
as such, will be legal investments for certain types of
institutional investors to the extent provided in SMMEA, subject,
in any case, to any other regulations which may govern investments
by such institutional investors. Any Class of Certificates that
represents an interest in a Trust Fund that includes junior
mortgage loans will not constitute "mortgage related securities"
for purposes of SMMEA. See "Legal Investment."
Use of Proceeds.......................... The Depositor will use the net proceeds from the sale of
each Series for one or more of the following purposes: (i) to
purchase the related Mortgage Assets, (ii) to repay indebtedness
which has been incurred to obtain funds to acquire such Mortgage
Assets, (iii) to establish any reserve funds described in the
related Prospectus Supplement and
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(iv) to pay costs of structuring, guaranteeing and issuing such
Certificates. If so specified in the related Prospectus
Supplement, the purchase of the Mortgage Assets for a Series may
be effected by an exchange of Certificates with the Depositor of
such Mortgage Assets. See "Use of Proceeds."
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RISK FACTORS
Investors should consider, among other things, the following factors in
connection with an investment in the Certificates.
Limited Liquidity
There can be no assurance that a secondary market for the Certificates
of any Series will develop or, if it does develop, that it will provide
Certificateholders with a sufficient level of liquidity or will continue for the
life of the Certificates. Donaldson, Lufkin & Jenrette Securities Corporation
(or one or more of its affiliates) intends to make a secondary market in the
Certificates, but has no obligation to do so. In addition, the market value of
Certificates of each Series will fluctuate with changes in prevailing rates of
interest. Consequently, sale of the Certificates by a Holder in any secondary
market which may develop may be at a discount from par value or from their
purchase price. Certificateholders have no optional redemption rights. The
Certificates will not be listed on any securities exchange.
Yield, Prepayment and Maturity
The rate at which prepayments (which include both voluntary prepayments
by the obligors on the Loans and liquidations due to defaults and foreclosures)
occur on the Loans underlying or comprising the Mortgage Assets for a Series
will be affected by a variety of factors, including, without limitation, the
level of prevailing mortgage market interest rates and economic, demographic,
tax, social, legal and other factors. Prepayments on the Loans comprising or
underlying the Mortgage Assets for a Series generally will result in a faster
rate of distributions of principal on the Certificates. Thus, the prepayment
experience on the Loans comprising or underlying the Mortgage Assets will affect
the average life and yield to investors of each Class and the extent to which
each such Class is paid prior to its Final Scheduled Distribution Date. A Series
may include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Certificates will be extremely sensitive to prepayments on the Loans
comprising or underlying the Mortgage Assets for such Series. In general, if a
Certificate, including a Certificate of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Loans occur at a rate faster
than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Certificateholder of such
Class could, under some such prepayment scenarios, fail to recoup its original
investment. Conversely, if a Certificate, including a Certificate of a Principal
Weighted Class, is purchased at a discount and principal distributions thereon
occur at a rate slower than assumed at the time of purchase, the investor's
actual yield to maturity could be significantly lower than that originally
anticipated. Any rating assigned to the Certificates by a Rating Agency will
reflect only such Rating Agency's assessment of the likelihood that timely
distributions will be made with respect to such Certificates in accordance with
the related Pooling and Servicing Agreement. Such rating will not constitute an
assessment of the likelihood that principal prepayments on the Loans underlying
or comprising the Mortgage Assets will be made by borrowers or of the degree to
which the rate of such prepayments might differ from that originally
anticipated. As a result, such rating will not address the possibility that
prepayment rates higher or lower than anticipated by an investor may cause such
investor to experience a lower than anticipated yield, or that an investor
purchasing an Interest Weighted Certificate at a significant premium might fail
to recoup its initial investment. See "Yield, Prepayment and Maturity
Considerations."
Credit Support Limitations
The amount, type and nature of insurance policies, subordination,
overcollateralization, Certificate Guarantee Insurance, letters of credit and
other credit support, if any, required with respect to a Series will be
determined on the basis of criteria established by each Rating Agency rating
such Series. Such criteria are necessarily based upon an actuarial analysis of
the behavior of Loans in a larger group. Such actuarial analysis is the basis
upon which each Rating Agency determines (a) required amounts and types of pool
insurance, special hazard insurance, reserve funds, subordination,
overcollateralization or other credit support and (b) limits on the number and
amount of Loans which have various special payment characteristics, have various
Loan-to-Value Ratios and/or were made for various purposes (e.g., primary
residence, second home, refinancing). There can be no assurance that the
historical data
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supporting such actuarial analysis will accurately reflect future experience nor
any assurance that the data derived from a large pool of housing loans
accurately predicts the delinquency, foreclosure or loss experience of any
particular pool of Loans.
In addition, if distributions in reduction of the principal balance of
Certificates of a Multiple Class Series are made in order of the respective
Final Scheduled Distribution Dates of the Class, any limits with respect to the
aggregate amount of losses covered by credit support may be exhausted before the
principal of the later-maturing Classes has been repaid. As a result, the impact
of significant losses on the Mortgage Loans may bear primarily upon the
Certificates of the later-maturing Classes.
The Prospectus Supplement for a Series will describe any reserve funds,
insurance policies, letter of credit or other third-party credit support
relating to the Mortgage Assets or to the Certificates of such Series. Use of
such reserve funds and payments under such insurance policies, letter of credit
or other third-party credit support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such reserve funds, insurance policies, letter of credit or other credit support
will not cover all potential losses or risks. The obligations of the issuers of
any credit support such as a pool insurance policy, special hazard insurance
policy, bankruptcy bond, letter of credit, Certificate Guarantee Insurance,
repurchase bond or other third-party credit support will not be guaranteed or
insured by the United States, or by any agency or instrumentality thereof. A
Series of Certificates may include a Class or multiple Classes of Subordinate
Certificates to the extent described in the related Prospectus Supplement.
Although such subordination is intended to reduce the risk of delinquent
distributions or ultimate losses to Holders of Senior Certificates, the
Subordinated Amount will be limited and will decline under certain circumstances
and the related Subordination Reserve Fund, if any, could be depleted in certain
circumstances. See "Description of the Certificates," "The Trust Funds" and
"Credit Support."
Certain Loans and Mortgaged Property
Reliable prepayment, loss and foreclosure statistics relating to
certain types of Loans may not be available for a Series. Such Loans may be
underwritten on the basis of an assessment that the borrower will have the
ability to make payments in higher amounts in later years and, in the case of
Loans with adjustable mortgage rates, after relatively short periods of time.
See "Loan Underwriting Procedures and Standards" and "Credit Support." Other
loans may be underwritten principally on the basis of the initial Loan-to-Value
Ratio of the Loans. To the extent losses on Loans exceed the amount of credit
support, the Trust Fund may experience a loss. Furthermore, Multifamily Loans,
Manufactured Homes or Cooperative Dwellings may entail risks of loss in the
event of delinquency and foreclosure or repossession that are greater than
similar risks associated with traditional single-family property. To the extent
losses on such Loans exceed levels estimated by the Rating Agency in determining
required levels of subordination or other credit support, the Trust Fund may
experience a loss. See "Servicing of Loans--Maintenance of Insurance Policies
and Other Servicing Procedures" and "Credit Support."
Limited Obligations and Assets of Depositor
Unless otherwise set forth in the Prospectus Supplement for a Series of
Certificates, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Certificates of such Series. The only
obligations of the Depositor with respect to the Certificates of any Series will
be pursuant to certain representations and warranties, if any, in the related
Pooling and Servicing Agreement. See "The Pooling and Servicing
Agreements--Assignment of Mortgage Assets" herein. The Depositor does not have,
and is not expected in the future to have, any significant assets with which to
meet any obligation to repurchase Mortgage 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 Loan which constitutes a Mortgage 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
Seller, the Servicer or the Master Servicer, as the case may be, or from a
reserve fund established to provide funds for such repurchases. See "The
Depositor."
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ERISA Considerations
Generally, ERISA applies to investments made by employee benefit plans
and transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Certificates of any Series. See
"ERISA Considerations."
Certain Federal Tax Considerations Regarding REMIC Residual Interests
Holders of REMIC Residual Interests will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the related REMIC regardless of the amount or timing of their
receipt of cash payments as described in "Certain Federal Income Tax
Considerations--Residual Interests in a REMIC." Accordingly, under certain
circumstances, holders of Certificates which constitute REMIC Residual Interests
might have taxable income and tax liabilities arising from such investment
during a taxable year in excess of the cash received during such period. The
requirement that Holders of Residual Interest Certificates report their pro rata
share of the taxable income and net loss of the related REMIC will continue
until the principal balances of all Classes of Certificates of the related
Series have been reduced to zero, even though holders of Residual Interests have
received full payment of their stated interest and principal. A portion (or, in
certain circumstances, all) of a Residual Interest Certificateholder's share of
the related REMIC's taxable income may be treated as "excess inclusion" income
to such holder which (i) except in the case of certain thrift institutions, will
not be subject to offset by losses from other activities, (ii) for a tax-exempt
Holder, will be treated as unrelated business taxable income and (iii) for a
foreign holder, will not qualify for exemption from withholding tax. Individual
Holders of Certificates constituting Residual Interests may be limited in their
ability to deduct servicing fees and other expenses of the related REMIC.
Because of the special tax treatment of REMIC residual interests, the taxable
income arising in a given year on a REMIC residual interest will not be equal to
the taxable income associated with investment in a corporate bond or stripped
instrument having similar cash flow characteristics and pre-tax yield.
Therefore, the after-tax yield on the Residual Interest Certificates may be
negative or significantly less than that of a corporate bond or stripped
instrument having similar cash flow characteristics.
DESCRIPTION OF THE CERTIFICATES
General
The Certificates will be issued in Series pursuant to separate Pooling
and Servicing Agreements among the Depositor, the Master Servicer and the
Trustee for the related Series identified in the related Prospectus Supplement.
The following summaries describe certain provisions common to each Series. 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 Pooling and Servicing
Agreement and the Prospectus Supplement relating to each Series. When particular
provisions or terms used in the Pooling and Servicing Agreement are referred to,
such provisions or terms shall be as specified in the Pooling and Servicing
Agreement.
Each Series will consist of one or more Classes, one or more of which
may consist of Compound Interest Certificates, Floating Interest Certificates,
Interest Weighted Certificates or Principal Weighted Certificates. A Series may
also include one or more Classes of Subordinate Certificates. Unless otherwise
specified in the related Prospectus Supplement, a Class of Subordinate
Certificates will be offered hereby or by such Prospectus Supplement only if
rated by a Rating Agency in at least its fourth highest applicable rating
category. If so specified in the related Prospectus Supplement, the Mortgage
Assets in a Trust Fund may be divided into multiple Asset Groups and the
Certificates of each separate Class will evidence beneficial ownership of each
corresponding Asset Group.
The Certificates for each Series will be issued in fully registered
form, in the minimum original principal amount, notional amount or percentage
interest specified in the related Prospectus Supplement. The transfer of the
Certificates may be registered, and the Certificates may be exchanged, without
the payment of any service charge payable in connection with such registration
of transfer or exchange, but the Trustee may require payment of a sum
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sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer or exchange of Certificates. If specified in the
related Prospectus Supplement, one or more Classes of a Series may be available
in book-entry form only.
Distributions on the Certificates
General. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Certificates will be
made on each Distribution Date to the extent of the "Available Distribution
Amount" as set forth in the related Prospectus Supplement.
Distributions of interest on Certificates which receive interest will
be made periodically at the intervals and at the Pass-Through Rate or
Certificate Rate specified or, with respect to Floating Interest Certificates,
determined in the manner described in the related Prospectus Supplement.
Interest on the Certificates will be calculated on the basis of a 360-day year
consisting of twelve 30-day months unless otherwise specified in the related
Prospectus Supplement.
Distributions of principal of and interest on Certificates of a Series
will be made by check mailed to Certificateholders of such Series registered as
such on the close of business on the record date specified in the related
Prospectus Supplement at their addresses appearing on the Certificate Register,
except that (a) distributions may be made by wire transfer in certain
circumstances described in the related Prospectus Supplement and (b) the final
distribution in retirement of a Certificate will be made only upon presentation
and surrender of such Certificate at the corporate trust office of the Trustee
for such Series or such other office of the Trustee as specified in the
Prospectus Supplement. Notice of the final distribution on a Certificate will be
mailed to the Holder of such Certificate before the Distribution Date on which
such final distribution in retirement of the Certificate is expected to be made.
If specified in the related Prospectus Supplement, the Certificates of a Series
or certain Classes of a Series may be available only in book-entry form. See
"Book-Entry Registration" herein.
With respect to reports to be furnished to Certificateholders
concerning a distribution, see "The Pooling and Servicing Agreements--Reports to
Certificateholders."
Pass-Through Certificates Generally. With respect to a Series other
than a Multiple Class Series, distributions on the Certificates on each
Distribution Date will generally be allocated to each Certificate entitled
thereto on the basis of the undivided percentage interest (the "Percentage
Interest") evidenced by such Certificate in the Trust Fund or on the basis of
their outstanding principal amounts or notional amounts. If the Mortgage Assets
for a Series have adjustable or variable interest or pass-through rates, then
the Pass-Through Rate of the Certificates of such Series may also vary, due to
changes in such rates and due to prepayments with respect to Loans comprising or
underlying the related Mortgage Assets. If the Mortgage Assets for a Series have
fixed interest or pass-through rates, then the Pass-Through Rate on Certificates
of the related Series may be fixed, or may vary, to the extent prepayments cause
changes in the weighted average interest rate or pass-through rate of the
Mortgage Assets. If the Mortgage Assets have lifetime or periodic adjustment
caps on their respective pass-through rates, then the Pass-Through Rate on the
Certificates of the related Series may also reflect such caps.
Multiple Class Series. Each Certificate of a Multiple Class Series will
have a principal amount or a notional amount and a specified Certificate Rate
(which may be zero). Interest distributions on a Multiple Class Series will be
made on each Certificate entitled to an interest distribution on each
Distribution Date at the Certificate Rate specified or, with respect to Floating
Interest Certificates, determined as described in the related Prospectus
Supplement, to the extent funds are available in the Certificate Account,
subject to any subordination of the rights of any Subordinate Certificates to
receive current distributions. See "Subordinate Certificates" below and "Credit
Support."
Interest on all Certificates of a Multiple Class Series currently
entitled to receive interest will be distributed on the Distribution Date
specified in the related Prospectus Supplement, to the extent funds are
available in the Certificate Account, subject to any subordination of the rights
of any Subordinate Class to receive current distributions. See "Subordinate
Certificates" below and "Credit Support." Distributions of interest on a Class
of
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Compound Interest Certificates will commence only after the related Accrual
Termination Date specified in the related Prospectus Supplement. On each
Distribution Date prior to and including the Accrual Termination Date, interest
on such Class of Compound Interest Certificates will accrue and the amount of
interest accrued on such Distribution Date will be added to the principal
balance thereof on the related Distribution Date. On each Distribution Date
after the Accrual Termination Date, interest distributions will be made on
Classes of Compound Interest Certificates on the basis of the current Compound
Value of such Class. The Compound Value of a Class of Compound Interest
Certificates equals the initial aggregate principal balance of the Class, plus
accrued and undistributed interest added to such Class through the immediately
preceding Distribution Date, less any principal distributions previously made in
reduction of the aggregate outstanding principal balance of such Class.
To the extent provided in the related Prospectus Supplement, the
Certificates of a Multiple Class Series may include one or more Classes of
Floating Interest Certificates. The Certificate Rate of a Floating Interest
Certificate will be a variable or adjustable rate, subject to a Maximum Floating
Rate, Minimum Floating Rate, or both. For each Class of Floating Interest
Certificates, the related Prospectus Supplement will set forth the initial
Floating Rate (or the method of determining it), the Floating Interest Period,
and the formula, index, or other method by which the Floating Rate for each
Floating Interest Period will be determined.
If so specified in the related Prospectus Supplement, a Series may
include one or more Classes of Interest Weighted Certificates, Principal
Weighted Certificates, or both. Unless otherwise specified in the Prospectus
Supplement, payments received from the Mortgage Assets will be allocated on the
basis of the Percentage Interest of each Class in the principal component of
such distributions, the interest component of such distributions, or both, and
will be further allocated on a pro rata basis among the Certificates within each
Class. The method or formula for determining the Percentage Interest of a
Certificate will be set forth in the related Prospectus Supplement.
In the case of a Multiple Class Series, the timing, sequential order,
priority of payment or amount of distributions in respect of principal, and any
schedule or formula or other provisions applicable to the determination thereof
of each Class of Certificates shall be as set forth in the related Prospectus
Supplement. A Multiple Class Series may contain two or more classes of
Certificates as to which distributions of principal or interest or both on any
class may be made upon the occurrence of specified events, in accordance with a
schedule or formula (including "planned amortization classes" and "targeted
amortization classes"), or on the basis of collections from designated portions
of the Trust Fund.
Subordinate Certificates. One or more Classes of a Series may consist
of Subordinate Certificates. Subordinate Certificates may be included in a
Series to provide credit support as described herein under "Credit Support" in
lieu of or in addition to other forms of credit support. The extent of
subordination of a Class of Subordinate Certificates may be limited as described
in the related Prospectus Supplement. See "Credit Support." If the Mortgage
Assets are divided into separate Asset Groups, beneficial ownership of which is
evidenced by separate Classes of a Series, credit support may be provided by a
cross-support feature which requires that distributions be made to Senior
Certificates evidencing beneficial ownership of one Asset Group prior to making
distributions on Subordinate Certificates evidencing a beneficial ownership
interest in another Asset Group within the Trust Fund. Subordinate Certificates
will not be offered hereby or by such related Prospectus Supplement unless they
are rated in one of the four highest rating categories by at least one Rating
Agency.
Funding Account
If so specified in the related Prospectus Supplement, the Pooling and
Servicing Agreement may provide for the transfer by the Seller of additional
Loans to the related Trust Fund after the Closing Date. Such additional Loans
will be required to conform to the requirements set forth in the related Pooling
and Servicing Agreement or other agreement providing for such transfer. As
specified in the related Prospectus Supplement, such transfer may be funded by
the establishment of a Funding Account (a "Funding Account"). If a Funding
Account is established, all or a portion of the proceeds of the sale of one or
more Classes of Certificates of the related Series or a portion of collections
on the Loans in respect of principal will be deposited in such account to be
released as additional Loans are transferred. Unless otherwise specified in the
related Prospectus Supplement, all amounts deposited in a Funding Account will
be required to be invested in Eligible Investments and the amount held therein
shall at no time exceed
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25% of the aggregate outstanding principal balance of the Certificates. Unless
otherwise specified in the related Prospectus Supplement, the related Pooling
and Servicing Agreement or other agreement providing for the transfer of
additional Loans will provide that all such transfers must be made within 3
months after the Closing Date, and that amounts set aside to fund such transfers
(whether in a Funding Account or otherwise) and not so applied within the
required period of time will be deemed to be principal prepayments and applied
in the manner set forth in such Prospectus Supplement.
Optional Termination
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Master 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 Mortgage Assets from such Trust Fund on or after
a date specified in the related Prospectus Supplement, or on or after such time
as the aggregate outstanding principal amount of the Mortgage Assets is less
than a specified percentage of their initial aggregate principal amount. In the
case of a Trust Fund for which a REMIC election or elections have been made, the
Trustee shall receive a satisfactory opinion of counsel that the repurchase
price will not jeopardize the REMIC status of the REMIC or REMICs and that the
optional termination will be conducted so as to constitute a "qualified
liquidation" under Section 860F of the Code. See "The Pooling and Servicing
Agreements--Termination."
Book-Entry Registration
If so specified in the related Prospectus Supplement, the Certificates
will be issued in book-entry form in the minimum denominations specified in such
Prospectus Supplement and integral multiples thereof, and each Class will be
represented by a single Certificate registered in the name of the nominee of the
depository, The Depository Trust Company ("DTC"), a limited-purpose trust
company organized under the laws of the State of New York. If so specified in
the related Prospectus Supplement, no person acquiring an interest in the
Certificates (a "Certificateowner") will be entitled to receive a Certificate
issued in fully registered, certificated form (a "Definitive Certificate")
representing such person's interest in the Certificates except in the event that
the book-entry system for the Certificates is discontinued (as described below).
Unless and until Definitive Certificates are issued, it is anticipated that the
only Certificateholder of the Certificates will be Cede & Co., as nominee of
DTC. Certificateowners will not be registered "Certificateholders" or registered
"Holders" under the Pooling and Servicing Agreement, and Certificateowners will
only be permitted to exercise the rights of Certificateholders indirectly
through DTC Participants.
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry changes in
accounts of its Participants. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to entities that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Certificateowners that are not Participants or Indirect Participants
but desire to purchase, sell or otherwise transfer ownership of Certificates may
do so only though Participants and Indirect Participants. Because DTC can only
act on behalf of Participants and Indirect Participants, the ability of a
Certificateowner to pledge such owner's Certificate to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Certificate, may be limited. In addition, under a book-entry format,
Certificateowners may experience some delay in their receipt of principal and
interest distributions with respect to the Certificates since such distributions
will be forwarded to DTC and DTC will then forward such distributions to its
Participants which in turn will forward them to Indirect Participants or
Certificateowners.
Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC Participants may make book-entry transfers
among Participants through DTC facilities with respect to the Certificates and
DTC, as registered holder, is required to receive and transmit principal and
interest distributions and distributions with respect to the Certificates.
Participants and Indirect Participants with which Certificateowners have
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accounts with respect to Certificates similarly are required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificateowners. Accordingly, although Certificateowners will not
possess certificates, the Rules provide a mechanism by which Certificateowners
will receive distributions and will be able to transfer their interests.
The Depositor understands that DTC will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose account with DTC the
Certificates are credited. Additionally, the Depositor understands that DTC will
take such actions with respect to holders of a certain specified interest in the
certificates or holders having a certain specified voting interest only at the
direction of and on behalf of Participants whose holdings represent that
specified interest or voting interest. DTC may take conflicting actions with
respect to other Holders of Certificates to the extent that such actions are
taken on behalf of Participants whose holdings represent that specified interest
or voting interest.
DTC may discontinue providing its services as securities depository
with respect to the Certificates at any time by giving reasonable notice to the
Depositor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Certificates will be
printed and delivered. In addition, the Depositor may at its option elect to
discontinue use of the book-entry system through DTC. In that event, too,
Definitive Certificates will be printed and delivered.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
Payment Delays
With respect to any Series, a period of time will elapse between
receipt of payments or distributions on the Mortgage Assets and the Distribution
Date on which such payments or distributions are passed through to
Certificateholders. Such a delay will effectively reduce the yield that would
otherwise be obtained if payments or distributions were distributed on or near
the date of receipt. The related Prospectus Supplement may set forth an example
of the timing of receipts and the distribution thereof to Certificateholders.
Principal Prepayments
With respect to a Series for which the Mortgage Assets consist of Loans
or participation interests therein, when a Loan prepays in full, the borrower
will generally be required to pay interest on the amount of prepayment only to
the prepayment date. In addition, the prepayment may not be required to be
passed through to Certificateholders until the month following receipt. The
effect of these provisions is to reduce the aggregate amount of interest which
would otherwise be available for distributions on the Certificates, thus
effectively reducing the yield that would be obtained if interest continued to
accrue on the Loan until the date on which the principal prepayment was
scheduled to be paid. To the extent specified in the related Prospectus
Supplement, this effect on yield may be mitigated by, among other things, an
adjustment to the servicing fee otherwise payable to the Master Servicer or
Servicer with respect to any such prepaid Loans. See "Servicing of
Loans--Advances and Limitations Thereon."
Timing of Reduction of Principal Balance
A Multiple Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Certificates is deemed
reduced as of a date prior to the Distribution Date on which principal thereon
is actually distributed. Consequently, the amount of interest accrued during any
Interest Accrual Period will be less than the amount that would have accrued on
the actual principal balance of the Certificate outstanding. The effect of such
provisions is to produce a lower yield on the Certificates than would be
obtained if interest were to accrue on the Certificates on the actual unpaid
principal amount of such Certificates to each Distribution Date. The related
Prospectus Supplement will specify the time at which the principal amounts of
the Certificates are determined or are deemed to reduce for purposes of
calculating interest distributions on Certificates of a Multiple Class Series.
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Interest or Principal Weighted Certificates
If a Class of Certificates consists of Interest Weighted Certificates
or Principal Weighted Certificates, a lower rate of principal prepayments than
anticipated will negatively affect the yield to investors in Principal Weighted
Certificates, and a higher rate of principal prepayments than anticipated will
negatively affect the yield to investors in Interest Weighted Certificates. The
Prospectus Supplement for a Series including such Certificates will include a
table showing the effect of various levels of prepayment on yields on such
Certificates. Such tables will be intended to illustrate the sensitivity of
yields to various prepayment rates and will not be intended to predict, or
provide information which will enable investors to predict, yields or prepayment
rates.
Funding Account
If the applicable Pooling and Servicing Agreement for a Series of
Certificates provides for a Funding Account or other means of funding the
transfer of additional Loans to the related Trust Fund, as described under
"Description of the Certificates--Funding Account" herein, and the Trust Fund is
unable to acquire such additional Loans within any applicable time limit, the
amounts set aside for such purpose may be applied as principal payments on one
or more Classes of Certificates of such Series. See "Risk Factors--Yield,
Prepayment and Maturity."
Final Scheduled Distribution Date
The Final Scheduled Distribution Date of each Class of any Series other
than a Multiple Class Series will be the Distribution Date following the latest
stated maturity of any Mortgage Asset in the related Trust Fund. The Final
Scheduled Distribution Date of each Class of any Multiple Class Series, if
specified in the related Prospectus Supplement, will be the date (calculated on
the basis of the assumptions applicable to such Series described therein) on
which the aggregate principal balance of such Class will be reduced to zero.
Since prepayments on the Loans underlying or comprising the Mortgage Assets will
be used to make distributions in reduction of the outstanding principal amount
of the Certificates, it is likely that the actual maturity of any Class will
occur earlier, and may occur substantially earlier, than its Final Scheduled
Distribution Date.
Prepayments and Weighted Average Life
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 the principal
of such security will be repaid to the investor. The weighted average life of
the Certificates of a Series will be influenced by the rate at which principal
on the Loans comprising or underlying the Mortgage Assets for such Certificates
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
The rate of principal prepayments on pools of housing loans is
influenced by a variety of economic, demographic, geographic, legal, tax, social
and other factors. The rate of prepayments of conventional housing loans has
fluctuated significantly in recent years. In general, however, if prevailing
mortgage market interest rates fall significantly below the interest rates on
the Loans comprising or underlying the Mortgage Assets 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 comprising or underlying the Mortgage Assets of a Series
may have different interest rates, and the stated pass-through or interest rate
of certain Mortgage Assets or the Certificate Rate or Pass-Through Rate on the
Certificates may be a number of percentage points less than interest rates on
such Loans. In addition, the weighted average life of the Certificates may be
affected by the varying maturities of the Loans comprising or underlying the
Mortgage Assets. If any Loans comprising or underlying the Mortgage Assets for a
Series have actual terms-to-stated maturity of less than those assumed in
calculating the Final Scheduled Distribution Date of the related Certificates,
one or more Class of the Series may be fully paid prior to its Final Scheduled
Distribution Date, even in the absence of prepayments and a reinvestment return
higher than assumed.
Prepayments on loans are commonly measured relative to a prepayment
standard or model, such as the Constant Prepayment Rate ("CPR") prepayment model
or the Standard Prepayment Assumption ("SPA") prepayment model. CPR represents a
constant assumed rate of prepayment each month relative to the then outstanding
principal
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balance of a pool of loans for the life of such loans. SPA represents an assumed
rate of prepayment each month relative to the then outstanding principal balance
of a pool of loans. A prepayment assumption of 100% of SPA assumes prepayment
rates of 0.2% per annum of the then outstanding principal balance of such loans
in the first month of the life of the loans and an additional 0.2% per annum in
each month thereafter until the thirtieth month. Beginning in the thirtieth
month and in each month thereafter during the life of the loans, 100% of SPA
assumes a constant prepayment rate of 6% per annum.
Neither CPR or SPA nor any other prepayment model or assumption
purports to be an historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of loans, including
the Loans underlying or comprising the Mortgage Assets. Thus, it is likely that
prepayment of any Loans comprising or underlying the Mortgage Assets for any
Series will not conform to any level of CPR or SPA.
The Prospectus Supplement for each Multiple Class Series may describe
the prepayment standard or model used to prepare the illustrative tables setting
forth the weighted average life of each Class of such Series under a given set
of prepayment assumptions. The related Prospectus Supplement may also describe
the percentage of the initial principal balance of each Class of such Series
that would be outstanding on specified Distribution Dates for such Series based
on the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Loans comprising or underlying the related Mortgage
Assets are made at rates corresponding to various percentages of CPR, SPA or at
such other rates specified in such Prospectus Supplement. Such tables and
assumptions are intended to illustrate the sensitivity of weighted average life
of the Certificates to various prepayment rates and will not be intended to
predict or to provide information which will enable investors to predict the
actual weighted average life of the Certificates or prepayment rates of the
Loans comprising or underlying the related Mortgage Assets.
Other Factors Affecting Weighted Average Life
Type of Loan. Multifamily Loans may have provisions which prevent
prepayment for a number of years and may provide for payments of interest only
during a certain period followed by amortization of principal on the basis of a
schedule extending beyond the maturity of the related mortgage loan. Additional
Collateral Loans, ARMs, Balloon Loans, Bi-Weekly Loans, GEM Loans, GPM Loans or
Buy-Down Loans comprising or underlying the Mortgage Assets may experience a
rate of principal prepayments which is different from the principal prepayment
rate for Additional Collateral Loans, ARMs, Balloon Loans, Bi-Weekly Loans, GEM
Loans, GPM Loans or Buy-Down Loans included in any other mortgage pool or from
conventional Fixed Rate Loans or from other adjustable rate or graduated equity
mortgages having different characteristics.
In the case of Negatively Amortizing ARMs, if interest rates rise
without a simultaneous increase in the related Scheduled Payment, Deferred
Interest and Negative Amortization may result. However, borrowers may pay
amounts in addition to their Scheduled Payments in order to avoid such Negative
Amortization and to increase tax deductible interest payments. To the extent
that any of such Mortgage Loans negatively amortize over their respective terms,
future interest accruals are computed on the higher outstanding principal
balance of such mortgage loan and a smaller portion of the Scheduled Payment is
applied to principal than would be required to amortize the unpaid principal
over its remaining term. Accordingly, the weighted average life of such Loans
will increase. During a period of declining interest rates, the portion of each
Scheduled Payment in excess of the scheduled interest and principal due will be
applied to reduce the outstanding principal balance of the related Loan, thereby
resulting in accelerated amortization of such Negatively Amortizing ARM. Any
such acceleration in amortization of the principal balance of any Negatively
Amortizing ARM will shorten the weighted average life of such Mortgage Loan. The
application of partial prepayments to reduce the outstanding principal balance
of a Negatively Amortizing ARM will tend to reduce the weighted average life of
the mortgage loan and will adversely affect the yield to Holders who purchased
their Certificates at a premium, if any, and Holders of an Interest Weighted
Class. The pooling of Negatively Amortizing ARMs having Rate Adjustment Dates in
different months, together with different initial Mortgage Rates, Maximum
Mortgage Rates, Minimum Mortgage Rates and stated maturity dates, could result
in some Negatively Amortizing ARMs which comprise or underlie the Mortgage
Assets experiencing negative amortization while the amortization of other
Negatively Amortizing ARMs may be accelerated.
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If the Loans comprising or underlying the Mortgage Assets for a Series
include ARMs that permit the borrower to convert to a long-term fixed interest
rate loan, the Master Servicer, the Servicer, the applicable Seller, the PMBS
Servicer or another party, as applicable, may, if specified in the related
Prospectus Supplement, be obligated to repurchase any Loan so converted. Any
such conversion and repurchase would reduce the average weighted life of the
Certificates of the related Series.
Because of the payment terms of Balloon Loans, there is a risk that
such Mortgage Loans, including Multifamily Loans and Additional Collateral
Loans, that require Balloon Payments may default at maturity, or that the
maturity of such Mortgage Loans may be extended in connection with a workout.
With respect to Balloon Loans, payment of the Balloon Payment (which, based on
the amortization schedule of such Mortgage Loans, is expected to be the entire
or a substantial amount of the original principal balance) will generally depend
on the Mortgagor's ability to obtain refinancing of such Mortgage Loans, to sell
the Mortgaged Property prior to the maturity of the Balloon Loan or to otherwise
have sufficient funds to pay such Balloon Payment. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing or sale is required, including, without limitation, real estate
values, the Mortgagor's financial situation, prevailing mortgage market interest
rates, the Mortgagor's equity in the related Mortgaged Property, tax laws and
prevailing general economic conditions. Unless otherwise specified in the
related Prospectus Supplement, none of the Depositor, the Master Servicer, or
any of their affiliates will be obligated to refinance or repurchase any
Mortgage Loan or to sell the Mortgaged Property.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year term
used as the basis for calculating the installments of principal and interest
applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans.
Foreclosures and Payment Plans. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Mortgage Assets which
are foreclosed in relation to the number of Loans which are repaid in accordance
with their terms will affect the weighted average life of the Loans comprising
or underlying the Mortgage Assets and that of the related Series of
Certificates. Servicing decisions made with respect to the Loans, including the
use of payment plans prior to a demand for acceleration and the restructuring of
Loans in bankruptcy proceedings, may also have an impact upon the payment
patterns of particular Loans. In particular, the return to Holders of
Certificates who purchased their Certificates at a premium, if any, and the
yield on an Interest Weighted Class may be adversely affected by servicing
policies and decisions relating to foreclosures.
Due on Sale Clauses. The acceleration of prepayment as a result of
certain transfers of the Mortgaged Property securing a Loan is another factor
affecting prepayment rates. Whereas FHA Loans are assumable by a purchaser of
the underlying mortgaged property, the Loans constituting or underlying the
Mortgage Assets may include "due-on-sale" clauses. Except as otherwise described
in the Prospectus Supplement for a Series, the PMBS Servicer of Loans underlying
Private Mortgage-Backed Securities and the Master Servicer or the Servicer of
Loans constituting or underlying the Mortgage Assets for a Series will be
required, to the extent it knows of any conveyance or prospective conveyance of
the related residence by any borrower, to enforce any "due-on-sale" clause
applicable to the related Loan under the circumstances and in the manner it
enforces such clauses with respect to other similar loans in its portfolio.
Certain of the Multifamily Loans in a Trust Fund may also contain a
due-on-encumbrance clause that entitles the lender to accelerate the maturity of
the Mortgage Loan upon the creation of any other lien or encumbrance upon the
Mortgaged Property. FHA Loans and VA Loans are not permitted to contain
"due-on-sale" clauses and are freely assumable by qualified persons. However, as
homeowners move or default on their housing loans, the Mortgaged Property is
generally sold and the loans prepaid, even though, by their terms, the loans are
not "due-on-sale" and could have been assumed by new buyers.
Optional Termination. If so specified in the related Prospectus
Supplement, the entity specified therein may cause an early termination of the
related Trust Fund by its repurchase of the remaining Mortgage Assets therein.
See "Description of the Certificates--Optional Termination."
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THE TRUST FUNDS
General
The Trust Fund for each Series will be held by the Trustee for the
benefit of the related Certificateholders. Each Trust Fund will consist of (a)
the Mortgage Assets; (b) amounts held from time to time in the Collection
Account and the Certificate Account established for such Series; (c) Mortgaged
Property which secured a Loan and which is acquired on behalf of the
Certificateholders by foreclosure, deed in lieu of foreclosure or repossession
and certain proceeds from the disposition of any related Additional Collateral;
(d) any reserve fund for such Series, if specified in the related Prospectus
Supplement; (e) the Servicing Agreements, if any, relating to Loans in the Trust
Fund; (f) any primary mortgage insurance policies relating to Loans in the Trust
Fund; (g) any pool insurance policy, any special hazard insurance policy, any
bankruptcy bond or other credit support relating to the Series; (h) investments
held in any fund or account or any Guaranteed Investment Contract and, if so
specified in the Prospectus Supplement, income from the reinvestment of such
funds; and (i) any other instrument or agreement relating to the Trust Fund and
specified in the related Prospectus Supplement (which may include an interest
rate swap agreement or an interest rate cap agreement or similar agreement
issued by a bank, insurance company or savings and loan association); provided,
that if so specified in the related Prospectus Supplement, certain of the items
listed above may be held outside of the Trust Fund.
To the extent specified in the related Prospectus Supplement, certain
amounts ("Retained Interests") which are received with respect to a Private
Mortgage-Backed Security or Loan comprising the Mortgage Assets for a Series
will not be included in the Trust Fund for such Series, but will be retained by
or payable to the originator, Servicer or seller of such Private Mortgage-Backed
Security or Loan, free and clear of the interest of Certificateholders under the
related Pooling and Servicing Agreement.
Mortgage Assets in the Trust Fund for a Series may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement: (a) Private Mortgage-Backed Securities, (b) Mortgage
Loans or participation interests therein and Manufactured Home Loans or
participation interests therein or (c) Agency Securities. Loans which comprise
the Mortgage Assets will be purchased by the Depositor directly or through an
affiliate in the open market or in privately negotiated transactions from the
Seller. Some of the Loans may have been originated by an affiliate of the
Depositor. Participation interests in Loans may be purchased by the Depositor,
or an affiliate, pursuant to a participation agreement. See "The Pooling and
Servicing Agreements--Assignment of Mortgage Assets."
Private Mortgage-Backed Securities
General. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates, evidencing an undivided interest in a pool of Loans,
(b) collateralized mortgage obligations secured by Loans or (c) pass-through
certificates representing beneficial interests in Agency Securities. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying Loans will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The
PMBS Trustee or its agent, or a custodian, will possess the Loans underlying
such Private Mortgage-Backed Security. Loans underlying a Private
Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer")
directly or by one or more subservicers who may be subject to the supervision of
the PMBS Servicer. The PMBS Servicer will be an FNMA- or FHLMC-approved servicer
and, if FHA Loans underlie the Private Mortgage-Backed Securities, approved by
HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS
Issuer") will be a financial institution or other entity engaged generally in
the business of mortgage 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
housing loans to such trusts, and selling beneficial interests in such trusts.
If so specified in the Prospectus Supplement, the PMBS Issuer may be the
Depositor or an affiliate of the Depositor. The obligations of the PMBS Issuer
will generally be limited to certain representations and warranties with respect
to the
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assets conveyed by it to the related trust. Unless otherwise specified in the
related Prospectus Supplement, the PMBS Issuer will not have guaranteed any of
the assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an agency
or instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed 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 Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
Underlying Loans. The Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing Loans or
Additional Collateral Loans, GEM Loans, GPM Loans, Balloon Loans, Buy-Down
Loans, Bi-Weekly Loans, ARMs, or Loans having other special payment features.
Loans may be secured by Single Family Property, Multifamily Property,
Manufactured Homes, or, in the case of Cooperative Loans, by an assignment of
the proprietary lease or occupancy agreement relating to a Cooperative Dwelling
and the shares issued by the related cooperative. Except as otherwise specified
in the related Prospectus Supplement, (i) no Loan will have had a Loan-to-Value
Ratio at origination in excess of 95%, (ii) each Mortgage Loan secured by Single
Family Property and having a Loan-to-Value Ratio in excess of 80% at origination
will be covered by a primary mortgage insurance policy, (iii) each Loan will
have had an original term to stated maturity of not less than 10 years and not
more than 40 years, (iv) no Loan that was more than 30 days delinquent as to the
payment of principal or interest will have been eligible for inclusion in the
assets under the related PMBS Agreement, (v) each Loan (other than a Cooperative
Loan) will be required to be covered by a standard hazard insurance policy
(which may be a blanket policy), and (vi) each Loan (other than a Cooperative
Loan or a Loan secured by a Manufactured Home) will be covered by a title
insurance policy.
Credit Support Relating to Private Mortgage-Backed Securities. Credit
support in the form of reserve funds, subordination of other private mortgage
certificates issued under the PMBS Agreement, overcollateralization, letters of
credit, insurance policies or other types of credit support may be provided with
respect to the Loans underlying the Private Mortgage-Backed Securities or with
respect to the Private Mortgage-Backed Securities themselves. The type,
characteristics and amount of credit support, if any, will be a function of
certain characteristics of the Loans and other factors and will have been
established for the Private Mortgage-Backed Securities on the basis of
requirements of the rating agencies which initially assigned a rating to the
Private Mortgage-Backed Securities.
Additional Information. The Prospectus Supplement for a Series for
which the Trust Fund includes Private Mortgage-Backed Securities will specify
(i) the aggregate approximate principal amount and type of the Private
Mortgage-Backed Securities to be included in the Trust Fund, (ii) certain
characteristics of the Loans which comprise the underlying assets for the
Private Mortgage-Backed Securities including (A) the payment features of such
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 underlying Loans insured or guaranteed
by a governmental entity, (C) the servicing fee or range of servicing fees with
respect to the Loans, and (D) the minimum and maximum stated maturities of the
underlying Loans at origination, (iii) the maximum original term-to-stated
maturity of the Private Mortgage-Backed Securities, (iv) the weighted average
term-to-stated maturity of the Private Mortgage-Backed Securities, (v) the
pass-through or certificate rate or ranges thereof for the Private
Mortgage-Backed Securities, (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities, (vii) the PMBS
Issuer, the PMBS Servicer (if other than the PMBS Issuer) and the PMBS Trustee
for such Private Mortgage-Backed Securities, (viii) certain characteristics of
credit support, if any, such as reserve funds, insurance policies, letters of
credit or guarantees relating to the Loans underlying the Private
Mortgage-Backed Securities or to such Private Mortgage-Backed Securities
themselves, (ix) the terms on which the underlying Loans for such Private
Mortgage-Backed Securities may, or are required to, be purchased prior to their
stated maturity or the stated maturity of the Private Mortgage-Backed Securities
and (x) the terms on which Loans may be substituted for those originally
underlying the Private Mortgage-Backed Securities.
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The Agency Securities
All of the Agency Securities will be registered in the name of the
Trustee or its nominee or, in the case of Agency Securities issued only in
book-entry form, a financial intermediary (which may be the Trustee) that is a
member of the Federal Reserve System or of a clearing corporation on the books
of which the security is held. Each Agency Security will evidence an interest in
a pool of mortgage loans and/or cooperative loans and/or in principal
distributions and interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates that are set
forth below are descriptions of certificates representing proportionate
interests in a pool of mortgage loans and in the payments of principal and
interest thereon. GNMA, FHLMC or FNMA may also issue mortgage-backed securities
representing a right to receive distributions of interest only or principal only
or disproportionate distributions of principal or interest or to receive
distributions of principal and/or interest prior or subsequent to distributions
on other certificates representing interests in the same pool of mortgage loans.
In addition, any of such issuers may issue certificates representing interests
in mortgage loans having characteristics that are different from the types of
mortgage loans described below. The terms of any such certificates to be
included in a Trust Fund (and of the underlying mortgage loans) will be
described in the related Prospectus Supplement, and the descriptions that follow
are subject to modification as appropriate to reflect the terms of any such
certificates that are actually included in a Trust Fund.
GNMA. GNMA is a wholly-owned corporate instrumentality of the United
States within HUD. Section 306(g) of Title III of the National Housing Act of
1934, as amended (the "Housing Act"), authorizes GNMA to guarantee the timely
payment of the principal of and interest on certificates representing interests
in a pool of mortgages (i) insured by the FHA, under the Housing Act or under
Title V of the Housing Act of 1949, or (ii) partially guaranteed by the VA under
the Servicemen's Readjustment Act of 1944, as amended, or under Chapter 37 of
Title 38, United States Code.
Section 306(g) of the Housing Act provides that "the full faith and
credit of the United States is pledged to the payment of all amounts which may
be required to be paid under any guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d) of
the Housing Act, borrow from the United States Treasury an amount that is at any
time sufficient to enable GNMA to perform its obligations under its guarantee.
See "Additional Information" for the availability of further information
regarding GNMA and GNMA Certificates.
GNMA Certificates. Unless otherwise specified in the related Prospectus
Supplement, each GNMA Certificate relating to a Series (which may be a "GNMA I
Certificate" or a "GNMA II Certificate" as referred to by GNMA) will be a "fully
modified pass-through" mortgage-backed certificate issued and serviced by a
mortgage banking company or other financial concern approved by GNMA, except
with respect to any stripped mortgage-backed securities guaranteed by GNMA or
any REMIC securities issued by GNMA. The characteristics of any GNMA
Certificates included in the Trust Fund for a Series of Certificates will be set
forth in the related Prospectus Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States
created pursuant to Title III of the Emergency Home Finance Act of 1970, as
amended (the "FHLMC Act"). FHLMC was established primarily for the purpose of
increasing the availability of mortgage credit for the financing of needed
housing. The principal activity of FHLMC currently consists of purchasing
first-lien, conventional, residential mortgage loans or participation interests
in such mortgage loans and reselling the mortgage loans so purchased in the form
of guaranteed mortgage securities, primarily FHLMC Certificates. In 1981, FHLMC
initiated its Home Mortgage Guaranty Program under which it purchases mortgage
loans from sellers with FHLMC Certificates representing interests in the
mortgage loans so purchased. All mortgage loans purchased by FHLMC must meet
certain standards set forth in the FHLMC Act. FHLMC is confined to purchasing,
so far as practicable, mortgage loans that it deems to be of such quality and
type as to meet generally the purchase standards imposed by private
institutional mortgage investors. See "Additional Information" for the
availability of further information regarding FHLMC and FHLMC Certificates.
Neither the United States nor any agency thereof is obligated to finance FHLMC's
operations or to assist FHLMC in any other manner.
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FHLMC Certificates. Unless otherwise specified in the related
Prospectus Supplement, each FHLMC Certificate relating to a Series will
represent an undivided interest in a pool of mortgage loans that typically
consists of conventional loans (but may include FHA Loans and VA Loans)
purchased by FHLMC, except with respect to any stripped mortgage-backed
securities issued by FHLMC. Each such pool will consist of mortgage loans (i)
substantially all of which are secured by one- to four-family residential
properties or (ii) if specified in the related Prospectus Supplement, are
secured by five or more family residential properties. The characteristics of
any FHLMC Certificates included in the Trust Fund for a Series of Certificates
will be set forth in the related Prospectus Supplement.
FNMA. FNMA is a federally chartered and privately owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act (12 U.S.C. ss. 1716 et seq.). It is the nation's largest supplier of
residential mortgage funds. FNMA was originally established in 1938 as a United
States government agency to provide supplemental liquidity to the mortgage
market and was transformed into a stockholder-owned and privately managed
corporation by legislation enacted in 1968. FNMA provides funds to the mortgage
market primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. See "Additional Information"
for the availability of further information respecting FNMA and FNMA
Certificates. Although the Secretary of the Treasury of the United States has
authority to lend FNMA up to $2.25 billion outstanding at any time, neither the
United States nor any agency thereof is obligated to finance FNMA's operations
or to assist FNMA in any other manner.
FNMA Certificates. Unless otherwise specified in the related Prospectus
Supplement, each FNMA Certificate relating to a Series will represent a
fractional undivided interest in a pool of mortgage loans formed by FNMA, except
with respect to any stripped mortgage-backed securities issued by FNMA. Mortgage
loans underlying FNMA Certificates will consist of (i) fixed, variable or
adjustable rate conventional mortgage loans or (ii) fixed-rate FHA Loans or VA
Loans. Such mortgage loans may be secured by either one- to four-family or
multi-family residential properties. The characteristics of any FNMA
Certificates included in the Trust Fund for a Series of Certificates will be set
forth in the related Prospectus Supplement.
The Mortgage Loans
The Trust Fund for a Series may consist of Mortgage Loans or
participation interests therein. Mortgage Loans comprising the Mortgage Assets
and Mortgage Loans in which participation interests are conveyed to the Trustee
are both referred to herein as the "Mortgage Loans." If so specified in the
related Prospectus Supplement, the Mortgage Loans will have been originated by
mortgage lenders which are FNMA- or FHLMC-approved seller/servicers or by their
wholly-owned subsidiaries, and, in the case of FHA Loans, approved by HUD as an
FHA mortgagee. Some of the Mortgage Loans may have been originated by an
affiliate of the Depositor. The Mortgage Loans may include Conventional Loans,
FHA Loans or VA Loans. The Mortgage Loans may have fixed interest rates or
adjustable interest rates and may provide for fixed level payments or may be
Additional Collateral Loans, GPM Loans, GEM Loans, Balloon Loans, Buy-Down
Loans, Bi-Weekly Loans or Mortgage Loans with other payment characteristics as
described below and under "Yield, Prepayment and Maturity Considerations" herein
or in the related Prospectus Supplement. ARMs may have a feature which permits
the borrower to convert the rate thereon to a long-term fixed rate. The Mortgage
Loans may be secured by mortgages or deeds of trust or other similar security
instruments creating a first lien or a junior lien on Mortgaged Property. The
Mortgage Loans may also include Cooperative Loans evidenced by promissory notes
secured by a lien on the shares issued by private, non-profit, cooperative
housing corporations and on the related proprietary leases or occupancy
agreements granting exclusive rights to occupy specific Cooperative Dwellings.
The Mortgage Loans may also include Condominium Loans secured by a Mortgage on a
Condominium Unit together with such Condominium Unit's appurtenant interest in
the common elements.
The Mortgaged Properties may include Single Family Property (i.e.,
one-to four-family residential housing, including Condominium Units, and
Cooperative Dwellings) or Multifamily Property (i.e., multifamily residential
rental properties or cooperatively-owned properties consisting of five or more
dwelling units). 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.
Multifamily Property may include mixed commercial and residential structures.
Each Single Family Property and Multifamily Property will be located
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on land owned in fee simple by the borrower or on land leased by the borrower.
The fee interest in any leased land will be subject to the lien securing the
related Mortgage Loan. Attached dwellings may include owner-occupied structures
where each borrower owns the land upon which the unit is built, with the
remaining adjacent land owned in common or dwelling units subject to a
proprietary lease or occupancy agreement in a cooperatively owned apartment
building. The proprietary lease or occupancy agreement securing a Cooperative
Loan is generally subordinate to any blanket mortgage on the related cooperative
apartment building and/or on the underlying land. Additionally, in the case of a
Cooperative Loan, the proprietary lease or occupancy agreement is subject to
termination and the cooperative shares are subject to cancellation by the
cooperative if the tenant-stockholder fails to pay maintenance or other
obligations or charges owed by such tenant-stockholder. See "Certain Legal
Aspects of Loans."
If specified in the related Prospectus Supplement, certain of the
mortgage pools may contain Mortgage Loans secured by junior liens, and the
related senior liens ("Senior Liens") may not be included in the mortgage pool.
The primary risk to holders of Mortgage Loans secured by junior liens is the
possibility that adequate funds will not be received in connection with a
foreclosure of the related Senior Liens to satisfy fully both the Senior Liens
and the Mortgage Loan. In the event that a holder of a Senior Lien forecloses on
a Mortgaged Property, the proceeds of the foreclosure or similar sale will be
applied first to the payment of court costs and fees in connection with the
foreclosure, second to real estate taxes, third in satisfaction of all
principal, interest, prepayment or acceleration penalties, if any, and any other
sums due and owing to the holder of the Senior Liens. The claims of the holders
of the Senior Liens will be satisfied in full out of proceeds of the liquidation
of the Mortgage Loan, if such proceeds are sufficient, before the Trust Fund as
holder of the junior lien receives any payments in respect of the Mortgage Loan.
If the Master Servicer were to foreclose on any Mortgage Loan, it would do so
subject to any related Senior Liens. In order for the debt related to the
Mortgage Loan to be paid in full at such sale, a bidder at the foreclosure sale
of such Mortgage Loan would have to bid an amount sufficient to pay off all sums
due under the Mortgage Loan and the Senior Liens or purchase the Mortgaged
Property subject to the Senior Liens. In the event that such proceeds from a
foreclosure or similar sale of the related Mortgaged Property are insufficient
to satisfy all Senior Liens and the Mortgage Loan in the aggregate, the Trust
Fund, as the holder of the junior lien, and, accordingly, holders of one or more
Classes of the Certificates bear (i) the risk of delay in distributions while a
deficiency judgment against the borrower is obtained and (ii) the risk of loss
if the deficiency judgment is not realized upon. Moreover, deficiency judgments
may not be available in certain jurisdictions. In addition, a junior mortgagee
may not foreclose on the property securing a junior mortgage unless it
forecloses subject to the senior mortgages.
Liquidation expenses with respect to defaulted junior mortgage loans do
not vary directly with the outstanding principal balance of the loan at the time
of default. Therefore, assuming that the Master Servicer took the same steps in
realizing upon a defaulted junior mortgage loan having a small remaining
principal balance as it would in the case of a defaulted junior mortgage loan
having a large remaining principal balance, the amount realized after expenses
of liquidation would be smaller as a percentage of the outstanding principal
balance of the small junior mortgage loan than would be the case with the
defaulted junior mortgage loan having a large remaining principal balance.
Because the average outstanding principal balance of the Mortgage Loans is
smaller relative to the size of the average outstanding principal balance of the
loans in a typical pool of first priority mortgage loans, liquidation proceeds
may also be smaller as a percentage of the principal balance of a Mortgage Loan
than would be the case in a typical pool of first priority mortgage loans.
If specified in the related Prospectus Supplement, a Trust Fund will
contain Additional Collateral Loans. Unless otherwise specified in the related
Prospectus Supplement, the security agreements and other similar security
instruments related to the Additional Collateral for the Loans in a Trust Fund
will, in the case of Additional Collateral consisting of personal property,
create first liens thereon, and, in the case of Additional Collateral consisting
of real estate, create first or junior liens thereon. Additional Collateral, or
the liens thereon in favor of the related Additional Collateral Loans, may be
greater or less in value than the principal balances of such Additional
Collateral Loans, the Appraised Values of the underlying Mortgaged Properties or
the differences, if any, between such principal balances and such Appraised
Values, and the requirements that Additional Collateral be maintained may be
terminated upon the reduction of the Loan-to-Value Ratios or principal balances
of the related Additional Collateral Loans to certain pre-determined amounts.
Additional Collateral (including any related third-party guarantees) may be
provided either in addition to or in lieu of primary mortgage insurance policies
for the Additional Collateral Loans in a Trust Fund, as specified in the related
Prospectus Supplement. Guarantees supporting Additional Collateral Loans may be
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guarantees of payment or guarantees of collectability and may be full guarantees
or limited guarantees. If a Trust Fund includes Additional Collateral Loans, the
related Prospectus Supplement will specify the nature and extent of such
Additional Collateral Loans and of the related Additional Collateral. If
specified in such Prospectus Supplement, the Trustee, on behalf of the related
Certificateholders, will have only the right to receive certain proceeds from
the disposition of any such Additional Collateral consisting of personal
property and the liens thereon will not be assigned to the Trustee. No assurance
can be given as to the amount of proceeds, if any, that might be realized from
the disposition of the Additional Collateral for any of the Additional
Collateral Loans. See "Certain Legal Aspects of Loans--Anti-Deficiency
Legislation and Other Limitations on Lenders" herein.
Additional Collateral Loans may include Nest Egg Mortgage Loans(sm).
Such Mortgage Loans are interest-only Mortgage Loans for an initial period
specified in the related Prospectus Supplement. If the related Mortgagor pledges
an eligible life insurance policy as Additional Collateral after such initial
period, the Mortgagor will continue to make interest-only payments with respect
to the Mortgage Loan until the final scheduled payment on such Mortgage Loan, as
described in the Prospectus Supplement.
The percentage of Mortgage Loans which are owner-occupied will be
disclosed in the related Prospectus Supplement. Unless otherwise specified in
the Prospectus Supplement, the sole basis for a representation that a given
percentage of the Mortgage Loans are secured by Single Family Property that is
owner-occupied will be either (i) the making of a representation by the
Mortgagor at origination of the Mortgage 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 borrower intends to use the Mortgaged Property as
a primary residence, or (ii) 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. Mortgage Loans secured by investment
properties and Multifamily Property may also be secured by an assignment of
leases and rents and operating or other cash flow guarantees relating to the
Loans to the extent specified in the related Prospectus Supplement.
The characteristics of the Mortgage Loans comprising or underlying the
Mortgage Assets for a Series may vary to the extent that credit support is
provided in levels satisfactory to the Rating Agency which assigns a rating to a
Series of Certificates. Unless otherwise specified in the related Prospectus
Supplement for a Series, the following selection criteria shall apply with
respect to the Mortgage Loans comprising the Mortgage Assets:
(a) no Mortgage Loan will have had a Loan-to-Value Ratio
at origination in excess of 95%;
(b) no Mortgage Loan that is a Conventional Loan secured by a
Single Family Property may have a Loan-to-Value Ratio in excess of 80%,
unless covered by a primary mortgage insurance policy as described
herein;
(c) each Mortgage Loan must have an original term to maturity
of not less than 10 years and not more than 40 years;
(d) no Mortgage Loan may be included which, as of the Cut-off
Date, is more than 30 days delinquent as to payment of principal or
interest; and
(e) no Mortgage Loan (other than a Cooperative Loan) may be
included unless a title insurance policy and a standard hazard
insurance policy (which may be a blanket policy) is in effect with
respect to the Mortgaged Property securing such Mortgage Loan.
Each Mortgage Loan will be selected by the Depositor for inclusion in a
Trust Fund from among those purchased by the Depositor, either directly or
through its affiliates, from a Seller or Sellers. The related Prospectus
Supplement will specify the extent of Mortgage Loans so acquired. Other mortgage
loans available for purchase by the Depositor may have characteristics which
would make them eligible for inclusion in a Trust Fund but were not selected for
inclusion in such Trust Fund.
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Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans to be included in a Trust Fund will be delivered either directly
or indirectly to the Depositor by one or more Sellers identified in the related
Prospectus Supplement, concurrently with the issuance of the related series of
Certificates (a "Designated Seller Transaction"). Such Certificates may be sold
in whole or in part to any such Seller in exchange for the related Mortgage
Loans, or may be offered under any of the other methods described herein under
"Methods of Distribution." The related Prospectus Supplement for a Trust Fund
composed of Mortgage Loans acquired by the Depositor pursuant to a Designated
Seller Transaction will generally include information, provided by the related
Seller, about the Seller, the Mortgage Loans and the underwriting standards
applicable to the Mortgage Loans. Neither the Depositor nor any of its
affiliates (other than the Seller, if applicable) will make any representation
or warranty with respect to such Mortgage Loans, or any representation as to the
accuracy or completeness of such information provided by the Seller and no
assurances are made as to any such Seller's financial strength, stability or
wherewithal to honor its repurchase obligations for breaches of representations
and warranties or otherwise honor its obligations.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained for any Cooperative Loan. Generally, the
cooperative itself is responsible for maintenance of hazard insurance for the
property owned by the cooperative and the tenant-stockholders of that
cooperative do not maintain individual hazard insurance policies. To the extent,
however, a cooperative and the related borrower on a Cooperative Note do not
maintain such insurance or do not maintain adequate coverage or any insurance
proceeds are not applied to the restoration of the damaged property, damage to
such borrower's Cooperative Dwelling or such cooperative's building could
significantly reduce the value of the collateral securing such Cooperative Note.
The initial Loan-to-Value Ratio of any Mortgage Loan represents the
ratio of the principal amount of the Mortgage Loan at origination, plus in the
case of a Mortgage Loan secured by a junior lien, the principal amount of the
related Senior Lien, to the Appraised Value of such Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Buy-Down Loans, during the period (the "Buy-Down Period") when the
borrower is not obligated to pay the full Scheduled Payment otherwise due on
such loan, each of the Buy-Down Loans will provide for Scheduled Payments based
on a hypothetical reduced interest rate (the "Buy-Down Mortgage Rate") that will
not have been more than 3% below the mortgage rate at origination, and for
annual increases in the Buy-Down Mortgage Rate during the Buy-Down Period that
will not exceed 1%. The Buy-Down Period will not exceed three years. Unless
specified otherwise in the related Prospectus Supplement, the maximum amount of
funds ("Buy-Down Amounts") that may be contributed by the Servicer of the
related Buy-Down Loan is limited to 6% of the Appraised Value of the related
Mortgaged Property. This limitation does not apply to contributions from
immediate relatives or the employer of the mortgagor. Except as may be otherwise
indicated in the related Prospectus Supplement, the borrower under each Buy-Down
Loan will have been qualified at a mortgage rate which is not more than 3% per
annum below the current mortgage rate at origination. Accordingly, the repayment
of a Buy-Down Loan is dependent on the ability of the borrower to make larger
Scheduled Payments after the Buy-Down Amounts have been depleted and, for
certain Buy-Down Loans, while such Buy-Down Amounts are being depleted.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Loans, (a) no Mortgage Loan will have been delinquent for
more than 30 days within the 12-month period ending with the Cut-off Date, (b)
no more than two payments will have been 30 days or more delinquent during a
three-year period ending on the Cut-off Date, (c) Mortgage Loans with respect to
any single borrower will not exceed 5% of the aggregate principal balance of the
Loans comprising the Mortgage Assets as of the Cut-off Date, and (d) the debt
service coverage ratio with respect to each Mortgage Loan (calculated as
described in the related Prospectus Supplement) will not be less than 11:1.
Unless otherwise specified in the related Prospectus Supplement, the
Bi-Weekly Loans will consist of fixed-rate, bi-weekly payment, conventional,
fully-amortizing Mortgage Loans payable on every other Friday during the term
thereof and secured by first mortgages on one-to four-family residential
properties.
Unless otherwise specified in the related Prospectus Supplement, ARMs
will provide for a fixed initial mortgage rate for either the first six or
twelve Scheduled Payments. Thereafter, the Mortgage Rates are subject to
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periodic adjustment based, subject to the applicable limitations, on changes in
the relevant Index described in the applicable Prospectus Supplement, to a rate
equal to the Index plus the Gross Margin, which is a fixed percentage spread
over the Index established contractually for each ARM, at the time of its
origination. An ARM may be convertible into a fixed-rate Mortgage Loan. To the
extent specified in the related Prospectus Supplement, any ARM so converted may
be subject to repurchase by the Seller, the Servicer or the Master Servicer.
ARMs have features that can cause payment increases that some borrowers
may find difficult to make. However, each of the ARMs provides that its mortgage
rate may not be adjusted to a rate above the applicable lifetime mortgage rate
cap (the "Maximum Mortgage Rate") or below the applicable lifetime minimum
mortgage rate (the "Minimum Mortgage Rate"), if any, for such ARM. In addition,
certain of the ARMs provide for limitations on the maximum amount by which their
mortgage rates may adjust for any single adjustment period (the "Periodic Rate
Cap"). Some ARMs are payable in self-amortizing payments of principal and
interest. Other ARMs ("Negatively Amortizing ARMs") instead provide for
limitations on changes in the Scheduled Payment on such ARMs to protect
borrowers from payment increases due to rising interest rates. Such limitations
can result in Scheduled Payments which are greater or less than the amount
necessary to amortize a Negatively Amortizing ARM by its original maturity at
the mortgage rate in effect during any particular adjustment period. In the
event that the Scheduled Payment is not sufficient to pay the interest accruing
on a Negatively Amortizing ARM, then the Deferred Interest is added to the
principal balance of such ARM causing the negative amortization thereof, and
will be repaid through future Scheduled Payments. If specified in the related
Prospectus Supplement, Negatively Amortizing ARMs may provide for the extension
of their original stated maturity to accommodate changes in their mortgage rate.
The relevant Prospectus Supplement will specify whether the ARMs comprising or
underlying the Mortgage Assets are Negatively Amortizing ARMs.
If applicable, the Prospectus Supplement for each Series will specify
the Index to be used with respect to any Mortgage Loans underlying such Series.
The related Prospectus Supplement for each Series will provide
information with respect to the Mortgage Loans as of the Cut-off Date, generally
including, among other things, (a) the aggregate outstanding principal balance
of the Mortgage Loans; (b) the weighted average mortgage rate on the Mortgage
Loans, and, in the case of ARMs, the weighted average of the current mortgage
rates and the Maximum Mortgage Rates, if any; (c) the average outstanding
principal balance of the Mortgage Loans; (d) the weighted average remaining
term-to-stated maturity of the Mortgage Loans and the range of remaining
terms-to-stated maturity; (e) the range of Loan-to-Value Ratios of the Mortgage
Loans; (f) the relative percentage (by outstanding principal balance as of the
Cut-off Date) of Mortgage Loans that are Additional Collateral Loans, ARMs,
Balloon Loans, Buy-Down Loans, GEM Loans, GPM Loans, Cooperative Loans,
Conventional Loans, Bi-Weekly Loans, FHA Loans and VA Loans, (g) the percentage
of Mortgage Loans (by outstanding principal balance as of the Cut-off Date) that
are covered by primary mortgage insurance policies; (h) any pool insurance
policy, special hazard insurance policy or bankruptcy bond or other credit
support relating to the Mortgage Loans; (i) the geographic distribution of the
Mortgaged Properties securing the Mortgage Loans, (j) the percentage of Mortgage
Loans (by principal balance as of the Cut-off Date) that are secured by Single
Family Property, Multifamily Property, Cooperative Dwellings, investment
property and vacation or second homes and (k) with respect to Mortgage Loans
secured by a junior lien, the amount of the related Senior Liens. The related
Prospectus Supplement will also specify any other limitations on the types or
characteristics of Mortgage Loans which may comprise or underlie the Mortgage
Assets for a Series.
If information of the nature described above respecting the Mortgage
Loans is not known to the Depositor at the time the Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement and the final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Certificates.
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The Manufactured Home Loans
The Manufactured Home Loans comprising or underlying the Mortgage
Assets for a Series of Certificates will consist of manufactured housing
conditional sales contracts and installment loan agreements originated by a
manufactured housing dealer in the ordinary course of business and purchased by
the Depositor. Each Manufactured Home Loan will have been originated by a bank
or savings institution which is a FNMA- or FHLMC-approved seller/servicer or by
any financial institution approved for insurance by the Secretary of Housing and
Urban Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will be fully amortizing and will bear interest at a
fixed interest rate.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Manufactured Homes securing the Manufactured Home Loans consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6).
In addition, unless otherwise specified in the related Prospectus Supplement for
a Series, the following restrictions apply with respect to Manufactured Home
Loans comprising or underlying the Mortgage Assets for a Series:
(a) no Manufactured Home Loan will have had a Loan-to-
Value Ratio at origination in excess of 95%;
(b) each Manufactured Home Loan must have an original term to
maturity of not less than three years and not more than 25 years;
(c) no Manufactured Home Loan may be more than 30 days
delinquent as to payment of principal or interest as of the Cut-off
Date; and
(d) each Manufactured Home Loan must have, as of the Cut-off
Date, a standard hazard insurance policy (which may be a blanket
policy) in effect with respect thereto.
The initial Loan-to-Value Ratio of any Manufactured Home Loan
represents the ratio of the principal amount of the Manufactured Home Loan at
origination to the Appraised Value of such Manufactured Home. With respect to
underwriting of Manufactured Home Loans, see "Loan Underwriting Procedures and
Standards." With respect to servicing of Manufactured Home Loans, see "Servicing
of Loans."
The related Prospectus Supplement for each Series will provide
information with respect to the Manufactured Home Loans comprising the Mortgage
Assets as of the Cut-off Date, including, among other things, (a) the aggregate
outstanding principal balance of the Manufactured Home Loans comprising or
underlying the Mortgage Assets; (b) the weighted average interest rate on the
Manufactured Home Loans; (c) the average outstanding principal balance of the
Manufactured Home Loans; (d) the weighted average remaining scheduled term to
maturity of the Manufactured Home Loans and the range of remaining scheduled
terms to maturity; (e) the range of Loan-to-Value Ratios of the Manufactured
Home Loans; (f) the relative percentages (by principal balance as of the Cut-off
Date) of Manufactured Home Loans that were made on new Manufactured Homes and on
used Manufactured Homes; (g) any pool insurance policy, special hazard insurance
policy or bankruptcy bond or other credit support relating to the Manufactured
Home Loans; and (h) the distribution by state of Manufactured Homes securing the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Manufactured Home Loans which may be included
in the Mortgage Assets for a Series.
If information of the nature specified above respecting the
Manufactured Home Loans is not known to the Depositor at the time the
Certificates are initially offered, more general information of the nature
described above will be provided in the Prospectus Supplement and the final
specific information will be set forth in a Current Report on Form 8-K to be
available to investors on the date of issuance of the related Series and to be
filed with the Commission within 15 days after the initial issuance of such
Certificates.
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Collection Account and Certificate Account
Unless otherwise specified in the related Prospectus Supplement, a
separate Collection Account for each Series will be established by the Master
Servicer in the name of the Trustee for deposit of all distributions received
with respect to the Mortgage Assets for such Series, all Advances (other than
Advances deposited into the Certificate Account), the amount of cash to be
initially deposited therein, if any, reinvestment income thereon and certain
other amounts required to be deposited therein pursuant to the Pooling and
Servicing Agreement. Unless otherwise specified in the related Prospectus
Supplement or Pooling and Servicing Agreement, any reinvestment income or other
gain from investments of funds in the Collection Account will be credited to
such Collection Account, and any loss resulting from such investments will be
charged to such Collection Account. Such reinvestment income may, however, be
payable to the Master Servicer or to a Servicer as additional servicing
compensation. See "Servicing of Loans" and "The Pooling and Servicing
Agreements--Investment of Funds." In such a case, such reinvestment income would
not be included in calculation of the Available Distribution Amount. See
"Description of the Certificates--Distributions on the Certificates."
Funds on deposit in the Collection Account will be available for
deposit into the Certificate Account for certain payments provided for in the
Pooling and Servicing Agreement. Unless otherwise specified in the Prospectus
Supplement or the Pooling and Servicing Agreement, amounts in the Collection
Account constituting reinvestment income which is payable to the Master Servicer
as additional servicing compensation or for the reimbursement of advances or
expenses, amounts in respect of any Servicing Fee, Retained Interest, and
amounts to be deposited into any reserve fund will not be included in
determining amounts to be remitted to the Trustee for deposit into the
Certificate Account.
A separate Certificate Account will be established by the Trustee or,
if so specified in the related Prospectus Supplement, by the Master Servicer, in
either case in the name of the Trustee for the benefit of the Certificateholders
into which all funds received from the Master Servicer and all required
withdrawals from any reserve funds and any draws on any Certificate Guarantee
Insurance for such Series will be deposited, pending distribution to the
Certificateholders. Unless otherwise specified in the related Prospectus
Supplement, any reinvestment income or other gain from investments of funds in
the Certificate Account will be credited to the Certificate Account and any loss
resulting from such investments will be charged to such Certificate Account.
Such reinvestment income, may, however, be payable to the Master Servicer or the
Trustee as additional servicing compensation. On each Distribution Date, all
funds on deposit in the Certificate Account, subject to certain permitted
withdrawals by the Trustee as set forth in the Pooling and Servicing Agreement,
will be available for remittance to the Certificateholders; provided that, if it
is specified in the related Prospectus Supplement that the Certificate Account
will be maintained by the Master Servicer in the name of the Trustee, then,
prior to each Distribution Date, funds in the Certificate Account will be
transferred to a separate account established by and in the name of the Trustee
from which the funds on deposit therein will, subject to permitted withdrawals
by the Trustee as specified above, be available for remittance to the
Certificateholders. See also "The Pooling and Servicing Agreements--Certificate
Account" herein.
Other Funds or Accounts
A Trust Fund may include certain other funds and accounts or a security
interest in certain funds and accounts for the purpose of, among other things,
paying certain administrative fees and expenses of the Trust Fund and
accumulating funds pending their distribution. If so specified in the related
Prospectus Supplement, certain funds may be established with the Trustee with
respect to Buy-Down Loans, GPM Loans, or other Loans having special payment
features included in the Trust Fund in addition to or in lieu of any such
similar funds to be held by the Servicer. See "Servicing of Loans--Payments on
Loans; Deposits to Collection Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the value of a Multiple Class Series is determined
on the basis of the scheduled maximum principal balance of the GPM Loans, a GPM
Fund will be established which will be similar to that which would be
established if GPM Loans constituted the Mortgage Assets. See "Servicing of
Loans--Payments on Loans; Deposits to Collection Accounts" herein. Other similar
accounts may be established as specified in the related Prospectus Supplement.
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LOAN UNDERWRITING PROCEDURES AND STANDARDS
Underwriting Standards
The Depositor expects that all Loans comprising the Mortgage Assets for
a Series will have been originated in accordance with the underwriting
procedures and standards described herein, except as otherwise set forth in the
related Prospectus Supplement.
The Seller of the Loans (or other entity specified in the related
Prospectus Supplement, which may be the originator) will make representations
and warranties concerning compliance with such underwriting procedures and
standards. Additionally, unless otherwise specified in the related Prospectus
Supplement, all or a sample of the Loans comprising Mortgage Assets for a Series
will be reviewed by or on behalf of the Depositor to determine compliance with
such underwriting standards and procedures and compliance with other
requirements for inclusion in the Trust Fund.
Mortgage Loans will have been originated by a savings and loan
association, savings bank, commercial bank, credit union, insurance company or
similar institution which is supervised and examined by a federal or state
authority or by a mortgagee approved by the Secretary of Housing and Urban
Development pursuant to Sections 203 and 211 of the National Housing Act or a
wholly-owned subsidiary thereof. Manufactured Home Loans may have been
originated by such institutions or by a financial institution approved for
insurance by the Secretary of Housing and Urban Development pursuant to Section
2 of the National Housing Act. Except as otherwise set forth in the related
Prospectus Supplement for a Series of Certificates, the originator of a Loan
will have applied underwriting procedures intended to evaluate the borrower's
credit standing and repayment ability and the value and adequacy of the related
property as collateral. FHA Loans and VA Loans will have been originated in
compliance with the underwriting policies of FHA and VA, respectively.
Each borrower will have been required to complete an application
designed to provide to the original lender pertinent credit information about
the borrower. As part of the description of the borrower's financial condition,
the borrower will have furnished information with respect to its assets,
liabilities, income, credit history, employment history and personal
information, and an authorization to apply for a credit report which summarizes
the borrower's credit history with local merchants and lenders and any record of
bankruptcy. If the borrower was self-employed, the borrower will have been
required to submit copies of recent tax returns. The borrower may also have been
required to authorize verifications of deposits at financial institutions where
the borrower had demand or savings accounts. Certain considerations may cause an
originator of Loans to depart from these guidelines. For example, when two
individuals co-sign the loan documents, the incomes and expenses of both
individuals may be included in the computation. In the case of a Multifamily
Loan, the Mortgagor will also be required to provide certain information
regarding the related Multifamily Property, including a current rent roll and
operating income statements (which may be pro forma and unaudited). In addition,
the originator will generally also consider the location of the Multifamily
Property, the availability of competitive lease space and rental income of
comparable properties in the relevant market area, the overall economy and
demographic features of the geographic area and the Mortgagor's prior experience
in owning and operating properties similar to the Multifamily Properties.
The adequacy of the property financed by the related Loan as security
for repayment of such Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected in
accordance with pre-established guidelines established by the Loan originator.
The appraisal procedure guidelines will have required that the appraiser or an
agent on its behalf to personally inspect the property and to verify that it was
in good condition and that construction, if new, had been completed. The
appraisal will have been based upon a market data analysis of recent sales of
comparable properties and, when deemed applicable, a replacement cost analysis
based on the current cost of constructing or purchasing a similar property. With
respect to Multifamily Properties, the appraisal must specify whether an income
analysis, a market analysis or a cost analysis was used. An appraisal employing
the income approach to value analyzes a property's projected net cash flow,
capitalization and other operational information in determining the property's
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value. The market approach to value analyzes the prices paid for the purchase of
similar properties in the property's area, with adjustments made for variations
between those other properties and the property being appraised. The cost
approach to value requires the appraiser to make an estimate of land value and
then determine the current cost of reproducing the improvements less any accrued
depreciation. In any case, the value of the property being financed, as
indicated by the appraisal, must be such that it currently supports, and is
anticipated to support in the future, the outstanding loan balance. Unless
otherwise specified in the related Prospectus Supplement, all appraisals are
required to conform to the Uniform Standards of Professional Appraisal Practice
and the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and must be on forms acceptable to the FNMA and/or FHLMC.
Based on the data provided, certain verifications and the appraisal, a
determination will have been made by the original lender that the borrower's
monthly income would be sufficient to enable the borrower to meet its monthly
obligations on the Loan and other expenses related to the property (such as
property taxes, utility costs, standard hazard and primary mortgage insurance
and, if applicable, maintenance fees and other levies assessed by a Cooperative)
and certain other fixed obligations other than housing expenses. The originating
lender's guidelines for Loans secured by Single Family Property generally will
specify that Scheduled Payments plus taxes and insurance and all Scheduled
Payments extending beyond one year (including those mentioned above and other
fixed obligations, such as car payments) would equal no more than specified
percentages of the prospective borrower's gross income. These guidelines will
generally be applied only to the payments to be made during the first year of
the Loan. Except as otherwise specified in the related Prospectus Supplement,
with respect to Mortgage Loans that are Conventional Loans, underwriting
guidelines used to establish the relevant percentages of gross income will be
similar to underwriting guidelines used by FNMA and FHLMC at the time of
origination of the Loan, except that the ratio of Scheduled Payments and certain
other fixed obligations to monthly gross income may exceed the comparable FNMA
or FHLMC limits as specified in the related Prospectus Supplement.
With respect to FHA Loans and VA Loans, traditional underwriting
guidelines used by the FHA and the VA, as the case may be, which were in effect
at the time of origination of each Loan will generally have been applied. With
respect to Manufactured Home Loans that are Conventional Loans, the related
Prospectus Supplement will specify the required minimum downpayment, the maximum
amount of purchase price eligible for financing, the maximum original principal
amount that may be financed, and the limitations on ratios of borrower's
Scheduled Payment to gross monthly income and monthly income net of other fixed
payment obligations.
In the case of the Multifamily Loans, lenders typically look to the
Debt Service Coverage Ratio of a loan as an important measure of the risk of
default on such a loan. Unless otherwise defined in the related Prospectus
Supplement, the "Debt Service Coverage Ratio" of a Multifamily Loan at any given
time is the ratio of (i) the Net Operating Income of the related Mortgaged
Property for a twelve-month period to (ii) the annualized scheduled payments on
the Mortgage Loan and on any other loan that is secured by a lien on the
Mortgaged Property prior to the lien of the related Mortgage. Unless otherwise
defined in the related Prospectus Supplement, "Net Operating Income" means, for
any given period, the total operating revenues derived from a Multifamily
Property during such period, minus the total operating expenses incurred in
respect of such property during such period other than (i) non-cash items such
as depreciation and amortization, (ii) capital expenditures and (iii) debt
service on loans (including the related Mortgage Loan) secured by liens on such
property. The Net Operating Income of a Multifamily Property will fluctuate over
time and may or may not be sufficient to cover debt service on the related
Mortgage Loan at any given time. As the primary source of the operating revenues
of a Multifamily Property, rental income (and maintenance payments from
tenant-stockholders of a cooperatively owned Multifamily Property) may be
affected by the condition of the applicable real estate market and/or area
economy. Increases in operating expenses due to the general economic climate or
economic conditions in a locality or industry segment, such as increases in
interest rates, real estate tax rates, energy costs, labor costs and other
operating expenses, and/or to changes in governmental rules, regulations and
fiscal policies, may also affect the risk of default on a Multifamily Loan.
Lenders also look to the Loan-to-Value Ratio of a Multifamily Loan as a measure
of risk of loss if a property must be liquidated following a default.
If so specified in the related Prospectus Supplement, the underwriting
of a Multifamily Loan may also include environmental testing. Under the laws of
certain states, contamination of real property may give rise to a lien on the
property to assure the costs of cleanup. In several states, such a lien has
priority over an existing mortgage lien on
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such property. In addition, under the laws of some states and under the federal
Comprehensive Environmental Response, Compensation and Liability Act of 1980
("CERCLA"), a lender may be liable, as an "owner" or "operator", for costs of
addressing releases or threatened releases of hazardous substances 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 the borrower or a prior owner. A
lender also risks such liability on foreclosure of the mortgage. See "Certain
Legal Aspects of Mortgage Loans--Environmental Legislation."
With respect to Multifamily Property, the Loan originator will have
made an assessment of the capabilities of the management of the project,
including a review of management's past performance record, its management
reporting and control procedures (to determine its ability to recognize and
respond to problems) and its accounting procedures to determine cash management
ability. Income derived from the Mortgaged Property constituting investment
property may have been considered for underwriting purposes, rather than the
income of the borrower from other sources.
With respect to Mortgaged Property consisting of vacation or second
homes, no income derived from the property will have been considered for
underwriting purposes.
Certain types of Loans that may be included in the Mortgage Assets for
a Series are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, Balloon Loans, Buy-Down
Loans, GEM Loans and GPM Loans provide for escalating or variable payments by
the borrower. These types of Loans are underwritten on the basis of a judgment
that the borrower will have the ability to make larger Scheduled Payments in
subsequent years. ARMs may involve similar assessments.
To the extent specified in the related Prospectus Supplement, the
Depositor may purchase Loans (or participation interests therein) for inclusion
in a Trust Fund that are underwritten under standards and procedures which vary
from and are less stringent than those described herein. For instance, Loans may
be underwritten under a "limited documentation program," if specified in the
Prospectus Supplement. With respect to such Loans, minimal investigation into
the borrowers' credit history and income profile is undertaken by the originator
and such Loans may be underwritten primarily on the basis of an appraisal of the
Mortgaged Property and Loan-to-Value Ratio on origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
Prospectus Supplement, the originator may forego certain aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be applied.
In addition, Mortgage Loans may have been originated in connection with
a governmental program under which underwriting standards were significantly
less stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of default
and losses. The related Prospectus Supplement will specify the underwriting
standards applicable to such Mortgage Loans.
The underwriting standards applied by the Loan originator require that
the underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance, and provides sufficient
value to mitigate the effects of adverse shifts in real estate values. Certain
states where the Mortgaged Properties may be located have "antideficiency" laws
requiring, in general, that lenders providing credit on Single Family Property
look solely to the property for repayment in the event of foreclosure. See
"Certain Legal Aspects of Loans" herein.
With respect to the underwriting standards applicable to any Mortgage
Loans, such underwriting standards generally include a set of specific criteria
pursuant to which the underwriting evaluation is made. However, the application
of such underwriting standards does not imply that each specific criterion was
satisfied individually. Rather, a Mortgage Loan will be considered to be
originated in accordance with a given set of underwriting standards if, based on
an overall qualitative evaluation, the loan is in substantial compliance with
such underwriting standards. For example, a Mortgage Loan may be considered to
comply with a set of underwriting standards, even if one or more specific
criteria included in such underwriting standards were not satisfied, if other
factors compensated for the criteria that were not satisfied or if the Mortgage
Loan is considered to be in substantial compliance with the underwriting
standards.
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Loss Experience
The general appreciation of real estate values experienced in the past
has been a factor in limiting the general loss experience on Conventional Loans.
However, there can be no assurance that the past pattern of appreciation in
value of the real property securing such Loans will continue. Further, there is
no assurance that appreciation of real estate values generally will limit loss
experiences on non-traditional housing such as Multifamily Property,
Manufactured Homes or Cooperative Dwellings. Similarly, no assurance can be
given that the value of the Mortgaged Property (including Cooperative Dwellings)
securing a Loan has remained or will remain at the level existing on the date of
origination of such Loan. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Loans and any secondary financing on the Mortgaged Properties
securing such Loans become equal to or greater than the value of such Mortgaged
Properties, then the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition, the value of property securing Cooperative Loans and the
delinquency rates with respect to Cooperative Loans, could be adversely affected
if the current favorable tax treatment of cooperative tenant stockholders were
to become less favorable. See "Certain Legal Aspects of Loans" herein.
No assurance can be given that values of Manufactured Homes have or
will remain at the levels existing on the dates of origination of the related
Loan. Manufactured Homes are less likely to experience appreciation in value and
more likely to experience depreciation in value over time than other types of
Mortgaged Property. Additionally, delinquency, loss and foreclosure experience
on Manufactured Home Loans may be adversely affected to a greater degree by
regional and local economic conditions than more traditional Mortgaged Property.
Loans secured by Multifamily Property may also be more susceptible to losses due
to changes in local and regional economic conditions than Loans secured by
Single Family Property. For example, unemployment resulting from an economic
downturn in local industry may sharply affect occupancy rates. Also, interest
rate fluctuations can make home ownership a more attractive alternative to
renting, causing occupancy rates and market rents to decline. New construction
can create an oversupply, particularly in a market that has experienced high
vacancy rates.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Loans
included in the Mortgage Assets for a Series of Certificates are not covered by
the methods of credit support or the insurance policies described herein or in
the related Prospectus Supplement, such losses will be borne by Holders of the
Certificates of such Series. Even where credit support covers all losses
resulting from delinquency and foreclosure or repossession, the effect of
foreclosures and repossessions may be to increase prepayment experience on the
Mortgage Assets, thus reducing average weighted life and affecting yield to
maturity. See "Yield, Prepayment and Maturity Considerations."
Representations and Warranties
Unless otherwise specified in the related Prospectus Supplement or in
the Pooling and Servicing Agreement, the Seller (or other party as described in
the related Prospectus Supplement) will represent and warrant to the Depositor
and the Trustee with respect to the Mortgage Loans comprising the Mortgage
Assets in a Trust Fund, upon delivery of the Mortgage Loans to the Trustee
hereunder, among other things, generally that: (i) any required hazard and
primary mortgage insurance policies were effective at the origination of such
Mortgage Loan, and each such policy remained in effect on the date of purchase
of such Mortgage Loan from the Seller by or on behalf of the Depositor; (ii)
either (A) a title insurance policy insuring (subject only to permissible title
insurance exceptions) the lien status of the Mortgage was effective at the
origination of such Mortgage Loan and such policy remained in effect on the date
of purchase of the Mortgage Loan from the Seller by or on behalf of the
Depositor or (B) if the Mortgaged Property securing such Mortgage Loan is
located in an area where such policies are generally not available, there is in
the related mortgage file an attorney's certificate of title indicating (subject
to such permissible exceptions set forth therein) the first lien status of the
mortgage; (iii) the Seller has good title to such Mortgage Loan and such
Mortgage Loan was subject to no offsets, defenses or counterclaims except as may
be provided under the Relief Act and except to the extent that any buydown
agreement exists for a Buy-Down Loan; (iv) there are no mechanics' liens or
claims for work, labor or material affecting the related Mortgaged Property
which are, or may be a lien prior to, or equal with, the lien of the related
Mortgage (subject only to permissible title insurance exceptions); (v) the
related Mortgaged Property is free from material damage and at least in adequate
repair; (vi) there are no delinquent tax or
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assessment liens against the related Mortgaged Property; (vii) such Mortgage
Loan is not more than 30 days' delinquent as to any scheduled payment of
principal and/or interest; (viii) if a primary mortgage insurance policy is
required with respect to such Mortgage Loan, such Mortgage Loan is the subject
of such a policy; and (ix) such Mortgage Loan was made in compliance with, and
is enforceable under, all applicable local, state and federal laws in all
material respects.
If the Mortgage Loans include Cooperative Loans, no representations or
warranties with respect to title insurance or hazard insurance will be given. In
addition, if the Mortgage Loans include Condominium Loans, no representation
regarding hazard insurance will be given. Generally, the Cooperative or
Condominium Association itself is responsible for the maintenance of hazard
insurance for property owned by the Cooperative and the Condominium Association
is responsible for maintaining standard hazard insurance, insuring the entire
Condominium Building (including each individual Condominium Unit), and the
borrowers of that Cooperative or Condominium do not maintain separate hazard
insurance on their individual Cooperative Dwellings or Condominium Units. See
"Servicing of Loans--Maintenance of Insurance Policies and Other Servicing
Procedures" herein. With respect to a Cooperative Loan, the Seller (or other
party as described in the related Prospectus Supplement) will represent and
warrant that (i) the security interest created by the cooperative security
agreements is a valid first lien on the collateral securing the Cooperative Loan
(subject to the right of the related Cooperative to cancel shares and terminate
the proprietary lease for unpaid assessments) and (ii) the related Cooperative
Dwelling is free of material damage and in good repair.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Manufactured Home Loan, the Seller (or other party as described
in the related Prospectus Supplement) will represent and warrant, among other
things that (i) immediately prior to the transfer and assignment of the
Manufactured Home Loans to the Trustee, the Seller had good title to, and was
the sole owner of, each Manufactured Home Loan; (ii) as of the date of such
transfer and assignment, the Manufactured Home Loans are subject to no offsets,
defenses or counterclaims; (iii) each Manufactured Home Loan at the time it was
made complied in all material respects with applicable state and federal laws,
including usury, equal credit opportunity and truth-in-lending or similar
disclosure laws; (iv) as of the date of such transfer and assignment, each
Manufactured Home Loan constitutes a valid first lien on the related
Manufactured Home and such Manufactured Home is free of material damage and is
in good repair; (v) as of the date of such representation and warranty, no
Manufactured Home Loan is more than 30 days delinquent and there are no
delinquent tax or assessment liens against the related Manufactured Home; and
(vi) with respect to each Manufactured Home Loan, any required hazard insurance
policy was effective at the origination of each Manufactured Home Loan and
remained in effect on the date of the transfer and assignment of the
Manufactured Home Loan from the Depositor and that all premiums due on such
insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made
by the Master Servicer in respect of a Loan that materially and adversely
affects the interest of the Certificateholder in such Loan, the Seller (or other
party as described in the Prospectus Supplement) will be obligated to cure such
breach in all material respects, repurchase such Loan from the Trustee, or
deliver a Qualified Substitute Mortgage Loan as described below under "The
Pooling and Servicing Agreements--Assignment of Mortgage Assets." See "Risk
Factors--Limited Obligations and Assets of the Depositor." If the Seller or
other party fails to cure or repurchase, another party may be required to cure
or repurchase as described in the Prospectus Supplement. The PMBS Trustee (in
the case of Private Mortgage-Backed Securities) or the Trustee, as applicable,
will be required to enforce this obligation following the practices it would
employ in its good faith business judgment were it the owner of such Loan. If so
specified in the related Prospectus Supplement, the Master Servicer may be
obligated to enforce such obligations rather than the Trustee or PMBS Trustee.
SERVICING OF LOANS
General
Customary servicing functions with respect to Loans constituting the
Mortgage Assets in the Trust Fund will be provided by the Master Servicer
directly or through one or more servicers (the "Servicers") subject to
supervision
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by the Master Servicer. If the Master Servicer is not directly servicing the
Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicers of their servicing responsibilities under their
servicing agreements ("Servicing Agreements") with the Master Servicer, (ii)
maintain any standard or special hazard insurance policy, primary mortgage
insurance bankruptcy bond or pool insurance policy required for the related
Loans and (iii) advance funds as described below under "Advances." If the Master
Servicer services the Loans through Servicers as its agents, the Master Servicer
will be ultimately responsible for the performance of all servicing activities,
including those performed by the Servicers, notwithstanding its delegation of
certain responsibilities to such Servicer.
The Master Servicer will be a party to the Pooling and Servicing
Agreement for any Series for which Loans comprise the Mortgage Assets and may be
a party to a Participation Agreement executed with respect to any Participation
Certificates which constitute the Mortgage Assets. The Master Servicer may be an
affiliate of the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and each Servicer will be required to be a FNMA-
or FHLMC-approved seller/servicer and, in the case of FHA Loans, approved by HUD
as an FHA mortgagee.
The Master Servicer will be paid a Servicing Fee for the performance of
its services and duties under each Pooling and Servicing Agreement as specified
in the related Prospectus Supplement. Each Servicer, if any, will be entitled to
receive a portion of the Servicing Fee. In addition, the Master Servicer or
Servicer may be entitled to retain late charges, assumption fees and similar
charges to the extent collected from mortgagors. If a Servicer is terminated by
the Master Servicer, the servicing function of the Servicer will be either
transferred to a substitute Servicer or performed by the Master Servicer. The
Master Servicer will be entitled to retain the portion of the Servicing Fee paid
to the Servicer under a terminated Servicing Agreement if the Master Servicer
elects to perform such servicing functions itself.
The Master Servicer, at its election, may pay itself the Servicing Fee
for a Series with respect to each Mortgage Loan either by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to the deposit of
such payment in the Collection Account for such Series, (b) withdrawing the
Servicing Fee from the Collection Account after the entire Scheduled Payment has
been deposited in the Collection Account, or (c) requesting that the Trustee pay
the Servicing Fee out of amounts in the Certificate Account.
Collection Procedures; Escrow Accounts
The Master Servicer will make reasonable efforts to collect all
payments required to be made under the Mortgage Loans and will, consistent with
the Pooling and Servicing Agreement for a Series and any applicable insurance
policies and other forms of credit support, follow such collection procedures as
it follows with respect to comparable loans held in its own portfolio.
Consistent with the above, the Master Servicer may, in its discretion, (i) waive
any assumption fee, late payment charge, or other charge in connection with a
Loan and (ii) arrange with a mortgagor a schedule for the liquidation of
delinquencies by extending the Due Dates for Scheduled Payments on such Loan,
provided, however, that the Master Servicer shall first determine that any such
waiver or extension will not impair the coverage of any related insurance policy
or materially and adversely affect the lien of the related Mortgage or the lien
on any related Additional Collateral. In addition, unless otherwise specified in
the related Prospectus Supplement, if a material default occurs or a payment
default is reasonably foreseeable with respect to a Multifamily Loan, the Master
Servicer will be permitted, subject to any specific limitations set forth in the
related Pooling Agreement and described in the related Prospectus Supplement, to
modify, waive or amend any term of such Mortgage Loan, including deferring
payments, extending the stated maturity date or otherwise adjusting the payment
schedule, provided that such modification, waiver or amendment (i) is reasonably
likely to produce a greater recovery with respect to such Mortgage Loan on a
present value basis than would liquidation and (ii) will not adversely affect
the coverage under any applicable instrument of credit enhancement.
In the case of Multifamily Loans, a Mortgagor's failure to make
required Mortgage Loan payments may mean that operating income is insufficient
to service the mortgage debt, or may reflect the diversion of that income from
the servicing of the mortgage debt. In addition, a Mortgagor under a Multifamily
Loan that is unable to make Mortgage Loan payments may also be unable to make
timely payment of taxes and otherwise to maintain and insure the related
Mortgaged Property. In general, the related Master Servicer will be required to
monitor any Multifamily
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Loan that is in default, evaluate whether the causes of the default can be
corrected over a reasonable period without significant impairment of the value
of the related Mortgaged Property, initiate corrective action in cooperation
with the Mortgagor if cure is likely, inspect the related Mortgaged Property and
take such other actions as are consistent with the servicing standard. A
significant period of time may elapse before the Master Servicer is able to
assess the success of any such corrective action or the need for additional
initiatives. The time within which the Master Servicer can make the initial
determination of appropriate action, evaluate the success of corrective action,
develop additional initiatives, institute foreclosure proceedings and actually
foreclose (or accept a deed to a Mortgaged Property in lieu of foreclosure) on
behalf of the Certificateholders of the related Series may vary considerably
depending on the particular Multifamily Loan, the Mortgaged Property, the
Mortgagor, the presence of an acceptable party to assume the Multifamily Loan
and the laws of the jurisdiction in which the Mortgaged Property is located. If
a Mortgagor files a bankruptcy petition, the Master Servicer may not be
permitted to accelerate the maturity of the related Multifamily Loan or to
foreclose on the Mortgaged Property for a considerable period of time. See
"Certain Legal Aspects of Mortgage Loans."
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer, to the extent permitted by law, will establish and maintain
escrow accounts ("Escrow Accounts") in which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
that are required to be paid to the mortgagee will be deposited. Mortgage Loans
and Manufactured Home Loans may not require such payments under the loan related
documents, in which case the Master Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments, mortgage
and hazard insurance, to refund to borrowers amounts determined to be overages,
to pay interest to borrowers on balances in the Escrow Account to the extent
required by law, to repair or otherwise protect the property securing the
related Loan and to clear and terminate such Escrow Account. The Master Servicer
will be responsible for the administration of the Escrow Accounts and generally
will make advances to such account when a deficiency exists therein.
Deposits to and Withdrawals from the Collection Account
Unless otherwise indicated in the related Prospectus Supplement, the
Collection Account will be an Eligible Account and the funds held therein may be
invested, pending remittance to the Trustee, in Eligible Investments. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be entitled to receive as additional compensation any interest or other
income earned on funds in the Collection Account.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer 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 Master Servicer
on or before the related Cut-off Date, and thereafter, after the date of receipt
thereof, the following payments and collections received or made by it (other
than in respect of principal of and interest on the related Loans due on or
before such Cut-off Date):
(i) All payments on account of principal, including
prepayments, on such Loans;
(ii) All payments on account of interest on such Loans
net of any portion thereof retained by the related Servicer (including
the Master Servicer), if any, as servicing compensation on the Loans in
accordance with the related Pooling and Servicing Agreement;
(iii) All Insurance Proceeds and all amounts received by
the Master Servicer in connection with the liquidation of defaulted
Loans or property acquired in respect thereof, whether through
foreclosure sale or otherwise, including payments in connection with
such Loans received from the mortgagor, other than amounts required to
be paid to the mortgagor pursuant to the terms of the applicable
Mortgage or otherwise pursuant to law ("Liquidation Proceeds"),
exclusive of proceeds to be applied to the restoration or repair of the
Mortgaged Property or released to the Mortgagor in accordance with the
Master Servicer's normal servicing procedures, net of expenses incurred
by the Master Servicer (or the related Servicer) in connection with the
liquidation of any defaulted Mortgage Loan and not recovered under a
primary mortgage insurance policy ("Liquidation Expenses");
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(iv) Any Buydown Funds (and, if applicable, investment
earnings thereon) required to be paid as described herein;
(v) All proceeds of any Mortgage Loan in such Trust
Fund purchased (or, in the case of a substitution, certain amounts
representing a principal adjustment) by the Master Servicer, the Seller
or any other person pursuant to the terms of the related Pooling and
Servicing Agreement;
(vi) All amounts required to be deposited therein in
connection with any losses on Eligible Investments pursuant to the
related Pooling and Servicing Agreement; and
(vii) All other amounts required to be deposited therein
pursuant to the related Pooling and Servicing Agreement.
The Master Servicer is permitted, from time to time, to make
withdrawals from the Collection Account for certain purposes, as specifically
set forth in the related Pooling and Servicing Agreement, which generally will
include the following, except as otherwise provided therein:
(i) to make deposits to the Certificate Account in the
amounts and in the manner provided in the Pooling and Servicing
Agreement;
(ii) to reimburse itself for Advances, including amounts
advanced in respect of taxes, insurance premiums or similar expenses as
to any Mortgaged Property, out of late payments or collections on the
related Mortgage Loan with respect to which such Advances were made;
(iii) to pay to itself unpaid Servicing Fees, out of payments
or collections of interest on each Mortgage Loan;
(iv) to pay to itself as additional servicing compensation any
investment income on funds deposited in the Collection Account, and, if
so provided in the Pooling and Servicing Agreement, any profits
realized upon disposition of a Mortgaged Property acquired by deed in
lieu of foreclosure or otherwise allowed under the Pooling and
Servicing Agreement;
(v) to pay to itself or the Seller all amounts received with
respect to each Mortgage Loan purchased, repurchased or removed
pursuant to the terms of the Pooling and Servicing Agreement and not
required to be distributed as of the date on which the related purchase
price is determined;
(vi) to reimburse itself for any Advance previously made which
the Master Servicer has determined to not be ultimately recoverable
from Liquidation Proceeds, Insurance Proceeds or otherwise, subject, in
the case of a Series with Senior Certificates and Subordinate
Certificates, to certain limitations set forth in the Pooling and
Servicing Agreement as described in the related Prospectus Supplement;
(vii) to pay for costs and expenses incurred by the Trust Fund
for environmental site assessments performed with respect to
Multifamily Properties that constitute security for defaulted Mortgage
Loans, and for any containment, clean-up or remediation of hazardous
wastes and materials present on such Mortgaged Properties, as described
below under "--Presentation of Claims; Realization Upon Defaulted
Loans";
(viii) to reimburse itself, the Trustee or the Depositor for
certain other expenses incurred for which it, the Trustee or the
Depositor is entitled to reimbursement or against which it, the Trustee
or the Depositor is indemnified pursuant to the Pooling and Servicing
Agreement;
(ix) to make any other withdrawals permitted by the related
Pooling Agreement and described in the related Prospectus Supplement;
and
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(x) to clear the Collection Account of amounts relating to the
corresponding Loans in connection with the termination of the Trust
Fund pursuant to the Pooling and Servicing Agreement.
Servicing Accounts
Unless otherwise specified in the related Prospectus Supplement, in
those cases where a Servicer is servicing a Mortgage Loan, the Servicer will
establish and maintain an account (a "Servicing Account") that will be an
Eligible Account and which is otherwise acceptable to the Master Servicer. The
Servicer is required to deposit into the Servicing Account all proceeds of
Mortgage Loans received by the Servicer, less its servicing compensation and any
reimbursed expenses and advances, to the extent permitted by the Servicing
Agreement. On the date specified in the related Prospectus Supplement, the
Servicer will remit to the Master Servicer all funds held in the Servicing
Account with respect to each Mortgage Loan, after deducting from such remittance
an amount equal to the servicing compensation and unreimbursed expenses and
advances to which it is then entitled pursuant to the related Servicing
Agreement, to the extent not previously paid to or retained by it. In addition
on each such date the Servicer will be required to remit to the Master Servicer
any amount required to be advanced pursuant to the related Servicing Agreement,
and the Servicer will also be required to the Master Servicer, within one
business day of receipt, the proceeds of any principal Prepayments and all
Insurance Proceeds and Liquidation Proceeds.
Buy-Down Loans, GPM Loans and Other Subsidized Loans
With respect to each Buy-Down Loan, if any, included in a Trust Fund
the Master Servicer will deposit all Buy-Down Amounts in a custodial account
(which may be interest-bearing) complying with the requirements set forth above
for the Collection Account (the "Buy-Down Fund"). The amount of such deposit,
together with investment earnings thereon at the rate specified in the related
Prospectus Supplement, will provide sufficient funds to support the payments on
such Buy-Down Loan on a level debt service basis. The Master Servicer will not
be obligated to add to the Buy-Down Account should amounts therein and
investment earnings prove insufficient to maintain the scheduled level of
payments on the Buy-Down Loans, in which event distributions to the
Certificateholders may be affected. Unless otherwise provided in the related
Prospectus Supplement, a Buy-Down Fund will not be included in or deemed to be a
part of the Trust Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the Master Servicer will deposit the
subsidy funds in a custodial account (which may be interest-bearing) complying
with the requirements set forth above for the Collection Account set forth above
(a "Subsidy Fund"). Unless otherwise specified in the related Prospectus
Supplement, the terms of each such Loan will provide for the contribution of the
entire undiscounted amount of subsidy amounts necessary to maintain the
scheduled level of payments due during the early years of such Loan. Neither the
Master Servicer, any Servicer nor the Depositor will be obligated to add to such
Subsidy Fund any of its own funds. Unless otherwise provided in the related
Prospectus Supplement, such Subsidy Fund will not be included in or deemed to be
a part of the Trust Fund.
If the Depositor values any GPM Loans deposited into the Trust Fund for
a Multiple Class Series on the basis of such GPM Loan's scheduled maximum
principal balance, the Master Servicer will, if and to the extent provided in
the related Prospectus Supplement, deposit in a custodial account (which may be
interest-bearing) (the "GPM Fund") complying with the requirements set forth
above for the Collection Account an amount which, together with reinvestment
income thereon at the rate set forth in the related Prospectus Supplement, will
be sufficient to cover the amount by which payments of principal and interest on
such GPM Loans assumed in calculating payments due on the Certificates of such
Multiple Class Series exceed the scheduled payments on such GPM Loans. The
Trustee will withdraw amounts from the GPM Fund for a Series upon a prepayment
of such GPM Loan as necessary and apply such amounts to the payment of principal
and interest on the Certificates of such Series. Neither the Depositor, the
Master Servicer nor any Servicer will be obligated to supplement the GPM Fund
should amounts therein and investment earnings thereon prove insufficient to
maintain the scheduled level of payments, in which event, distributions to the
Certificateholders may be affected. Unless otherwise specified in the related
Prospectus Supplement, such GPM Fund will not be included in or deemed to be
part of the Trust Fund.
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With respect to any other type of Loan which provides for payments
other than on the basis of level payments, an account may be established as
described in the related Prospectus Supplement on terms similar to those
relating to the Buy-Down Fund, Subsidiary Fund or the GPM Fund.
Advances and Limitations Thereon
General. The related Prospectus Supplement will describe the
circumstances under which the Master Servicer or Servicer will make Advances
with respect to delinquent payments on Loans. Unless otherwise specified in the
related Prospectus Supplement, neither the Master Servicer nor any Servicer will
be obligated to make Advances, and such obligation may be limited in amount, may
be limited to advances received from the Servicers, if any, or may not be
activated until a certain portion of a specified reserve fund is depleted. If
the Master Servicer is obligated to make Advances, a surety bond or other credit
support may be provided with respect to such obligation as described in the
related Prospectus Supplement. Advances are intended to provide liquidity and
not to guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the Servicer or the Master Servicer, as the case may be, out of
amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance polices or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance polices or Liquidation Proceeds from the related Loan, the Servicer or
Master Servicer will be entitled to reimbursement from other funds in the
Certificate Account, Collection Account or Servicing Account, as the case may
be, or from a specified reserve fund as applicable, to the extent specified in
the related Prospectus Supplement. With respect to any Multiple Class Series, so
long as the related Subordinate Certificates remain outstanding and subject to
certain limitations as described in the related Prospectus Supplement, such
Advances by the Master Servicer may also be reimbursable out of amounts
otherwise distributable to holders of the Subordinate Certificates, if any.
Advances in Connection With Prepaid Loans. In addition when a borrower
makes a principal prepayment in full between Due Dates on the related Loan, the
borrower will generally be required to pay interest on the principal amount
prepaid only to the date of such prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the Master Servicer may be obligated to advance moneys
from its own funds to the extent necessary to include in its remittance to the
Trustee for deposit into the Certificate Account an amount equal to a full
Scheduled Payment of interest on the related Loan (less any related Servicing
Fees). Any such principal prepayment, together with a full Scheduled Payment of
interest thereon (to the extent of such adjustment or advance), will be
distributed to Certificateholders on the related Distribution Date. If the
amount necessary to include a full Scheduled Payment of interest as described
above exceeds the amount which the Master Servicer is obligated to advance, as
applicable, a shortfall may occur as a result of a prepayment in full. See
"Yield, Prepayment and Maturity Considerations."
Maintenance of Insurance Policies and Other Servicing Procedures
Standard Hazard Insurance; Flood Insurance. Except as otherwise
specified in the related Prospectus Supplement, the Master Servicer will be
required to maintain or to cause the borrower on each Loan to maintain or will
use its best reasonable efforts to cause each Servicer of a Loan to maintain a
standard hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the property securing the related Loan is located. See
"Description of Mortgage and Other Insurance" herein. Unless otherwise specified
in the related Prospectus Supplement, coverage will be in an amount at least
equal to the greater of (i) the amount necessary to avoid the enforcement of any
co-insurance clause contained in the policy or (ii) the outstanding principal
balance of the related Loan. The Master Servicer will also maintain on REO
Property that secured a defaulted Loan and that has been acquired upon
foreclosure, deed in lieu of foreclosure, or repossession, a standard hazard
insurance policy in an amount that is at least equal to the maximum insurable
value of such REO Property. No earthquake or other additional insurance will be
required of any borrower 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. When, at the time of origination of a Loan or at any time during the
term of the Loan the Master Servicer or the related Servicer determines that the
related Mortgaged Property is located in an area identified on a Flood Hazard
Boundary Map or
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Flood Insurance Rate Map issued by the Flood Emergency Management Agency as
having special flood hazards and flood insurance has been made available, the
borrower will cause to be maintained a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
with a generally acceptable insurance carrier, in an amount representing
coverage not less than the less of (i) the outstanding principal balance of the
Loan or (ii) the maximum amount of insurance which is available under the
National Flood Insurance Act of 1968, the Flood Disaster Protection Act of 1983
or the National Flood Insurance Reform Act of 1994, as amended. The Pooling and
Servicing Agreement will obligate the Mortgagor to obtain and maintain all
requisite flood insurance coverage at the Mortgagor's cost and expense, and on
the Mortgagor's failure to do so, authorizes the Master Servicer or Servicer to
obtain and maintain such coverage at the Mortgagor's cost and expense and to
seek reimbursement therefor from the Mortgagor.
Any amounts collected by the Master Servicer or the Servicer, as the
case may be, under any such policies of insurance (other than amounts to be
applied to the restoration or repair of the Mortgaged Property, released to the
borrower in accordance with normal servicing procedures or used to reimburse the
Master Servicer for amounts to which it is entitled to reimbursement) will be
deposited in the Collection Account. In the event that the Master Servicer
obtains and maintains a blanket policy insuring against hazard losses on all of
the Loans, written by an insurer then acceptable to each Rating Agency which
assigns a rating to such Series, it will conclusively be deemed to have
satisfied its obligations to cause to be maintained a standard hazard insurance
policy for each Loan or related REO Property. This blanket policy may contain a
deductible clause, in which case the Master Servicer will, in the event that
there has been a loss that would have been covered by such policy absent such
deductible clause, deposit in the Collection Account the amount not otherwise
payable under the blanket policy because of the application of such deductible
clause.
The Depositor will not require that a standard hazard or flood
insurance policy be maintained on the Cooperative Dwelling relating to any
Cooperative Loan. Generally, the Cooperative itself is responsible for
maintenance of hazard insurance for the property owned by the cooperative and
the tenant-stockholders of that cooperative do not maintain individual hazard
insurance policies. To the extent, however, that a Cooperative and the related
borrower on a Cooperative Loan do not maintain such insurance or do not maintain
adequate coverage or any insurance proceeds are not applied to the restoration
of damaged property, any damage to such borrower's Cooperative Dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support. Similarly, the Depositor will not require that a standard hazard or
flood insurance policy be maintained on a Condominium Unit relating to any
Condominium Loan. Generally, the Condominium Association is responsible for
maintenance of hazard insurance insuring the entire Condominium building
(including each individual Condominium Unit), and the owner(s) of an individual
Condominium Unit do not maintain separate hazard insurance policies. To the
extent, however, that a Condominium Association and the related borrower on a
Condominium Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to such borrower's Condominium Unit or the related
Condominium Building could significantly reduce the value of the collateral
securing such Condominium Loan to the extent not covered by other credit
support.
Special Hazard Insurance Policy. If, and to the extent specified in the
related Prospectus Supplement, the Master Servicer will maintain a special
hazard insurance policy, in the amount set forth in the related Prospectus
Supplement, in full force and effect with respect to the Loans. Unless otherwise
specified in the related Prospectus Supplement, the special hazard insurance
policy will provide for a fixed premium rate based on the declining aggregate
outstanding principal balance of the Loans. The Master Servicer will agree to
pay the premium for any special hazard insurance policy on a timely basis. If
the special hazard insurance policy is canceled or terminated for any reason
(other than the exhaustion of total policy coverage), the Master Servicer will
exercise its best reasonable efforts to obtain from another insurer a
replacement policy comparable to the special hazard insurance policy with a
total coverage which is equal to the then existing coverage of the terminated
special hazard insurance policy; provided that if the cost of any such
replacement policy is greater than the cost of the terminated special hazard
insurance policy, the amount of coverage under the replacement policy will,
unless otherwise specified in the related Prospectus Supplement, be reduced to a
level such that the applicable premium does not exceed 150% of the cost of the
special hazard insurance policy that was replaced. Any amounts collected by the
Master Servicer under the special hazard insurance policy in the nature of
insurance proceeds will be deposited in the Collection Account (net of
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amounts to be used to repair, restore or replace the related property securing
the Loan or to reimburse the Master Servicer (or a Servicer) for related amounts
owed to it). Certain characteristics of the special hazard insurance policy are
described under "Description of Mortgage and Other Insurance--Hazard Insurance
on the Loans."
Primary Mortgage Insurance. To the extent described in the related
Prospectus Supplement, the Master Servicer will be required to use its best
reasonable efforts to keep, or to cause each Servicer to keep, in full force and
effect, a primary mortgage insurance policy with respect to each Conventional
Loan secured by Single Family Property for which such coverage is required for
as long as the related mortgagor is obligated to maintain such primary mortgage
insurance under the terms of the related Loan. The Master Servicer will not
cancel or refuse to renew any such primary mortgage insurance policy in effect
at the date of the initial issuance of the Certificates that is required to be
kept in force unless a replacement primary mortgage insurance policy for such
cancelled or nonrenewed policy is maintained with a Qualified Insurer.
Primary insurance policies will be required with respect to
Manufactured Home Loans only to the extent described in the related Prospectus
Supplement. If primary mortgage insurance is to be maintained with respect to
Manufactured Home Loans, the Master Servicer will be required to maintain such
insurance as described above. For further information regarding the extent of
coverage under a primary mortgage insurance policy, see "Description of Mortgage
and Other Insurance--Mortgage Insurance on the Loans."
FHA Insurance and VA Guarantees. To the extent specified in the related
Prospectus Supplement, all or a portion of the Loans may be insured by the FHA
or guaranteed by the VA. The Master Servicer will be required to take such steps
as are reasonably necessary to keep such insurance and guarantees in full force
and effect. See "Description of Mortgage and Other Insurance--Mortgage Insurance
on the Loans."
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated to use its best reasonable
efforts to maintain a pool insurance policy with respect to the Loans in the
amount and with the coverage described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the pool
insurance policy will provide for a fixed premium rate on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer will
be obligated to pay the premiums for such pool insurance policy on a timely
basis.
The Prospectus Supplement will identify the pool insurer for the
related Series of Certificates. If the pool insurer ceases to be a Qualified
Insurer because it is not approved as an insurer by FHLMC or FNMA or because its
claims-paying ability is no longer rated in the category required by the related
Prospectus Supplement, the Master Servicer will be obligated to review, no less
often than monthly, the financial condition of the pool insurer to determine
whether recoveries under the pool insurance policy are jeopardized by reason of
the financial condition of the pool insurer. If the Master Servicer determines
that recoveries may be so jeopardized or if the pool insurer ceases to be
qualified under applicable law to transact a mortgage guaranty insurance
business, the Master Servicer will exercise its best reasonable efforts to
obtain from another Qualified Insurer a comparable replacement pool insurance
policy with a total coverage equal to the then outstanding coverage of the pool
insurance policy to be replaced; provided that, if the premium rate on the
replacement policy is greater than that of the existing pool insurance policy,
then the coverage of the replacement policy will, unless otherwise specified in
the related Prospectus Supplement, be reduced to a level such that its premium
rate does not exceed 150% of the premium rate on the pool insurance policy to be
replaced. Payments made under a pool insurance policy will be deposited into the
Collection Account (net of expenses of the Master Servicer or any related
unreimbursed Advances or unpaid Servicing Fee). Certain characteristics of the
pool insurance policy are described under "Description of Mortgage and Other
Insurance--Mortgage Insurance on the Loans."
Bankruptcy Bond. If so specified in the related Prospectus Supplement,
the Master Servicer will be obligated to use its best reasonable efforts to
obtain and thereafter maintain a bankruptcy bond or similar insurance or
guaranty in full force and effect throughout the term of the related Pooling and
Servicing Agreement, unless coverage thereunder has been exhausted through
payment of claims. If so specified in the Prospectus Supplement, the Master
Servicer will be required to pay from its servicing compensation the premiums
for the bankruptcy bond on a timely basis. Coverage under the bankruptcy bond
may be cancelled or reduced by the Master Servicer at any time, provided
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that such cancellation or reduction does not adversely affect the then current
rating of the related Series of Certificates. See "Description of Mortgage and
Other Insurance--Bankruptcy Bond" herein.
Presentation of Claims; Realization Upon Defaulted Loans
The Master Servicer, on behalf of the Trustee and the
Certificateholders, will be required to present or cause to be presented, claims
with respect to any standard hazard insurance policy, pool insurance policy,
special hazard insurance policy, bankruptcy bond, or primary mortgage insurance
policy, and to the FHA and the VA, if applicable in respect of any FHA insurance
or VA guarantee respecting defaulted Mortgage Loans.
The Master Servicer will use its reasonable best efforts to foreclose
upon, repossess or otherwise comparably convert the ownership of the real
properties securing such of 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 Master Servicer will follow such practices and procedures as it deems
necessary or advisable and as are normal and usual in its servicing activities
with respect to comparable loans serviced by it. However, the Master 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: (i) that such
restoration or foreclosure will increase the Liquidation Proceeds in respect of
the related Mortgage Loan available to the Certificateholders after
reimbursement to itself for such expenses and (ii) that 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 or elections have been made, the Master
Servicer shall not liquidate any collateral acquired through foreclosure later
than two years after the acquisition of such collateral, unless a longer period
of time is necessary for the orderly liquidation of the collateral and the
Master Servicer has obtained from the IRS an extension of the two year period
within which it would otherwise be required to liquidate the collateral. While
the holder of Mortgaged Property acquired through foreclosure can often maximize
its recovery by providing financing to a new purchaser, the Trust Fund will have
no ability to do so and neither the Master Servicer nor any Servicer will be
required to do so.
With respect to a Mortgage Loan in default, the Master Servicer may
pursue foreclosure (or similar remedies) concurrently with pursuing any remedy
for a breach of a representation and warranty. However, the Master Servicer is
not required to continue to pursue both such remedies if it determines that one
such remedy is more likely to result in a greater recovery. If such Mortgage
Loan is an Additional Collateral Loan, the Master Servicer (or the related
Servicer, if the lien on the Additional Collateral for such Additional
Collateral Loan is not assigned to the Trustee on behalf of the
Certificateholders) may proceed against the related Mortgaged Property or the
related Additional Collateral first or may proceed against both concurrently (as
permitted by applicable law and the terms under which such Additional Collateral
is held, including any third-party guarantee). Upon the first to occur of final
liquidation (by foreclosure or otherwise) and a repurchase or substitution
pursuant to a breach of a representation and warranty, such Mortgage Loan will
be removed from the related Trust Fund if it has not been removed previously.
If any property securing a defaulted Loan is damaged and proceeds, if
any, from the related standard hazard insurance policy or the applicable special
hazard insurance policy, if any, are insufficient to restore the damaged
property to a condition sufficient to permit recovery under any pool insurance
policy or any primary mortgage insurance policy, FHA insurance, or VA guarantee,
neither the Master Servicer nor any Servicer will be required to expend its own
funds to restore the damaged property unless it determines (i) that such
restoration will increase the Liquidation Proceeds in respect of the Loan after
reimbursement of the expenses incurred by such Servicer or the Master Servicer
and (ii) that such expenses will be recoverable by it through proceeds of the
sale of the property or proceeds of the related pool insurance policy or any
related primary mortgage insurance policy, FHA insurance, or VA guarantee.
As to collateral securing a Cooperative Loan, any prospective purchaser
will generally have to obtain the approval of the board of directors of the
relevant cooperative before purchasing the shares and acquiring rights under the
proprietary lease or occupancy agreement securing that Cooperative Loan. See
"Certain Legal Aspects of Loans--Foreclosure on Shares of Cooperatives" herein.
This approval is usually based on the purchaser's income and net worth and
numerous other factors. Although the Cooperative's approval is unlikely to be
unreasonably withheld
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or delayed, the necessity of acquiring such approval could limit the number of
potential purchasers for those shares and otherwise limit the Trust Fund's
ability to sell and realize the value of those shares.
With respect to a defaulted Manufactured Home Loan, the value of the
related Manufactured Home can be expected to be less on resale than a new
Manufactured Home. To the extent equity does not cushion the loss in market
value, and such loss is not covered by other credit support, a loss may be
experienced by the Trust Fund.
Notwithstanding the foregoing, unless otherwise specified in the
related Prospectus Supplement, the Master Servicer may not acquire title to any
Multifamily Property securing a Mortgage Loan or take any other action that
would cause the related Trustee, for the benefit of Certificateholders of the
related series, or any other specified person to be considered to hold title to,
to be a "mortgagee-in-possession" of, or to be an "owner" or an "operator" of
such Mortgaged Property within the meaning of certain federal environmental
laws, unless the Master Servicer has previously determined, based on a report
prepared by a person who regularly conducts environmental audits (which report
will be an expense of the Trust Fund), that either:
(i) the Mortgaged Property is in compliance with applicable
environmental laws and regulations or, if not, that taking such actions
as are necessary to bring the Mortgaged Property into compliance
therewith is reasonably likely to produce a greater recovery on a
present value basis than not taking such actions; and
(ii) there are no circumstances or conditions present at the
Mortgaged Property that have resulted in any contamination for which
investigation, testing, monitoring, containment, clean-up or
remediation could be required under any applicable environmental laws
and regulations or, if such circumstances or conditions are present for
which any such action could be required, taking such actions with
respect to the Mortgaged Property is reasonably likely to produce a
greater recovery on a present value basis than not taking such actions.
See "Certain Legal Aspects of Mortgage Loans--Environmental
Legislation."
With respect to a Loan secured by a Multifamily Property, the market
value of any property obtained in foreclosure or by deed in lieu of foreclosure
will be based substantially on the operating income obtained by renting the
dwelling units. As a default on a Loan secured by Multifamily Property is likely
to have occurred because operating income, net of expenses, is insufficient to
make debt service payments on the related Loan, it can be anticipated that the
market value of such property will be less than anticipated when such Loan was
originated. To the extent that equity does not cushion the loss in market value
and such loss is not covered by other credit support, a loss may be experienced
by the related Trust Fund.
Enforcement of Due-On-Sale Clauses
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the borrower, the
Master Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such conveyance,
exercise the Trustee's right to accelerate the maturity of such Loan under the
applicable "due-on-sale" clause, if any, unless the Master Servicer reasonably
believes that such clause is not enforceable under applicable law or if the
enforcement of such clause would result in loss of coverage under any primary
mortgage insurance policy. If such conditions are not met or the Master Servicer
reasonably believes that enforcement of a due-on-sale clause will not be
enforceable, the Master Servicer is authorized to accept from or enter into a
substitution or assumption agreement, on behalf of the Trustee, with the person
to whom such property has been or is about to be conveyed, pursuant to which
such person becomes liable under the Loan and pursuant to which the original
borrower is released from liability and such person is substituted as the
borrower and becomes liable under the Loan. Any fee collected in connection with
an assumption will be retained by the Master Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with a
substitution or assumption.
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Servicing Compensation and Payment of Expenses
Except as otherwise provided in the related Prospectus Supplement, the
Master Servicer or any Servicer will be entitled to a servicing fee in an amount
to be determined as specified in the related Prospectus Supplement. The
servicing fee may be fixed or variable, as specified in the related Prospectus
Supplement. The Master Servicer or any Servicer will be entitled to additional
servicing compensation, unless otherwise specified in the related Prospectus
Supplement, in the form of assumption fees, late payment charges, or excess
proceeds following disposition of property in connection with defaulted Loans
and as otherwise specified herein.
Unless otherwise specified in the related Prospectus Supplement, the
Master Servicer will pay the fees of the Servicers, if any, and certain expenses
incurred in connection with the servicing of the Loans, including, without
limitation, the payment of the fees and expenses of the Trustee and independent
accountants, payment of insurance policy premiums and the cost of credit
support, if any, payment of expenses incurred in enforcing the obligations of
Servicers and Sellers and in the preparation of reports to Certificateholders.
Certain of these expenses may be reimbursable pursuant to the terms of the
Pooling and Servicing Agreement from Liquidation Proceeds and the proceeds of
insurance policies and, in the case of enforcement of the obligations of
Servicers and Sellers, from any recoveries in excess of amounts due with respect
to the related Loans or from specific recoveries of costs.
The Master Servicer will be entitled to reimbursement for certain
expenses incurred by it in connection with the liquidation of defaulted Loans.
The related Trust Fund will suffer no loss by reason of such expenses to the
extent claims are paid under related insurance policies or from the Liquidation
Proceeds. If claims are either not made or paid under the applicable insurance
policies or if coverage thereunder has been exhausted, the related Trust Fund
will suffer a loss to the extent that Liquidation Proceeds, after reimbursement
of the Master Servicer's expenses, are less than the outstanding principal
balance of and unpaid interest on the related Loan which would be distributable
to Certificateholders. In addition, the Master Servicer will be entitled to
reimbursement of expenditures incurred by it in connection with the restoration
of property securing a defaulted Loan, such right of reimbursement being prior
to the rights of the Certificateholders to receive any related proceeds of
insurance policies, Liquidation Proceeds or amounts derived from other forms of
credit support. The Master Servicer is also entitled to reimbursement from the
Collection Account and the Certificate Account for Advances.
Unless otherwise provided in the Prospectus Supplement, the rights of
the Master Servicer to receive funds from the Collection Account or the
Certificate 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 Certificateholders of such Series.
Evidence as to Compliance
Each Pooling and Servicing Agreement will provide for delivery (on or
before a specified date in each year) to the Trustee of an annual statement
signed by an officer of the Master Servicer, unless otherwise specified in the
related Prospectus Supplement, to the effect that the Master Servicer has
complied in all material respects with the minimum servicing standards set forth
in the Uniform Single Attestation Program for Mortgage Bankers and has fulfilled
in all material respects its obligations under the Pooling and Servicing
Agreement throughout the preceding year or, if there has been material
noncompliance with such servicing standards or a material default in the
fulfillment of any such obligation, such statement shall include a description
of such noncompliance or specify each such known default, as the case may be,
and the nature and status thereof. Such statement may be provided as a single
form making the required statements as to more than one Pooling and Servicing
Agreement.
Each Pooling and Servicing Agreement will also provide that on or
before a specified date in each year, beginning the first such date that is at
least a specified number of months after the Cut-off Date, a firm of independent
public accountants will furnish a report to the Depositor and the Trustee
stating the opinion of such firm that, unless otherwise specified in the related
Prospectus Supplement, on the basis of an examination by such firm conducted
substantially in accordance with standards established by the American Institute
of Certified Public Accountants, the assertion by management of the Master
Servicer regarding the Master Servicer's compliance with the minimum servicing
standards set forth in the Uniform Single Attestation Program for Mortgage
Bankers during the preceding
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year is fairly stated in all material respects, subject to such exceptions and
other qualifications that, in the opinion of such firm, such accounting
standards require it to report. In rendering its statement such firm may rely,
as to the matters relating to the direct servicing of mortgage loans by
Servicers, upon comparable statements for examinations conducted by independent
public accountants substantially in accordance with standards established by the
American Institute of Certified Public Accountants (rendered within one year of
such statement) with respect to those Servicers which also have been the subject
of such an examination.
Certain Matters Regarding the Master Servicer and the Depositor
The Master Servicer for each Series will be identified in the related
Prospectus Supplement. The Master Servicer may be an affiliate of the Depositor
and may have other business relationships with the Depositor and its affiliates.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may not resign from its obligations and duties under the Pooling
and Servicing Agreement except upon its determination that its duties thereunder
are no longer permissible under applicable law or except in connection with a
permitted transfer of servicing. No such resignation will become effective until
the Trustee or a successor Master Servicer has assumed the Master Servicer's
obligations and duties under the Pooling and Servicing Agreement.
In the event of an Event of Default under the Pooling and Servicing
Agreement, the Master Servicer may be replaced by the Trustee or a successor
Master Servicer. See "The Pooling and Servicing Agreements--Rights upon Events
of Default" herein.
Unless otherwise provided in the Prospectus Supplement, the Master
Servicer has the right, with the consent of the Trustee, which consent shall not
be unreasonably withheld, to assign its rights and delegate its duties and
obligations under the Pooling and Servicing Agreement for each Series; provided
that the purchaser or transferee accepting such assignment or delegation (i) is
qualified to sell loans to and service mortgage loans for FNMA or FHLMC; (ii)
has a net worth of not less than $10,000,000; (iii) is acceptable to each Rating
Agency for purposes of maintaining its then-current ratings of the Certificates;
(iv) is reasonably acceptable to the Trustee; and (v) executes and delivers to
the Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such purchaser or
transferee of the due and punctual performance and performed or observed by the
Master Servicer under the Pooling and Servicing Agreement from and after the
date of such agreement. To the extent that the Master Servicer transfers its
obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above. However, in such
instance the assigning Master Servicer will remain liable for the servicing
obligations under the Pooling and Servicing Agreement. Any entity into which the
Master Servicer is merged or consolidated or any successor corporation resulting
from any merger, conversion or consolidation will succeed to the Master
Servicer's obligations under the related Pooling and Servicing Agreement,
provided that such successor or surviving entity meets the requirements for a
successor Master Servicer set forth above.
Each Pooling and Servicing Agreement will also provide that neither the
Master Servicer, the Depositor, nor any director, officer, employee or agent of
the Master Servicer or the Depositor, will be under any liability to the related
Trust Fund or the Certificateholders for any action taken or for failing to take
any action in good faith pursuant to the Pooling and Servicing Agreement or for
errors in judgment; provided, however, that neither the Master Servicer, the
Depositor, nor any such person will be protected against any breach of warranty
or representations made by such party under the Pooling and Servicing Agreement
or the failure to perform its obligations in compliance with any standard of
care set forth in the Pooling and Servicing 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 Pooling and Servicing Agreement will
further provide that the Master Servicer, the Depositor and any director,
officer, employee or agent of the Master Servicer or the Depositor 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 Pooling and Servicing Agreement or the Certificates, 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
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addition, the Pooling and Servicing Agreement provides that neither the Master
Servicer nor the Depositor is under any obligation to appear in, prosecute or
defend any legal action which is not incidental to its servicing
responsibilities under the Pooling and Servicing Agreement which, in its
opinion, may involve it in any expense or liability. The Master Servicer or the
Depositor may, in its discretion, undertake any such action which it may deem
necessary or desirable with respect to the Pooling and Servicing Agreement and
the rights and duties of the parties thereto and the interests of the
Certificateholders thereunder. In such event, the legal expenses and costs of
such action and any liability resulting therefrom will be expenses, costs, and
liabilities of the Trust Fund and the Master Servicer or the Depositor will be
entitled to be reimbursed therefor out of the Collection Account (or the
Certificate Account, if applicable).
CREDIT SUPPORT
General
For any Series, credit support may be provided with respect to one or
more Classes thereof or the related Mortgage Assets. Credit support may be in
the form of a letter of credit, the subordination of one or more Classes of the
Certificates of such Series, subordination created through
overcollateralization, the establishment of one or more reserve funds, use of a
pool insurance policy, bankruptcy bond, repurchase bond or special hazard
insurance policy, certificate guarantee insurance, the use of cross-support
features or another method of credit support described in the related Prospectus
Supplement, or any combination of the foregoing, in any case, in such amounts
and having such terms and conditions as are acceptable to each Rating Agency
which assigns a rating to the Certificates of the related Series. Credit support
may also be provided in the form of an insurance policy covering the risk of
collection and adequacy of any Additional Collateral provided in connection with
any Additional Collateral Loan, subject to the limitations set forth in any such
insurance policy.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the credit support will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon at the Pass-Through Rate or Certificate Rate,
as applicable. If losses occur which exceed the amount covered by credit support
or which are not covered by credit support, such losses will be borne by the
Certificateholders. If credit support is provided with respect to a Series, the
related Prospectus Supplement will include a description of (a) the amount
payable under such credit support, (b) any conditions to payment thereunder not
otherwise described herein, (c) the conditions under which the amount payable
under such credit support may be reduced and under which such credit support may
be terminated or replaced and (d) the material provisions of any agreement
relating to such credit support. Additionally, the related Prospectus Supplement
will set forth certain information with respect to the issuer of any third-party
credit support, including (a) a brief description of its principal business
activities, (b) its principal place of business, place of incorporation and the
jurisdiction under which it is chartered or licensed to do business, (c) if
applicable, the identity of regulatory agencies which exercise primary
jurisdiction over the conduct of its business and (d) its total assets, and its
stockholders' or policyholders' surplus, if applicable, as of the date specified
in the Prospectus Supplement.
Subordinate Certificates; Subordination Reserve Fund
If so specified in the related Prospectus Supplement, one or more
Classes of a Series may be Subordinate Certificates. If so specified in the
related Prospectus Supplement, the rights of the Subordinate Certificateholders
to receive distributions of principal and interest from the Certificate Account
on any Distribution Date will be subordinated to such rights of the Senior
Certificateholders to the extent of the then applicable Subordinated Amount as
defined in the related Prospectus Supplement. The Subordinated Amount will
decrease whenever amounts otherwise payable to the Subordinate
Certificateholders are paid to the Senior Certificateholders (including amounts
withdrawn from the Subordination Reserve Fund, if any, and paid to the Senior
Certificateholders), and will (unless otherwise specified in the related
Prospectus Supplement) increase whenever there is distributed to the Subordinate
Certificateholders amounts in respect of which subordination payments have
previously been paid to the Senior Certificateholders (which will occur when
subordination payments in respect of delinquencies and certain other
deficiencies have been recovered).
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A Series may include a Class or Subordinate Certificates entitled to
receive cash flows remaining after distributions made to all other Classes. Such
right will effectively be subordinate to the rights of other Certificateholders,
but will not be limited to the Subordinated Amount. If so specified in the
related Prospectus Supplement, the subordination of a Class may apply only in
the event of certain types of losses not covered by insurance policies or other
credit support, such as losses arising from damage to property securing a Loan
not covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and application of certain provisions of the Bankruptcy
Code, or losses resulting from the denial of insurance coverage due to fraud or
misrepresentation in connection with the origination of a Loan.
With respect to any Series which includes one or more Classes of
Subordinate Certificates, a Subordination Reserve Fund may be established if so
specified in the related Prospectus Supplement. The Subordination Reserve Fund,
if any, will be funded with cash, a letter of credit, a demand note or Eligible
Reserve Fund Investments, or by the retention of amounts of principal or
interest otherwise payable to Holders of Subordinate Certificates, or both, as
specified in the related Prospectus Supplement. The Subordination Reserve Fund
will not be a part of the Trust Fund, unless otherwise specified in the related
Prospectus Supplement. If the Subordination Reserve Fund is not a part of the
Trust Fund, the Trustee will have a security interest therein on behalf of the
Senior Certificateholders. Moneys will be withdrawn from the Subordination
Reserve Fund to make distributions of principal of or interest on Senior
Certificates under the circumstances set forth in the related Prospectus
Supplement.
Moneys deposited in any Subordination Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the related
Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the Subordination Reserve Fund for such Series,
and any loss resulting from such investments will be charged to such
Subordination Reserve Fund. Amounts in any Subordination Reserve Fund in excess
of the Required Reserve Fund Balance may be periodically released to the
Subordinate Certificateholders under the conditions and to the extent specified
in the related Prospectus Supplement. Additional information concerning any
Subordination Reserve Fund will be set forth in the related Prospectus
Supplement, including the amount of any initial deposit to such Subordination
Reserve Fund, the Required Reserve Fund Balance to be maintained therein, the
purposes for which funds in the Subordination Reserve Fund may be applied to
make distributions to Senior Certificateholders and the employment of
reinvestment earnings on amounts in the Subordination Reserve Fund, if any.
Overcollateralization
If so specified in the related Prospectus Supplement, subordination may
be provided by one or more Classes of Senior Certificates through
overcollateralization; i.e. by having a greater amount of aggregate principal
balance of the Mortgage Assets for a Series than the aggregate principal balance
of the Certificates of such Series. Such subordination may exist on the Closing
Date or may be effected through the allocation of interest payments on the Loans
to reduce the principal balances of certain Classes of Certificates.
In a Series with overcollateralization, the allocation of losses to the
Certificates is handled through the priority of payment process, first by
interest that otherwise would pay down principal on the Certificates, and then
such losses would allocated to the Senior Certificates only if the principal
balance of the Mortgage Loans was reduced to less than the principal balance of
the Senior Certificates. If so specified in the related Prospectus Supplement,
the level of overcollateralization required under the provisions of the Pooling
and Servicing Agreement will be subject to various tests based primarily on the
loss and delinquency experience of the related Mortgage Assets, and will be
raised and lowered accordingly.
Cross-Support Features
If the Mortgage Assets for a Series are divided into separate Asset
Groups, the beneficial ownership of which is evidenced by a separate Class or
Classes of a Series, credit support may be provided by a cross-support feature
which requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Certificates evidencing the beneficial ownership interest in another Asset
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Group within the Trust Fund. The related Prospectus Supplement for a Series
which includes a cross-support feature will describe the manner and conditions
for applying such cross-support feature.
Insurance
Credit support with respect to a Series may be provided by various
forms of insurance policies, subject to limits on the aggregate dollar amount of
claims that will be payable under each such insurance policy, with respect to
all Loans comprising or underlying the Mortgage Assets for a Series, or such of
the Loans as have certain characteristics. Such insurance policies include
primary mortgage insurance and standard hazard insurance and may, if specified
in the related Prospectus Supplement, include a pool insurance policy covering
losses in amounts in excess of coverage of any primary insurance policy, a
special hazard insurance policy covering certain risks not covered by standard
hazard insurance policies, a bankruptcy bond covering certain losses resulting
from the bankruptcy of a borrower and application of certain provisions of the
Bankruptcy Code, a repurchase bond covering the repurchase of a Loan for which
mortgage insurance or hazard insurance coverage has been denied due to
misrepresentations in connection with the organization of the related Loan, or
other insurance covering other risks associated with the particular type of
Loan. See "Description of Mortgage and Other Insurance." Copies of the actual
pool insurance policy, special hazard insurance policy, bankruptcy bond or
repurchase bond, if any, relating to the Loans comprising the Mortgage Assets
for a Series will be filed with the Commission as an exhibit to a Current Report
on Form 8-K to be filed within 15 days of issuance of the Certificates of the
related Series.
Letter of Credit
The letter of credit, if any, with respect to a Series of Certificates
will be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Certificates (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the Bankruptcy Code, or losses resulting from denial of insurance coverage due
to misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each Series of Certificates will expire at the
earlier of the date specified in the related Prospectus Supplement or the
termination of the Trust Fund. See "Description of the Certificates--Optional
Termination" and "The Pooling and Servicing Agreements--Termination." A copy of
the letter of credit for a Series, if any, will be filed with the Commission as
an exhibit to a Current Report on Form 8-K to be filed within 15 days of
issuance of the Certificates of the related Series.
Certificate Guarantee Insurance
Certificate Guarantee Insurance, if any, with respect to a Series of
Certificates will be provided by one or more insurance companies. Such
Certificate Guarantee Insurance will guarantee, with respect to one or more
Classes of Certificates of the related Series, timely distributions of interest
and full distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Certificate Guarantee Insurance will also guarantee against any payment made to
a Certificateholder which is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the certificate guarantee insurance
for a Series, if any, will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related Series.
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Reserve Funds
One or more Reserve Funds may be established with respect to a Series,
in which cash, a letter of credit, Eligible Reserve Fund Investments, a demand
note or a combination thereof, in the amounts, if any, so specified in the
related Prospectus Supplement will be deposited. The Reserve Funds for a Series
may also be funded over time by depositing therein a specified amount of the
distributions received on the related Mortgage Assets as specified in the
related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement. A
Reserve Fund may be provided to increase the likelihood of timely payments of
principal of and interest on the Certificates, if required as a condition to the
rating of such Series by each Rating Agency rating such Series. If so specified
in the related Prospectus Supplement, Reserve Funds may be established to
provide limited protection, in an amount satisfactory to each Rating Agency
which assigns a rating to the Certificates, against certain types of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the Bankruptcy Code or losses resulting from denial of insurance coverage due to
fraud or misrepresentation in connection with the origination of a Loan.
Following each Distribution Date amounts in such Reserve Fund in excess of any
required reserve fund balance may be released from the Reserve Fund under the
conditions and to the extent specified in the related Prospectus Supplement and
will not be available for further application by the Trustee.
Moneys deposited in any Reserve Funds will be invested in Eligible
Reserve Fund Investments, except as otherwise specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, any reinvestment income or other gain from such investments will be
credited to the related Reserve Fund for such Series, and any loss resulting
from such investments will be charged to such Reserve Fund. However, such income
may be payable to the Master Servicer or a Servicer as additional servicing
compensation. See "Servicing of Loans" and "The Pooling and Servicing
Agreements--Investment of Funds." The Reserve Fund, if any, for a Series will
not be a part of the Trust Fund unless otherwise specified in the related
Prospectus Supplement.
Additional information concerning any Reserve Fund will be set forth in
the related Prospectus Supplement, including the initial balance of such Reserve
Fund, the required Reserve Fund balance to be maintained, the purposes for which
funds in the Reserve Fund may be applied to make distributions to
Certificateholders and use of investment earnings from the Reserve Fund, if any.
DESCRIPTION OF MORTGAGE AND OTHER INSURANCE
The following descriptions of primary mortgage insurance policies, pool
insurance policies, special hazard insurance policies, standard hazard insurance
policies, bankruptcy bonds, repurchase bonds and other insurance and the
respective coverages thereunder are general descriptions only and do not purport
to be complete.
Mortgage Insurance on the Loans
General. Unless otherwise specified in the related Prospectus
Supplement, all Mortgage Loans that are Conventional Loans secured by Single
Family Property and which had initial Loan-to-Value Ratios of greater than 80%
will be covered by primary mortgage insurance policies providing coverage on the
amount of each such Mortgage Loan in excess of 75% of the original Appraised
Value of the related Mortgaged Property and remaining in force until the
principal balance of such Mortgage Loan is reduced to 80% of such original
Appraised Value. Multifamily Loans will not be covered by a primary mortgage
insurance policy, regardless of the related Loan-to-Value Ratio.
A pool insurance policy will be obtained if so specified in the related
Prospectus Supplement to cover any loss (subject to limitations described
herein) occurring as a result of default by the borrowers to the extent not
covered by any primary mortgage insurance policy, FHA Insurance or VA Guarantee.
See "Pool Insurance Policy" below.
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Neither the primary mortgage insurance policies nor any pool insurance policy
will insure against certain losses sustained in the event of a personal
bankruptcy of the borrower under a Mortgage Loan. See "Certain Legal Aspects of
Loans" herein. Such losses will be covered to the extent described in the
related Prospectus Supplement by the bankruptcy bond or other credit support, if
any.
To the extent that the primary mortgage insurance policies do not cover
all losses on a defaulted or foreclosed Mortgage Loan, and to the extent such
losses are not covered by the pool insurance policy or other credit support for
such Series, such losses, if any, would affect payments to Certificateholders.
In addition, the pool insurance policy and primary mortgage insurance policies
do not provide coverage against hazard losses. See "Hazard Insurance on the
Loans" below. Certain hazard risks will not be insured and the occurrence of
such hazards could adversely affect payments to the Certificateholders.
Primary Mortgage Insurance. While the terms and conditions of the
primary mortgage insurance policies issued by one primary mortgage guaranty
insurer (a "Primary Insurer") will differ from those in primary mortgage
insurance policies issued by other Primary Insurers, each primary mortgage
insurance policy generally will pay either: (i) the insured percentage of the
loss on the related Mortgaged Property; (ii) the entire amount of such loss,
after receipt by the Primary Insurer of good and merchantable title to, and
possession of, the Mortgaged Property; or (iii) at the option of the Primary
Insurer under certain primary mortgage insurance policies, the sum of the
delinquent monthly payments plus any advances made by the insured, both to the
date of the claim payment and, thereafter, monthly payments in the amount that
would have become due under the Mortgage Loan if it had not been discharged plus
any advances made by the insured until the earlier of (a) the date the Mortgage
Loan would have been discharged in full if the default had not occurred or (b)
an approved sale. The amount of the loss as calculated under a primary mortgage
insurance policy covering a Mortgage Loan will generally consist of the unpaid
principal amount of such Mortgage Loan and accrued and unpaid interest thereon
and reimbursement of certain expenses, less (i) rents or other payments
collected or received by the insured (other than the proceeds of hazard
insurance) that are derived from the related Mortgaged Property, (ii) hazard
insurance proceeds in excess of the amount required to restore such Mortgaged
Property and which have not been applied to the payment of the Mortgage Loan,
(iii) amounts expended but not approved by the Primary Insurer, (iv) claim
payments previously made on such Mortgage Loan and (v) unpaid premiums and
certain other amounts.
As conditions precedent to the filing or payment of a claim under a
primary mortgage insurance policy, in the event of default by the Mortgagor, the
insured will typically be required, among other things, to: (i) advance or
discharge (a) hazard insurance premiums and (b) as necessary and approved in
advance by the Primary Insurer, real estate taxes, protection and preservation
expenses and foreclosure and related costs; (ii) in the event of any physical
loss or damage to the Mortgaged Property, have the Mortgaged Property restored
to at least its condition at the effective date of the primary mortgage
insurance policy (ordinary wear and tear excepted); and (iii) tender to the
Primary Insurer good and merchantable title to, and possession of, the Mortgaged
Property.
The Pooling and Servicing Agreement for a Series generally will require
that the Master Servicer or Servicer maintain, or cause to be maintained,
coverage under a primary mortgage insurance policy to the extent such coverage
was in place on the Cut-off Date. In the event that the Depositor gains
knowledge that, as of the Closing Date, a Mortgage Loan had a Loan-to-Value
Ratio at origination in excess of 80% and was not the subject of a primary
mortgage insurance policy (and was not included in any exception to such
standard disclosed in the related Prospectus Supplement) and that such Mortgage
Loan has a then current Loan-to-Value Ratio in excess of 80%, then the Master
Servicer or the Servicer is required to use its reasonable efforts to obtain and
maintain a primary mortgage insurance policy to the extent that such a policy is
obtainable at a reasonable price.
Any primary mortgage insurance or primary credit insurance policies
relating to Loans secured by Manufactured Homes will be described in the related
Prospectus Supplement.
FHA Insurance and VA Guarantees. The Housing Act authorizes various FHA
mortgage insurance programs. Some of the Mortgage Loans may be insured under
either Section 203(b), Section 234 or Section 235 of the Housing Act. Under
Section 203(b), FHA insures mortgage loans of up to 30 years' duration for the
purchase of one- to four-family dwelling units. Mortgage loans for the purchase
of condominium units are insured by FHA under Section 234.
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Loans insured under these programs must bear interest at a rate not exceeding
the maximum rate in effect at the time the loan is made, as established by HUD,
and may not exceed specified percentages of the lesser of the appraised value of
the property and the sales price, less seller paid closing costs for the
property, up to certain specified maximums. In addition, FHA imposes initial
investment minimums and other requirements on mortgage loans insured under the
Section 203(b) and Section 234 programs.
Under Section 235, assistance payments are paid by HUD to the mortgagee
on behalf of eligible mortgagors for as long as the mortgagors continue to be
eligible for the payments. To be eligible, a mortgagor must be part of a family,
have income within the limits prescribed by HUD at the time of initial
occupancy, occupy the property and meet requirements for recertification at
least annually.
The regulations governing these programs provide that insurance
benefits are payable either (i) upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or (ii) upon
assignment of the defaulted mortgage loan to HUD. The FHA insurance that may be
provided under these programs upon the conveyance of the home to HUD is equal to
100% of the outstanding principal balance of the mortgage loan, plus accrued
interest, as described below, and certain additional costs and expenses. When
entitlement to insurance benefits results from assignment of the mortgage loan
to HUD, the insurance payment is computed as of the date of the assignment and
includes the unpaid principal amount of the mortgage loan plus mortgage interest
accrued and unpaid to the assignment date.
When entitlement to insurance benefits results from foreclosure (or
other acquisition of possession) and conveyance, the insurance payment is equal
to the unpaid principal amount of the mortgage loan, adjusted to reimburse the
mortgagee for certain tax, insurance and similar payments made by it and to
deduct certain amounts received or retained by the mortgagee after default, plus
reimbursement not to exceed two-thirds of the mortgagee's foreclosure costs. Any
FHA insurance relating to Loans underlying a Series of Certificates will be
described in the related Prospectus Supplement.
The Servicemen's Readjustment Act of 1944, as amended, permits a
veteran (or, in certain instances, his or her spouse) to obtain a mortgage loan
guaranty by the VA covering mortgage financing of the purchase of a one- to
four-family dwelling unit to be occupied as the veteran's home at an interest
rate not exceeding the maximum rate in effect at the time the loan is made, as
established by HUD. The program has no limit on the amount of a mortgage loan,
requires no down payment from the purchaser and permits the guaranty of mortgage
loans with terms, limited by the estimated economic life of the property, up to
30 years. The maximum guaranty that may be issued by the VA under this program
is 50% of the original principal amount of the mortgage loan up to a certain
dollar limit established by the VA. The liability on the guaranty is reduced or
increased on a pro rata basis with any reduction or increase in the amount of
indebtedness, but in no event will the amount payable on the guaranty exceed the
amount of the original guaranty. Notwithstanding the dollar and percentage
limitations of the guaranty, a mortgagee will ordinarily suffer a monetary loss
only when the difference between the unsatisfied indebtedness and the proceeds
of a foreclosure sale of mortgaged premises is greater than the original
guaranty as adjusted. The VA may, at its option, and without regard to the
guaranty, make full payment to a mortgagee of the unsatisfied indebtedness on a
mortgage upon its assignment to the VA.
Since there is no limit imposed by the VA on the principal amount of a
VA-guaranteed mortgage loan but there is a limit on the amount of the VA
guaranty, additional coverage under a Primary Mortgage Insurance Policy may be
required by the Depositor for VA loans in excess of certain amounts. The amount
of any such additional coverage will be set forth in the related Prospectus
Supplement. Any VA guaranty relating to Loans underlying a Series of
Certificates will be described in the related Prospectus Supplement.
Pool Insurance Policy. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to maintain the pool insurance
policy and to present or cause the Servicers, if any, to present claims
thereunder on behalf of the Trustee and the Certificateholders. See "Servicing
of Loans--Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and conditions of pool insurance policies vary to some
degree, the following describes material aspects of such policies generally. The
related Prospectus Supplement will describe any provisions of a pool insurance
policy which are materially different from those described below.
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The responsibilities of the Master Servicer, the amount of claim for
benefits, the conditions precedent to the filing or payment of a claim, the
policy provisions and the payment of claims under a pool insurance policy are
generally similar to those described above for primary mortgage insurance
policies, subject to the aggregate limit on the amount of coverage. It may also
be a condition precedent to the payment of any claim under the pool insurance
policy that the insured maintain a primary mortgage insurance policy that is
acceptable to the pool insurer on all Mortgage Loans in the related Trust Fund
that have Loan-to-Value Ratios at the time of origination in excess of 80% and
that a claim under such primary mortgage insurance policy has been submitted and
settled. FHA Insurance and VA Guarantees will be deemed to be acceptable primary
insurance policies under the pool insurance policy. Assuming satisfaction of
these conditions, the pool insurer will pay to the insured the amount of the
loss which will generally be: (i) the amount of the unpaid principal balance of
the defaulted Mortgage Loan immediately prior to the sale of the Mortgaged
Property, (ii) the amount of the accumulated unpaid interest on such Mortgage
Loan to the date of claim settlement at the contractual rate of interest and
(iii) advances made by the insured as described above less certain payments. An
"approved sale" is (i) a sale of the Mortgaged Property acquired by the insured
because of a default by the borrower to which the pool insurer has given prior
approval, (ii) a foreclosure or trustee's sale of the Mortgaged Property at a
price exceeding the maximum amount specified by the pool insurer, (iii) the
acquisition of the Mortgaged Property under the primary mortgage insurance
policy by the mortgage insurer or (iv) the acquisition of the Mortgaged Property
by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and merchantable title to the Mortgaged
Property. If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and the proceeds, if any, from the related standard hazard insurance
policy or the applicable special hazard insurance policy, if any, are
insufficient to restore the damaged Mortgaged Property to a condition sufficient
to permit recovery under the pool insurance policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to the
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it through liquidation proceeds or insurance proceeds.
The original amount of coverage under the pool insurance policy will be
reduced over the life of the Certificates by the aggregate net dollar amount of
claims paid less the aggregate net dollar amount realized by the pool insurer
upon disposition of all foreclosed Mortgaged Properties covered thereby. The
amount of claims paid includes certain expenses incurred by the Master Servicer
as well as accrued interest at the applicable interest rate on delinquent
Mortgage Loans to the date of payment of the claim. See "Certain Legal Aspects
of Loans" herein. Accordingly, if aggregate net claims paid under a pool
insurance policy reach the original policy limit, coverage under the pool
insurance policy will lapse and any further losses will be borne by the Trust
Fund, and thus will affect adversely payments on the Certificates. In addition,
the exhaustion of coverage under any pool insurance policy may affect the Master
Servicer's or Servicer's willingness or obligation to make Advances. If the
Master Servicer or a Servicer determines that an Advance in respect of a
delinquent Loan would not be recoverable from the proceeds of the liquidation of
such Loan or otherwise, it will not be obligated to make an advance respecting
any such delinquency since the Advance would not be ultimately recoverable by
it. See "Servicing of Loans--Advances and Limitations Thereon."
Mortgage Insurance with Respect to Manufactured Home Loans. A
Manufactured Home Loan may be an FHA Loan or a VA Loan. Any primary mortgage or
similar insurance and any pool insurance policy with respect to Manufactured
Home Loans will be described in the related Prospectus Supplement.
Hazard Insurance on the Loans
Standard Hazard Insurance Policies for Mortgage Loans. The terms of the
Mortgage Loans require each Mortgagor to maintain a hazard insurance policy
covering the related Mortgaged Property and providing for coverage at least
equal to that of the standard form of fire insurance policy with extended
coverage customary in the state in which the property is located. Such coverage
generally will be in an amount equal to the lesser of the principal balance of
such Mortgage Loan or 100% of the insurable value of the improvements securing
the Mortgage Loan. The Pooling and Servicing Agreement will provide that the
Master Servicer or Servicer shall cause such hazard policies to be maintained or
shall obtain a blanket policy insuring against losses on the Mortgage Loans. The
ability
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of the Master Servicer or Servicer to ensure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any hazard insurance policy and under any flood insurance policy
referred to below, or upon the extent to which information in this regard is
furnished to the Master Servicer or the Servicer by Mortgagors.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the property by
fire, lightning, explosion, smoke, windstorm, hail, riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
The policies relating to the Mortgage Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws. Such policies
typically do not cover any physical damage resulting from the following: war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mudflows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in
certain cases, vandalism. The foregoing list is merely indicative of certain
kinds of uninsured risks and is not intended to be all-inclusive. Where the
improvements securing a Mortgage Loan are located in a federally designated
flood area at the time of origination of such Mortgage Loan, the Pooling and
Servicing Agreement generally requires the Master Servicer or Servicer to cause
to be maintained for each such Mortgage Loan serviced, flood insurance as
described under "Servicing of Loans--Maintenance of Insurance Policies and Other
Servicing Procedures."
Standard Hazard Insurance Policies for Manufactured Home Loans. The
terms of the Pooling and Servicing Agreement will require the Servicer or the
Master Servicer, as applicable, to cause to be maintained with respect to each
Manufactured Home Loan one or more standard hazard insurance policies which
provide, at a minimum, the same coverage as a standard form fire and extended
coverage insurance policy that is customary for manufactured housing, issued by
a company authorized to issue such policies in the state in which the
Manufactured Home is located, and in an amount which is not less than the
maximum insurable value of such Manufactured Home or the principal balance due
from the Mortgagor on the related Manufactured Home Loan, whichever is less.
Such coverage may be provided by one or more blanket insurance policies covering
losses on the Manufactured Home Loans resulting from the absence or
insufficiency of individual standard hazard insurance policies. If a
Manufactured Home's location was, at the time of origination of the related
Manufactured Home Loan, within a federally designated flood area, the Servicer
or the Master Servicer also will be required to maintain flood insurance.
If the Servicer or the Master Servicer repossesses a Manufactured Home
on behalf of the Trustee, the Servicer or the Master Servicer will either (i)
maintain at its expense hazard insurance with respect to such Manufactured Home
or (ii) indemnify the Trustee against any damage to such Manufactured Home prior
to resale or other disposition.
Special Hazard Insurance Policy. Although the terms of such policies
vary to some degree, a special hazard insurance policy typically provides that,
where there has been damage to property securing a defaulted or foreclosed Loan
(title to which has been acquired by the insured) and to the extent such damage
is not covered by the standard hazard insurance policy or any flood insurance
policy, if applicable, required to be maintained with respect to such property,
or in connection with partial loss resulting from the application of the
coinsurance clause in a standard hazard insurance policy, the special hazard
insurer will pay the lesser of (i) the cost of repair or replacement of such
property or (ii) upon transfer of the property to the special hazard insurer,
the unpaid principal balance of such Loan at the time of acquisition of such
property by foreclosure or deed in lieu of foreclosure, plus accrued interest to
the date of claim settlement and certain expenses incurred by the Master
Servicer or the Servicer with respect to such property. If the unpaid principal
balance plus accrued interest and certain expenses is paid by the special hazard
insurer, the amount of further coverage under the special hazard insurance
policy will be reduced by such amount less any net proceeds from the sale of the
property. Any amount paid as the cost of repair of the property will reduce
coverage by such amount. Special hazard insurance policies typically do not
cover losses occasioned by war, civil insurrection, certain governmental
actions, errors in design, faulty workmanship or materials (except under certain
circumstances), nuclear reaction, flood (if the mortgaged property is in a
federally designated flood area), chemical contamination and certain other
risks.
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Restoration of the property with the proceeds described under (i) above
is expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under the 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 certain expenses will not affect the
total insurance proceeds paid to holders of the Certificates, but will affect
the relative amounts of coverage remaining under the special hazard insurance
policy and pool insurance policy.
Other Hazard-Related Insurance; Liability Insurance. With respect to
Loans secured by Multifamily Property, certain additional insurance policies may
be required with respect to the Multifamily Property; for example, general
liability insurance for bodily injury and property damage, steam boiler coverage
where a steam boiler or other pressure vessel is in operation, and rent loss
insurance to cover operating income losses following damage or destruction of
the Mortgaged Property. With respect to a Series for which Loans secured by
Multifamily Property are included in the Trust Fund, the related Prospectus
Supplement will specify the required types and amounts of additional insurance
and describe the general terms of such insurance and conditions to payment
thereunder.
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 (and, if specified
in the related Prospectus Supplement, any related Additional Collateral) at an
amount less than the then outstanding principal balance of such Loan. The amount
of the secured debt could be reduced to such value, and the holder of such Loan
thus would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so assigned to the property (and any
related Additional Collateral) by the bankruptcy court. In addition, certain
other modifications of the terms of a Loan can result from a bankruptcy
proceeding. See "Certain Legal Aspects of Loans" herein. If so provided in the
related Prospectus Supplement, the Master Servicer will obtain a bankruptcy bond
or similar insurance contract (the "bankruptcy bond") for proceedings with
respect to borrowers under the Bankruptcy Code. The bankruptcy bond will cover
certain losses resulting from a reduction by a bankruptcy court of scheduled
payments of principal of and interest on a Loan or a reduction by such court of
the principal amount of a Loan and will cover certain unpaid interest on the
amount of such a principal reduction from the date of the filing of a bankruptcy
petition.
The bankruptcy bond will provide coverage in the aggregate amount
specified in the related Prospectus Supplement for all Loans in the Trust Fund
secured by single unit primary residences. Such amount will be reduced by
payments made under such bankruptcy bond in respect of such Loans, unless
otherwise specified in the related Prospectus Supplement, and will not be
restored.
Repurchase Bond
If so specified in the related Prospectus Supplement, the Seller, the
Depositor or the Master Servicer will be obligated to repurchase any Loan (up to
an aggregate dollar amount specified in the related Prospectus Supplement) for
which insurance coverage is denied due to dishonesty, misrepresentation or fraud
in connection with the origination or sale of such Loan. Such obligation may be
secured by a surety bond guaranteeing payment of the amount to be paid by the
Seller, the Depositor or the Master Servicer.
THE POOLING AND SERVICING AGREEMENTS
The following summaries describe certain provisions of the Pooling and
Servicing 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 Pooling and Servicing Agreements. Where particular provisions or terms used
in the Pooling and Servicing Agreements are referred to, such provisions or
terms are as specified in the Pooling and Servicing Agreements.
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Assignment of Mortgage Assets
General. The Depositor will transfer, convey and assign to the Trustee
all right, title and interest of the Depositor in the Mortgage Assets and other
property to be included in the Trust Fund for a Series. Such assignment will
include all principal and interest due on or with respect to the Mortgage Assets
after the Cut-off Date specified in the related Prospectus Supplement (except
for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
Assignment of Private Mortgage-Backed Securities. The Depositor will
cause Private Mortgage-Backed Securities to be registered in the name of the
Trustee (or its nominee or correspondent). The Trustee (or its agent or
correspondent) will have possession of any certificated Private Mortgage-Backed
Securities. Unless otherwise specified in the related Prospectus Supplement, the
Trustee will not be in possession of or be assignee of record of any underlying
assets for a Private Mortgage-Backed Security. See "The Trust Funds--Private
Mortgage-Backed Securities" herein. Each Private Mortgage-Backed Security will
be identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement (the "Mortgage Certificate Schedule"), which will specify
the original principal amount, outstanding principal balance as of the Cut-off
Date, annual pass-through rate or interest rate and maturity date for each
Private Mortgage-Backed Security conveyed to the Trustee. In the Pooling and
Servicing Agreement, the Depositor will represent and warrant to the Trustee
regarding the Private Mortgage-Backed Securities: (i) that the information
contained in the Mortgage Certificate Schedule is true and correct in all
material respects; (ii) that, immediately prior to the conveyance of the Private
Mortgage-Backed Securities, the Depositor had good title thereto, and was the
sole owner thereof (subject to any Retained Interests); (iii) that there has
been no other sale by it of such Private Mortgage-Backed Securities and (iv)
that there is no existing lien, charge, security interest or other encumbrance
(other than any Retained Interest) on such Private Mortgage-Backed Securities.
Assignment of Agency Securities. The Depositor will transfer, convey
and assign to the Trustee (or its nominee or correspondent) all right, title and
interest of the Depositor in the Agency Securities and other property to be
included in the Trust Fund for a series. Such assignment will include all
principal and interest due on or with respect to the Agency Securities after the
Cut-off Date specified in the related Prospectus Supplement (except for any
Retained Interest). The Depositor will cause the Agency Securities to be
registered in the name of the Trustee (or its nominee or correspondent), and the
Trustee will concurrently authenticate and deliver the Certificates. Each Agency
Security will be identified in a schedule appearing as an exhibit to the related
Pooling and Servicing Agreement, which will specify as to each Agency Security
the original principal amount and outstanding principal balance as of the
Cut-off Date and the annual pass-through rate or interest rate for each Agency
Security conveyed to the Trustee.
Assignment of Mortgage Loans. In addition, the Depositor will, as to
each Mortgage Loan, deliver or cause to be delivered to the Trustee, or, as
specified in the related Prospectus Supplement, the Custodian, the Mortgage Note
endorsed without recourse to the order of the Trustee or in blank, the original
Mortgage with evidence of recording indicated thereon (except for any Mortgage
not returned from the public recording office, in which case a copy of such
Mortgage will be delivered, together with a certificate that the original of
such mortgage was delivered to such recording office), an assignment of the
Mortgage in recordable form and, if applicable, any riders or modifications to
such Mortgage Note and Mortgage, together with certain other documents as set
forth in the related Pooling and Servicing Agreement. The Trustee, or, if so
specified in the related Prospectus Supplement, the Custodian, will hold such
documents in trust for the benefit of the Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will, at the time of delivery of the Certificates, cause assignments
to the Trustee of the Mortgage Loans 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 Mortgage Loan. As promptly as possible, the Depositor
will cause such assignments to be so recorded, in which event, the Pooling and
Servicing Agreement may require the Depositor to repurchase from the Trustee any
Mortgage Loan required to be recorded but not recorded within such time, at the
price described above with respect to repurchase by reason of defective
documentation. Unless otherwise provided in the related Prospectus Supplement,
the enforcement of the repurchase obligation would
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constitute the sole remedy available to the Certificateholders or the Trustee
for the failure of a Mortgage Loan to be recorded.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, its agent, or a custodian,
the related original cooperative note endorsed to the order of the Trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Each Mortgage Loan will be identified in a schedule appearing as an
exhibit to the Trust Agreement (the "Mortgage Loan Schedule"). Such Mortgage
Loan Schedule will specify, among other things, with respect to each Mortgage
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 of the related mortgage note; if the
Mortgage Loan is an ARM, the Minimum Mortgage Rate, the Maximum Mortgage Rate,
if any, and the Periodic Rate Cap; and whether the Mortgage Loan is an
Additional Collateral Loan, a Balloon Loan, a Cooperative Loan, a GPM Loan, a
GEM Loan, a Buy-Down Loan or a Mortgage Loan with other than fixed Scheduled
Payments and level amortization.
Assignment of Manufactured Home Loans. The Depositor will cause any
Manufactured Home Loans included in the Mortgage Assets for a Series of
Certificates to be assigned to the Trustee, together with principal and interest
due on or with respect to the Manufactured Home Loans after the Cut-off Date
specified in the related Prospectus Supplement. Each Manufactured Home Loan will
be identified in a loan schedule (the "Loan Schedule") appearing as an exhibit
to the related Pooling and Servicing Agreement. Such Loan Schedule will specify,
with respect to each Manufactured Home Loan, among other things: the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-off Date; the interest rate; the current Scheduled Payment
of principal and interest; and the maturity date of the Manufactured Home Loan.
In addition, with respect to each Manufactured Home Loan, the Depositor
will deliver or cause to be delivered to the Trustee, or, as specified in the
related Prospectus Supplement, the custodian, the original Manufactured Home
Loan and copies of documents and instruments related to each Manufactured Home
Loan and the security interest in the Manufactured Home securing each
Manufactured Home Loan. To give notice of the right, title and interest of the
Certificateholders to the Manufactured Home Loans, the Depositor will cause a
UCC-1 financing statement to be filed identifying the Trustee as the secured
party and identifying all Manufactured Home Loans as collateral. Unless
otherwise specified in the related Prospectus Supplement, the Manufactured Home
Loans will not be stamped or otherwise marked to reflect their assignment from
the Depositor to the Trustee. Therefore, if a subsequent purchaser were able to
take physical possession of the Manufactured Home Loans without notice of such
assignment, the interest of the Certificateholders in the Manufactured Home
Loans could be defeated. See "Certain Legal Aspects of Loans--Manufactured Home
Loans."
The Seller (or other party as described in the related Prospectus
Supplement) will provide limited representations and warranties to Depositor and
the Trustee concerning the Manufactured Home Loans. Such representations and
warranties will include: (i) that the information contained in the Loan Schedule
provides an accurate listing of the Manufactured Home Loans and that the
information respecting such Manufactured Home Loans set forth in such Loan
Schedule is true and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that, immediately prior to
the conveyance of the Manufactured Home Loans, the Depositor had good title to,
and was sole owner of, each such Manufactured Home Loan (subject to any Retained
Interests); (iii) that there has been no other sale by it of such Manufactured
Home Loans and that the Manufactured Home Loan is not subject to any lien,
charge, security interest or other encumbrance; (iv) if the Master Servicer will
not directly service the Manufactured Home Loans, each Servicing Agreement
entered into with a Servicer with respect to Manufactured Home Loans comprising
the Mortgage Assets has been assigned and conveyed to the Trustee and is not
subject to any offset, counterclaim, encumbrance or other charge; and (v) the
Depositor has obtained from each of the Master Servicer, the Servicer, the
originator of the Manufactured Home Loans or such other entity that is the
seller of the related Manufactured Home Loan representations and warranties
relating to certain information
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respecting the origination of and current status of the Manufactured Home Loans,
and has no knowledge of any fact which would cause it to believe that such
representations and warranties are inaccurate in any material respect. See "Loan
Underwriting Procedures and Standards" herein.
Assignment of Participation Certificates. The Depositor will cause any
Participation Certificates obtained under a participation agreement to be
assigned to the Trustee by delivering to the Trustee the Participation
Certificate, which will be reregistered in the name of the Trustee. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will not
be in possession of or be assignee of record with respect to the Loans
represented by the Participation Certificate. Each Participation Certificate
will be identified in a "Participation Certificate Schedule" which will specify
the original principal balance, outstanding principal balance as of the Cut-off
Date, pass-through rate and maturity date for each Participation Certificate. In
the Pooling and Servicing Agreement, the Depositor will represent and warrant to
the Trustee regarding the Participation Certificate: (i) that the information
contained in the Participation Certificate Schedule is true and correct in all
material respects; (ii) that, immediately prior to the conveyance of the
Participation Certificates, the Depositor had good title to and was sole owner
of the Participation Certificate; (iii) that there has been no other sale by it
of such Participation Certificate and (iv) that such Participation Certificate
is not subject to any existing lien, charge, security interest or other
encumbrance (other than any Retained Interests).
Repurchase and Substitution of Loans
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee is found by
the Trustee within 90 days of the execution of the related Pooling and Servicing
Agreement (or promptly after the Trustee's receipt of any document permitted to
be delivered after the Closing Date) to be defective in any material respect and
the related Servicer or Seller does not cure such defect within 60 days from the
date the Master Servicer was notified of the defect by the Trustee, or within
such other period specified in the related Prospectus Supplement, the related
Servicer or Seller if, and to the extent it is obligated to do so under the
related servicing agreement or mortgage loan sale agreement will, not later than
90 days or within such other period specified in the related Prospectus
Supplement, from the date the Seller or the Master Servicer was notified of the
defect by the Depositor, the Master Servicer or the Trustee, repurchase the
related Mortgage Loan or any property acquired in respect thereof from the
Trustee at a price equal to the outstanding principal balance of such Mortgage
Loan (or, in the case of a foreclosed Mortgage Loan, the outstanding principal
balance of such Mortgage Loan immediately prior to foreclosure), plus accrued
and unpaid interest to the date of the next scheduled payment on such Mortgage
Loan at the related Mortgage Rate.
Unless otherwise provided in the related Prospectus Supplement, the
Master Servicer may, rather than repurchase the Loan as described above, remove
such Loan from the Trust Fund (the "Deleted Loan") and substitute in its place
one or more other Loans (each, a "Qualified Substitute Mortgage Loan") provided,
however, that (i) with respect to a Trust Fund for which no REMIC election is
made, such substitution must be effected within 120 days of the date of initial
issuance of the Certificates and (ii) with respect to a Trust Fund for which a
REMIC election or elections are made, the Trustee must have received a
satisfactory opinion of counsel that such substitution will not result in a
prohibited transactions tax under the Code or cause the Trust Fund to lose its
status as a REMIC, or in the case of a Trust Fund consisting of two or more
REMICs, that such substitution will not cause any such REMIC to lose its status
as a REMIC.
Any Qualified Substitute Mortgage Loan will have, unless otherwise
specified in the related Prospectus Supplement, on the date of substitution, (i)
an outstanding principal balance, after deduction of all Scheduled Payments due
in the month of substitution, not in excess of the outstanding principal balance
of the Deleted Loan (the amount of any shortfall to be deposited to the
Certificate Account in the month of substitution for distribution to
Certificateholders), (ii) an interest rate not lower than and not more than 1%
of the interest rate of the Deleted Loan, (iii) have a Loan-to-Value Ratio at
the time of substitution no higher than that of the Deleted Loan at the time of
substitution, (iv) have a remaining term to maturity not greater than (and not
more than one year less than) that of the Deleted Loan, and (v) comply with all
of the representations and warranties set forth in the related Pooling and
Servicing Agreement as of the date of substitution. The related Pooling and
Servicing Agreement may include additional requirements relating to ARMs or
other specific types of Mortgage Loans, or additional provisions relating
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to meeting the foregoing requirements on an aggregate basis where a number of
substitutions occur contemporaneously.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Certificateholders or the Trustee for a material
defect in a Loan document.
Unless otherwise specified in the related Prospectus Supplement, the
Seller (or other party as described in the related Prospectus Supplement) will
make representations and warranties with respect to Loans which comprise the
Mortgage Assets for a Series. See "Loan Underwriting Procedures and
Standards--Representations and Warranties" above. If the related Seller (or
other party) cannot cure a breach of any such representations and warranties in
all material respects within 60 days after notification by the Master Servicer,
the Depositor or the Trustee of such breach, and if such breach is of a nature
that materially and adversely affects interest of the Certificateholders in such
Loan, the Seller is obligated to cure, substitute or repurchase the affected
Mortgage Loan if such Seller is required to do so under the applicable
agreement.
Reports to Certificateholders
The Master Servicer will prepare and will forward or will provide to
the Trustee for forwarding to each Certificateholder on each Distribution Date,
or as soon thereafter as is practicable, a statement setting forth, to the
extent applicable to any Series as specified in the related Pooling and
Servicing Agreement, among other things:
(i) as applicable, either (A) the amount of such
distribution allocable to principal on the Mortgage Assets, separately
identifying the aggregate amount of any principal prepayments included
therein and the amount, if any, advanced by the Master Servicer or by a
Servicer or (B) the amount of the principal distribution in reduction
of stated principal amount (or Compound Value) of each Class and the
aggregate unpaid principal amount (or Compound Value) of each Class
following such distribution;
(ii) as applicable, either (A) the amount of such
distribution allocable to interest on the Mortgage Assets and the
amount, if any, advanced by the Master Servicer or a Servicer or (B)
the amount of the interest distribution;
(iii) the amount of servicing compensation with respect
to the Mortgage Assets paid during the Due Period commencing on the Due
Date to which such distribution relates and the amount of servicing
compensation during such period attributable to penalties and fees;
(iv) with respect to Compound Interest Certificates,
prior to the Accrual Termination Date in addition to the information
specified in (i)(B) above, the amount of interest accrued on such
Certificates during the related Interest Accrual Period and added to
the Compound Value thereof;
(v) in the case of Floating Interest Certificates, the
Floating Rate applicable to the distribution being made;
(vi) if applicable, the number and aggregate principal
balances of Loans (A) delinquent for 31 to 60 days, (B) delinquent for
61 days to 90 days and (C) delinquent 91 days or more, as of the close
of business on the Determination Date to which such distribution
relates;
(vii) if applicable, the book value of any REO Property
acquired on behalf of Certificateholders through foreclosure, grant of
a deed in lieu of foreclosure or repossession as of the close of
business on the last Business Day of the calendar month preceding the
Distribution Date to which such distribution relates;
(viii) if applicable, the amount of coverage under any
pool insurance policy as of the close of business on the applicable
Distribution Date;
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(ix) if applicable, the amount of coverage under any
special hazard insurance policy as of the close of business on the
applicable Distribution Date;
(x) if applicable, the amount of coverage under any
bankruptcy bond as of the close of business on the applicable
Distribution Date;
(xi) in the case of any other credit support described
in the related Prospectus Supplement, the amount of coverage of such
credit support as of the close of business on the applicable
Distribution Date;
(xii) in the case of any Series which includes a
Subordinate Class, the Subordinated Amount, if any, determined as of
the related Determination Date and if the distribution to the Senior
Certificateholders is less than their required distribution, the amount
of the shortfall;
(xiii) the amount of any withdrawal from any applicable
Reserve Fund included in amounts actually distributed to
Certificateholders and the remaining balance of each Reserve Fund
(including any Subordination Reserve Fund), if any, on such
Distribution Date, after giving effect to distributions made on such
date; and
(xiv) such other information as specified in the related
Pooling and Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Master Servicer, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Certificateholder of record at any
time during such calendar year a report summarizing the items provided to
Certificateholders as specified in the Pooling and Servicing Agreement to enable
Certificateholders to prepare their tax returns including, without limitation,
the amount of original issue discount accrued on the Certificates, if
applicable. Information in the Distribution Date and annual reports provided to
the Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Master Servicer will provide to the
Trustee a report by independent public accountants with respect to the Master
Servicer's servicing of the Loans. See "Servicing of Loans--Evidence as to
Compliance" herein.
Investment of Funds
The Certificate Account, Collection Account or Custodial Account, if
any, and any other funds and accounts for a Series that may be invested by the
Trustee or by the Master Servicer or by the Servicer, if any, can be invested
only in Eligible Investments acceptable to each Rating Agency rating such
Series, which may include, without limitation, (i) direct obligations of, or
obligations fully guaranteed as to principal and interest by, the United States
of America or any agency or instrumentality thereof, provided that such
obligations are backed by the full faith and credit of the United States of
America; (ii) commercial paper (having original maturities of not more than nine
months) of any corporation incorporated under the laws of the United States or
any state thereof or the District of Columbia which on the date of acquisition
has been rated by each Rating Agency in its highest short-term rating, or such
lower category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates by each Rating Agency; (iii)
certificates of deposit, demand or time deposits, federal funds or bankers'
acceptances issued by any bank or trust company incorporated under the laws of
the United States of America or of any state thereof or the District of
Columbia, provided that the short-term commercial paper of such bank or trust
company (or in the case of the principal depository institution in a depository
institution holding company, the long-term unsecured debt obligations of such
holding company) at the date of acquisition thereof has been rated by each
Rating Agency in its highest short-term rating; (iv) money market funds or
mutual funds organized under the Investment Company Act of 1940 rated in the
highest rating category by each Rating Agency; (v) repurchase obligations (the
collateral of which is held by a third party or the Trustee) with respect to any
security described in (i) above, provided that the long-term unsecured
obligations of the party agreeing to repurchase such obligations are at the time
rated by each Rating Agency in one of its two highest long-term rating
categories; and (vi) such other investments which do not adversely affect the
rating on the Certificates of such Series as confirmed in writing by each Rating
Agency.
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Funds held in a Reserve Fund or Subordinated Reserve Fund may be
invested in certain Eligible Reserve Fund Investments which may include Eligible
Investments, mortgage loans, mortgage pass-through or participation securities,
mortgage-backed bonds or notes or other investments to the extent specified in
the related Prospectus Supplement.
Eligible Investments or Eligible Reserve Fund Investments with respect
to a Series will include only obligations or securities that mature on or before
the date on which the amounts in the Collection Account are required to be
remitted to the Trustee and amounts in the Certificate Account, any Reserve Fund
or the Subordinated Reserve Fund for such Series are required or may be
anticipated to be required to be applied for the benefit of Certificateholders
of such Series.
Unless provided in the related Prospectus Supplement, the reinvestment
income from the Subordination Reserve Fund, other Reserve Fund, Servicer
Account, Collection Account or the Certificate Account will be property of the
Trustee, the Master Servicer or a Servicer and not available for distributions
to Certificateholders. See "Servicing of Loans" herein.
Event of Default
Events of Default under the Pooling and Servicing Agreement for each
Series generally include (i) any failure by the Master Servicer to remit to the
Trustee for distribution to the Certificateholders of such Series any required
payment which continues unremedied for five business days, or one business day
for certain other required payments, after the giving of written notice of such
failure, requiring the same to be remedied, to the Master Servicer by the
Trustee or the Depositor for such Series, or to the Master Servicer, the
Depositor and the Trustee by the Holders of Certificates of such Series
evidencing at least 25% of Voting Rights of the Certificates for such Series,
(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 Pooling and
Servicing Agreement which continues unremedied for 30 days after the giving of
written notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
Holders of Certificates of such Series evidencing at least 25% of the Voting
Rights of the Certificates and (iii) certain events in insolvency, readjustment
of debt, marshalling of assets and liabilities or similar proceedings and
certain actions by the Master Servicer indicating its insolvency, reorganization
or inability to pay its obligations.
Rights Upon Event of Default
Unless otherwise specified in the related Prospectus Supplement, so
long as an Event of Default remains unremedied under the Pooling and Servicing
Agreement for a Series, the Trustee for such Series or Holders of Certificates
of such Series evidencing at least 51% of the aggregate outstanding principal
amount of the Certificates for such Series (the first 51% who provide such
notice) or the Depositor may terminate all of the rights and obligations of the
Master Servicer as servicer under the Pooling and Servicing Agreement and in and
to the Mortgage Loans (other than its right as a Certificateholder under the
Pooling and Servicing Agreement which rights the Master Servicer will retain
under all circumstances), whereupon the Trustee will succeed to all the
responsibilities, duties and liabilities of the Master Servicer under the
Pooling and Servicing 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 Pooling and Servicing Agreement. Unless otherwise
specified in the related Prospectus Supplement, in the event that the Trustee
would be obligated to succeed the Master Servicer but is unwilling so to act, it
may appoint (or if it is unable so to act, it shall appoint) or petition a court
of competent jurisdiction for the appointment of, a FNMA- or FHLMC-approved
mortgage servicing institution with a net worth of at least $10,000,000 or such
other amount as specified in the related Prospectus Supplement to act as a
successor to the Master Servicer under the Pooling and Servicing Agreement
(unless otherwise set forth in the Pooling and Servicing Agreement). Pending
such appointment, the Trustee is obligated to act in such capacity.
No Certificateholder of a Series, solely by virtue of such Holder's
status as a Certificateholder, will have any right under the Pooling and
Servicing Agreement for such Series to institute any proceeding with respect to
the
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Pooling and Servicing Agreement, unless such Holder previously has given to the
Trustee for such Series written notice of default and unless the Holders of
Certificates evidencing at least 25% of the aggregate outstanding principal
amount of the Certificates for such Series have made written request upon the
Trustee to institute such proceeding in its own name as Trustee thereunder and
have offered to the Trustee reasonable indemnity, and the Trustee for 60 days
has neglected or refused to institute any such proceeding.
The Trustee
The identity of the commercial bank, national banking association,
banking corporation, savings and loan association or trust company named as the
Trustee for each Series of Certificates will be set forth in the related
Prospectus Supplement. The entity serving as Trustee may have normal banking
relationships with the Depositor or the Master Servicer. In addition, for the
purpose of meeting the legal requirements of certain local jurisdictions, the
Trustee will have the power to appoint co-trustees or separate trustees of all
or any part of the Trust Fund relating to a Series of Certificates. In the event
of such appointment, all rights, powers, duties and obligations conferred or
imposed upon the Trustee by the Pooling and Servicing Agreement relating to such
Series will be conferred or imposed upon the Trustee and each such separate
trustee or co-trustee jointly, or, in any jurisdiction in which the Trustee
shall be incompetent or unqualified to perform certain acts, singly upon such
separate trustee or co-trustee who shall exercise and perform such rights,
powers, duties and obligations solely at the direction of the Trustee. The
Trustee may also appoint agents to perform any of the responsibilities of the
Trustee, which agents shall have any or all of the rights, powers, duties and
obligations of the Trustee conferred on them by such appointment; provided that
the Trustee shall continue to be responsible for its duties and obligations
under the Pooling and Servicing Agreement.
Duties of the Trustee
The Trustee makes no representations as to the validity or sufficiency
of the Pooling and Servicing Agreement, the Certificates or of any Mortgage
Asset or related documents. If no Event of Default (as defined in the related
Pooling and Servicing Agreement) has occurred, the Trustee is required to
perform only those duties specifically required of it under the Pooling and
Servicing 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 Pooling and Servicing Agreement. However, the Trustee will not be
responsible for the accuracy or content of any such documents furnished by it or
the Certificateholders to the Master Servicer under the Pooling and Servicing
Agreement.
The Trustee may be held liable for its own grossly negligent action or
failure to act, or for its own willful 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 Certificateholders in an Event of Default. See "Rights Upon Event of
Default" above. 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 a Pooling and Servicing Agreement, or in the exercise of any of its rights
or powers, if it has reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
Resignation of Trustee
The Trustee may, upon written notice to the Depositor, the Master
Servicer and to all Certificateholders; provided, that such resignation shall
not be effective until a successor trustee is appointed. If no successor Trustee
has been appointed and has accepted the appointment within 60 days after giving
such notice of resignation, the resigning Trustee may petition any court of
competent jurisdiction for appointment of a successor Trustee; provided, that
such the resigning Trustee shall not resign and be discharged until such time as
the successor trustee is approved by each Rating Agency. The Trustee may also be
removed at any time (i) by the Depositor, if the Trustee ceases to be eligible
to continue as such under the Pooling and Servicing Agreement, (ii) if the
Trustee becomes insolvent, (iii) if a tax is imposed or threatened with respect
to the Trust Fund by any state in which the Trustee or the Trust Fund held by
the Trustee pursuant to the Pooling and Servicing Agreement is located, or (iv)
by the Holders of Certificates evidencing at least 51% of the aggregate
outstanding principal amount of the Certificates in the Trust Fund
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upon 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.
Certificate Account
The Trustee will establish a separate account (the "Certificate
Account") in its name as Trustee for the Certificateholders, or if it is so
specified in the related Prospectus Supplement, the Certificate Account may be
established by the Master Servicer in the name of the Trustee. Unless otherwise
specified in the related Prospectus Supplement, the Certificate Account will be
an Eligible Account, and the funds held therein may be invested, pending
disbursement to Certificateholders of the related Series, pursuant to the terms
of the Pooling and Servicing Agreement, in Eligible Investments. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer or
the Trustee will be entitled to receive, as additional compensation, any
interest or other income earned on funds in the Certificate Account. There will
be deposited into the Certificate Account monthly all funds received from the
Master Servicer and required withdrawals from any reserve funds. Unless
otherwise specified in the related Prospectus Supplement, the Trustee is
permitted from time to time to make withdrawals from the Certificate Account for
each Series to remove amounts deposited therein in error, to pay to itself or
the Master Servicer any reinvestment income on funds held in the Certificate
Account to the extent it is entitled, to remit to the Master Servicer its
Servicing Fee, assumption or substitution fees, late payment charges and other
mortgagor charges, reimbursement of Advances and expenses, to make deposits to
any reserve fund, to make regular distributions to the Certificateholders, to
clear and terminate the Certificate Account and to make other withdrawals as
required or permitted by the related Pooling and Servicing Agreement.
Expense Reserve Fund
If specified in the Prospectus Supplement relating to a Series, the
Depositor may deposit on the related Closing Date in an account to be
established with the Trustee (the "Expense Reserve Fund") cash or Eligible
Investments which will be available to pay anticipated fees and expenses of the
Trustee or other agents. The Expense Reserve Fund for a Series may also be
funded over time through the deposit therein of all or a portion of cash flow,
to the extent described in the related Prospectus Supplement. The Expense
Reserve Fund, if any, will not be part of the Trust Fund held for the benefit of
the Holders. Amounts on deposit in any Expense Reserve Fund will be invested in
one or more Eligible Investments.
Amendment of Pooling and Servicing Agreement
Unless otherwise specified in the Prospectus Supplement, the Pooling
and Servicing Agreement for each Series of Certificates may be amended by the
Depositor, the Master Servicer, and the Trustee with respect to such Series,
without notice to or consent of the Certificateholders (i) to cure any
ambiguity, (ii) to correct or supplement any provision therein which may be
defective or inconsistent with any other provision therein, (iii) to make any
other provisions with respect to matters or questions arising under such Pooling
and Servicing Agreement which are not inconsistent with any other provisions of
such Pooling and Servicing Agreement or (iv) to comply with any requirements
imposed by the Code; provided that such amendment (other than pursuant to clause
(iv) above) will not adversely affect in any material respect the interests of
any Certificateholders of such Series.
Unless otherwise specified in the related Prospectus Supplement, the
Pooling and Servicing Agreement for each Series may also be amended by the
Trustee, the Master Servicer and the Depositor with respect to such Series with
the consent of the Holders possessing not less than 66 2/3% of the aggregate
outstanding principal amount of the Certificates of each Class of such Series
affected thereby, for the purpose of adding any provisions to or changing in any
manner or eliminating any of the provisions of such Pooling and Servicing
Agreement or modifying in any manner the rights of Certificateholders of such
Series; provided, however, that no such amendment may (i) reduce the amount or
delay the timing of payments on any Certificate without the consent of the
Holder of such Certificate; (ii) adversely affect the REMIC status, if a REMIC
election or elections have been made, for the related Trust Fund of a Series; or
(iii) reduce the aforesaid percentage of aggregate outstanding principal amount
of Certificates of each Class, the Holders of which are required to consent to
any such amendment without the consent of the Holders of 100% of the aggregate
outstanding principal amount of each Class of Certificates affected thereby.
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Notwithstanding the foregoing, if a REMIC election or elections have
been made with respect to the related Trust Fund, the Trustee will not be
entitled to consent to any amendment to a Pooling and Servicing Agreement
without having first received an opinion of counsel to the effect that such
amendment or the exercise of any power granted to the Master Servicer, the
Depositor or the Trustee in accordance with such amendment will not result in
the imposition of a tax on the related Trust Fund or any related REMIC or cause
such Trust Fund or any such REMIC to fail to qualify as a REMIC.
Voting Rights
The related Prospectus Supplement will set forth the method of
determining allocation of voting rights with respect to a Series, if other than
as set forth herein.
REMIC Administrator
With respect to any Multiple Class Series, preparation of certain
reports and certain other administrative duties with respect to the Trust Fund
may be performed by a REMIC administrator, who may be an affiliate of the
Depositor.
Termination
The obligations created by the Pooling and Servicing Agreement for a
Series will terminate upon the distribution to Certificateholders of all amounts
distributable to them pursuant to such Pooling and Servicing Agreement after (i)
the later of the final payment or other liquidation of the last Mortgage Loan
remaining in the Trust Fund for such Series or the disposition of all property
acquired upon foreclosure or deed in lieu of foreclosure in respect of any
Mortgage Loan or (ii) the repurchase by the Master Servicer or the Depositor (or
other party as specified in the Prospectus Supplement) from the Trustee for such
Series of all Mortgage Loans at that time subject to the Pooling and Servicing
Agreement and all property acquired in respect of any Mortgage Loan. The
exercise of such right will effect early retirement of the Certificates of such
Series, but such right to so purchase is subject to the aggregate principal
balances of the Mortgage Loans at the time of repurchase being less than a fixed
percentage, to be set forth in the related Prospectus Supplement, of the Cut-off
Date Aggregate Principal Balance. In no event, however, will the trust created
by the Pooling and Servicing Agreement continue beyond the expiration of 21
years from the death of the last survivor of certain persons identified therein.
For each Series, the Master Servicer or the Trustee, as applicable, will give
written notice of termination of the Pooling and Servicing Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency specified in the
notice of termination. See "Description of the Certificates--Optional
Termination" herein.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
properties securing the housing loans are situated. The summaries are qualified
in their entirety by reference to the applicable federal and state laws
governing the Loans.
Mortgages
The Mortgage Loans comprising or underlying the Mortgage Assets for a
Series will 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. Priority with respect to such instruments
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depends on their terms and in some cases the term of separate subordination or
intercreditor agreements, 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/homeowner or the land trustee (as described below), and the mortgagee,
who is the lender. Under the mortgage instrument, the mortgagor delivers to the
mortgagee a note or bond and the mortgage. In the case of a land trust, there
are three parties because title to the property is held by a land trustee under
a land trust agreement of which the borrower/homeowner 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/homeowner, 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. A deed to secure debt typically has two parties, pursuant to which
the borrower, or grantor, conveys title to the real property to the grantee, or
lender, generally with a power of sale, until such times as the debt is repaid.
The mortgagee's authority under a mortgage or a deed to secure debt 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,
the deed to secure debt, or deed of trust, and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
Cooperative Loans
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the cooperative shares and proprietary leases or occupancy
agreements, the priority of which will depend on the terms of the particular
security agreement as well as the order of recordation of the agreement or the
filing of the financing statements related thereto in the appropriate recording
office, or the taking of possession of the cooperative shares; depending on the
law of the state where the cooperative is located. Such a lien or security
interest is not, in general, prior to liens in favor of the cooperative
corporation for unpaid assessments or common charges. Such a lien or security
interest is not prior to the lien for real estate taxes and assessments and
other charges imposed under governmental police powers.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. A corporation which is entitled to be treated as a housing
cooperative under the Code owns all the real property or some interest therein
sufficient to permit it to own the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage or mortgages on the cooperative apartment building
and/or underlying land, as is generally the case, or an underlying lease of the
land, as is the case in some instances, the Cooperative, as property mortgagor,
is also responsible for meeting these mortgage or rental obligations. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord are generally subordinate to the interest
of the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations (i) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a blanket mortgage on a Cooperative may provide
financing in the form of a mortgage that does not fully amortize, with a
significant portion of principal being due in one final payment at maturity. The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure by
the holder of a blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual
tenant-stockholder of Cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans. Similarly, the termination of the
land lease by its holder could eliminate or significantly diminish the value
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of any collateral held by the lender who financed an individual
tenant-stockholder of the Cooperative shares or, in the case of the Mortgage
Loans, the collateral securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership
of stock or shares in the corporation, receive proprietary leases or occupancy
agreements which confer exclusive rights to occupy specific units. Generally, a
tenant-stockholder of a Cooperative must make a monthly payment to the
Cooperative representing such tenant-stockholder's pro rata share of the
Cooperative's payments for its blanket mortgage, real property taxes,
maintenance expenses and other capital or ordinary expenses. An ownership
interest in a Cooperative and accompanying occupancy rights are financed through
a Cooperative share loan evidenced by a promissory note and secured by a
security interest in the occupancy agreement or proprietary lease and in the
related Cooperative shares. The lender takes possession of the share certificate
and a counterpart of the proprietary lease or occupancy agreement and a
financing statement covering the proprietary lease or occupancy agreement and
the Cooperative shares is filed in the appropriate state and local offices to
perfect the lender's interest in its collateral. Subject to the limitations
discussed below, upon default of the tenant-stockholder, the lender may sue for
judgment on the promissory note, dispose of the collateral at a public or
private sale or otherwise proceed against the collateral or tenant-stockholder
as an individual as provided in the security agreement covering the assignment
of the proprietary lease or occupancy agreement and the pledge of cooperative
shares. See "Realizing on Cooperative Loan Security" below.
Tax Aspects of Cooperative Ownership. In general, a
"tenant-stockholder" (as defined in Section 216(b)(2) of the Code) of a
corporation that qualifies as a "cooperative housing corporation" within the
meaning of Section 216(b)(1) of the Code is allowed a deduction for amounts paid
or accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Section 216(a) of the Code to the corporation
under Sections 163 and 164 of the Code. In order for a corporation to qualify
under Section 216(b)(1) of the Code for its taxable year in which such items are
allowable as a deduction to the corporation, such section requires, among other
things, that at least 80% of the gross income of the corporation be derived from
its tenant-stockholders. By virtue of this requirement, the status of a
corporation for purposes of Section 216(b)(1) of the Code must be determined on
a year-to-year basis. Consequently, there can be no assurance that cooperatives
relating to the Cooperative Loans will qualify under such section for any
particular year. In the event that such a cooperative fails to qualify for one
or more years, the value of the collateral securing any related Cooperative
Loans could be significantly impaired because no deduction would be allowable to
tenant-stockholders under Section 216(a) of the Code with respect to those
years. In view of the significance of the tax benefits accorded
tenant-stockholders of a corporation that qualifies under Section 216(b)(1) of
the Code, the likelihood that such a failure would be permitted to continue over
a period of years appears remote.
Foreclosure on Mortgages
Foreclosure of a deed of trust or a deed to secure debt 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,
the trustee must record a notice of default and send a copy to the
borrower-trustor and to any person who has recorded a request for a copy of a
notice of default and notice of sale. In addition, the trustee in some states
must provide notice to any other individual having an interest in the real
property, including any junior lienholders. 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
specific 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 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
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of a default and deny the mortgagee foreclosure on proof that either the
mortgagor's default was neither willful nor in bad faith or the mortgagee's
action established a waiver, fraud, bad faith, or oppressive or unconscionable
conduct such as to warrant a court of equity to refuse affirmative relief to the
mortgagee. Under certain circumstances a court of equity may relieve the
mortgagor from an entirely technical default where such default was not willful.
A foreclosure action is subject to most of the delays and expenses of
other lawsuits if defenses or counterclaims are interposed, sometimes requiring
up to several years to complete. Similarly, a suit against the debtor on the
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 case of foreclosure under either a mortgage, a deed of trust, or a
deed to secure debt, 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. It is common for the lender to purchase the
property from the trustee or referee for an amount which may be equal to the
principal amount of the mortgage or deed of trust plus accrued and unpaid
interest and the expenses of foreclosure, in which event the mortgagor's debt
will be extinguished or the lender may purchase for a lesser amount in order to
preserve its right against a borrower to seek a deficiency judgment in states
where such a judgment is available. Thereafter, the lender will assume the
burdens of ownership, including obtaining casualty insurance, paying taxes and
making such repairs at its own expense as are necessary to render the property
suitable for sale. The lender will commonly obtain the services of a real estate
broker and pay the broker's commission in connection with the sale of the
property. Depending upon market conditions, the ultimate proceeds of the sale of
the property may not equal the lender's investment in the property. Any loss may
be reduced by the receipt of any mortgage guaranty insurance proceeds.
A junior mortgagee may not foreclose on the property securing a junior
mortgage unless it forecloses subject to the senior mortgages, in which case it
must either pay the entire amount due on the senior mortgages to the senior
mortgagees prior to or at the time of the foreclosure sale or undertake the
obligation to make payments on the senior mortgages in the event the mortgagor
is in default thereunder, in either event adding the amounts expended to the
balance due on the junior loan, and may be subrogated to the rights of the
senior mortgagees. In addition, in the event that the foreclosure of a junior
mortgage triggers the enforcement of a "due-on-sale" clause in a senior
mortgage, the junior mortgagee may be required to pay the full amount of the
senior mortgages to the senior mortgagees. Accordingly, with respect to those
Mortgage Loans which are junior mortgage loans, if the lender purchases the
property, the lender's title will be subject to all senior liens and claims and
certain governmental liens. The proceeds received by the referee or trustee from
the sale are applied first to the costs, fees and expenses of sale and then in
satisfaction of the indebtedness secured by the mortgage or deed of trust under
which the sale was conducted. Any remaining proceeds are generally payable to
the holders of junior mortgages or deeds of trust and other liens and claims in
order of their priority, whether or not the borrower is in default. Any
additional proceeds are generally payable to the mortgagor or trustor. The
payment of the proceeds to the holders of junior mortgages may occur in the
foreclosure action of the senior mortgagee or may require the institution of
separate legal proceeds.
The proceeds received by the referee or trustee from the sale are
applied first to the costs, fees and expenses of sale and then in satisfaction
of the indebtedness secured by the mortgage or deed of trust under which the
sale was conducted. Any remaining proceeds are generally payable to the holders
of junior mortgages or deeds of trust and other liens and claims in order of
their priority, whether or not the borrower is in default. Any additional
proceeds are generally payable to the mortgagor or trustor. The payment of the
proceeds to the holders of junior mortgages may occur in the foreclosure action
of the senior mortgagee or may require the institution of separate legal
proceedings.
The purposes of a foreclosure action are to enable the mortgagee to
realize upon its security and to bar the mortgagor, and all persons who have an
interest in the property which is subordinate to the foreclosing mortgagee, from
their "equity of redemption." The doctrine of equity of redemption provides
that, until the property covered by a mortgage has been sold in accordance with
a properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been
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commenced, the redeeming party must pay certain costs of such action. Those
having an equity of redemption must be made parties and duly summoned to the
foreclosure action in order for their equity of redemption to be barred.
Realizing Upon Cooperative Loan Security
The Cooperative shares and proprietary lease or occupancy agreement
owned by the tenant-stockholder and pledged to the lender are, in almost all
cases, subject to restrictions on transfer as set forth in the Cooperative's
certificate of incorporation and by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the Cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the Cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants thereunder. Typically, the lender and the Cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the
tenant-stockholder under the proprietary lease or occupancy agreement will
usually constitute a default under the security agreement between the lender and
the tenant-stockholder.
The recognition agreement generally provides that, in the event that
the tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the Cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the Cooperative will recognize the
lender's lien against proceeds from a sale of the Cooperative apartment,
subject, however, to the Cooperative's right to sums due under such proprietary
lease or occupancy agreement or which have become liens on the shares relating
to the proprietary lease or occupancy agreement. The total amount owed to the
Cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the Cooperative Loan and accrued and unpaid
interest thereon.
Recognition agreements also generally provide that in the event the
lender succeeds to the tenant-shareholder's shares and proprietary lease or
occupancy agreement as the result of realizing upon its collateral for a
Cooperative Loan, the lender must obtain the approval or consent of the
Cooperative as required by the proprietary lease before transferring the
Cooperative shares and assigning the proprietary lease. Generally, the lender is
not limited in any rights it may have to dispossess the tenant-stockholder.
The terms of the Cooperative Loans do not require either the
tenant-stockholder or the cooperative to obtain title insurance of any type.
Consequently, the existence of any prior liens or other imperfections of title
also may adversely affect the marketability of the cooperative dwelling unit in
the event of foreclosure.
In New York, lenders generally have realized upon the pledged shares
and proprietary lease or occupancy agreement given to secure a Cooperative Loan
by public sale in accordance with the provisions of Article 9 of the New York
Uniform Commercial Code (the "UCC") and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the sale. Generally, a
sale conducted according to the usual practice of banks selling similar
collateral will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be
applied first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to reimbursement
is subject to the right of the Cooperative corporation to receive sums due under
the proprietary lease or occupancy agreement. If there are proceeds remaining,
the lender must account to the tenant-stockholder for the surplus. Conversely,
if a portion of the indebtedness remains
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unpaid, the tenant-stockholder is generally responsible for the deficiency. See
"Anti-Deficiency Legislation and Other Limitations on Lenders" below.
Rights of Redemption
In some states, after sale pursuant to a deed of trust or a deed to
secure debt 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 nonstatutory 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 right of redemption would defeat the
title of any purchaser from the lender subsequent to foreclosure or sale under a
deed of trust or a deed to secure debt. 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.
Anti-deficiency Legislation and Other Limitations on Lenders
Certain states have imposed statutory prohibitions which limit the
remedies of a beneficiary under a deed of trust or a mortgagee under a mortgage
or a deed to secure debt. 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,
deed to secure debt or mortgage by foreclosure in an attempt to satisfy the full
debt before bringing a personal action against the borrower. In certain other
states, the lender has the option of bringing a personal action against the
borrower on the debt without first exhausting such security; however in some of
these states, the lender, following judgment on such personal action, may be
deemed to have elected a remedy and may be precluded from exercising remedies
with respect to the security. Consequently, the practical effect of the election
requirement, in those states permitting such election, is that lenders will
usually proceed against the security first rather than bringing a personal
action against the borrower. Finally, other statutory provisions limit any
deficiency judgment against the former borrower following a judicial 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 judicial sale. Certain
state laws also place a limitation on the mortgagee with respect to late payment
charges.
With respect to mortgage loans secured by collateral in addition to the
related mortgaged properties, realization upon the additional collateral may be
governed by the Uniform Commercial Code in effect under the law of the state
applicable thereto. Some courts have interpreted the Uniform Commercial Code to
prohibit or limit a deficiency award in certain circumstances, including those
in which the disposition of the collateral was not conducted in a commercially
reasonable manner. In some states, the Uniform Commercial Code does not apply to
liens upon additional collateral consisting of certain types of personal
property (including, for example, bank accounts and, to a certain extent,
insurance policies and annuities). Realization upon such additional collateral
will be governed by state laws applicable thereto rather than by the Uniform
Commercial Code, and the availability of deficiency awards under such state laws
may be limited. Whether realization upon any Additional Collateral is governed
by the Uniform Commercial Code or by other state laws, the ability of secured
parties to realize upon the additional collateral may be limited by statutory
prohibitions that limit remedies in respect of the related mortgage loans. Such
prohibitions may affect secured parties either independently or in conjunction
with statutory requirements that secured parties proceed against the related
mortgaged properties first or against both such mortgaged properties and the
additional collateral concurrently. Some state statutes require secured parties
to exhaust the security afforded by the mortgaged properties through foreclosure
before attempting to realize upon the related additional collateral (including
any third-party guarantees). Other state statutes require secured parties to
foreclose upon mortgaged properties and additional collateral concurrently. In
states where statutes limit the rights of secured parties to obtain deficiency
judgments
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against borrowers or guarantors following foreclosure upon the related mortgaged
properties and where secured parties either are required or elect to proceed
against such mortgaged properties before proceeding against the related
additional collateral, limitations upon the amounts of deficiency judgments may
reduce the amounts that may be realized by the secured parties upon the
disposition of such additional collateral. Further, in certain states where
secured parties may choose whether to proceed against the related mortgaged
properties or additional collateral first or against both concurrently, the
secured parties, following a proceeding against one, may be deemed to have
elected a remedy and may be precluded from exercising remedies with respect to
the other. Consequently, the practical effect of the election requirement, in
those states permitting such election, is that secured parties will usually
proceed against both concurrently or against the mortgaged properties first if
prohibited from proceeding against both by state law.
For Cooperative Loans. Generally, lenders realize on cooperative shares
and the accompanying proprietary lease given to secure a Cooperative Loan under
Article 9 of the UCC. Some courts have interpreted section 9-504 of the UCC to
prohibit a deficiency award unless the creditor establishes that the sale of the
collateral (which, in the case of a Cooperative Loan, would be the shares of the
Cooperative and the related proprietary lease or occupancy agreement) was
conducted in a commercially reasonable manner.
Federal Bankruptcy and Other Laws Affecting Creditors' Rights. In
addition to laws limiting or prohibiting deficiency judgments, numerous other
statutory provisions, including the federal bankruptcy laws, the Relief Act, and
state laws affording relief to debtors, may interfere with or affect the ability
of the secured lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, the filing of a
petition acts as a stay against the enforcement of remedies for collection of a
debt. Moreover, a court with federal bankruptcy jurisdiction may permit a debtor
through a Chapter 13 under the Bankruptcy Code rehabilitative plan to cure a
monetary default with respect to a loan on a debtor's residence by paying
arrearages within a reasonable time period and reinstating the original loan
payment schedule even though the lender accelerated the loan and the lender has
taken all steps to realize upon his security (provided no sale of the property
has yet occurred) prior to the filing of the debtor's Chapter 13 petition. Some
courts with federal bankruptcy jurisdiction have approved plans, based on the
particular facts of the reorganization case, that effected the curing of a loan
default by permitting the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that
the terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. These courts have suggested that
such modifications may include reducing the amount of each monthly payment,
changing the rate of interest, altering the repayment schedule and reducing the
lender's security interest to the value of the residence, thus leaving the
lender a general unsecured creditor for the difference between the value of the
residence and the outstanding balance of the loan. Federal bankruptcy law and
limited case law indicate that the foregoing modifications could not be applied
to the terms of a loan secured by property that is the principal residence of
the debtor. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt. Therefore, with respect to any
Additional Collateral Loan secured by property of the debtor in addition to the
debtor's principal residence, courts with federal bankruptcy jurisdiction may
reduce the amount of each monthly payment, change the rate of interest, alter
the repayment schedule, forgive all or a portion of the debt, reduce the
lender's security interest to the value of the collateral and otherwise subject
such mortgage loan to the cramdown provisions of Chapter 13.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded
from foreclosing without authorization from the bankruptcy court. The lender's
lien may be transferred to other collateral and/or be limited in amount to the
value of the lender's interest in the collateral as of the date of the
bankruptcy. The loan term may be extended, the interest rate may be adjusted to
market rates and the priority of the loan may be subordinated to bankruptcy
court-approved financing. The bankruptcy court can, in effect, invalidate
due-on-sale clauses through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the
lender's security. This may delay or interfere with the enforcement of rights in
respect of a defaulted Loan. In addition, substantive requirements are imposed
upon lenders in connection with the origination and the servicing of mortgage
loans by numerous federal and some state consumer protection laws. The laws
include the federal Truth-in-Lending Act, Real Estate Settlement
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Procedures Act, Equal Credit Opportunity Act, Fair Credit Billing Act, Fair
Credit Reporting Act and related statutes and regulations. These federal laws
impose specific statutory liabilities upon lenders who originate loans and who
fail to comply with the provisions of the law. In some cases, this liability may
affect assignees of the loans. With respect to mortgage loans secured by
collateral in addition to the related mortgaged properties, such tax liens may
in certain circumstances provide priority over the lien on such additional
collateral.
Certain of the Mortgage Loans may be subject to special rules,
disclosure requirements and other provisions that were added to the federal
Truth-in-Lending Act by the Homeownership and Equity Protection Act of 1994
(such Mortgage Loans, "High Cost Loans"), if such Mortgage Loans were originated
on or after October 1, 1995, are not mortgaged loans made to finance the
purchase of the mortgaged property and have interest rates or origination costs
in excess of certain prescribed levels. Purchasers or assignees of any High Cost
Loan could be liable for all claims and subject to all defenses arising under
such provisions that the borrower could assert against the originator thereof.
Remedies available to the borrower include monetary penalties, as sell as
rescission rights if the appropriate disclosures were not given as required. See
"Loan Underwriting Procedures and Standards--Representations and Warranties."
Soldiers' and Sailors' Civil Relief Act. Generally, under the terms of
the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief
Act"), a borrower who enters military service after the origination of such
borrower's Mortgage Loan (including a borrower who is a member of the National
Guard or is in reserve status at the time of the origination of the Mortgage
Loan and is later called to active duty) may not be charged interest above an
annual rate of 6% during the period of such borrower's active duty status,
unless a court orders otherwise upon application of the lender. It is possible
that such interest rate limitation could have an effect, for an indeterminate
period of time, on the ability of the Trust Fund to collect full amounts of
interest on certain of the Mortgage Loans. Unless otherwise provided in the
applicable Prospectus Supplement, any shortfall in interest collections
resulting from the application of the Relief Act could result in losses to the
holders of the Certificates. In addition, the Relief Act imposes limitations
which would impair the ability of the Trust Fund to foreclose on an affected
Mortgage Loan during the borrower's period of active duty status. Thus, in the
event that such a Mortgage Loan goes into default, there may be delays and
losses occasioned by the inability to realize upon the Mortgaged Property in a
timely fashion.
Junior Mortgages
Some of the Mortgage Loans may be secured by junior mortgages or deeds
of trust, which are junior to senior mortgages or deeds of trust which are not
part of the Trust Fund. The rights of the Certificateholders as the holders of a
junior deed of trust or a junior mortgage are subordinate in lien priority and
in payment priority to those of the holder of the senior mortgage or deed of
trust, including the prior rights of the senior mortgagee or beneficiary to
receive and apply hazard insurance and condemnation proceeds and, upon default
of the mortgagor, to cause a foreclosure on the property. Upon completion of the
foreclosure proceedings by the holder of the senior mortgage or the sale
pursuant to the deed of trust, the junior mortgagee's or junior beneficiary's
lien will be extinguished unless the junior lienholder satisfies the defaulted
senior loan or asserts its subordinate interest in a property in foreclosure
proceedings. See "--Foreclosure on Mortgages" herein.
Furthermore, the terms of the junior mortgage or deed of trust are
subordinate to the terms of the senior mortgage or deed of trust. In the event
of a conflict between the terms of the senior mortgage or deed of trust and the
junior mortgage or deed of trust, the terms of the senior mortgage or deed of
trust will govern generally. Upon a failure of the mortgagor or trustor to
perform any of its obligations, the senior mortgagee or beneficiary, subject to
the terms of the senior mortgage or deed of trust, may have the right to perform
the obligation itself. Generally, all sums so expended by the mortgagee or
beneficiary become part of the indebtedness secured by the mortgage or deed of
trust. To the extent a senior mortgagee expends such sums, such sums will
generally have priority over all sums due under the junior mortgage.
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Due-on-sale Clauses in Mortgage Loans
Unless the Prospectus Supplement indicates otherwise, the Loans
generally contain due-on-sale clauses. These clauses permit the lender to
accelerate the maturity of the loan if the borrower sells, transfers or conveys
the property. The enforceability of these clauses has been the subject of
legislation or litigation in many states, and in some cases the enforceability
of these clauses has been limited or denied. However, the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act"), preempts state
constitutional, statutory and case law that prohibit the enforcement of
due-on-sale clauses and permits lenders to enforce these clauses in accordance
with their terms, subject to certain limited exceptions. The Garn-St Germain Act
does "encourage" lenders to permit assumption of loans at the original rate of
interest or at some other rate less than the average of the original rate and
the market rate.
The Garn-St Germain Act also sets forth nine specific instances in
which a mortgage lender covered by the Garn-St Germain Act may not exercise a
due-on-sale clause, notwithstanding the fact that a transfer of the property may
have occurred. These include intra-family transfers, certain transfers by
operation of law, leases of fewer than three years and the creation of a junior
encumbrance. Regulations promulgated under the Garn-St Germain Act also prohibit
the imposition of a prepayment penalty upon the acceleration of a loan pursuant
to a due-on-sale clause.
The inability to enforce a due-on-sale clause may result in a mortgage
loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the Mortgage Loans and the number of Mortgage Loans which may be
outstanding until maturity.
Upon foreclosure, courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of its defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts 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 the lender to foreclose if the default under the mortgage
instrument is not monetary, such as the borrower failing to adequately maintain
the property or the borrower executing a second mortgage or deed of trust
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 deeds of trust or
mortgages receive notices in addition to the statutorily prescribed minimum. For
the most part, these cases have upheld the notice provisions as being reasonable
or have found that the sale by a trustee under a deed of trust, or under a
mortgage having a power of sale, does not involve sufficient state action to
afford constitutional protections to the borrower.
Enforceability of Prepayment and Late Payment Fees
Forms of notes, mortgages and deeds of trust used by lenders may
contain provisions obligating the borrower to pay a late charge if payments are
not timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if the
loan is prepaid. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
Equitable Limitations on Remedies
In connection with lenders' attempts to realize upon their security,
courts have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for 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
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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.
The Mortgage Loans may include a debt-acceleration clause, which
permits the lender to accelerate the debt upon a monetary default of the
borrower, after the applicable cure period. The courts of all states will
enforce clauses providing for acceleration in the event of a material payment
default. However, courts of any state, exercising equity jurisdiction, may
refuse to allow a lender to foreclose a mortgage or deed of trust when an
acceleration of the indebtedness would be inequitable or unjust and the
circumstances would render the acceleration unconscionable.
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,
as succeeded by the OTS, 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
the Mortgage Loans.
Subordinate Financing
When the mortgagor encumbers mortgaged property with one or more junior
liens, the senior lender is subjected to additional risk. First, the mortgagor
may have difficulty servicing and repaying multiple loans. In addition, if the
junior loan permits recourse to the mortgagor (as junior loans often do) and the
senior loan does not, a mortgagor may be more likely to repay sums due on the
junior loan than those on the senior loan. Second, acts of the senior lender
that prejudice the junior lender or impair the junior lender's security may
create a superior equity in favor of the junior lender. For example, if the
mortgagor and the senior lender agree to an increase in the principal amount of
or the interest rate payable on the senior loan, the senior lender may lose its
priority to the extent an existing junior lender is harmed or the mortgagor is
additionally burdened. Third, if the mortgagor defaults on the senior loan
and/or any junior loan or loans, the existence of junior loans and actions taken
by junior lenders can impair the security available to the senior lender and can
interfere with or delay the taking of action by the senior lender. Moreover, the
bankruptcy of a junior lender may operate to stay foreclosure or similar
proceeds by the senior lender.
Applicability of Usury Laws
Title V of the Depository Institutions Deregulation and Monetary
Control Act of 1980, enacted in March 1980 ("Title V"), provides that state
usury limitations shall not apply to certain types of residential first mortgage
loans originated by certain lenders after March 31, 1980. Similar federal
statutes were in effect with respect to mortgage loans made during the first
three months of 1980. The OTS, as successor to the Federal Home Loan Bank Board,
is authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen states adopted such a law prior to the April 1, 1983
deadline. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V.
In any state in which application of Title V has been expressly
rejected or a provision limiting discount points or other charges is adopted, no
Mortgage Loans originated after the date of such state action will be eligible
as Mortgage Assets if such Mortgage Loans bear interest or provide for discount
points or charges in excess of permitted
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levels. No Mortgage Loan originated prior to January 1, 1980 will bear interest
or provide for discount points or charges in excess of permitted levels.
Adjustable Interest Rate Loans
ARMs originated by non-federally chartered lenders have historically
been subject to a variety of restrictions. Such restrictions differed from state
to state, resulting in difficulties in determining whether a particular
alternative mortgage instrument originated by a state-chartered lender complied
with applicable law. These difficulties were alleviated substantially as a
result of the enactment of Title VIII of the Garn-St Germain Act ("Title VIII").
Title VIII provides that, notwithstanding any state law to the contrary,
state-chartered banks may originate "alternative mortgage instruments"
(including ARMs) in accordance with regulations promulgated by the Comptroller
of the Currency with respect to origination of alternative mortgage instruments
by national banks; state chartered credit unions may originate alternative
mortgage instruments in accordance with regulations promulgated by the National
Credit Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations; and
state-chartered savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board, as succeeded by the OTS, with respect to
origination of alternative mortgage instruments by federal savings and loan
associations. Title VIII provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of such
provisions. Certain states have taken such action.
Environmental Legislation
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of on the property. Such a
lien will generally have priority over all subsequent liens on the property and,
in certain of these states, will have priority over prior recorded liens
including the lien of a mortgage. In addition, under federal environmental
legislation and possibly under state law in a number of states, a secured party
which takes a deed in lieu of foreclosure or acquires a mortgaged property at a
foreclosure sale or otherwise is deemed an "owner" or "operator" of the property
may be liable for the costs of cleaning up a contaminated site. Although such
costs could be substantial, it is unclear whether they would be imposed on a
secured lender.
Manufactured Home Loans
Security Interests in the Manufactured Homes. Law governing perfection
of a security interest in a Manufactured Home varies from state to state.
Security interests in Manufactured Homes may be perfected either by notation of
the secured party's lien on the certificate of title or by delivery of the
required documents and payment of a fee to the state motor vehicle authority,
depending on state law. In some nontitle states, perfection pursuant to the
provisions of the UCC is required. The lender or a servicer may effect such
notation or delivery of the required documents and fees, and obtain possession
of the certificate of title, as appropriate under the laws of the state in which
any manufactured home securing a Manufactured Home Loan is registered. In the
event such notation or delivery is not effected or the security interest is not
filed in accordance with the applicable law (for example, is filed under a motor
vehicle title statute rather than under the UCC, in a few states), a first
priority security interest in the Manufactured Home securing a Manufactured Home
Loan may not be obtained.
As Manufactured Homes have become larger and often have been attached
to their sites without any apparent intention to move them, courts in many
states have held that Manufactured Homes, under certain circumstances, may
become subject to real estate title and recording laws. As a result, a security
interest in a Manufactured Home could be rendered subordinate to the interests
of other parties claiming an interest in the Manufactured Home under applicable
state real estate law. In order to perfect a security interest in a Manufactured
Home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions or the UCC or a real estate
mortgage under the real estate laws of the state where the home is located.
These filings must be made in the real estate records office of the county where
the home is located. Manufactured Home Loans typically contain provisions
prohibiting the borrower from permanently attaching the Manufactured Home to its
site. So long as the borrower does
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not violate this agreement, a security interest in the Manufactured Home will be
governed by the certificate of title laws or the UCC, and the notation of the
security interest on the certificate of title or the filing of a UCC financing
statement will be effective to maintain the priority of the security interest in
the Manufactured Home. If, however, a Manufactured Home is permanently attached
to its site, other parties could obtain an interest in the manufactured home
which is prior to the security interest originally retained by the lender or its
assignee.
With respect to a Series of Certificates evidencing interests in a
Trust Fund that includes Manufactured Home Loans and as described in the related
Prospectus Supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. If such
real estate filings are not made and if any of the foregoing events were to
occur, the only recourse of the Certificateholders would be against the Seller
pursuant to its repurchase obligation for breach of warranties. A PMBS Agreement
pursuant to which Private Mortgage-Backed Securities backed by Manufactured Home
Loans are issued will, unless otherwise specified in the related Prospectus
Supplement, have substantially similar requirements for perfection of a security
interest.
In general, upon an assignment of a Manufactured Home Loan, the
certificate of title relating to the Manufactured Home will not be amended to
identify the assignee as the new secured party. In most states, an assignment is
an effective conveyance of such security interest without amendment of any lien
noted on the related certificate of title and the new secured party succeeds to
the assignor's rights as the secured party. However, in some states there exists
a risk that, in the absence of an amendment to the certificate of title, such
assignment of the security interest might not be held effective against
creditors of the assignor.
Relocation of a Manufactured Home. In the event that the owner of a
Manufactured Home moves the home to a state other than the state in which such
Manufactured Home initially is registered, under the laws of most states the
perfected security interest in the Manufactured Home would continue for four
months after such relocation and thereafter only if and after the owner
reregisters the Manufactured Home in such state. If the owner were to relocate a
Manufactured Home to another state and not reregister the Manufactured Home in
such state, and if steps are not taken to reperfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to reregister a Manufactured Home; accordingly, possession
of the certificate of title to such Manufactured Home must be surrendered or, in
the case of Manufactured Homes registered in states which provide for notation
of lien, the notice of surrender must be given to any person whose security
interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the owner of the Manufactured Home Loan would have the opportunity
to reperfect its security interest in the Manufactured Home in the state of
relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, reregistration could defeat perfection. In
the ordinary course of servicing the Manufactured Home Loans, the Master
Servicer will be required to take steps to effect reperfection upon receipt of
notice of reregistration or information from the borrower as to relocation.
Similarly, when a borrower under a Manufactured Home Loan sells the related
Manufactured Home, the Trustee must surrender possession of the certificate of
title or the Trustee will receive notice as a result of its lien noted thereon
and accordingly will be an opportunity to require satisfaction of the related
Manufactured Home Loan before release of the lien. Under the Pooling and
Servicing Agreement, the Master Servicer is obligated to take such steps, at the
Master Servicer's expense, as are necessary to maintain perfection of security
interests in the Manufactured Homes. PMBS Agreements pursuant to which Private
Mortgage-Backed Securities backed by Manufactured Home Loans are issued will
impose substantially similar requirements.
Intervening Liens. Under the laws of most states, liens for repairs
performed on a Manufactured Home take priority even over a perfected security
interest. The Master Servicer or the originator of such Loans will represent
that it has no knowledge of any such liens with respect to any Manufactured Home
securing payment on any Manufactured Home Loan. However, such liens could arise
at any time during the term of a Manufactured Home Loan. No notice will be given
to the Trustee or Certificateholders in the event such a lien arises. PMBS
Agreements pursuant to which Private Mortgage-Backed Securities backed by
Manufactured Home Loans are issued will contain substantially similar
requirements.
Enforcement of Security Interests in Manufactured Homes. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Manufactured Home
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Loan 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 Manufactured Home Loan 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 so that the debtor may redeem at or before such resale. In the event
of such repossession and resale of a Manufactured Home, the holder of a
Manufactured Home Loan would be entitled to be paid out of the sale proceeds
before such proceeds could be applied to the payment of the claims of unsecured
creditors or the holders or subsequently perfected interests or, thereafter, to
the borrower.
Under the laws applicable in most states, a creditor is entitled to
obtain a deficiency judgment from a borrower for any deficiency on repossession
and resale of the Manufactured Home securing such borrower's loan. However, some
states impose prohibitions or limitations on deficiency judgments. See
"Anti-deficiency Legislation and Other Limitations on Lenders" above.
Certain other statutory provisions, including federal and state
bankruptcy and insolvency laws and general equitable principles, may limit or
delay the ability of a lender to repossess and resell collateral or enforce a
deficiency judgment. See "Federal Bankruptcy and Other Laws Affecting Creditors'
Rights" and "Equitable Limitations on Remedies" above.
Consumer Protection Laws. The so-called "Holder-In-Due-Course" rule of
the Federal Trade Commission is intended to defeat the ability of the transferor
of a consumer credit contract who is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the borrower thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the borrower could assert against the seller of goods. Liability under
this rule is limited to amounts paid under a Manufactured Home Loan; however,
the borrower also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought against such borrower. Numerous other
federal and state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Manufactured Home Loan, 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 Manufactured Home Loan.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale"
Clauses. Loans and installment sale contracts relating to a Manufactured Home
Loan typically prohibit the sale or transfer of the related Manufactured Homes
without the consent of the lender and permit the acceleration of the maturity of
the Manufactured Home Loans by the lender upon any such sale or transfer for
which no such consent is granted.
In the case of a transfer of a Manufactured Home, the lender's ability
to accelerate the maturity of the related Manufactured Home Loan will depend on
the enforceability under state law of the "due-on-sale" clause. The Garn-St
Germain Depository Institutions Act of 1982 preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. See "Due-on-Sale Clauses in
Mortgage Loans" above. With respect to any Manufactured Home Loan secured by a
Manufactured Home occupied by the borrower, the ability to accelerate will not
apply to those types of transfers discussed in "Due-on-Sale Clauses in Mortgage
Loans" above. FHA Loans and VA Loans are not permitted to contain "due-on-sale"
clauses, and so are freely assumable.
Applicability of Usury Laws. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of Manufactured Homes. The
Manufactured Home Loans would be covered if they satisfy certain conditions,
among other things, governing the terms of any prepayments, late charges and
deferral fees and requiring a 30-day notice period prior to instituting any
action leading to repossession of or foreclosure with respect to the related
unit. See "Applicability of Usury Laws" above.
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Louisiana Law. Any contract secured by a manufactured home located in
Louisiana will be governed by Louisiana law rather than Article 9 of the UCC.
Louisiana laws provide similar mechanisms for perfection and enforcement of
security interests in manufactured housing used as collateral for an installment
sale contract or installment loan agreement.
Under Louisiana law, a manufactured home that has been permanently
affixed to real estate will nevertheless remain subject to the motor vehicle
registration laws unless the obligor and any holder of a security interest in
the property execute and file in the real estate records for the parish in which
the property is located a document converting the unit into real property. A
manufactured home that is converted into real property but is then removed from
its site can be converted back to personal property governed by the motor
vehicle registration laws if the obligor executes and files various documents in
the appropriate real estate records and all mortgagees under real estate
mortgages on the property and the land to which it was affixed file releases
with the motor vehicle commission.
So long as a manufactured home remains subject to the Louisiana motor
vehicle laws, liens are recorded on the certificate of title by the motor
vehicle commissioner and repossession can be accomplished by voluntary consent
of the obligor, executory process (repossession proceedings which must be
initiated through the courts but which involve minimal court supervision) or a
civil suit for possession. In connection with a voluntary surrender, the obligor
must be given a full release from liability for all amounts due under the
contract. In executory process repossessions, a sheriff's sale (without court
supervision) is permitted, unless the obligor brings suit to enjoin the sale,
and the lender is prohibited from seeking a deficiency judgment against the
obligor unless the lender obtained an appraisal of the manufactured home prior
to the sale and the property was sold for at least two-thirds of its appraised
value.
Formaldehyde Litigation. A number of lawsuits are pending in the United
States alleging personal injury from exposure to the chemical formaldehyde,
which is present in many building materials, including such components of
manufactured housing as plywood flooring and wall paneling. Some of these
lawsuits are pending against manufacturers of manufactured housing, suppliers of
component parts, and related persons in the distribution process. The Depositor
is aware of a limited number of cases in which plaintiffs have won judgments in
these lawsuits.
Under the FTC Rule, which is described above under "Consumer Protection
Laws", the holder of any Loan secured by a Manufactured Home with respect to
which a formaldehyde claim has been successfully asserted may be liable to the
obligor for the amount paid by the obligor on the related Loan and may be unable
to collect amounts still due under the Loan. In the event an obligor is
successful in asserting such a claim, the related Certificateholders could
suffer a loss if (i) the related Seller fails or cannot be required to
repurchase the affected Loan for a breach of representation and warranty and
(ii) the Master Servicer or the Trustee were unsuccessful in asserting any claim
of contribution or subrogation on behalf of the Certificateholders against the
manufacturer or other persons who were directly liable to the plaintiff for the
damages. Typical products liability insurance policies held by manufacturers and
component suppliers of manufactured homes may not cover liabilities arising from
formaldehyde in manufactured housing, with the result that recoveries from such
manufacturers, suppliers or other persons may be limited to their corporate
assets without the benefit of insurance.
Soldiers' and Sailors' Civil Relief Act. Generally, under the terms of
the Relief Act, a borrower who enters military service after the origination of
such borrower's Manufactured Home Loan (including a borrower who is a member of
the National Guard or is in reserve status at the time of the origination of the
Manufactured Home Loan and is later called to active duty) may not be charged
interest above an annual rate of 6% during the period of such borrower's active
duty status, unless a court orders otherwise upon application of the lender. It
is possible that such interest rate limitation could have an effect, for an
indeterminate period of time, on the ability of the Trust Fund to collect full
amounts of interest on certain of the Manufactured Home Loans. Unless otherwise
provided in the applicable Prospectus Supplement, any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the holders of the Certificates. In addition, the Relief Act imposes
limitations which would impair the ability of the Trust Fund to enforce the lien
with respect to an affected Manufactured Home Loan during the borrower's period
of active duty status. Thus, in the event that such a Manufactured Home Loan
goes into default, there may be delays and losses occasioned by the inability to
enforce the lien with respect to the Manufactured Home in a timely fashion.
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Forfeitures in Drug and RICO Proceedings. Federal law provides that
property owned by persons convicted of drug-related crimes or of criminal
violations of the Racketeer Influenced and Corrupt Organizations ("RICO")
statute can be seized by the government if the property was used in, or
purchased with the proceeds of, such crimes. Under procedures contained in the
Comprehensive Crime Control Act of 1984 (the "Crime Control Act"), the
government may seize the property even before conviction. The government must
publish notice of the forfeiture proceeding and may give notice to all parties
"known to have an alleged interest in the property," including the holders of
mortgage loans.
A lender may avoid forfeiture of its interest in the property if it
establishes that: (i) its mortgage was executed and recorded before the
commission of the crime upon which the forfeiture is based, or (ii) the lender
was, at the time of the execution of the mortgage, "reasonably without cause to
believe" that the property was used in, or purchased with the proceeds of,
illegal drug or RICO activities.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
General
The following is a general discussion of the anticipated material
federal income tax consequences of the purchase, ownership and disposition of
the Certificates offered hereunder where Thacher Proffitt & Wood or Stroock &
Stroock & Lavan LLP is identified in the applicable Prospectus Supplement as
counsel to the Depositor (hereinafter "Counsel to the Depositor"). This
discussion is directed solely to Certificateholders that hold the Certificates
as capital assets within the meaning of Section 1221 of the Internal Revenue
Code of 1986 (the "Code") and does not purport to discuss all federal income tax
consequences that may be applicable to particular categories of investors, some
of which (such as banks, insurance companies and foreign investors) may be
subject to special rules. Further, the authorities on which this discussion, and
the opinion referred to below, are based are subject to change or differing
interpretations, which could apply retroactively. Taxpayers should consult their
own tax advisors and tax return preparers regarding the preparation of any item
on a tax return, even where the anticipated tax treatment has been discussed
herein. In addition to the federal income tax consequences described herein,
potential investors should consider the state and local tax consequences, if
any, of the purchase, ownership and disposition of the Certificates. See "State
and Other Tax Consequences." Certificateholders are advised to consult their own
tax advisors concerning the federal, state, local or other tax consequences to
them of the purchase, ownership and disposition of the Certificates offered
hereunder.
As to each Series, unless otherwise disclosed in the related Prospectus
Supplement, the Trustee will covenant to elect to have treated the Trust Fund,
or a portion thereof, as one or more real estate mortgage investment conduits
("REMICs") under Sections 860A through 860G (the "REMIC Provisions") of the
Code. The Prospectus Supplement for each series of Certificates will identify
all Certificates representing "regular interests" and the "residual interest" in
each such REMIC. If a REMIC election or elections will not be made for a Trust
Fund, the federal income tax consequences of the purchase, ownership and
disposition of the related Certificates will be set forth in the related
Prospectus Supplement. For purposes of this tax discussion, references to a
"Certificateholder" or a "holder" are to the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing
original issue discount that are set forth in Sections 1271-1273 and 1275 of the
Code and in the Treasury regulations issued thereunder (the "OID Regulations"),
and in part upon the REMIC Provisions and the Treasury regulations issued
thereunder (the "REMIC Regulations"). The OID Regulations do not adequately
address certain issues relevant to, and in some instances provide that they are
not applicable to, securities such as the Certificates.
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REMICs
Classification of REMICs
Upon the issuance of each series of REMIC Certificates, Counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one
or more of the ongoing requirements of the Code for such status during any
taxable year, the Code provides that the entity will not be treated as a REMIC
for such year or thereafter. In that event, such entity may be taxable as a
corporation under Treasury regulations, and the related REMIC Certificates may
not be accorded the status or given the tax treatment described below. Although
the Code authorizes the Treasury Department to issue regulations providing
relief in the event of an inadvertent termination of REMIC status, no such
regulations have been issued. Any such relief, moreover, may be accompanied by
sanctions, such as the imposition of a corporate tax on all or a portion of the
Trust Fund's income for the period in which the requirements for such status are
not satisfied. The Pooling and Servicing Agreement with respect to each REMIC
will include provisions designed to maintain the Trust Fund's status as a REMIC
under the REMIC Provisions. It is not anticipated that the status of any Trust
Fund as a REMIC will be terminated.
Characterization of Investments in REMIC Certificates
In general, the REMIC Certificates will be "real estate assets" within
the meaning of Section 856(c)(4)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(4)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code. The
determination as to the percentage of the REMIC's assets that constitute assets
described in the foregoing sections of the Code will be made with respect to
each calendar quarter based on the average adjusted basis of each category of
the assets held by the REMIC during such calendar quarter. The REMIC will report
those determinations to Certificateholders in the manner and at the times
required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Loans, payments on
Loans held pending distribution on the REMIC Certificates and may include
property acquired by foreclosure held pending sale, and amounts in reserve
accounts. It is unclear whether property acquired by foreclosure held pending
sale, or amounts in reserve accounts would be considered to be part of the
Loans, or whether such assets (to the extent not invested in assets described in
the foregoing sections) otherwise would receive the same treatment as the Loans
for purposes of all the foregoing sections. In addition, in some instances Loans
(including Additional Collateral Loans) may not be treated entirely as assets
described in the foregoing sections. If the assets of a REMIC include Additional
Collateral Loans, the non-real property collateral, while itself not an asset of
the REMIC, could cause the Loans not to qualify for one or more of such
characterizations. If so, the related Prospectus Supplement will describe the
Loans (including Additional Collateral Loans) that may not be so treated. The
REMIC Regulations do provide, however, that payments on Loans held pending
distribution are considered part of the Loans for purposes of Section
856(c)(4)(A) of the Code.
Tiered REMIC Structures
For certain series of REMIC Certificates, two or more separate
elections may be made to treat designated portions of the related Trust Fund as
REMICs ("Tiered REMICs") for federal income tax purposes. Upon the issuance
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of any such series of REMIC Certificates, Counsel to the Depositor will deliver
its opinion generally to the effect that, assuming compliance with all
provisions of the related Pooling and Servicing Agreement, the Tiered REMICs
will each qualify as a REMIC and the REMIC Certificates issued by the Tiered
REMICs will be considered to evidence ownership of REMIC regular interests or
REMIC residual interests in the related REMIC within the meaning of the REMIC
Provisions.
Solely for purposes of determining whether the REMIC Certificates will
be "real estate assets" within the meaning of Section 856(c)(4)(A) of the Code,
and "loans secured by an interest in real property" under Section 7701(a)(19)(C)
of the Code, and whether the income on such Certificates is interest described
in Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
Taxation of Owners of REMIC Regular Certificates
General
Except as otherwise stated in this discussion, REMIC Regular
Certificates will be treated for federal income tax purposes as debt instruments
issued by the REMIC and not as ownership interests in the REMIC or its assets.
Moreover, holders of REMIC Regular Certificates that otherwise report income
under a cash method of accounting will be required to report income with respect
to REMIC Regular Certificates under an accrual method.
Original Issue Discount
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Loans held by, or Loans underlying Mortgage Assets held by, a REMIC in computing
the accrual of original issue discount on REMIC Regular Certificates issued by
that REMIC, and that adjustments be made in the amount and rate of accrual of
such discount to reflect differences between the actual prepayment rate and the
prepayment assumption. The prepayment assumption is to be determined in a manner
prescribed in Treasury regulations; as noted above, those regulations have not
been issued. The Conference Committee Report (the "Committee Report")
accompanying the Tax Reform Act of 1986 indicates that the regulations will
provide that the prepayment assumption used with respect to a REMIC Regular
Certificate must be the same as that used in pricing the initial offering of
such REMIC Regular Certificate. The prepayment assumption (the "Prepayment
Assumption") used in reporting original issue discount for each Series will be
consistent with this standard and will be disclosed in the related Prospectus
Supplement. However, neither the Depositor, any Master Servicer nor the Trustee
will make any representation that the Loans will in fact prepay at a rate
conforming to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate
will be the excess of its stated redemption price over its issue price. The
issue price of a particular class of REMIC Regular Certificates will be the
first cash price at which a substantial amount of REMIC Regular Certificates of
that class is sold (excluding sales to bond houses, brokers and underwriters).
If less than a substantial amount of a particular class of REMIC Regular
Certificates is sold for cash on or prior to the date of their initial issuance
(the "Closing Date"), the issue price for such class will be the fair market
value of such class on the Closing Date. Under the OID Regulations, the stated
redemption price of a REMIC Regular Certificate is equal to the total of all
payments to be made on such Certificate other than "qualified stated interest."
"Qualified stated interest" includes interest that is unconditionally payable at
least annually at a single fixed rate, at a "qualified floating rate," a
combination of a single fixed rate and one or more "qualified floating rates" or
one "qualified inverse floating rate," or a combination of "qualified floating
rates" or at an "objective rate" that does not operate in a manner that
accelerates or defers interest payments on such REMIC Regular Certificate.
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In the case of REMIC Regular Certificates bearing adjustable interest
rates, the determination of the total amount of original issue discount and the
timing of the inclusion thereof will vary according to the characteristics of
such REMIC Regular Certificates. If the original issue discount rules apply to
such Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
In addition, if the accrued interest to be paid on the first
Distribution Date is computed with respect to a period that begins prior to the
Closing Date, a portion of the purchase price paid for a REMIC Regular
Certificate will reflect such accrued interest. In such cases, information
returns provided to the Certificateholders and the IRS will be based on the
position that the portion of the purchase price paid for the interest accrued
with respect to periods prior to the Closing Date is treated as part of the
overall cost of such REMIC Regular Certificate (and not as a separate asset the
cost of which is recovered entirely out of interest received on the next
Distribution Date) and that the portion of the interest paid on the first
Distribution Date in excess of interest accrued for a number of days
corresponding to the number of days from the Closing Date to the first
Distribution Date should be included in the stated redemption price of such
REMIC Regular Certificate. However, the OID Regulations state that all or some
portion of such accrued interest may be treated as a separate asset the cost of
which is recovered entirely out of interest paid on the first Distribution Date.
It is unclear how an election to do so would be made under the OID Regulations
and whether such an election could be made unilaterally by a Certificateholder.
Notwithstanding the general definition of original issue discount,
original issue discount on a REMIC Regular Certificate will be considered to be
de minimis if it is less than 0.25% of the stated redemption price of the REMIC
Regular Certificate multiplied by its weighted average life. For this purpose,
the weighted average life of the REMIC Regular Certificate is computed as the
sum of the amounts determined, as to each payment included in the stated
redemption price of such REMIC Regular Certificate, by multiplying (i) the
number of complete years (rounding down for partial years) from the issue date
until such payment is expected to be made (presumably taking into account the
Prepayment Assumption) by (ii) a fraction, the numerator of which is the amount
of payment, and the denominator of which is the stated redemption price at
maturity of such REMIC Regular Certificate. Under the OID Regulations, original
issue discount of only a de minimis amount (other than de minimis original issue
discount attributable to a so-called "teaser" interest rate or an initial
interest holiday) will be included in income as each payment of stated principal
is made, based on the product of the total amount of such de minimis original
issue discount and a fraction, the numerator of which is the amount of such
principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess
of a de minimis amount, the holder of such Certificate must include in ordinary
gross income the sum of the "daily portions" of original issue discount for each
day during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the
related Prospectus Supplement, each period that ends on a date that corresponds
to a Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Loans being prepaid at a rate equal to
the Prepayment Assumption, and in the case of Mortgage Assets other than Loans,
that distributions will be made with respect to each Mortgage Asset in
accordance
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with the participation agreement or other organizational document under which
such Mortgage Asset was issued, and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Loans being prepaid at a rate equal to the Prepayment
Assumption, and in the case of Mortgage Assets other than Loans, that
distributions will be made with respect to each Mortgage Asset in accordance
with the participation agreement or other organizational document under which
such Mortgage Asset was issued. The adjusted issue price of a REMIC Regular
Certificate at the beginning of any accrual period will equal the issue price of
such Certificate, increased by the aggregate amount of original issue discount
that accrued with respect to such Certificate in prior accrual periods, and
reduced by the amount of any distributions made on such REMIC Regular
Certificate in prior accrual periods of amounts included in the stated
redemption price. The original issue discount accruing during any accrual
period, computed as described above, will be allocated ratably to each day
during the accrual period to determine the daily portion of original issue
discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases
such Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of the REMIC Regular
Certificate's "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals (i) the adjusted issue price (or, in the
case of the first accrual period, the issue price) of such Certificate at the
beginning of the accrual period which includes such day plus (ii) the daily
portions of original issue discount for all days during such accrual period
prior to such day minus (iii) any principal payments made during such accrual
period prior to such day with respect to such certificate.
Market Discount
A Certificateholder that purchases a REMIC Regular Certificate at a
market discount, that is, in the case of a REMIC Regular Certificate issued
without original issue discount, at a purchase price less than its remaining
stated principal amount, or in the case of a REMIC Regular Certificate issued
with original issue discount, at a purchase price less than its adjusted issue
price will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder 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 made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest may not be revoked without the consent of the IRS.
However, market discount with respect to a REMIC Regular Certificate
will be considered to be de minimis for purposes of Section 1276 of the Code if
such market discount is less than 0.25% of the remaining stated redemption price
of such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount
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would be treated in a manner similar to original issue discount of a de minimis
amount. See "Taxation of Owners of REMIC Regular Certificates--Original Issue
Discount." Such treatment would 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 above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department certain
rules described in the Committee Report will apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the REMIC Regular Certificate as of the beginning of the accrual period, or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining on the REMIC Regular Certificate at
the beginning of the accrual period. Moreover, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or
other periodic distributions throughout their term, the effect of these rules
may be to require market discount to be includible in income at a rate that is
not significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such a REMIC Regular Certificate purchased with market
discount. For these purposes, the de minimis rule referred to above applies. Any
such deferred interest expense would not exceed the market discount that accrues
during such taxable year and is, in general, allowed as a deduction not later
than the year in which such market discount is includible in income. If such
holder elects to include market discount in income currently as it accrues on
all market discount instruments acquired by such holder in that taxable year or
thereafter, the interest deferral rule described above will not apply.
Premium
A REMIC Regular Certificate purchased at a cost (excluding any portion
of such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to account for all
interest, discount and premium based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount." The Committee Report states that the same rules that apply to accrual
of market discount (which rules will require use of a prepayment assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have original issue discount) will also
apply in amortizing bond premium under Section 171 of the Code.
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Realized Losses
Under Section 166 of the Code, both corporate holders of the REMIC
Regular Certificates and noncorporate holders of the REMIC Regular Certificates
that acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Loans. However, it appears that a
noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificates, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Loans until it can be established that any such reduction
ultimately will not be recoverable. As a result, the amount of taxable income
reported in any period by the holder of a REMIC Regular Certificate could exceed
the amount of economic income actually realized by the holder in such period.
Although the holder of a REMIC Regular Certificate eventually will recognize a
loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of such loss or
reduction in income.
Taxation of Owners of REMIC Residual Certificates
General
As residual interests, the REMIC Residual Certificates will be subject
to tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Loans or as debt instruments issued by the REMIC.
A holder of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income of or
allowed as a loss to any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such
Certificate from a prior holder also will be required to report on its federal
income tax return amounts representing its daily share of the taxable income (or
net loss) of the REMIC for each day that it holds such Certificate. Those daily
amounts generally will equal the amounts of taxable income or net loss
determined as described above. The Committee Report indicates that certain
modifications of the general rules may be made, by regulations, legislation or
otherwise, to reduce (or increase) the income of a REMIC Residual
Certificateholder that purchased such Certificate from a prior holder of such
Certificate at a price greater than (or less than) the adjusted basis (as
defined below) such REMIC Residual Certificate would have had in the hands of an
original holder of such Certificate. The REMIC Regulations, however, do not
provide for any such modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal
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income tax purposes. Although it appears likely that any such payment would be
includible in income immediately upon its receipt, the IRS might assert that
such payment should be included in income over time according to an amortization
schedule or according to some other method. Because of the uncertainty
concerning the treatment of such payments, holders of REMIC Residual
Certificates should consult their tax advisors concerning the treatment of such
payments for income tax purposes.
The amount of income REMIC Residual Certificateholders will be required
to report (or the tax liability associated with such income) may exceed the
amount of cash distributions received from the REMIC for the corresponding
period. Consequently, REMIC Residual Certificateholders should have other
sources of funds sufficient to pay any federal income taxes due as a result of
their ownership of REMIC Residual Certificates or unrelated deductions against
which income may be offset, subject to the rules relating to "excess inclusions"
and "noneconomic" residual interests discussed below. The fact that the tax
liability associated with the income allocated to REMIC Residual
Certificateholders may exceed the cash distributions received by such REMIC
Residual Certificateholders for the corresponding period may significantly
adversely affect such REMIC Residual Certificateholders' after-tax rate of
return, and may cause such after-tax rate of return to be negative.
Taxable Income of the REMIC
The taxable income of the REMIC will equal the income from the Loans
and other assets of the REMIC plus any cancellation of indebtedness income due
to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by amortization of any premium on issuance) on the REMIC Regular
Certificates (and any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby), amortization of any premium on the
Loans, bad debt losses with respect to the Loans and, except as described below,
servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Loans or other property will equal the fair market value of such interests
in the Loans or other property. Accordingly, if one or more classes of REMIC
Certificates are retained initially rather than sold, the Trustee may be
required to estimate the fair market value of such interests in order to
determine the basis of the REMIC in the Loans and other property held by the
REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Loans that it holds will be equivalent to the method for
accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently as it accrues, on
a constant yield basis. See "--Taxation of Owners of REMIC Regular Certificates"
above, which describes a method for accruing such discount income that is
analogous to that required to be used by a REMIC as to Loans with market
discount that it holds.
A Loan will be deemed to have been acquired with discount (or premium)
to the extent that the REMIC's basis therein, determined as described above, is
less than (or greater than) its stated redemption price. Any such discount will
be includible in the income of the REMIC as it accrues, in advance of receipt of
the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that each REMIC will elect under Section 171 of
the Code to amortize any premium on the Loans. Premium on any Loan to which such
election applies may be amortized under a constant yield method, presumably
taking into account the Prepayment Assumption. Further, such an election would
not apply to any Loan originated on or before September 27, 1985. Instead,
premium on such a Loan should be allocated among the principal payments thereon
and be deductible by the REMIC as those payments become due or upon the
prepayment of such Loan.
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A REMIC will be allowed deductions for interest (including original
issue discount) on the REMIC Regular Certificates (including any other class of
REMIC Certificates constituting "regular interests" in the REMIC not offered
hereby) equal to the deductions that would be allowed if the REMIC Regular
Certificates (including any other class of REMIC Certificates constituting
"regular interests" in the REMIC not offered hereby) were indebtedness of the
REMIC. Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess
of the stated redemption price of such class (such excess "Issue Premium"), the
net amount of interest deductions that are allowed the REMIC in each taxable
year with respect to the REMIC Regular Certificates of such class will be
reduced by an amount equal to the portion of the Issue Premium that is
considered to be amortized or repaid in that year. Although the matter is not
entirely certain, it is likely that Issue Premium would be amortized under a
constant yield method in a manner analogous to the method of accruing original
issue discount described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in
the same manner as if the REMIC were an individual having the calendar year as
its taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
Basis Rules, Net Losses and Distributions
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such Certificate, increased by amounts included in the income of
the REMIC Residual Certificateholder and decreased (but not below zero) by
distributions made, and by net losses allocated, to such REMIC Residual
Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account
any net loss for any calendar quarter to the extent such net loss exceeds such
REMIC Residual Certificateholder's adjusted basis in its REMIC Residual
Certificate as of the close of such calendar quarter (determined without regard
to such net loss). Any loss that is not currently deductible by reason of this
limitation may be carried forward indefinitely to future calendar quarters and,
subject to the same limitation, may be used only to offset income from the REMIC
Residual Certificate. The ability of REMIC Residual Certificateholders to deduct
net losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such Certificate. To the extent a distribution on a REMIC
Residual Certificate exceeds such adjusted basis, it will be treated as gain
from the sale of such Certificate. Holders of certain REMIC Residual
Certificates may be entitled to distributions early in the term of the related
REMIC under circumstances in which their basis in such REMIC Residual
Certificates will not be sufficiently large that such distributions will be
treated as nontaxable returns of capital. Their basis in such REMIC Residual
Certificates will initially equal the amount paid for such REMIC Residual
Certificates and will be increased by their allocable shares of the taxable
income of the REMIC. However, such basis increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial basis is less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial basis either occur after
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such distributions or (together with their initial basis) are less than the
amount of such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder
may not amortize its basis in a REMIC Residual Certificate, but may only recover
its basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates," below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any difference
between the cost of such REMIC Residual Certificate to such REMIC Residual
Certificateholder and the adjusted basis such REMIC Residual Certificate would
have had in the hands of an original holder, see "--Taxation of Owners of REMIC
Residual Certificates--General."
Excess Inclusions
Any "excess inclusions" with respect to a REMIC Residual Certificate
will, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
the REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal rate" is an
average of current yields on Treasury securities with a remaining term of
greater than nine years, computed and published monthly by the IRS.
For REMIC Residual Certificateholders, an excess inclusion (i) will not
be permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
Recently enacted provisions governing the relationship between excess
inclusions and the alternative minimum tax provide that (i) the alternative
minimum taxable income of the taxpayer is based on the taxpayer's regular
taxable income computed without regard to the rule that taxable income cannot be
less than the amount of excess inclusions, (ii) the alternative minimum taxable
of a taxpayer for a taxable year cannot be less than the amount of excess
inclusions for that year, and (iii) the amount of any alternative minimum tax
net operating loss is computed without regard to any excess inclusions.
Under Treasury regulations yet to be issued, in the case of any REMIC
Residual Certificates held by a real estate investment trust, the aggregate
excess inclusions with respect to such Certificates, reduced (but not below
zero) by the real estate investment trust taxable income (within the meaning of
Section 857(b)(2) of the Code, excluding any net capital gain), will be
allocated among the shareholders of such trust in proportion to the dividends
received by such shareholders from such trust, and any amount so allocated will
be treated as an excess inclusion with respect to a REMIC Residual Certificate
as if held directly by such shareholder. A similar rule will apply with respect
to regulated investment companies, common trust funds and certain cooperatives.
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Noneconomic REMIC Residual Certificates
Under the REMIC Regulations, a transfer of a "noneconomic" REMIC
Residual Certificate will be disregarded for all federal income tax purposes if
"a significant purpose of the transfer was to enable the transferor to impede
the assessment or collection of tax." If such transfer is disregarded, the
purported transferor will continue to remain liable for any taxes due with
respect to the income on such "noneconomic" REMIC Residual Certificate. The
REMIC Regulations provide that a REMIC Residual Certificate is noneconomic
unless, based on the Prepayment Assumption and on any required or permitted
clean up calls or required qualified liquidation provided for in the REMIC's
organizational documents, (1) the present value of the expected future
distributions (discounted using the "applicable Federal rate" for obligations
whose term ends on the close of the last quarter in which excess inclusions are
expected to accrue with respect to the REMIC Residual Certificate, which rate is
computed and published monthly by the IRS) on the REMIC Residual Certificate
equals at least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
will also be required to make a reasonable investigation to determine such
transferee's historic payments of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date might be disregarded in accordance with
the above-described rules, which would result in the retention of tax liability
by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors In REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
Mark-to-Market Rules
On December 24, 1996, the IRS released final regulations (the "Mark-to-
Market Regulations") relating to the requirement that a securities dealer mark
to market securities held for sale to customers. This mark-to-market requirement
applies to all securities owned by a dealer, except to the extent that the
dealer has specifically identified a security as held for investment. The
Mark-to-Market Regulations provide that for purposes of this mark-to-market
requirement, any REMIC Residual Certificate acquired after January 4, 1995 will
not be treated as a security and therefore generally may not be marked to
market.
Possible Pass-Through of Miscellaneous Itemized Deductions
Fees and expenses of a REMIC generally will be allocated to the holders
of the related REMIC Residual Certificates. The applicable Treasury regulations
indicate, however, that in the case of a REMIC that is similar to a single class
grantor trust, all or a portion of such fees and expenses should be allocated to
the holders of the related REMIC Regular Certificates. Unless otherwise stated
in the related Prospectus Supplement, such fees and expenses will be allocated
to holders of the related REMIC Residual Certificates in their entirety and not
to the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular
Certificates the holders of which receive an allocation of fees and expenses in
accordance with the preceding discussion, if any holder thereof is an
individual,
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estate or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, (i) an amount equal to such individual's,
estate's or trust's share of such fees and expenses will be added to the gross
income of such holder and (ii) such individual's, estate's or trust's share of
such fees and expenses will be treated as a miscellaneous itemized deduction
allowable subject to the limitation of Section 67 of the Code, which permits
such deductions only to the extent they exceed in the aggregate two percent of a
taxpayer's adjusted gross income. For taxable years beginning after December 31,
1997, in the case of a partnership that has 100 or more partners and elects to
be treated as an "electing large partnership," 70 percent of such partnership's
miscellaneous itemized deductions will be disallowed, although the remaining
deductions will generally be allowed at the partnership level and will not be
subject to the 2 percent floor that would otherwise be applicable to individual
partners. In addition, Section 68 of the Code provides that the amount of
itemized deductions otherwise allowable for an individual whose adjusted gross
income exceeds a specified amount will be reduced by the lesser of (i) 3% of the
excess of the individual's adjusted gross income over such amount or (ii) 80% of
the amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of such Certificates
that are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Furthermore, in determining the alternative minimum
taxable income of such a holder of a REMIC Certificate that is an individual,
estate or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, no deduction will be allowed for such holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
Sales of REMIC Certificates
If a REMIC Certificate is sold, the selling Certificateholder will
recognize gain or loss equal to the difference between the amount realized on
the sale and its adjusted basis in the REMIC Regular Certificate. The adjusted
basis of a REMIC Regular Certificate generally will equal the cost of such REMIC
Regular Certificate to such Certificateholder, increased by income reported by
such Certificateholder with respect to such REMIC Regular Certificate (including
original issue discount and market discount income) and reduced (but not below
zero) by distributions on such REMIC Regular Certificate received by such
Certificateholder and by any amortized premium. The adjusted basis of a REMIC
Residual Certificate will be determined as described under "--Taxation of Owners
of REMIC Residual Certificates--Basis Rules, Net Losses and Distributions."
Except as provided in the following four paragraphs, any such gain or loss will
be capital gain or loss provided such REMIC Certificate is held as a capital
asset (generally property held for investment) within the meaning of Section
1221 of the Code.
Gain from the sale of a REMIC Regular Certificate that might otherwise
be capital gain will be treated as ordinary income to the extent such gain does
not exceed the excess, if any, of (i) the amount that would have been includible
in the seller's income with respect to such REMIC Regular Certificate assuming
that income had accrued thereon at a rate equal to 110% of the "applicable
Federal rate" (generally a rate based on an average of current yields on
Treasury securities having a maturity comparable to that of the Certificate
based on the application of the Prepayment Assumption to such Certificate, which
rate is computed and published monthly by the IRS), determined as of the date of
purchase of such Certificate, over (ii) the amount of ordinary income actually
includible in the seller's income prior to such sale. In addition, gain
recognized on the sale of a REMIC Regular Certificate by a seller who purchased
such Certificate at a market discount will be taxable as ordinary income in an
amount not exceeding the portion of such discount that accrued during the period
such REMIC Certificate was held by such holder, reduced by any market discount
included in income under the rules described above under "--Taxation of Owners
of REMIC Regular Certificates--Market Discount and--Premium."
REMIC Certificates will be "evidences of indebtedness" within the
meaning of Section 582(c)(1) of the Code, so that gain or loss recognized from
the sale of a REMIC Certificate by a bank or thrift institution to which such
section applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within
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the meaning of Section 1258 of the Code. A conversion transaction generally is
one in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at
ordinary income rates rather than capital gains rates in order to include such
net capital gain in total net investment income for the taxable year, for
purposes of the rule that limits the deduction of interest on indebtedness
incurred to purchase or carry property held for investment to a taxpayer's net
investment income.
Except as may be provided in Treasury regulations yet to be issued, if
the seller of a REMIC Residual Certificate reacquires a REMIC Residual
Certificate, or acquires any other residual interest in a REMIC or any similar
interest in a "taxable mortgage pool" (as defined in Section 7701(i) of the
Code) during the period beginning six months before, and ending six months
after, the date of such sale, such sale will be subject to the "wash sale" rules
of Section 1091 of the Code. In that event, any loss realized by the Residual
Certificateholder on the sale will not be deductible, but instead will be added
to such REMIC Residual Certificateholder's adjusted basis in the newly acquired
asset.
Prohibited Transactions and Other Possible REMIC Taxes
The Code imposes a tax on REMICs equal to 100% of the net income
derived from "prohibited transactions" (a "Prohibited Transaction Tax"). In
general, subject to certain specified exceptions, a prohibited transaction means
the disposition of a Loan, the receipt of income from a source other than a Loan
or certain other permitted investments, the receipt of compensation for
services, or gain from the disposition of an asset purchased with the payments
on the Loans for temporary investment pending distribution on the REMIC
Certificates. It is not anticipated that any REMIC will engage in any prohibited
transactions in which it would recognize a material amount of net income.
In addition, certain contributions to a REMIC made after the day on
which the REMIC issues all of its interests could result in the imposition of a
tax on the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are subject to federal income tax at the highest corporate
rate on "net income from foreclosure property," determined by reference to the
rules applicable to real estate investment trusts. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is
not anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to
the extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee, in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will
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be charged against the related Trust Fund, resulting in a reduction in amounts
payable to holders of the related REMIC Certificates.
Tax and Restrictions on Transfers of REMIC Residual Certificates to
Certain Organizations.
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Such a tax
would be generally imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization, and, as of the
time of the transfer, the transferor did not have actual knowledge that such
affidavit was false. Moreover, an entity will not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that (i) residual interests
in such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the related Pooling and Servicing Agreement, and will be discussed
more fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization. For taxable years beginning after December 31,
1997, notwithstanding the preceding two sentences, in the case of a REMIC
Residual Certificate held by an "electing large partnership," all interests in
such partnership shall be treated as held by disqualified organizations (without
regard to whether the record holders of the partnership furnish statements
described in the preceding sentence) and the amount that would be subject to tax
under the second preceding sentence is excluded from the gross income of the
partnership (in lieu of a deduction in the amount of such tax generally allowed
to pass-through entities).
For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(not including instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation), (ii) any organization (other
than a cooperative described in Section 521 of the Code) that is exempt from
federal income tax, unless it is subject to the tax imposed by Section 511 of
the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
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Termination and Liquidation
A REMIC will terminate immediately after the Distribution Date
following receipt by the REMIC of the final payment in respect of the Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss. If the REMIC adopts a plan of complete
liquidation, within the meaning of Section 860F(a)(4)(A)(i) of the Code, which
may be accomplished by designating in the REMIC's final tax return a date on
which such adoption is deemed to occur, and sells all of its assets (other than
cash) within a 90-day period beginning on such date, the REMIC will not be
subjected to any "prohibited transactions taxes" solely on account of such
qualified liquidation, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and Residual Certificates within
the 90-day period.
Reporting and Other Administrative Matters
Solely for purposes of the administrative provisions of the Code, the
REMIC will be treated as a partnership and REMIC Residual Certificateholders
will be treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the REMIC, will generally hold at least a nominal amount of REMIC Residual
Certificates, and will be designated as and will act as the "tax matters person"
with respect to the REMIC in all respects.
As the tax matters person, the Trustee will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, with
the name and address of such person and other information.
Reporting of interest income, including any original issue discount,
with respect to REMIC Regular Certificates is required annually, and may be
required more frequently under Treasury regulations. These information reports
generally are required to be sent to individual holders of REMIC Regular
Interests and the IRS; holders of REMIC Regular Certificates that are
corporations, trusts, securities dealers and certain other non-individuals will
be provided interest and original issue discount income information and the
information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets, will be made as required under
the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because
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exact computation of the accrual of market discount on a constant yield method
would require information relating to the holder's purchase price that the
Trustee will not have, such regulations only require that information pertaining
to the appropriate proportionate method of accruing market discount be provided.
See "--Taxation of Owners of REMIC Regular Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules
will be borne by the Trustee.
Backup Withholding With Respect to REMIC Certificates
Payments of interest and principal, as well as payments of proceeds
from the sale of REMIC Certificates, may be subject to the "backup withholding
tax" under Section 3406 of the Code at a rate of 31% if recipients of such
payments fail to furnish to the payor certain information, including their
taxpayer identification numbers, or otherwise fail to establish an exemption
from such tax. Treasury regulations (the "Final Withholding Regulations"), which
are generally effective with respect to payments made after December 31, 1998,
consolidate and modify the current certification requirements and means by which
a holder may claim exemption from United States federal income tax withholding
and provide certain presumptions regarding the status of holders when payments
to the holders cannot be reliably associated with appropriate documentation
provided to the payor. All holders should consult their tax advisors regarding
the application of the Final Withholding Regulations. Any amounts deducted and
withheld from a distribution to a recipient would be allowed as a credit against
such recipient's federal income tax. Furthermore, certain penalties may be
imposed by the IRS on a recipient of payments that is required to supply
information but that does not do so in the proper manner.
Foreign Investors in REMIC Certificates
A REMIC Regular Certificateholder that is not a "United States person"
(as defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). The Final Withholding Regulations
consolidate and modify the current certification requirements and means by which
a non-United States person may claim exemption from United States federal income
tax withholding. All holders that are non-United States persons should consult
their tax advisors regarding the application of the Final Withholding
Regulations, which are generally effective with respect to payments made after
December 31, 1998. For these purposes, "United States person" means a citizen or
resident of the United States, a corporation or partnership created or organized
in, or under the laws of, the United States or any political subdivision thereof
(except, in the case of a partnership, to the extent provided in regulations),
an estate whose income is subject to United States federal income tax regardless
of its source, or 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 the authority to control all substantial
decisions of the trust. To the extent prescribed in regulations by the Secretary
of the Treasury, which regulations have not yet been issued, a trust which was
in existence on August 20, 1996 (other than a trust treated as owned by the
grantor under subpart E of part I of subchapter J of chapter 1 of the Code), and
which was treated as a United States person on August 19, 1996, may elect to
continue to be treated as a United States person notwithstanding the previous
sentence. It is possible that the IRS may assert that the foregoing tax
exemption should not apply with respect to a REMIC Regular Certificate held by a
REMIC Residual Certificateholder that owns directly or indirectly a 10% or
greater interest in the related REMIC Residual Certificates. If the holder does
not qualify for exemption, distributions of interest, including distributions in
respect of accrued original issue discount, to such holder may be subject to a
tax rate of 30%, subject to reduction under any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United
States shareholder of a controlled foreign corporation from taxation on such
United States shareholder's allocable portion of the interest income received by
such controlled foreign corporation.
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Further, it appears that a REMIC Regular Certificate would not be
included in the estate of a non-resident alien individual and would not be
subject to United States estate taxes. However, Certificateholders who are
non-resident alien individuals should consult their tax advisors concerning this
question. Unless otherwise stated in the related Prospectus Supplement,
transfers of REMIC Residual Certificates to investors that are not United States
persons will be prohibited under the related Pooling and Servicing Agreement.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in
"Certain Federal Income Tax Consequences," potential investors should consider
the state and local tax consequences of the acquisition, ownership, and
disposition of the Certificates offered hereunder. State tax law may differ
substantially from the corresponding federal tax law, and this discussion does
not purport to describe any aspect of the tax laws of any state or other
jurisdiction. Therefore, prospective investors should consult their own tax
advisors with respect to the various tax consequences of investments in the
Certificates offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions
on employee pension and welfare benefit plans subject to ERISA ("ERISA Plans").
Section 4975 of the Code imposes similar prohibited transaction restrictions on
tax-qualified retirement plans described in Section 401(a) of the Code
("Qualified Retirement Plans") and on Individual Retirement Accounts ("IRAs")
described in Section 408 of the Code (collectively, "Tax-Favored Plans")
Tax-Favored Plans and ERISA Plans, collectively, "Plans".
Certain employee benefit plans, such as governmental plans (as defined
in Section 3(32) of ERISA), and, if no election has been made under Section
410(d) of the Code, church plans (as defined in Section 3(33) of ERISA, are not
subject to the ERISA requirements discussed herein. Accordingly, assets of such
plans may be invested in Certificates without regard to the ERISA considerations
described below, subject to the provisions of applicable federal and state law.
Any such plan that is a Qualified Retirement Plan and exempt from taxation under
Sections 401(a) and 501(a) of the Code, however, is subject to the prohibited
transaction rules set forth in Section 503 of the Code.
In addition to imposing general fiduciary requirements, including those
of investment prudence and diversification and the requirement that a Plan's
investment be made in accordance with the documents governing the Plan, Section
406 of ERISA and Section 4975 of the Code prohibit a broad range of transactions
involving "plan assets" of ERISA Plans and Tax-Favored Plans (collectively,
"Plans") and persons ("parties in interest" under Section 3(14) of ERISA or
"disqualified persons" under Section 4975(e)(2) of the Code; collectively,
"Parties In Interest") who have certain specified relationships to the Plans,
unless a statutory or administrative exemption is available. Certain Parties in
Interest that participate in a prohibited transaction may be subject to a
penalty, or an excise tax, imposed pursuant to Section 502(i) of ERISA or
Section 4975 of the Code, unless a statutory or administrative exemption is
available.
Plan Asset Regulations. A Plan's investment in Certificates may cause
the underlying Mortgage Assets and other assets included in a related Trust Fund
to be deemed assets of such Plan. Section 2510.3-101 of the regulations (the
"Plan Asset Regulations") of the United States Department of Labor (the "DOL")
provides that, for purposes of applying the general fiduciary responsibility
provisions of ERISA and the prohibited transaction provisions of ERISA and the
Code, when a Plan acquires an equity interest in an entity (such as a
Certificate), the Plan's assets include both such equity interest and an
undivided interest in each of the underlying assets of the entity, unless
certain exceptions not applicable here apply, or unless the equity participation
in the entity by "benefit plan investors" (i.e., Plans and certain employee
benefit plans not subject to ERISA) is not "significant", both as defined
therein. For this purpose, in general, equity participation by benefit plan
investors will be "significant" on any date if 25% or more of the value of any
class of equity interests in the entity is held by benefit plan investors.
Equity participation in a Trust Fund will
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be significant on any date if immediately after the most recent acquisition of
any Certificate, 25% or more of any class of Certificates is held by benefit
plan investors.
Any person who has discretionary authority or control respecting the
management or disposition of Plan assets, and any person who provides investment
advice with respect to such assets for a fee, is a fiduciary of the investing
Plan. If the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, then any party exercising management or discretionary
control regarding those assets, such as the Master Servicer, any Servicer, any
sub-servicer, the Trustee, the obligor under any credit enhancement mechanism,
or certain affiliates thereof may be deemed to be a Plan "fiduciary" and thus
subject to the fiduciary responsibility provisions and prohibited transaction
provisions of ERISA and the Code with respect to the investing Plan. In
addition, if the Mortgage Assets and other assets included in a Trust Fund
constitute Plan assets, the purchase of Certificates by a Plan, as well as the
operation of the Trust Fund, may constitute or involve a prohibited transaction
under ERISA or the Code.
The Plan Asset Regulations provide that where a Plan acquires a
"guaranteed governmental mortgage pool certificate", the Plan's assets include
such certificate but do not solely by reason of the Plan's holdings of such
certificate include any of the mortgages underlying such certificate. The Plan
Asset Regulations include in the definition of a "guaranteed governmental
mortgage pool certificate" FHLMC Certificates, GNMA Certificates and FNMA
Certificates. Accordingly, even if such Agency Securities included in a Trust
Fund were deemed to be assets of Plan investors, the mortgages underlying such
Agency Securities would not be treated as assets of such Plans. Private Mortgage
Backed Securities are not "guaranteed governmental mortgage pool certificates"
within the meaning of the Plan Asset Regulations. Potential Plan investors
should consult their counsel and review the ERISA discussion in the related
Prospectus Supplement before purchasing any such Certificates.
Prohibited Transaction Exemption. The DOL has granted to Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") an individual prohibited
transaction exemption (Prohibited Transaction Exemption 90-83, the "Exemption"),
which generally exempts from the application of the prohibited transaction
provisions of Section 406 of ERISA, and the excise taxes imposed on such
prohibited transactions pursuant to Section 4975(a) and (b) of the Code, certain
transactions, among others, relating to the servicing and operation of mortgage
pools and the purchase, sale and holding of mortgage pass-through certificates
underwritten by an Underwriter (as hereinafter defined), provided that certain
conditions set forth in the Exemption are satisfied. For purposes of this
Section "ERISA Considerations," the term "Underwriter" includes (a) DLJ, (b) any
person directly or indirectly, through one or more intermediaries, controlling,
controlled by or under common control with DLJ and (c) any member of the
underwriting syndicate or selling group of which a person described in (a) or
(b) is a manager or co-manager with respect to a class of Certificates.
The Exemption sets forth six general conditions which must be satisfied
for a transaction involving the purchase, sale and holding of Certificates to be
eligible for exemptive relief thereunder. First, the acquisition of Certificates
by a Plan or with Plan assets must be on terms that are at least as favorable to
the Plan as they would be in an arm's-length transaction with an unrelated
party. Second, the Exemption only applies to Certificates evidencing rights and
interests that are not subordinated to the rights and interests evidenced by the
other Certificates of the same Trust Fund. Third, the Certificates at the time
of acquisition by or with Plan assets must be rated in one of the three highest
generic rating categories by Standard and Poor's, a Division of the McGraw-Hill
Companies, Inc., Moody's Investors Service, Inc., Duff & Phelps, Inc. or Fitch
Investors Service, L.P. (collectively, the "Exemption Rating Agencies"). Fourth,
the Trustee cannot be an affiliate of any other member of the "Restricted Group"
which consists of any Underwriter, the Master Servicer, any Servicer, any
subservicer, the Trustee and any obligor with respect to assets of a Trust Fund
constituting more than 5% of the aggregate unamortized principal balance of the
assets in the related Trust Fund as of the date of initial issuance of the
Certificates. Fifth, the sum of all payments made to and retained by the
Underwriters must represent not more than reasonable compensation for
underwriting the Certificates; the sum of all payments made to and retained by
the Depositor pursuant to the assignment of the assets to the related Trust Fund
must represent not more than the fair market value of such obligations, and the
sum of all payments made to and retained by the Master Servicer, any Servicer
and any subservicer must represent not more than reasonable compensation for
such person's services under the related Pooling and Servicing Agreement and
reimbursement of such person's reasonable expenses in connection therewith.
Sixth, the Exemption requires that the investing Plan be
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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 Exemption also requires that a Trust Fund meet the following
requirements: (i) the Trust Fund must consist solely of assets of the type that
have been included in other investment pools; (ii) certificates in such other
investment pools must have been rated in one of the three highest categories of
one of the Exemption Rating Agencies for at least one year prior to the Plan's
acquisition of Certificates; and (iii) certificates 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 Certificates.
A fiduciary of any Plan or other investor of Plan assets contemplating
purchasing a Certificate must make its own determination that the general
conditions set forth above will be satisfied with respect to such Certificate.
If the general conditions of the Exemption are satisfied, the Exemption
may provide an exemption from the restrictions imposed by Sections 406(a) and
407 of ERISA (as well as the excise taxes imposed by Sections 4975(a) and (b) of
the Code by reason of Sections 4975(c)(1)(A) through (D) of the Code) in
connection with the direct or indirect sale, exchange, transfer, holding or the
direct or indirect acquisition or disposition in the secondary market of
Certificates by Plans or with Plan assets. However, no exemption is provided
from the restrictions of Sections 406(a)(1)(E) and 406(a)(2) of ERISA for the
acquisition or holding of a Certificate by a Plan or with Plan assets of an
"Excluded Plan" (as hereinafter defined) by any person who has discretionary
authority or renders investment advice with respect to Plan assets of such
Excluded Plan. For purposes of the Certificates, an Excluded Plan is a Plan
sponsored by any member of the Restricted Group.
If certain specific conditions of the Exemption are also satisfied, the
Exemption may provide an exemption from the restrictions imposed by Sections
406(b)(1) and (b)(2) of ERISA and the taxes imposed by Section 4975(c)(1)(E) of
the Code in connection with (i) the direct or indirect sale, exchange or
transfer of Certificates in the initial issuance of Certificates between the
Company or an Underwriter and a Plan when the person who has discretionary
authority or renders investment advice with respect to the investment of the
relevant Plan assets in the Certificates is (a) a mortgagor with respect to 5%
or less of the fair market value of the assets of the related Trust Fund or (b)
an affiliate of such a person, (ii) the direct or indirect acquisition or
disposition in the secondary market of Certificates by or with Plan assets and
(iii) the holding of Certificates by or with Plan assets.
Further, if certain specific conditions of the Exemption are satisfied,
the Exemption may provide an exemption from the restrictions imposed by Sections
406(a), 406(b) and 407 of ERISA, and the taxes imposed by Sections 4975(a) and
(b) of the Code by reason of Section 4975(c) of the Code for transactions in
connection with the servicing, management and operation of the Trust Funds. The
Depositor expects that the specific conditions of the Exemption required for
this purpose will be satisfied with respect to the Certificates so that the
Exemption would provide an exemption from the restrictions imposed by Sections
406(a) and (b) of ERISA (as well as the excise taxes imposed by Sections 4975(a)
and (b) of the Code by reason of Section 4975(c) of the Code) for transactions
in connection with the servicing, management and operation of the Trust Funds,
provided that the general conditions of the Exemption are satisfied.
The Exemption also may provide an exemption from the restrictions
imposed by Sections 406(a) and 407(a) of ERISA, and the taxes imposed by Section
4975(a) and (b) of the Code by reason of Sections 4975(c)(1)(A) through (D) of
the Code if such restrictions are deemed to otherwise apply merely because a
person is deemed to be a Party In Interest with respect to an investing Plan (or
the investing entity holding Plan assets) by virtue of providing services to the
Plan (or by virtue of having certain specified relationships to such a person)
solely as a result of the ownership of Certificates by a Plan or the investment
of Plan assets in Certificates.
On July 21, 1997, the DOL amended the Exemption, which extends
exemptive relief to certain mortgage-backed and asset-backed securities
transactions using Funding Accounts for trusts issuing pass-through
certificates. With respect to the Certificates, the amendment generally allows
Mortgage Loans supporting payments to Certificateholders, and having a value
equal to no more than 25% of the total principal amount of the Certificates
being offered by a Trust Fund, to be transferred to such Trust Fund within a
period no longer than 90 days or three
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months following the Closing Date ("Pre-Funding Period") instead of requiring
that all such Mortgage Loans be either identified or transferred on or before
the Closing Date. In general, the relief applies to the purchase, sale and
holding of Certificates which otherwise qualify for the Exemption, provided that
the following general conditions are met:
(1) the ratio of the amount allocated to the Funding Account
to the total principal amount of the Certificates being offered
("Pre-Funding Limit") must be less than or equal to: (i) 40% for
transactions occurring on or after January 1, 1992 but prior to May 23,
1997 and (ii) 25% for transactions occurring on or after May 23, 1997;
(2) all additional Mortgage Loans transferred to the related
Trust Fund after the Closing Date ("Subsequent Mortgage Loans") must
meet the same terms and conditions for eligibility as the original
Mortgage Loans used to create the Trust Fund, which terms and
conditions have been approved by one of the Exemption Rating Agencies;
(3) the transfer of such Subsequent Mortgage Loans to the
Trust Fund during the Pre-Funding Period must not result in the
Certificates to be covered by the Exemptions receiving a lower credit
rating from an Exemption Rating Agency upon termination of the
Pre-Funding Period than the rating that was obtained at the time of the
initial issuance of the Certificates by the Trust Fund;
(4) solely as a result of the use of pre-funding, the weighted
average annual percentage interest rate (the "Average Interest Rate")
for all of the Mortgage Loans and Subsequent Mortgage Loans in the
Trust Fund at the end of the Pre-Funding Period must not be more than
100 basis points lower than the Average Interest Rate for the Mortgage
Loans which were transferred to the Trust Fund on the Closing Date;
(5) for transactions occurring on or after May 23, 1997,
either:
(i) the characteristics of the Subsequent Mortgage
Loans must be monitored by an insurer or other credit support provider
which is independent of the Depositor; or
(ii) an independent accountant retained by the
Depositor must provide the Depositor with a letter (with copies
provided to the Exemption Rating Agency rating the Certificates, the
Underwriter and the Trustee) stating whether or not the characteristics
of the Subsequent Mortgage Loans conform to the characteristics
described in the Prospectus or Prospectus Supplement and/or Agreement.
In preparing such letter, the independent accountant must use the same
type of procedures as were applicable to the Mortgage Loans which were
transferred to the Trust Fund as of the Closing Date;
(6) the Pre-Funding Period must end no later than three months
or 90 days after the Closing Date or earlier in certain circumstances
if the Funding Accounts falls below the minimum level specified in the
Agreement or an event of default occurs;
(7) amounts transferred to any Funding Accounts and/or
capitalized interest account used in connection with the pre-funding
may be invested only in investments which are permitted by the
Exemption Rating Agencies rating the Certificates and must:
(i) be direct obligations of, or obligations fully
guaranteed as to timely payment of principal and interest by, the
United States or any agency or instrumentality thereof (provided that
such obligations are backed by the full faith and credit of the United
States); or
(ii) have been rated (or the obligor has been rated)
in one of the three highest generic rating categories by one of the
Exemption Rating Agencies;
(8) the Prospectus or Prospectus Supplement must describe the
duration of the Pre-Funding Period; and
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(9) the Trustee (or any agent with which the Trustee contracts
to provide trust services) must be a substantial financial institution
or trust company experienced in trust activities and familiar with its
duties, responsibilities and liabilities with ERISA. The Trustee, as
legal owner of the Trust Fund, must enforce all the rights created in
favor of Certificateholders of the Trust Fund, including employee
benefit plans subject to ERISA.
Before purchasing a Certificate, a fiduciary of a Plan or other
investor of Plan assets should itself confirm (a) that the Certificates
constitute "certificates" for purposes of the Exemption and (b) that the
specific and general conditions set forth in the Exemption and the other
requirements set forth in the Exemption would be satisfied. In addition to
making its own determination as to the availability of the exemptive relief
provided in the Exemption, the fiduciary or other Plan investor should consider
its general fiduciary obligations under ERISA in determining whether to purchase
any Certificates by or with Plan assets.
Any fiduciary or other Plan investor which proposes to purchase
Certificates on behalf of or with Plan assets should consult with its counsel
with respect to the potential applicability of ERISA and the Code to such
investment and the availability of the Exemption or any other prohibited
transaction exemption in connection therewith. In particular, in connection with
a contemplated purchase of Certificates representing a beneficial ownership
interest in a pool of single-family residential first mortgage loans, such
fiduciary or other Plan investor should consider the availability of the
Exemption or Prohibited Transaction Class Exemption ("PTCE") 83-1 ("PTCE 83-1")
for certain transactions involving mortgage pool investment trusts. However,
PTCE 83-1 does not provide exemptive relief with respect to Certificates
evidencing interests in Trust Funds which include Cooperative Loans and may not
provide exemptive relief for Certificates having certain cash-flow
characteristics that may be issued by a Trust Fund. In addition, such fiduciary
or other Plan investor should consider the availability of PTCE 96-23, regarding
transactions effected by "in-house asset managers", PTCE 95-60, regarding
investments by insurance company general accounts, PTCE 90-1, regarding
investments by insurance company pooled separate accounts, PTCE 91-38, regarding
investments by bank collective investment funds, and PTCE 84-14, regarding
transactions effected by "qualified professional asset managers." The Prospectus
Supplement with respect to a series of Certificates may contain additional
information regarding the application of the Exemption, PTCE 83-1, or any other
exemption, with respect to the Certificates offered thereby. There can be no
assurance that any of these exemptions will apply with respect to any particular
Plan's or other Plan investor's investment in the Certificates or, even if an
exemption were deemed to apply, that any exemption would apply to all prohibited
transactions that may occur in connection with such investment.
Tax Exempt Investors. A Plan that is exempt from federal income
taxation pursuant to Section 501 of the Code (a "Tax Exempt Investor")
nonetheless will be subject to federal income taxation to the extent that its
income is "unrelated business taxable income" ("UBTI") within the meaning of
Section 512 of the Code. All "excess inclusions" of a REMIC allocated to a REMIC
Residual Certificate held by a Tax-Exempt Investor will be considered UBTI and
thus will be subject to federal income tax. See "Certain Federal Income Tax
Consequences--Taxation of Owners of REMIC Residual Certificates--Excess
Inclusions."
Consultation With Counsel. Any fiduciary of a Plan or other Plan
investor that proposes to acquire or hold Certificates on behalf of or with Plan
assets should consult with its counsel with respect to the potential
applicability of the fiduciary responsibility provisions of ERISA and the
prohibited transaction provisions of ERISA and the Code to the proposed
investment and the Exemption, the availability of PTCE 83-1 or any other
prohibited transaction exemption.
LEGAL INVESTMENT
Each class of Certificates offered hereby and by the related Prospectus
Supplement will be rated at the date of issuance in one of the four highest
rating categories by at least one Rating Agency. Unless otherwise set forth in
the related Prospectus Supplement, Certificates of any Series will constitute
"mortgage related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated by a Rating Agency
in one of its two highest categories and, as such, will be legal investments for
persons, trusts, corporations,
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partnerships, associations, business trusts and business entities (including,
but not limited to, state-chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or of any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities. Any
Class of Certificates that represents an interest in a Trust Fund that includes
junior mortgage loans will not constitute "mortgage related securities" for
purposes of SMMEA.
Under SMMEA, if a State enacted legislation prior to October 4, 1991
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Certificates will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Certain States have enacted legislation which overrides the
preemption provisions of SMMEA. SMMEA provides, however, that in no event will
the enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally
chartered depository institutions as follows: federal savings and loan
associations and federal savings banks may invest in, sell or otherwise deal
with mortgage-related securities without limitations as to the percentage of
their assets represented thereby; federal credit unions may invest in
mortgage-related securities, and national banks may purchase mortgage-related
securities for their own account without regard to the limitations generally
applicable to investment securities set forth in 12 U.S.C. 24 (Seventh), subject
in each case to such regulations as the applicable federal regulatory authority
may prescribe.
The Federal Financial Institution Examination Council has adopted a
supervisory policy statement (the "Policy Statement"), applicable to all
depository institutions, setting forth guidelines for and significant
restrictions on investments in "high-risk mortgage securities." The Policy
Statement has been adopted by the Federal Reserve Board, the Office of the
Comptroller of the Currency, the FDIC and the Office of Thrift Supervision with
an effective date of February 10, 1992. The Policy Statement generally indicates
that a mortgage derivative product will be deemed to be high risk if it exhibits
greater price volatility than a standard fixed rate thirty-year mortgage
security. According to the Policy Statement, prior to purchase, a depository
institution will be required to determine whether a mortgage derivative product
that it is considering acquiring is high-risk, and if so that the proposed
acquisition would reduce the institution's overall interest rate risk. Reliance
on analysis and documentation obtained from a securities dealer or other outside
party without internal analysis by the institution would be unacceptable. There
can be no assurance as to which Classes of the Certificates of any Series will
be treated as high-risk under the Policy Statement.
The predecessor to the OTS issued a bulletin, entitled, "Mortgage
Derivative Products and Mortgage Swaps," which is applicable to thrift
institutions regulated by the OTS. The bulletin established guidelines for the
investment by savings institutions in certain "high-risk" mortgage derivative
securities and limitations on the use of such securities by insolvent,
undercapitalized or otherwise "troubled" institutions. According to the
bulletin, such "high-risk" mortgage derivative securities include securities
having certain specified characteristics, which my include certain classes of
Certificates. In addition, the National Credit Union Administration has issued
regulations governing federal credit union investments which prohibit investment
in certain specified types of securities, which may include certain Classes of
Certificates. Similar policy statements have been issued by regulators having
jurisdiction over other types of depository institutions.
Certain classes of Certificates offered hereby, including any class
that is not rated in one of the two highest categories by at least one Rating
Agency, will not constitute "mortgage related securities" for purposes of SMMEA.
Any such class of Certificates will be identified in the related Prospectus
Supplement. Prospective investors in such classes of Certificates, in
particular, should consider the matters discussed in the following paragraph.
There may be other restrictions on the ability of certain investors
either to purchase certain Classes of Certificates or to purchase any Class of
Certificates representing more than a specified percentage of the investors'
assets. The Depositor will make no representations as to the proper
characterization of any Class of Certificates for
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legal investment or other purposes, or as to the ability of particular investors
to purchase any Class of Certificates under applicable legal investment
restrictions. These uncertainties may adversely affect the liquidity of any
Class of Certificates. Accordingly, all investors whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent the Certificates of any
Class constitute legal investments under SMMEA or are subject to investment,
capital or other restrictions, and, if applicable, whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered
hereby will be passed upon for the Depositor and for the Underwriters by Thacher
Proffitt & Wood, New York, New York or Stroock & Stroock & Lavan LLP, New York,
New York.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on April 14,
1988 and is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette Inc., a
Delaware corporation. The principal executive offices of the Depositor are
located at 277 Park Avenue, New York, New York 10172. Its telephone number is
(212) 504-3000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. The Depositor has one class of common
stock, all of which is owned by Donaldson, Lufkin & Jenrette Inc.
Neither the Depositor, its parent nor any of the Depositor's affiliates
will ensure or guarantee distributions on the Certificates of any Series.
As described herein, the only obligations of the Depositor will be
pursuant to certain representations and warranties with respect to the Mortgage
Assets. See "Loan Underwriting Standards--Representations and Warranties" and
"The Pooling and Servicing Agreements--Assignment of Mortgage Assets" herein.
The Depositor will have no ongoing servicing responsibilities or other
responsibilities with respect to any Mortgage Asset. The Depositor does not have
nor is it expected in the future to have any significant assets with which to
meet any obligations with respect to any Trust Fund. If the Depositor were
required to repurchase or substitute a Loan, its only source of funds to make
the required payment would be funds obtained from the Seller of such Loan, or if
applicable, the Master Servicer or, the Servicer. See "Risk Factors" herein.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds
from the sale of each Series offered hereby and by the related Prospectus
Supplement to purchase the Mortgage Assets, to repay indebtedness which has been
incurred to obtain funds to acquire the Mortgage Assets, to establish the
reserve funds, if any, for the Series and to pay costs of structuring,
guaranteeing and issuing the Certificates. If so specified in the related
Prospectus Supplement, Certificates may be exchanged by the Depositor for
Mortgage Assets. The Depositor expects that it will make additional sales of
securities similar to the Certificates from time to time, but the timing and
amount of any such additional offerings will be dependent upon a number of
factors, including the volume of mortgage loans purchased by the Depositor,
prevailing interest rates, availability of funds and general market conditions.
PLAN OF DISTRIBUTION
The Certificates offered hereby and by the related Prospectus
Supplements will be offered in series may be sold directly by the Depositor or
may be offered through Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Depositor, or through underwriting syndicates represented by
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriters") through
one or more of the methods described below. The Prospectus Supplement
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prepared for each Series will describe the method of offering being utilized for
that Series and will state the net proceeds to the Depositor from such sale.
The Depositor intends that Certificates will be offered through the
following methods from time to time and that offerings may be made concurrently
through more than one of these methods or that an offering of a particular
Series of Certificates may be made through a combination of two or more of these
methods. Such methods are as follows:
1. by negotiated firm commitment or best efforts underwriting
and public re-offering by the Underwriters;
2. by placements by the Depositor with institutional investors
through dealers; and
3. by direct placements by the Depositor with institutional
investors.
In addition, if specified in the related Prospectus Supplement, a
Series of Certificates may be offered in whole or in part in exchange for the
Loans (and other assets, if applicable) that would comprise the Trust Fund for
such Certificates.
If Underwriters are used in a sale of any Certificates (other than in
connection with an underwriting on a best efforts basis), such Certificates will
be acquired by the Underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
fixed public offering prices or at varying prices to be determined at the time
of sale or at the time of commitment therefor. The managing underwriter or
underwriters with respect to the offer and sale of a particular Series of
Certificates will be set forth on the cover of the Prospectus Supplement
relating to such Series and the members of the underwriting syndicate, if any,
will be named in such Prospectus Supplement.
In connection with the sale of the Certificates, the Underwriters may
receive compensation from the Depositor or from purchasers of the Certificates
in the form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Depositor and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933, as amended.
It is anticipated that the underwriting agreement pertaining to the
sale of any Series of Certificates will provide that the obligations of the
Underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased (other than in connection with an underwriting on a best efforts
basis) and that, in limited circumstances, the Depositor will indemnify the
several Underwriters and the Underwriters will indemnify the Depositor against
certain civil liabilities, including liabilities under the Securities Act of
1933, as amended, or will contribute to payments required to be made in respect
thereof.
The Prospectus Supplement with respect to any Series offered by
placements through dealers will contain information regarding the nature of such
offering and any agreements to be entered into between the Depositor and
purchasers of Certificates of such Series.
The Depositor anticipates that the Certificates offered hereby will be
sold primarily to institutional investors or sophisticated non-institutional
investors. Purchasers of Certificates, including dealers, may, depending on the
facts and circumstances of such purchases, be deemed to be "underwriters" within
the meaning of the Securities Act of 1933, as amended, in connection with
reoffers and sales by them of Certificates. Holders of Certificates should
consult with their legal advisors in this regard prior to any such reoffer or
sale.
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GLOSSARY
The following are abbreviated definitions of certain capitalized terms
used in this Prospectus. Unless otherwise defined in the Prospectus Supplement
for a Series, such definitions will apply to capitalized terms used in such
Prospectus Supplement. The definitions may vary from those in the Pooling and
Servicing Agreement and the Pooling and Servicing Agreement generally provides a
more complete definition of certain of the terms. Reference should be made to
the Pooling and Servicing Agreement for a more complete definition of such
terms.
"Accrual Date" means, with respect to any Multiple Class Series, the
date upon which interest begins accruing on the Certificates of the Series, as
specified in such Certificates and the related Prospectus Supplement.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Certificates, the Distribution Date on which all Certificates of the
related Series with Final Scheduled Distribution Dates earlier than that of such
Class of Compound Interest Certificates have been fully paid, or such other date
or period as may be specified in the related Prospectus Supplement.
"Additional Collateral" means marketable securities, insurance
policies, annuities, certificates of deposit, cash, accounts or other personal
property and, in the case of Additional Collateral owned by any guarantor, may
consist of real estate.
"Additional Collateral Loan" means a Mortgage Loan that, in addition to
being secured by the related Mortgaged Property, is secured by other collateral
owned by the related Mortgagors or are supported by third-party guarantees
secured by collateral owned by the related guarantors.
"Advance" means a cash advance by the Master Servicer or a Servicer in
respect of delinquent payments of principal of and interest on a Loan, and for
the other purposes specified herein and in the related Prospectus Supplement.
"Agency Securities" means mortgage pass-through securities issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies.
"Appraised Value" means, unless otherwise specified in the related
Prospectus Supplement (i) with respect to a Mortgaged Property securing a Single
Family or Multifamily Property, the lesser of (x) the appraised value determined
in an appraisal obtained at origination of such Mortgage Loan, if any, or, if
the related Mortgaged Property has been appraised subsequent to origination, the
value determined in such subsequent appraisal and (y) the sales price for the
related Mortgaged Property (except in certain circumstances in which there has
been a subsequent appraisal); (ii) with respect to certain refinanced, modified
or converted Single Family or Multifamily Properties, the lesser of (x) the
appraised value of the related Mortgaged Property determined at origination or
in an appraisal, if any, obtained at the time of refinancing, modification or
conversion and (y) the sales price of the related Mortgage Property or, if the
Mortgage Loan is not a rate and term refinance Mortgage Loan and if the
Mortgaged Property was owned for a relatively short period of time prior to
refinancing, modification or conversion, the sum of the sales price of the
related Mortgaged Property plus the added value of any improvements; and (iii)
with respect to a Mortgaged Property securing a Manufactured Home Loan, the
least of the sale price, the appraised value, and the National Automobile
Dealer's Association book value plus prepaid taxes and hazard insurance
premiums.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage Loan as to which
the related Mortgage Note provides for periodic adjustments in the interest rate
component of the Scheduled Payment pursuant to an Index as described in the
related Prospectus Supplement.
"Asset Group" means a group of individual Mortgage Assets which share
similar characteristics and are aggregated into one group.
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"Available Distribution Amount" means the amount in the Certificate
Account (including amounts deposited therein from any reserve fund or other fund
or account) eligible for distribution to Certificateholders on a Distribution
Date.
"Balloon Loan" means Mortgage Loan with payments similar to a
Conventional Loan, calculated on the basis of an assumed amortization term, but
providing for a Balloon Payment of all outstanding principal and interest to be
made at the end of a specified term that is shorter than such assumed
amortization term.
"Balloon Payment" means the payment of all outstanding principal and
interest made at the end of the term of a Balloon Loan.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States
Code 101 et seq., and regulations promulgated thereunder.
"Bi-Weekly Loan" means a Mortgage Loan which provides for payments of
principal and interest by the borrower once every two weeks.
"Business Day" means a day that, in the City of New York or in the city
or cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulation or executive order to be closed.
"Buy-Down Fund" means a custodial account, established by the Master
Servicer or the Servicer for a Buy-Down Loan, that meets the requirements set
forth herein.
"Buy-Down Loan" means a level payment Mortgage Loan for which funds
have been provided by a Person other than the mortgagor to reduce the
mortgagor's Scheduled Payment during the early years of such Mortgage Loan.
"Certificate Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Master Servicer in respect of the Mortgage Assets in a Trust Fund.
"Certificate Guarantee Insurance" means an insurance policy issued by
one or more insurance companies which will guarantee timely distributions of
interest and full distributions of principal of a Series on the basis of a
schedule of principal distributions set forth in or determined in the manner
specified in the related Prospectus Supplement for the Series.
"Certificateholder" or "Holder" means the Person in whose name a
Certificate is registered in the Certificate register.
"Certificate Rate" means, with respect to any Multiple Class Series,
the per annum rate at which interest accrues on the principal balance of the
Certificates of such Series or a Class of such Series, which rate may be fixed
or variable, as specified in the related Prospectus Supplement.
"Certificates" means the Mortgage Pass-Through Certificates.
"Class" means a Class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in
the related Prospectus Supplement as the date on which Certificates of such
Series are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and
regulations promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Master Servicer for the deposit by the Master
Servicer of payments received from the Mortgage Assets in a Trust Fund (or from
the Servicers, if any).
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"Compound Interest Certificate" means any Certificate of a Multiple
Class Series on which interest accrues and is added to the principal balance of
such Certificate periodically, but with respect to which no interest or
principal will be payable except during the period or periods specified in the
related Prospectus Supplement.
"Compound Value" means, with respect to a Class of Compound Interest
Certificates, as of any Determination Date, the original principal balance of
such Class, plus all accrued and unpaid interest, if any, previously added to
the principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each
owner is entitled to the exclusive ownership and possession of his or her
individual Condominium Unit and also owns a proportionate undivided interest in
all parts of the Condominium Building (other than the individual Condominium
Units) and all areas or facilities, if any, for the common use of the
Condominium Units.
"Condominium Association" means the person(s) appointed or elected by
the Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a
group of buildings whether or not attached to each other, located on property
subject to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium
Unit (together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by
the FHA or the VA.
"Cooperative" means a corporation owned by tenant-stockholders who,
through the ownership of stock, shares or membership certificates in the
corporation, receive proprietary leases or occupancy agreements which confer
exclusive rights to occupy specific units.
"Cooperative Dwelling" means an individual housing unit in a building
owned by a cooperative.
"Cooperative Loan" means a housing loan made with respect to a
Cooperative Dwelling and secured by an assignment by the borrower
(tenant-stockholder) of a security interest in shares issued by the applicable
Cooperative.
"Cut-off Date" means the date designated in the Pooling and Servicing
Agreement for a Series on or before which amounts due and payable with respect
to a Mortgage Asset will not inure to the benefit of Certificateholders of the
Series.
"Deferred Interest" means excess interest resulting when the amount of
interest paid by a Mortgagor on a Negatively Amortizing ARM in any month is less
than the amount of interest accrued on the Stated Principal Balance thereof.
"Depositor" means DLJ Mortgage Acceptance Corp.
"Determination Date" means the day specified in the related Prospectus
Supplement as the day on which the Master Servicer calculates the amounts to be
distributed to Certificateholders on the next succeeding Distribution Date.
"Distribution Date" means, with respect to a Series or Class, each date
specified as a distribution date for such Series or Class in the related
Prospectus Supplement.
"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable to the Trustee or its nominee on any Mortgage Asset.
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"Eligible Account" means an account maintained with a federal or state
chartered depository institution (i) the short-term obligations of which are
rated by each Rating Agency in its highest rating at the time of any deposit
therein, or (ii) insured by the FDIC (to the limits established by such
Corporation), the uninsured deposits in which account are otherwise secured such
that, as evidenced by an opinion of counsel delivered to the Trustee prior to
the establishment of such account, the holders of the Certificates will have a
claim with respect to the funds in such account and a perfected first priority
security interest against any collateral securing such funds that is superior to
claims of any other depositors or general creditors of the depository
institution with which such account is maintained or (iii) a trust account or
accounts maintained with a federal or state chartered depository institution or
trust company with trust powers acting in its fiduciary capacity or (iv) an
account or accounts of a depository institution acceptable to the Rating
Agencies. Eligible Accounts may bear interest.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "The Pooling and Servicing Agreements--
Investment of Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any
other obligations or securities described as Eligible Reserve Fund Investments
in the Applicable Pooling and Servicing Agreement, as described in the related
Prospectus Supplement for a Series.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the
Master Servicer or the Servicer for a Loan, into which payments by borrowers to
pay taxes, assessments, mortgage and hazard insurance premium and other
comparable items that are required to be paid to the mortgagee are deposited.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration, a division of HUD.
"FHA Loan" means a fixed-rate housing loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of a
Series, the date after which no Certificates of such Class will remain
outstanding assuming timely payments or distributions are made on the Mortgage
Assets in the related Trust Fund.
"Floating Interest Certificate" means any Certificate of a Multiple
Class Series which accrues interest at a Floating Rate.
"Floating Interest Period" means the period of time during which a
given Certificate Rate applies to a Class of Floating Interest Certificates.
"Floating Rate" means a Certificate Rate which is subject to change
from time to time.
"FNMA" means the Federal National Mortgage Association.
"GEM Loan" means, unless specified otherwise in the related Prospectus
Supplement for a Series, a fixed rate, fully amortizing mortgage loan providing
for monthly payments based on a 10- to 30-year amortization schedule, with
further provisions for scheduled annual payment increases for a number of years
with the full amount of such increases being applied to principal, and with
further provision for level payments thereafter.
"GNMA" means the Government National Mortgage Association.
"GPM Certificate" means a Certificate backed by GPM Loans.
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"GPM Fund" means a trust account established by the Master Servicer or
the Servicer of a GPM Loan into which funds sufficient to cover the amount by
which payments of principal and interest on such GPM Loan assumed in calculating
payments due on the Certificates of the related Multiple Class Series exceed
scheduled payments on such GPM Loan.
"GPM Loan" means a mortgage loan providing for graduated payments,
having an amortization schedule (a) requiring the mortgagor's monthly
installments of principal and interest to increase at a predetermined rate
annually for a predetermined period of time after which the monthly installments
became fixed for the remainder of the mortgage term, (b) providing for deferred
payment of a portion of the interest due monthly during such period of time and
(c) providing for recoupment of the interest deferred through negative
amortization whereby the difference between the scheduled payment of interest on
the mortgage note and the amount of interest actually accrued is added monthly
to the outstanding principal balance of the mortgage note.
"Guaranteed Investment Contract" means a guaranteed investment contract
or reinvestment agreement providing for the investment of funds held in a fund
or account, guaranteeing a minimum or a fixed rate of return on the investment
of moneys deposited therein.
"HUD" means the United States Department of Housing and Urban
Development.
"Index" means the index applicable to any adjustments in the Mortgage
Rates of any ARMs included in the Mortgage Assets.
"Insurance Policies" means certain mortgage insurance, hazard insurance
and other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Multiple Class Series, during which interest accrues
on the Certificates or a Class of Certificates of such Series with respect to
any Distribution Date.
"Interest Weighted Certificates" means a Class of Certificates entitled
to a greater percentage of interest on the Loans underlying or comprising the
Mortgage Assets for the Series than the percentage of principal, if any, on such
Loans to which it is entitled.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of a letter of credit.
"L/C Percentage" means the maximum liability of an L/C Bank under a
letter of credit, equal to the percentage specified in the related Prospectus
Supplement for a Series for which a letter of credit is issued of the initial
aggregate principal balance of the Loans in the related Trust Fund or one or
more Classes of Certificates of the Series.
"Letter of Credit" means an irrevocable letter of credit issued by the
L/C Bank to provide limited protection against certain losses relating to Loans,
as described in the related Prospectus Supplement for a Series.
"Liquidation Proceeds" means amounts received by the Master Servicer or
Servicer in connection with the liquidation of a mortgage, net of liquidation
expenses.
"Loan" means a Mortgage Loan (including an interest therein) or a
Manufactured Home Loan (including an interest therein) that is deposited by the
Depositor into the Trust Fund for a Series.
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"Loan-to-Value Ratio" means the ratio, expressed as a percentage, of
the principal amount of a Loan, plus in the case of a Loan secured by a junior
lien, the principal amount of the related Senior Lien, at the date of
determination to the Appraised Value.
"Manufactured Home" means a manufactured home within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of this paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under this chapter."
"Manufactured Home Loan" means a loan secured by a Manufactured Home.
"Master Servicer" means, with respect to a Series secured by Loans, the
Person, if any, designated in the related Prospectus Supplement to manage and
supervise the administration and servicing by the Servicers of the Loans
comprising or underlying the Mortgage Assets for that Series, or the successors
or assigns of such Person.
"Maximum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate cap specified for any Floating Rate Certificates of such
Series in the related Prospectus Supplement.
"Maximum Mortgage Rate" means the maximum permissible Mortgage Rate
during the life of each ARM.
"Minimum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate floor specified for any Floating Rate Certificate of such
Series in the related Prospectus Supplement.
"Minimum Mortgage Rate" means the lifetime minimum Mortgage Rate during
the life of each ARM.
"Mortgage" means the mortgage, deed of trust or other instrument
securing a Mortgage Note.
"Mortgage Assets" means the Private Mortgage-Backed Securities, Agency
Securities or Loans, as the case may be, which are included in the Trust Fund
for such Series. A Mortgage Asset refers to a specific Private Mortgage-Backed
Security, Agency Security or Loan, as the case may be.
"Mortgage Loan" means a mortgage loan (including an interest therein)
secured by Mortgaged Property including Cooperative Loans and Condominium Loans.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by each Loan.
"Mortgaged Property" means the real property securing a Mortgage.
"Multifamily Loan" means any Loan secured by a Multifamily Property.
"Multifamily Property" means any property securing a Loan consisting of
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units.
"Multiple Class Series" means a Series of Certificates that may include
Floating Interest Certificates, Compound Interest Certificates and Planned
Amortization Certificates, and/or Subordinate and Senior Classes
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embodying a subordination feature which protects the Senior Class or Classes in
the event of failure of timely payment of Mortgage Assets.
"1986 Act" means the Tax Reform Act of 1986.
"Negatively Amortizing ARMs" means ARMs which provide for limitations
on changes in the Scheduled Payment which can result in Scheduled Payments which
are greater or less than the amount necessary to amortize such ARM by its stated
maturity at the Mortgage Rate in effect in any particular month.
"Nest Egg Mortgage Loan(sm)" means a Mortgage Loan originated under the
Nest Egg Mortgage Loan Program(sm), a mortgage loan origination program of DLJ
Mortgage Capital, Inc., an affiliate of the Depositor, and the Nest Egg Mortgage
Company LLC.
"OTS" means the Office of Thrift Supervision.
"Participation Certificate" means a certificate evidencing a
participation interest in a pool of Loans.
"Pass-Through Rate" means, with respect to a Series of a single Class,
the rate of interest paid to the Certificateholders in respect of the Mortgage
Assets.
"Percentage Interest" means, with respect to a Certificate, the
proportion (expressed as a percentage) of the percentage amounts of all of the
Certificates in the related Class represented by such Certificate, as specified
in the related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"PMBS Agreement" means the pooling and servicing agreement, indenture,
trust agreement or similar agreement pursuant to which a Private
Mortgaged-Backed Security is issued.
"PMBS Issuer" means, with respect to Private Mortgage-Backed
Securities, the depositor or seller/servicer under a PMBS Agreement.
"PMBS Servicer" means the servicer of the housing loans underlying a
Private Mortgage-Backed Security.
"PMBS Trustee" means the trustee designated under a PMBS Agreement.
"Pooling and Servicing Agreement" means the agreement relating to a
Series among the Depositor, the Master Servicer and the Trustee.
"Prepayment Assumption" means the prepayment standard or model used
with respect to the Certificates of a Series, such as the Constant Prepayment
Assumption or the Standard Prepayment Assumption, as described in "Yield,
Prepayment and Maturity Considerations--Prepayments and Weighted Average Life."
"Prepayment Period" means with respect to any Distribution Date, the
period specified in the related Prospectus Supplement for a Series.
"Principal Weighted Certificate" means a Class of Certificates entitled
to a greater percentage of principal on the Loans underlying or comprising the
Mortgage Assets in the Trust Fund for the related Series than the percentage of
interest to which it is entitled.
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"Private Mortgage-Backed Security" means a mortgage participation or
pass-through certificate representing a fractional, undivided interest in (i)
Loans, (ii) collateralized mortgage obligations secured by Loans or (iii) Agency
Securities.
"Qualified Insurer" means a mortgage guarantee or insurance company
duly qualified as such under the laws of the states in which the Mortgaged
Properties are located, duly authorized and licensed in such states to transact
the applicable insurance business and to write the insurance provided.
"Rating Agency" means a nationally recognized statistical rating
organization.
"Regular Interest" means a regular interest in a REMIC as described
herein under "Certain Federal income Tax Considerations--Tax Status as a REMIC."
"Reinvestment Income" means any interest or other earnings on funds or
accounts that are part of the Trust Fund for a Series.
"REMIC" means a real estate mortgage investment conduit under Section
860D of the Code.
"REMIC Administrator" means the Person, if any, specified in the
related Prospectus Supplement for a Series for which a REMIC election is made,
to serve as administrator of the Series.
"Remittance Date" means the calendar day or days of each month, as
specified in the related Prospectus Supplement for a Series, on which the
Servicer is required to withdraw funds from the related Servicer Account for
remittance to the Master Servicer.
"REO Property" means real property which secured a defaulted Loan which
has been acquired upon foreclosure, deed in lieu of foreclosure or repossession.
"Reserve Fund" means, with respect to a Series, any Reserve Fund
established pursuant to the Pooling and Servicing Agreement.
"Residual Interest" means a residual interest in a REMIC as described
herein under "Certain Federal Income Tax Considerations--Tax Status as a REMIC."
"Retained Interest" means, with respect to a Mortgage Asset, the amount
or percentage specified in the related Prospectus Supplement which is not sold
by the Depositor or seller of the Mortgage Asset and, therefore, is not included
in the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and
interest to be made by the borrower on a Mortgage Loan in accordance with the
terms of the related Mortgage Note.
"Seller" means the Person or Persons, which may include banks, savings
and loan associations, mortgage bankers, investment banking firms, the
Resolution Trust Corporation (the "RTC"), the Federal Deposit Insurance
Corporation (the "FDIC") and other mortgage loan originators or sellers
affiliated or not affiliated with the Depositor, or who may be the Master
Servicer or a Servicer, who sell the Loans to the Depositor for deposit into the
Trust Fund.
"Senior Certificateholder" means the Holder of a Senior Certificate.
"Senior Certificates" means a Class of Certificates as to which the
Holders' rights to receive distributions of principal and interest are senior to
the rights of Holders of Subordinate Certificates, to the extent specified in
the related Prospectus Supplement.
"Senior Lien" means a lien which is senior to a related junior lien.
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"Servicer" means the entity which has primary liability for servicing
Loans if other than the Master Servicer.
"Servicer Account" means an account established by a Servicer (other
than the Master Servicer) who is directly servicing Loans, into which such
Servicer will be required to deposit all receipts received by it with respect to
the Mortgage Assets serviced by such Servicer.
"Servicing Fee" means the amount paid to the Master Servicer on a given
Distribution Date, generally determined on a loan-by-loan basis, and calculated
at a specified per annum rate.
"Single Family Property" means property securing a Loan consisting of
one- to four-family attached or detached residential housing, including
Cooperative Dwellings.
"Subordinate Certificateholder" means a Holder of a Subordinate
Certificate.
"Subordinate Certificates" means a Class of Certificates as to which
the rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Certificates, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinated Amount" means the amount, if any, specified in the
related Prospectus Supplement for a Series with a Class of Subordinated
Certificates, that the Subordinate Certificates are subordinated to the Senior
Certificates of the same Series.
"Subordination Reserve Fund" means the subordination reserve fund, if
any, for a Series with a Class of Subordinate Certificates, established pursuant
to the related Pooling and Servicing Agreement.
"Trustee" means the trustee under a Pooling and Servicing Agreement,
and its successors.
"Trust Fund" means all property and assets held for the benefit of the
Certificateholders by the Trustee under the Pooling and Servicing Agreement for
a Series of Certificates as described under "The Trust Funds--General."
"UCC" means the Uniform Commercial Code.
"VA" means the Department of Veterans Affairs.
"VA Loans" means housing loans partially guaranteed by the VA.
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT INFORMATION
HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS
PROSPECTUS SUPPLEMENT OR PROSPECTUS.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms..................................... S-6
Risk Factors......................................... S-19
The Sponsor and Master Servicer...................... S-25
The Seller........................................... S-31
The Backup Master Servicer........................... S-31
The Depositor........................................ S-32
Use of Proceeds...................................... S-32
The Home Equity Loan Pool............................ S-32
Prepayment and Yield Considerations.................. S-41
Formation of the Trust and Trust Property............ S-46
Additional Information............................... S-47
Description of the Class A Certificates.............. S-47
The Certificate Insurer.............................. S-54
Credit Enhancement................................... S-56
The Pooling and Servicing Agreement.................. S-60
Certain Federal Income Tax Consequences.............. S-73
Certain State Tax Considerations..................... S-74
ERISA Considerations................................. S-74
Ratings.............................................. S-76
Legal Investment Considerations...................... S-76
Underwriting......................................... S-76
Report of Experts.................................... S-77
Certain Legal Matters................................ S-77
Index to Location of Principal Defined Terms......... S-78
PROSPECTUS
Additional Information............................... 2
Reports to Certificateholders........................ 2
Incorporation of Certain Documents by Reference...... 2
Summary of Prospectus................................ 3
Risk Factors......................................... 9
Description of the Certificates...................... 11
Yield, Prepayment and Maturity Considerations........ 15
The Trust Funds...................................... 19
Loan Underwriting Procedures and Standards........... 29
Servicing of Loans................................... 33
Credit Support....................................... 45
Description of Mortgage and other Insurance.......... 48
The Pooling and Servicing Agreements................. 53
Certain Legal Aspects of Loans....................... 62
Certain Federal Income Tax Consequences.............. 76
State and other Tax Consequences..................... 92
ERISA Considerations................................. 92
Legal Investment..................................... 96
Legal Matters........................................ 98
The Depositor........................................ 98
Use of Proceeds...................................... 98
Plan of Distribution................................. 98
Glossary............................................. 100
</TABLE>
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$125,000,000
FIRST GREENSBORO HOME EQUITY
LOAN TRUST 1997-2
FIRST GREENSBORO HOME
EQUITY, INC.
SPONSOR AND MASTER SERVICER
DLJ MORTGAGE
ACCEPTANCE CORP.
DEPOSITOR
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PROSPECTUS SUPPLEMENT
------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
DECEMBER 3, 1997
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